|
|
|
You know that Wall Street caused the financial crisis. But you probably had no idea that they continue to make hundreds of millions of dollars directly from Philadelphia taxpayers through things called “interest rate swaps.”
Financial deals with Wall Street firms including Wells Fargo, Morgan Stanley, Merrill Lynch, Citigroup and Goldman Sachs have, according to a new report by the left-leaning Pennsylvania Budget and Policy Center (PBPC), cost the city and School District $331 million—and they stand to lose another $240 million. The School District has paid out $63 million to Wall Street banks just to cancel five agreements, and the city has paid an estimated $52.4 million-plus.
The interest rate swaps, which you can read more about in the PBPC report or at some in the articles I link to below, ostensibly were signed to protect the city from having to pay higher interest rates. When interest rates tanked after the recession, however, the city and School District were left holding the bag and had to pay the old high interest rates, losing millions—or pay millions to cancel the agreements.
Our city and schools have already been cut to the bone: the city cut nearly $100 million during 2008 and 2009, while the School District faced a $629 million budget shortfall that was closed by serious teacher and staff layoffs and by big cuts to programs. More cuts are expected this year.
Pennsylvania Auditor General Jack Wagner called the swaps “highly risky and impenetrably complex transactions that, quite simply, amount to gambling with public money. Moreover they are susceptible of being marketed deceptively and they principally benefit the investment banks and multitude of intermediaries who sell them to relatively unsophisticated public officials.”
This “gambling with public money” was legalized by the Commodity Futures Modernization Act of 2000 at the height of the deregulatory frenzy that laid the groundwork for our current predicament.
Wagner's investigation uncovered “deceptive” practices and he is calling for law enforcement to investigate the “swaptions” and help localities recover lost funds. As Gretchen Morgenson writes at the New York Times, Wall Street benefits and cities suffer thanks to the interest rate swap market's lack of transparency. The losses are suffered nationwide: this Times article explains what happened to Denver, and this one explains what went down in Birmingham.
It's also worth noting that that this, Mother Jones reports, is something Senator Pat Toomey spent a lot of time working on in the private sector.
PBPC is calling on Wall Street banks to refund some of the losses and renegotiate the volatile agreements that are still active. Are public institutions acting like sore losers after making a poor decision in the free market? Maybe. But the taxpayers bailed out these very same institutions: $700 billion in TARP money—part of an estimated $3.5 trillion in total support for Wall Street.
This very much includes city and School District creditors (or in this case, what are called “counterparties”), which made out big on TARP alone: Bank of America/Merrill Lynch ($45 billion), Wells Fargo ($25 billion), Citigroup ($45 billion) and on and on.
"These financial institutions have profited, while Philadelphians have paid the price through lost city services, lost jobs, and lost school programs,” the report notes. “The financial institutions, on the other hand, have returned to profitability with subsidies from taxpayers—including Philadelphia taxpayers—and with multimillion-dollar contracts with the city. Moving forward the banks should respond as good corporate citizens of Philadelphia, by refunding a portion of the lucrative cancellation fees they received for terminating bad deals and renegotiate those deals which are currently active.”
The banks, an Occupy Philly activist tells me, will be hearing from them soon.
So the schools cut nurses, putting children's lives at risk, so Wells' Fargo can keep its stolen assets and pay its top execs millions. And here I always thought 'bank robber' meant someone robbing the bank, not the other way around.
— Mr. Johnson- Ugh. Daniel, I'm a big fan of your reporting, but reporting this straight from the PennBC's press release is a serious mistake. These reported "losses" are nonsense.
A basic formula of how they're calculation these loses would be: interest paid under swapped variable (acting as fixed) rate PLUS whatever penalty paid to exit the agreement MINUS what they would have paid if they had used interest rates calculated throughout the loan. Flatly, that's garbage. Think of it like a fixed rate mortgage on a house: you'd only get those lower rates if you refinanced.
A more realistic way to determine what the banks have taken from the city/SD would be to calculate ONLY the penalties for exiting the agreements. That's $63 million for the school district, and $52.4 for the city. And yes, these numbers could rise if the city cancels more agreements.
I'm not defending the financial institutions, whose reach and lack of regulation is a major national crisis. But certainly, the city's financial managers should have seen this as a real possibility: the whole point was to hedge on interest rates. If rates had risen, the city would have benefited. It's very possible that there were, as reported, conflicts of interests and hidden fees, which is deplorable. But exaggerating the losses, does nothing but muddy the issue.
