Wall Street Collects More Than $4 Billion From Taxpayers as Risky Swaps Backfire
Very thorough investigative piece from Bloomberg.
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Scroll down for a true, must-see anti-banker song...
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Bloomberg - The subprime mortgage crisis isn’t the only calamity Wall Street created that’s upending the finances of U.S. states and cities.
For more than a decade, banks and insurance companies convinced governments and nonprofits that financial engineering would lower interest rates on bonds sold for public projects such as roads, bridges and schools. That failed promise has cost more than $4 billion, according to data compiled by Bloomberg, as hundreds of borrowers from the Bay Area Toll Authority in Oakland, California, to Cornell University in Ithaca, New York, quietly paid Wall Street to end agreements since 2008.
California’s water resources department this year spent $305 million unwinding interest-rate bets that backfired, handing over the money to banks led by New York-based Morgan Stanley. North Carolina paid $59.8 million in August, enough to cover the annual salaries of about 1,400 full-time state employees. Reading, Pennsylvania, which sought protection in the state’s fiscally distressed communities program, got caught on the wrong end of the deals, costing it $21 million, equal to more than a year’s worth of real-estate taxes.
“It was brilliant, and it all blew up on me,” said Brian Mayhew, chief financial officer of the Bay Area Toll Authority, the state agency that gave Ambac Financial Group Inc., the New York-based bond insurer that filed for bankruptcy this week, $105 million to end $1.1 billion of interest-rate agreements. The payments equal more than two months of revenue on seven bridges the authority oversees around San Francisco.
Wall Street banks and insurers peddled financial derivatives known as interest-rate swaps to governments and nonprofits that bet they could lower the cost of borrowing. There were as much as $500 billion of the deals done in the $2.8 trillion municipal bond market before the credit crisis, according to a report by Randall Dodd, a senior researcher on the Financial Crisis Inquiry Commission, published by the International Monetary Fund in June.
$4 Billion
Borrowers from New York to California are now paying to get out of agreements. Altogether, they have made more than $4 billion of termination payments to firms including New York- based Citigroup Inc., New York-based JPMorgan Chase & Co. and Charlotte, North Carolina-based Bank of America Corp. since the beginning of 2008, according to a review of hundreds of bond documents and credit-rating reports by Bloomberg News.
In contrast to the subprime crisis, few taxpayers know anything about the cost of untangling municipal swaps. The only disclosure of payments to Wall Street often is buried in documents borrowers have to give investors when they sell bonds.
In many cases, firms getting payments aren’t explicitly identified and government officials often don’t call attention to payments made to cancel contracts. Many of the telephone calls and e-mails from Bloomberg News to dozens of government and nonprofit officials over the last eight months seeking comment on derivative transactions went unanswered.
Continue reading at Bloomberg....
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A prime example of Wall Street swindling the states...
Video: Jefferson County Alabama vs. JP Morgan
JPMorgan to Pay $75 Million in Alabama Case
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Goldman Sachs Still Paid for Swaps on Redeemed Bonds
Oct. 23 (Bloomberg) -- New Jersey taxpayers are sending almost $1 million a month to a partnership run by Goldman Sachs Group Inc. for protection against rising interest costs on bonds that the state redeemed more than a year ago.
The most-densely populated U.S. state is making the payments under an agreement made during the administration of former Governor James E. McGreevey in 2003, when New Jersey’s Transportation Trust Fund Authority sold $345 million in auction-rate bonds whose yields fluctuated with short-term interest costs. The agency finances road and rail projects.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aufmSRtDn0gg
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The federal investigation that prompted Gov. Bill Richardson of New Mexico to withdraw his nomination as commerce secretary offers a rare glimpse into a long-simmering investigation of possible bid-rigging, tax evasion and other wrongdoing throughout the municipal bond business.
NYT - Nationwide Investigation on Bids for Municipal Bonds
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Damn it feels good to be a banker...
This is so much better than it looks. One of the best songs we'ver ever posted.
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Nov 12, 2010 at 1:07 AM
Reader Comments (11)
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aufmSRtDn0gg
http://www.nytimes.com/2009/01/09/business/09insure.html?_r=1&hp=&pagewanted=all
http://www.bloomberg.com/news/2010-11-10/wall-street-collects-4-billion-from-taxpayers-as-swaps-backfire.html
http://www.dailykos.com/story/2010/11/12/919943/-Naked-Cap,-Krugman-To-Cat-Foodies:-F*ck-You!-Go-Away.
Daily Kos picked up my op-ed on SS...
One unexpected surprise is the banner at the bottom of the page. I'm thinking the banner is geography specific and may not show up for everyone. Here's where it lead for me:
http://www.chicagoforrahm.com/events/meet-rahm/?sc=google_banners_contest_lib
Oh, the irony!
http://dailybail.com/home/illinois-10-billion-pension-spiking-timebomb.html
"Mayor Daley was accused Monday of ignoring a “ticking time bomb” for Chicago taxpayers: four city employee pension funds that will run out of money by 2030."
"During opening day of City Council hearings on Daley’s final city budget, Ald. Edward M. Burke (14th), chairman of the Council’s Finance Committee, homed in on the pension crisis that will force Chicago taxpayers and city workers to dig deeper.. "
"But, Burke said that’s nowhere near enough to diffuse, what he called a “ticking time bomb.”"
