June 12, 2012 |
We all know that America’s cities and towns are in the throes of a deep
financial crisis. And are told, over and over, what’s supposedly behind
it: unreasonable demands by grasping state and municipal workers for
pay and pensions. The diagnosis is a grotesque cartoon. Many of the
biggest budget busters are on Wall Street, not Main Street.
In a country as big and locally diverse as the U.S., any number of
wacky pay and pension schemes are likely to flourish, though some of the
most outrageous turn out to cover not workers, b
ut legislators. But overall state and local pay has not been growing faster than in the private sector for equivalent work for
many years now.
What has driven cities and towns to the brink is not demands from their
workforce but the collapse of national income and the ensuing fall in
tax collections. Or, in other words, the Great Recession itself, for
which Wall Street and the financial sector are principally to blame. But
many powerful interests have jumped at the opportunity to use the
crisis to eviscerate what’s left of the welfare state, roll back
unionization to pre-New Deal levels, and keep cutting taxes on the
wealthy. The litany of horror stories that now fills the media is ideal
for their purposes.
The selective character of this press campaign became obvious last
week. As the latest wave of stories started rolling in the wake of
elections in California and Wisconsin, a striking piece of evidence
surfaced that flies in the face of the conventional narrative. The
Refund Transit Coalition, a coalition of unions and public interest
groups, put out a study that documented in stunning detail how Wall
Street banks have for years been hustling American cities, states, and
regional authorities out of
billions of dollars. But save for Gretchen Morgenson’s “Fair Game” column for the
New York Times, the study drew almost no attention.
At a time when cities and states are taking hatchets to services and
manically raising fees and fares, the group’s analysis merits a closer
look and a much, much wider audience.
Its starting point will be familiar to anyone who recalls the debate
over financial “reform” of the last few years. In the bad old days of
pre-2008 deregulated finance, bankers started pedaling hot new
“structured finance” products that they claimed were perfect for the
needs of clients who had thrived for decades using cheaper, plain
vanilla bonds and loans. The new marvels – swaps and other forms of
so-called “derivatives” whose values changed as other securities they
referenced fluctuated in value – were often complex and frequently not
priced in any actual market. Their buyers thus had difficulty
understanding how they really worked or how they might be
hurt by purchasing them.
In many documented cases, buyers also had only faint ideas about how
profitable these products were to the houses selling them. One befuddled
Pennsylvania school board, for example, diffidently quizzed J.P. Morgan
Chase: “The school-board official knew they were getting $750,000 for
entering into a ‘swaption’ with J.P. Morgan Chase & Co. They wanted
to know what was in it for the bank. They wanted to know the price. They
seem like reasonable requests. ‘I can’t quantify that to you,’ the
banker told them. ‘It is not a typical underwriting and I can’t quantify
that for you and there’s no way that
I can be specific on that.’”
One popular product involved an “interest rate” swap built into a bond
deal. In these, as the Transit study explains, some hapless municipal
authority brings out a bond and commits to making fixed payments to
buyers. That sounds like any other old fashioned bond offer. But here’s
the twist. In the swap version, the bank offers, for a handsome charge,
to pay a variable fee to the issuer of the bonds. The idea was that the
money could be used to make payments owed to the bond buyers. Payments
were supposed to vary with the course of interest rates. The
contrivances were heralded as protecting issuers against a rise in rates
and saving them money on their payments.
But there was a catch: If rates fell, then banks could make out big,
while issuers faced disaster, because the latter still had to make the
fixed payments on their bonds, while the banks’ payments would shrink as
rates fell. In effect, issuers were gambling on interest rates and
betting they somehow knew better than the banks what was going to
happen. And, ah, yes, the final touch: With old style bonds, you could
refinance if rates fell; with the new fangled derivatives, the banks
made sure to impose huge termination fees.
The result, for years now, has been literally billions of dollars of
losses for cities, states, and other local authorities, including school
boards and
state college loan agencies. Locked
in by the termination fees, they can stay in the swaps and pay and pay
as the banks’ payments to them dwindle. Or they can buy their way out of
the swaps at preposterous prices – Morgenson indicated that New York
State recently paid $243 million dollars to get out of some swaps, of
which $191 million had to be borrowed.
The Refund Transit study concentrated on local transit systems. Some of
its numbers are stunning. The study pegged annual swap losses at the
Massachusetts Bay Transportation Authority (Boston area) at $25.8
million and suggested that the MBTA will “lose another $254 million on
these swaps” before they lapse. The study added that the MBTA was losing
money on swaps even before the crisis, with total losses running in the
“hundreds of millions” of dollars.
In Charlotte, site of the Democratic Convention, the study suggests
that swaps with Bank of America and Wells Fargo cost the area transit
system almost $20 million a year – something to think about as the
President gives his scheduled acceptance speech at Bank of America
Stadium.
Other localities that the study suggests are wracking up big annual
losses include Chicago ($88 million), Detroit ($54 million), frugal
Chris Christie’s State of New Jersey ($83 million), New York City
($113.9 million), Philadelphia ($39 million), and San Francisco ($48
million).
The study includes a useful table of the main banks
benefiting
from
these arrangements. They include all the usual suspects: Besides Bank
of America and Wells Fargo: Citigroup, Morgan Stanley, Goldman Sachs, J.
P. Morgan Chase, UBS, and AIG, among others. Most were recipients of
TARP funds, while all have profited from super cheap Federal Reserve
financing, Fed, Freddie, and Fannie purchases of mortgage backed
securities, and extended deposit guarantees as well as tax concessions
granted by the
Treasury in the wake of the 2008 disaster.
Given all the other advantages conferred on our Too Big To Fail Banks
by the government and both major political parties, it would be a
stretch to argue that the toleration of these swaps by federal, state,
and local authorities – and the press, which in virtually all areas has
defaulted on reporting the basic facts – constitutes the greatest
outrage of all. But it is high time that they came in for full public
scrutiny. These products were obviously very risky; few agencies that
bought them appear to have understood this.
Despite some reforms aimed at eliminating crude “pay for play” deals,
state and local finance remains a area rife with conflicts of interest.
The whole series of deals needs to be investigated, the
advisers
who
recommended them to the authorities need to be identified, the full
losses added up, and responsibility fixed for the continuing series of
bad decisions. Many State Attorneys General and general counsels also
need to explain why they have not more aggressively publicized these
arrangements and challenged them in court. (A New York court ruled that
such deals were private contracts, not securities; that should have
brought forth howls of protests and immediate legal fixes.) It is high
time citizens, instead of banks, start occupying the transit
authorities, school boards, and other state and local entities that are
so vital to communities and real people.
Thomas Ferguson is Professor of
Political Science at the University of Massachusetts, Boston, Senior
Fellow at the Roosevelt Institute, and Contributing Editor at AlterNet.
No comments:
Post a Comment