Can the states use their sovereignty to break the contracts for the Cities?

City Finance Committee Chair Ignacio de la Fuente, who supported the move, said, “It’s time to take a stand. We need to use the economic power we have to send a message.”

If they want to send a message just don’t do swap deals going forward. Other than for simply refusing to do those deals – which nothing in the article says the underlying behavior is going to change – it just seems like whining because the Oakland politicians made a bad bet with taxpayer money. There is of valid course reasons for municipalities doing swaps (hedging against uncertainty), which those valid reasons evaporate when the losing side tries to get out of responsibility. This seems to be approving of the bank bailouts (which shouldn’t have been done because the loser didn’t have to pay) to then justify another type of bailout that shouldn’t be done.

There’s absolutely nothing here showing there was any sort of deception of any kind done to Oakland and in fact Oakland could have engaged in wise and well thought out city administration by entering into an interest swap hedge against uncertainty back in 1998. However, trying to break deals because you’re not turning a profit is part of the behaviors that we’ve seen that have lead to worst sort of economic results. It’s not like if interest rates had skyrocketed and Oakland was making outsized profits that they’d go and hand over all that extra to the counter-party on the other end (nor should Oakland as it would be just as ridiculous for the counter-party to whine and want to break the deal).

Thanks for the write-up, DDay.

A suggestion: it’s been noted that one reason “real people” aren’t as outraged about this robbery as they should be is that the whole thing is so complicated. Would it be possible for you to write — or link to – a bread-and-butter simple outline that would aid people’s understanding?

What was the original transaction between Oakland [or any city] and GS?
How do “interest rate swaps” work, and how were they sold to the cities?
Other “insurance devices” sold? What were they & how did they work?

What has been the history and effect of these deals, and how did those effects come about? [You mention "locked in rates," the losses that have thus far accrued and are anticipated.]

Frankly I haven’t searched the internet for such a “For Dummies” explanation. I’d bet one of the excellent financial writers here at the Lake could do one, or perhaps Yves Smith, Matt Taibbi, Robert Reich or someone else has done some relevant writing.

Again, it helps to motivate and increase people’s outrage if they understand the details.

Thanks again for your work.

I have lived in or near Oakland for decades and am constantly amazed by how mismanaged that city is! City executives must be at the top of the list of every snake oil huckster that comes down the road.
How, in 1998, did someone convince the city to start forking over 4 million dollars a year when the schools go begging and the police department is understaffed? I could go on and how.
But what did the city gain from the deal with GS? What?

Back in 1998 Oakland wanted to lock in the interest rates they paid on their debt. It would be like entering into a deal to lock in the interest rate of your credit card – you might pay 10% now, but you don’t know if in the future if you’ll be paying 5% or 15%. Locking in a 10% rate lets you plan for your future in the years ahead because you know what your expenses will be instead of having the risk of multiple curveballs thrown to you by the credit card companies. That your credit card interest rate would have gone to 5% if you hadn’t entered into a swap rather than 15% doesn’t mean that there’s wrongdoing on anyone’s part….just you ended up paying – rather than being paid – because of where interest rates when in the future. You can always refuse to do the underlying behavior to begin with, which until I heard that Oakland is refusing to enter into any more swaps, I can’t take what they say as serious because it’s showing that it’s not swaps that they have a problem with but instead they just don’t want to be accountable for losing money.

This specific deal in question with Oakland, Oakland hasn’t even been the loser as they’ve saved millions since the deal was done and only recently started to be on the losing on after the economy collapsed in 2008. This swap deal is saving Oakland $37 million dollars over the life of the swap per the City of Oakland itself – why should anyone be upset that Goldman is saving tens of millions of dollars because of the swap deal:

“The 1997 interest rate swap agreement has so far saved the city millions. But those gains are dropping because Oakland is paying Goldman a fixed interest rate that’s much higher than prevailing rates, which have been depressed since the 2008 financial collapse.
By the 2021 expiration date, the deal is still expected to have saved the city $37 million, assistant city administrator Scott Johnson said.”

http://www.insidebayarea.com/oaklandtribune/localnews/ci_20945312/oakland-considers-boycotting-goldman-sachs

Oakland has profited to the tune of $37 million dollars

Thanks DDay. I’m not sure how I feel. I am disgusted with the Banksters, but as SpInq points out… two wrongs don’t make a right.

Re Libor: I worked on Wall Street from 2000 to 2004. Even at that time, LIBOR-fixing was an open joke. That’s not to say that it was fixed. I’m just saying that everyone joked about how it could be fixed. I wish I knew then, what I know now. :(

DDay… And considering that you’re sleuthing out endless bankster scams, I’ll have to show you one that I figured out as a (former) Council member. It was created by the CRAs and in short:

My town’s budget was $100 million Year 1.

The CRAs stated that my town must maintain a 5% rainy day fund in Year 1 to have a AA rating.

The CRAs stated that my town must increase to an 8% rainy day fund to achieve a AAA rating.

If we are to go from 5% (of annual operating budget) to 8%, we must raise $3 million in taxes at some point and stick that money in the bank. Fundamentally, I agree with the existence of a rainy day fund. But who is to say the correct amount?

In municipal terms, one org that defines the amount is the GFOA (Govt Fin Officers Assoc). They assert the need to maintain cash flows. And that’s legit, but when it comes to property taxes… a municipality is not quite the same as a business that needs to collect money to pay wages every week or two. So IMO their assertion of cash flows is not highly relevant.

Even so, the $3million one-time increase is something that I can appreciate to some extent. But what gets me is the ongoing annual tax increases.

If we’re to maintain the additional 3% (8 – 5) on the increase in a $100,000,000 budget (assuming ee’s get a 3% increase), then that’s 3% on $3million every year or $90,000 going to the banks annually. That’s $90,000 / year that’s not funding the pension plan or paying for staff or lowering taxes. That’s an additional $90,000 going to the banks every year (90k in Yr 1, $180k in Yr 2, $270k in Yr 3, etc.).

Why are municipalities paying these fees that are simply going to the banks for their own reinvestment? The argument is that it lowers overall borrowing costs for the towns. BUT we all know that the system, incl. the CRAs and banks, is rigged.

Yet municipalities continue to play this game… even though services continue to be cut, taxes continue to be raised… and the Banksters continue to make out like bandits.

Just considering this now… I only know my town. This “small” variance could be a huge number, if considered nationwide.

And the saddest part about this… when I spoke to our auditor about our “credit rating” he sang praises about our improvement. Then I framed my concern as I did above. And a guy who is supposed to be a “municipal finance risk expert” said he had never thought about it like this.

“Trillions in tax surpluses are revealed in government Comprehensive Annual Financial Reports (CAFRs). This applies to every state; California’s various government CAFRs reveal $8 trillion in a sampled study, and the state CAFR alone shows $600 billion (explore here to see how to document other states).” — http://wp.me/p1hyep-2kO

and;

“Summarized here, California has $600 billion in cash and investments, with all state government agencies combined having $8 trillion. These amounts translate into $50,000 per household retained by the state, and a staggering $650,000 per household combined total.

This is why CAFR data disclosure is one of three obvious game-changing solutions a critical mass of the 99% can command to reclaim economic success from the current capture of the 1%; the other two are monetary and credit reform.” — http://wp.me/p1hyep-2eB

They can demand anything they want. What they’ll end up with is a zzz- credit rating from that bastion of knowledge and enlightenment known as Moody’s.