"He noted that the city’s entire property tax levy is gobbled up by pension and debt payments and that the pension funds are selling off assets to meet current obligations. "
http://www.suntimes.com/news/cityhall/2812798,city-council-pension-funds-101810.article
THE CITY'S ENTIRE PROPERTY TAX LEVY GOES TO PENSIONS AND DEBT PAYMENTS?!!? Mayor Daley sure liked privatization. Privatize 'em!;
"It's no secret that Chicago's mayor is a fan of privatization. In recent years, the Daley administration has cut lucrative (if mismanaged) deals to lease the city's parking meters and the Chicago Skyway to private contractors in exchange for lump-sums of cash up front."
"In the past, Daley's also proposed privatizing the city's water system and Midway Airport, among other services."
"But with the city facing a massive budget deficit -- and the windfalls from the Skyway and meters deals all but gone -- Daley suggested yesterday that a much wider array of city functions might be up on the auction block soon."
"According to the Chicago Tribune, the city's lakefront festivals, including the massive Taste of Chicago, could be put out for bid. Private companies, not city employees, would operate the festivals."
http://www.huffingtonpost.com/2010/08/27/daley-may-privatize-taste_n_697073.html
Daley's deals didn't have to be good to get done:
"Chicago drivers will pay a Morgan Stanley-led partnership at least $11.6 billion to park at city meters over the next 75 years, 10 times what Mayor Richard Daley got when he leased the system to investors in 2008. "
http://www.bloomberg.com/news/2010-08-09/morgan-stanley-group-s-11-billion-from-chicago-meters-makes-taxpayers-cry.html
Of course, that assumes the parking meter rates are predictable. They will raise by double, quadruple or octuple by 2013. After that, they're "inflation adjusted".
http://theexpiredmeter.com/?p=1139
The Rolling Stone has printed an excerpt of Matt Taibbi's "Griftopia", featuring a detailed rundown of Wall Street's and foreign interests role in privatization featuring the Mayor's highly questionable parking meter deal:
"Probably the best example of this is the notorious Chicago parking meter deal, a deal that would have been a hideous betrayal even without the foreign ownership angle. It was a blitzkrieg rip-off that would provide the blueprint for increasingly broke-ass America to carry lots of these prized toasters to the proverbial pawnshop."
http://www.rollingstone.com/politics/news/17390/222206?RS_show_page=0
So what's all this got to do with Rahm? These privatization deals can be handled so much more elegantly. Give the payrollers a chance. Don't push 'em out, let 'em fail:
"Mayoral challenger Rahm Emanuel isn't exactly planning to trash Chicago's garbage collection system. But he's promising big changes to wring as much as $65 million out of the annual cost."
"If elected mayor, the former White House chief-of-staff says he'd implement a process that could end in at least partial privatization. He says he would:"
"Establish a "benchmark" price per ton after comparing the cost of collecting Chicago's 1 million tons of annual garbage to costs in 10 major cities."
"Give the city's 1,142-strong, $173.7 million-a-year refuse-collection army a chance to generate the savings necessary to meet those benchmarks."
http://www.suntimes.com/news/cityhall/2878908,CST-NWS-rahm09web.article
Yeah, if the city hall connected payrollers don't meet the mark, they can be replaced some financial system connected firm. And, if the garbage deal goes sour, I'm sure Wall Street can cut deals for the water department, Midway Field and just about anything else.
I don't think the Police Department and the Fire Department can be privatized, but I don't think I'm as smart as Rahm is supposed to be, either.
Wow. Just think if Al Capone had thought up the 75 year lease deal.
Bankers, with fiduciary duties, came in and sold risky assets to the rubes on everything from city councils to school boards. They might have been within the letter of law, but they were not within the trust they were given, and I think they should be accountable for acting more like con-artists than investment advisors PAID to give expert guidance.
But that is another problem, corporate supra-citizens are never held accountable the way natural citizens are. On the rare occasions they face government regulation, they pay a fine and sign a Corporate Integrity Agreement. The shareholders (the other patsies) pay the fine. The management of the corporation never do a day in jail or pay with their own money. There is essentially no downside, so they go find the next scam. The CIA is a CYA, just another cost of doing business.
Hey Simpson, I spotted another whale for ya! If corporations have the rights of individuals - an absurdity since the are immortal for one thing, and exist only to make money for another - why don't they have the responsibilities? I'm pretty sure that if bankers knew they could go to jail for misconduct, there would be a lot less of it. Passing all the costs onto either shareholders or taxpayers is not the way to get accountability from corporations.
Oh no, another whale Sen. Simpson! All these corporations have foundations (well, and many politicians have them, too) for kicking back a little of their ill-gotten gains to the politicians who help legalize their thefts. There are many non-profits that are merely tax-free advocacy groups and money funnels. While on the topic, I note many charities were invested with Madoff, but surely it was just bad happenstance that philanthropy got mixed up with some type of proprietary money scam/laundry. Of course corporations don't have to sneak money out of the tax system, they openly ship it to offshore entities and banking centers that exist expressly for the sake of avoiding taxes. Maybe this pod of tax-dodging, legalized-bribing whales are on your list, though.
Thanks for this article. I plan to read a lot more about it. I wish all I had to do, though, was turn on the six o'clock news to find honest reporting and accountability, since I, like all the rubes, have limited time and resources and can't hire lawyers to game the system for me, I was hoping the watchdog media, taxpayer-paid regulators, and the nobel Department of Justice would be on the job on our behalf - but then, that's why they call us rubes.