How Wall Street Is Sucking Huge Amounts of Money from Los Angeles

[xchrom]

http://www.alternet.org/economy/new-report-reveals-how-wall-street-impoverishes-los-angeles



Los Angeles paid at least $204 million in fees to Wall Street in 2013, and probably significantly more, in addition to principle and interest payments, according to the report, "No Small Fees: LA Spends More on Wall Street than Our Streets." The study, issued today by a coalition of unions and community organizations, shows that due to revenue losses from the “Great Recession,” L.A. "all but stopped repairing sidewalks, clearing alleys and installing speed bumps. It stopped inspecting sewers, resulting in twice the number of sewer overflows." L.A. spends at least $51 million more in Wall Street in fees than it allocates for its entire budget for the Bureau of Street Services.

The researchers caution that the $204 million figure likely underestimates the true amount, because under current disclosure rules, deals made with private equity companies and hedge funds do not have to be publically disclosed. Also, because the city does not list all these fees in one centralized report, hundreds of individual documents must be reviewed to uncover the amounts. As one of the report's researchers stated,

"This is the first time an accounting of fees has been exposed for a specific public entity, and we don't think we have captured it all. So if you do this for every public entity, cities, counties, school districts, states, and universities, transportation agencies and other public entities we could be looking at an astounding amount of money for education and community services money sucked out of the system."

Astounding indeed. My back of the envelope estimate, extrapolating the L.A. experience to the economy as a whole, suggests that the fees Wall Street extracts from public entities could total more than $50 billion a year — enough to provide free tuition at every public college and university in the country.

[grahamhgreen]

1. 50 billion. Half of what we spend on Afghanistan.

[reformist2]

2. It seems all Wall Street does is "suck money" - they produce nothing.

If we all just put our money into computer-run index funds, we'd all be a lot better off. Well, everyone except the Wall Streeters.

[Enthusiast]

11. Oh, no. Those are investments. How would we get along without them, the job creators?

[bemildred]

3. Shock doctrine. It's not just for little foreign countries any more. nt

[xchrom]

4. +1

[Diremoon]

10. That is my suspicion as well

I believe that the shock doctrine is being applied to cities and states increasingly now. The wealthy and powerful are literally robbing us blind. This appears to be a new twist that they can use to rob cities. I wonder if this method was used on Detroit. After reading this article, I am wondering what portion of their debt is due to wall street, and their manipulation of Libor rates. Anyone have a ready answer? I certainly don't buy the accusations from the right that it is the fault of public unions. I am certain the profit taking will be lucrative enough there that many other big cities will undergo the same process.

[bemildred]

12. Shock Doctrine is just debt-enslavement, it can be applied (and is) at any level.

Individuals, cities, counties, states, other businesses, foreign nations, or your own, it can eat them all.

[Enthusiast]

13. And who speaks for us?

Seems like almost no one.

[Blue_Tires]

17. Taibbi illustrated beautifully how city governments get scammed:

Say your town wants to build a new elementary school. So it goes to Wall Street, which issues a bond in your town's name to raise $100 million, attracting cash from investors all over the globe. Once Wall Street raises all that money, it dumps it in a tax-exempt account, which your town then uses to pay builders, plumbers, the chalkboard company and whoever else winds up working on the project.

But here's the catch: Most towns, when they raise all that money, don't spend it all at once. Often it takes years to complete a construction project, and the last contractor isn't paid until long after the original bond is issued. While that unspent money is sitting in the town's account, local officials go looking for a financial company on Wall Street to invest it for them.

To do that, officials hire a middleman firm known as a broker to set up a public auction and invite banks to compete for the town's business. For the $100 million you borrowed on your elementary school bond, Bank A might offer you 5 percent interest. Bank B goes further and offers 5.25 percent. But Bank C, the winner of the auction, offers 5.5 percent.

In most cases, towns and cities, called issuers, are legally required to submit their bonds to a competitive auction of at least three banks, called providers. The scam Wall Street cooked up to beat this fair-market system was to devise phony auctions. Instead of submitting competitive bids and letting the highest rate win, providers like Chase, Bank of America and GE secretly divvied up the business of all the different cities and towns that came to Wall Street to borrow money. One company would be allowed to "win" the bid on an elementary school, the second would be handed a hospital, the third a hockey rink, and so on.

How did they rig the auctions? Simple: By bribing the auctioneers, those middlemen brokers hired to ensure the town got the best possible interest rate the market could offer. Instead of holding honest auctions in which none of the parties knew the size of one another's bids, the broker would tell the pre­arranged "winner" what the other two bids were, allowing the bank to lower its offer and come in with an interest rate just high enough to "beat" its supposed competitors. This simple but effective cheat – telling the winner what its rivals had bid – was called giving them a "last look." The winning bank would then reward the broker by providing it with kickbacks disguised as "fees" for swap deals that the brokers weren't even involved in.

