Goldman Sachs and Interest Rate Swaps in Oakland

The Occupy Oakland protesters had good reason to protest against Wall Street and Goldman Sachs. However, why a municipality would "bet" its money with an interest rate swap is a puzzle.

In any case, if you want to know how those TBTF banks do business, without any regard for the welfare of the community and with their goal to accumulate as much wealth as they can, then the following excerpt will give you pause:

Oakland's Toxic Deal with Wall Street
The city has already paid $26 million to Goldman Sachs, and local activists say the deal is unfair gift of public funds and should be terminated.
By Darwin BondGraham - East Bay Express

Oakland's debt to Goldman Sachs has angered progressives in part because the Wall Street giant received multibillion-dollar bailouts from the federal government, and yet refuses to renegotiate expensive financial instruments with cities that are costing local taxpayers millions more. During a meeting last June on Oakland's budget, Councilwoman Rebecca Kaplan fired off a letter to Goldman Sachs' CEO: "Many of us stood united as leaders supporting federal action that used taxpayer funds to save your company from economic disaster," Kaplan wrote to Lloyd Blankfein, whose pay topped $40 million in 2008. "These actions — to use taxpayer dollars in order to salvage private, for-profit corporations — was justified to the public on the grounds that it would enable companies such as yours to then be able to operate in a manner that would be beneficial to the public.

"Unfortunately," she concluded, "that half of the deal has not taken place."

Kaplan's letter followed research by the Service Employees International Union and the Alliance of Californians for Community Empowerment that exposed the unfairness of so-called rate-swap agreements between cities and investment banks across California. Last June SEIU members picketed the California Street offices of Goldman Sachs in San Francisco, demanding renegotiation of the deal's terms. "The $26 million the city has already paid is half of Oakland's deficit this year," activists said at the time, "but only 1 percent of Goldman Sachs' profits for the first quarter of 2011." But this campaign, as well as a resolution for the Oakland City Council to seek termination of the swap deal, later fell by the wayside.

The toxic rate-swap agreement in question dates to 1997 when Goldman Sachs convinced Oakland officials that it would protect taxpayers against the possibility that interest rates would rise on variable rate bonds that the city planned to issue the next year. Rate swaps — essentially contracts between two parties — allow governments to transform variable-rate debt payments into fixed-rate debt. Oakland's deal with Goldman Sachs converted floating rates on $187 million of bond debt into a fixed 5.6 percent.

The problem for Oakland, however, was that floating interest rates only briefly exceeded 5.6 percent in the past fifteen years; first between 1998 and 2001, and again at the height of the housing bubble between 2006 and 2008. During the economic recession that followed 9/11, interest rates plummeted below 2 percent, forcing Oakland to make much higher payments to Goldman Sachs than it would have had it never signed the deal. Then, with the collapse of the economy in 2008, the US Federal Reserve reduced its lending rates to virtually zero, with variable rates in markets trailing close behind. Yet Oakland was still stuck paying more than 5 percent.

You can read the whole article here