The original of the following has several links in it. http://www.citypaper.net/blogs/nakedcity/How-Wall-Street-took-331-million-from-Philly-and-its-schools.html
How Wall Street took $331 million from Philly and its schools
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 fromPhiladelphia 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 reportby 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 inBirmingham.
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.
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