How Wall Street Screws Municipal Governments

[BernieforPres2016]

In all of the misdeeds of Wall Street over the last decade, until Bernie Sanders brought up what interest rate swaps sold by Wall Street to the city of Chicago have done to the finances of Chicago in his meeting at a Chicago church on Saturday with Jesse Jackson, I had forgotten all about them. Some might not be familiar with them. Many cities and counties have been badly damaged by products Wall Street sold to them without properly disclosing the associated risks. Jefferson County, AL, home of Birmingham, the largest city in the state, filed for bankruptcy several years ago in large part due to an interest rate swap gone bad.

As Bernie pointed out, while cities like Philadelphia and Detroit have sued or threatened to sue Wall Street and recovered part of their losses, former Wall Streeter and Clinton protege, mayor Rahm Emanuel of Chicago, has closed large numbers of Chicago public schools (and mental health facilities) due to budget shortfalls while dutifully paying $36 million per year to Wall Street banks on interest rate swap products that have gone bad. Emanuel, who doesn't hesitate to employ bare knuckle tactics with the Chicago teacher's union (which had endorsed Bernie), won't go after Wall Street, which still favors him with campaign contributions.

Here is a link to a 16 page paper (in PDF form) that is a very good summary of how Wall Street screws municipal governments and what kinds of changes need to be made, along with a few short excerpts. This is another example of the Wall Street greed and corruption that Bernie Sanders is campaigning against as Wall Street funds SuperPacs for Hillary Clinton.

http://rooseveltinstitute.org/wp-content/uploads/2015/11/Bhatti_Dirty_Deals.pdf

<There is a saying that a budget is a moral document. If that is true, then cities like Detroit are bankrupt in more ways than one. Across the country, elected officials in financially distressed cities and states are cutting essential community services like mental health clinics and public schools in order to address budget crises, but they are faithfully paying Wall Street for predatory financial deals. In public budgeting parlance, funding for services is called discretionary spending but payments to Wall Street are considered mandatory.

Most people would agree that the most important debt that a school system owes is to students, to provide them with a decent education. In reality though, school districts like Philadelphia’s are routinely forced to increase class sizes, lay off teachers and guidance counselors, and close schools to pay predatory debts to Wall Street. The financialization of the United States economy over the last 35 years has distorted our social,economic, and political priorities. The primary function of government is to provide services to residents (e.g., streets, schools, fire protection, national defense), not to provide a profit to Wall Street. However, in the financialized economy, Wall Street profits trump all other priorities.>

<The current Wall Street business model is premised on extraction. The more money bankers can extract from the economy, the bigger their end of year bonuses will be. In municipal finance, this means diverting public dollars that are supposed to be spent on Main Street back to Wall Street. As tax rates for corporations and top income-earners have declined over the past 35 years, cities and states have been forced to take out debt to pay for things they used to be able to afford. This has provided banks with the opportunity to extract vast amounts of taxpayer dollars. Outstanding municipal bond debt has grown tenfold since 1981, from $361 billion to $3.7 trillion.>

<As public officials have been forced to increase borrowing to keep up with the growing demands of their communities, Wall Street firms have taken advantage of this crisis by steering municipal borrowers toward more complex debt deals that generate more fee revenue, turning a plain vanilla corner of banking into a complicated goldmine for bankers. The financialized economy allows Wall Street to extract wealth out of every transaction. Whether a parent takes out a loan to send a kid to college or a public agency issues a bond to pay for basic services, banks get to take a cut through fees and interest. This enriches the financial sector at the expense of working families, contributing to the growing inequality in our country.>

<In Chicago, Mayor Rahm Emanuel’s Board of Education voted to close 50 schools in 2013, the largest mass school closing in American history. This displaced 30,000 students, approximately 90 percent of whom were African American. Chicago Public Schools (CPS) claimed each school it closed would save the district $500,000 to $800,000 annually. Altogether, this means that the school closings would save the district at most $40 million. CPS pays $36 million a year on interest rate swap deals, enough money to keep at least 45 schools open. But instead of spending its money running schools, CPS is forced to prioritize payments to Wall Street ahead of children’s education. Parents and teachers have called on the Mayor and the Board of Education to challenge the legality of the swap deals on the grounds that the deals likely violated the MSRB’s fair dealing rule (see above), but to no avail. >

<Opacity is a threshold problem in municipal finance. Not only do financial institutions purposely obscure the terms and provisions of complicated financial contracts, but it can also be nearly impossible to get a full accounting of all the money that taxpayers are spending every year for financial services. Public officials are often contractually prohibited from disclosing fees and fee structures to the general public, sometimes in direct conflict with state open records laws. Banks and other Wall Street firms, especially private equity firms and hedge funds, fight to maintain a shroud of secrecy over fees in order to hide arbitrary and disparate fee structures. This makes it difficult to bring any accountability into the system or to have effective taxpayer oversight over financial deals.

Between cash management, debt management, and investment management for state and local governments, school districts, public agencies, and public pension funds, taxpayers do trillions of dollars in business with Wall Street firms every year. We deserve to know how our money is being spent and where it is going, and we should be able to evaluate the terms of all financial transactions.>