Obviously, in retrospect, these were very poor deals for the city. But even a semi-competent financial analyst could have comprehended the risk/reward here. Given the city/school district's absurd pension fund targets, it was even stupider (since they were so high, they should have hedged against LOW interest rates/inflation).
Better regulation is, without doubt, called for. It's very possible that banning these swaps for municipal entities is a good idea. But to pretend that the city and school district didn't have an incredible amount of responsibility for their own losses is unfair and untrue.— tsarstruck - tsarstrucks:
Good points--but I still think I'm on solid ground. Here's my case, first legal and then moral-political.
Legal:
- If fraud was indeed perpetrated, as has been alleged (see Auditor General report, and Times article that I link to by Gretchen Morgenson) on the part of the firms when striking these deals, it seems like good cause for cancellation of the deal--if not criminal charges.
Moral-Political:
- I wrote "Are public institutions acting like sore losers after making a poor decision in the free market? Maybe." I should have said "probably" or "definitely" instead of "maybe." I understand that the city and District made a bet: interest rates rise, we win, they drop, we lose. And the idiotic school district and city lost. BUT...
- It seems like these OTC derivatives should be illegal or highly regulated anyways--something way too high risk for localities, etc, to be gambling taxpayer money on.
- Furthermore, it's not the public's fault that they are legal: the CFMA of 2000 legalized these things, and it happened because the financial industry took over our government.
- Finally, it is outrageous that these payments are being made to Wall Street from public coffers after the enormous taxpayer bailout (and continuing under the radar bailouts, like discount window etc). Full stop. This argument has absolutely no legal bearing on these swap contracts, but it gives the citizens of Philadelphia (denizens of the proverbial Main Street) more than enough moral ground to demand the money back.— daniel.denvir - Oh, and to be clear: I think the lower interest rate should be counted in the losses (and PBPC makes the different numbers clear in their report)because I don't think the swaps should have ever have been signed in the first place. And yes, it's both parties fault. But I don't think the public should have to pay for it for the reasons articulated above. But thanks and yes, I welcome this exchange and your thoughtful comments.— daniel.denvir
- Can you tell us which public officials made these investments? They sound like the kind of stuff Rendell would have done. He loved gimmicks that would let him kick the "expense" can down the road to be paid by his successor.— justablogger99
- This commentary is completely off the mark. The responsibility for these type of transactions falls squarely on the elected officials whom agreed to the terms of the contract -- NOT Wall Street. Stop blaming investors and bankers for bad financing terms, it takes TWO parties to make a deal. Your moral defense is also off base -- morally, these elected officials screwed Philadelphia by agreeing to these terms, it has nothing to do with Wall Street! If this deal made the city money, you wouldn't be complaining. Take RESPONSIBILITY.— NickGeron
- Tsarstruck has it exactly right - if there was any wrong doing in these deals it was likely with the fees, rate setting, swaption valuing, and maybe some conflict of interest and those things should be exposed and addressed. However, the swaps structure itself is not blame for these "losses."
Daniel - you write that the lower interest rate should be counted into the losses because the swap should have never been entered into in the first place. So, I assume you think the city and school district should've issued unhedged variable rate debt and should not have hedged with a fixed rate swap?
My guess is that you wouldn't really support that structure either and think the city/school district should have issued traditional fixed rate bonds instead, in which case the interest costs would have been much higher than they were with the fixed rate swap and the "loss" analysis would be much different. How much has the city/school district "lost" by issuing traditional fixed rate debt instead of unhedged variable rate debt?— Noonan - "highly risky transactions that simply amount to gambling with public money, marketed to relatively unsophisticated public officials"
where did these "unsophisticated public officials" come from and how did they end up running this city?
what were the risks to these unsophisticated public officials personally?...NONE, their kids will not be affected by the cuts to the public schools or social services, there will not be cuts to the their payroll budget, this was a win-win for them, the responsibility for this falls squarely on the shoulders of the voters of philadelphia.
we constantly vote for "unsophisticated officials" regardless of their morals, ethics, education, or sophistication, there is but one prerequisite to political success in philadelphia.— tmstr929 - Tsarstruck:
The swap losses identified in our report are not “nonsense” but millions of dollars in actual losses to the school district and city.
In addition to the termination fees, both the district and the city entities also had significant swaps payments to the banks. Our analysis looks at both sides of the ledger: upfront payments and interest payments by the banks against interest payments by the entities and termination fees. The bottom line is that, on a net basis, the public agencies were the big losers.