The end result of this (at least) decade-long conspiracy was that towns and cities systematically lost, while banks and brokers won big. By shaving tiny fractions of a percent off their winning bids, the banks pocketed fantastic sums over the life of these multimillion-dollar bond deals. Lowering a bid by just one-100th of a percent, called a basis point, could cheat a town out of tens of thousands of dollars it would otherwise have earned on its bond deposits.

http://www.rollingstone.com/politics/news/the-scam-wall-street-learned-from-the-mafia-20120620?page=2

http://www.rollingstone.com/politics/blogs/taibblog/notes-on-wall-streets-bid-rigging-scandal-20120622

[marmar]

5. k/r

[Trust Buster]

6. Wall Street has hurt countries, counties, cities and pensions

Cities like Birmingham and countries like Greece and Iceland have been financially devastated by Wall Street derivatives. Pension funds were robbed by Wall Street and now their Right wing defenders point to "greedy" teachers, policeman and firefighters to lay blame. If only America would wake up.

[econoclast]

22. Actually Ireland

Managed to have its financial ccrisis without much help from derivatives.

[Trust Buster]

25. Think again

http://ftalphaville.ft.com/2010/12/21/444026/anglo-irish-indigestion-off-balance-sheet/

[OLDMDDEM]

7. Wall Street

I just wish that our Justice department would work more closely with the New York State Attorney General and start putting some of these banksters behind bars. This is pathetic. Spending less on the streets of LA because the city has to spend more? Invest on Wall Street and you are sure to lose. The system is rigged with high frequency trading and the only ones who win control the switch.

[Turbineguy]

8. It's their job.

The art of being a parasite is to not kill the host.

[Overseas]

9. K&R. Glad it is being exposed.

[abelenkpe]

14. Wall street is also a big reason so many Entertainment jobs

Have been recently offshored. Gotta keep always making more for shareholders and CEOs. So always cut cut cut labor costs. Read recently that the taxes from jobs lost in the VFX industry last year would have paid for all the recent cut to social programs for the poor and elderly in CA. Good thing our industry has been carved up and offshored in Bain capital style.

I thought we would have done more to limit Wall Street by now.

[flamingdem]

16. Agree but the studios bear a responsibility as well

The fat cats there like those subsidies in Louisiana, B.C. etc.

[zappaman]

18. They do but

California leads the nation in making it tough for businesses.
No matter what the business, the hurdles and penalties are ridiculous.
I wish the studios would stop sending almost everything out of state, but when you can spend 80 million instead of 130 million for the same product, it kinda makes sense.

[abelenkpe]

19. So true

[hibbing]

15. "Great Recession" = George W. Bush Recession

I am always amazed how the idiot son's name is never attached to the financial meltdown.

Peace

[me b zola]

20. K&R

[econoclast]

21. LA is handing the money over

Truth be told, Wall St isnt sucking the money out ... LA is voluntarily handing it over to the Wall Streeters. The LA controller's audit report ( easy to find in the web ) freely admits that if LA's City Employee pension fund (LACERS) and the Police and Fire pension fund (LAFPP) simply opted "passive" vs "active" investment management their investment management fees would be 2-3 million for each fund instead of 20+ million for each fund. So Wall St isn't snookering them ... LA is just handing it over voluntarily! Of course Wall St is taking it if its on offer. But why is LA offering?!?!? Don't carp to Wall St .... Yell at the LA elected reps and the Union management. Whether they optfot active or passive investment is their call!

[badtoworse]

23. What are the fees for?

The article talks about interest rate swaps which is likely a large portion of the fees. LA is on the hook because the Fed and the ECB drove interest rates to near zero levels after the swaps were executed. That is not Wall Street's fault. If and when rates go back up, it will be Wall Street paying LA if rates go over the notional rate in the swap.

ETA: Both parties are at risk in swap. As interest rates rise and fall, one party pays the an amount that maintains the agreed fixed rate on the debt. If rates go very high, Wall Street would be on the hook for large amounts of money.

[onethatcares]

24. aside from settlement penalties

that are less than the gains, when was the last time you saw a wall street firm lose?

I don't remember seeing many headlines about those.

[badtoworse]

27. It depends on what you mean by lose.

When I was an asset manager for an independent power producer, we had a swap in place on a certain project's debt. It went back an forth as to who paid who under the swap - some quarters, we paid and some quarters, the bank paid us. I can't say for certain who came out on top, but it was certainly not one-sided.

Anyone who swapped floating rate debt for a fixed rate prior to 2008, got killed. Interest rate swaps do involve risk and I'm sure the LA financial managers understood that. Had rates gone up, they would have looked like geniuses.

[econoclast]

26. They - the Wall St'ers usually sell

Both ends of the swap. They take a coupl'a basis points spread ... But someone else out there probably owns the other side. LA's loss is their gain. But the swap originator usually never holds the risk. Thats why they never lose.

[badtoworse]

29. That is true, but it doesn't change the fundamentals.

Whoever is holding a position in the swap is at risk and both sides get what they bargained for. The way to look at is that LA wanted fixed rate debt in 2008 and swapped for it. They would have been way better sticking with a floating rate, but at the time, it was impossible to know.

[econoclast]

30. Agreed

[rumdude]

28. Like the way LA is sucking water away from the rest of California?

Leaving small towns and farmers high and dry.

No love lost for LA here...