Both the city and school district took relatively swiftly steps to cut their losses and paid hefty fees for doing so.
The homeowners who got variable rate mortgages undoubtedly had some savings from low interest rates in the early years, but in the end a very large share of them took a bath. On net the risk was much greater than the reward.
The financial services industry went to great lengths to deregulate these instruments, which were prohibited for good reason--most states saw them as gambling with public money plain and simple. Guess what, they were right.
— Sharon Ward
- ActiVman
- adventures
- Arts
- Ask A Man-About-Town
- Award Tour
- Awards
- Bad Idea Factory
- Beer
- Below the Curve
- Bikes
- Booze
- Brian Hickey
- BRT
- Budget
- Budget Fuss
- Business
- Casinos
- City Council
- City Hall
- CouncilMANIC
- CP Abroad
- CP in the Community
- Criminal Justice System
- Day Tripper
- Death and Taxes
- Delaware River
- Design
- DROP
- Drugs
- Dubious Distinction
- Elections
- End of Days
- Environment
- Fashion
- Film Fest
- Financial Meltdown
- FrackTrack
- Free Library
- Gambling
- Gay Stuff
- Get Lit
- Greenstorming
- guns
- Hall Monitor
- Health
- Health Care
- Hello, Kitty
- Holidays
- Ice Cubes
- Iggles
- Immigration
- In Memoriam
- Labor
- Lawsuits
- Letters
- LGBTQ
- Maps
- Marcellus Shale
- Media
- MMA
- Mummers
- Music
- MUST READ
- Mysterious Mysteries
- Nation
- News
- Non Sequitur
- Opinion
- PA politics 2010
- Parking Wars
- Parks and Recreation
- People Send Us This Stuff
- Philadelphia Police
- Philadelphia Union
- Philaphemera
- Philly From Scratch
- philly madness
- Photos
- Poverty
- PPA
- President Obama
- Print Edition
- Prisons
- Protest
- Readers Write
- Real Estate
- Rock Bottom
- Schools
- Science
- Screwing Philly
- SEPTA
- snow
- So Lush
- Soccer
- Sporting Life
- Sports Complex
- State Politicians
- State Politics
- Street Art
- Strike
- Stuff We Like
- Taxes
- Taxi Drivers
- Tech Fetish
- television
- The Budget Crisis
- The City Paper
- The CLOG
- The Human Condition
- The Mayor
- The Phightin Phils
- The World
- Things that make you go hm
- Tinfoil Hats Off
- Under the Table
- Under the Tables
- Urban Development
- Urban Planning
- urban wildlife
- Video Poker
- We Call Shenanigans
- Weather
- Web Junk
- Weekend Omnibus
- White House
- What We've Found
- Women's Issues
- Flyered Up!
- How 'Bout That Weather?
- it's always sunny in philadelphia
- Stu!
- Shopping
- get out
- 10-track mind
- ArtsFlash
- Bloggity
- Bruce Being Bruce
- Colleges
- Comedy
- Gigantic Surprises
- Hello Canary
- Hello Puppy
- errata
- get lost
- Inside The Fishbowl
- Library Closings
- Local Support
- Movies
- Murder
- Night Moves
- Recycling
- radio
- Scientology
- Sex
- Sixers
- Skeeze Police
- State Politicians Screwing Philly
- That's a cool stencil!
- Theater
- Things We See
- This Week
- This Week in Oates
- University City
- WIN
- What we don't heart
- trailer!
- what we heart
- Feeling Guilty
- Askadelphia.
- Broke in Philly
- Contest
- Dance
- Dear Paper Doll
- Do A Good Thing
- Education
- Film Fest Schism
- G20-20 Vision
- Goodbye
- Gossip
- Great American Heroes
- PATCO
- Pearl Jam Week
- Puppy
- Stars of the Photostream
- sustainability
- Lower Merion Webcam-Gate
- The Cycle
- Equality Forum
- Bureaucrat of the Week
- Animals
- ElectionEar
- Photostream
- May
- April
- March
- February
- January
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011
- April 2011
- March 2011
- February 2011
- January 2011
- December 2010
- November 2010
- October 2010
- September 2010
- August 2010
- July 2010
- June 2010
- May 2010
- April 2010
- March 2010
- February 2010
- January 2010
- December 2009
- November 2009
- October 2009
- September 2009
- August 2009
- July 2009
- June 2009
- May 2009
- April 2009
- March 2009
- February 2009
- January 2009
- December 2008
- November 2008
