Municipalities increase their risks if they use the "innovative" products of investment banks, for example, interest rate swaps. It would be better for the public if all state and city revenue collected from taxpayers be used for the public purpose and not paid to TBTF investment banks who always want the biggest profit it can muster for themselves.
Sometimes Goldman's advice and actions become rocks around the necks of the municipalities: see here, here, here and here
So you would think that the Dodd-Frank bill would want to take this opportunity to deal with banks that advise municipalities badly or to take advantage of their lack of sophistication when it comes to the more exotic products they have on offer. We know that Goldman Sachs spends millions lobbying for the rules and the loopholes they want to see. You can see the sponsor and co-sponsors of bill HR 2827 here.
Now we have an article from Matt Taibbi of Rolling Stone that explains how the rules were sidelined by bill HR 2827. The likes of Goldman Sachs are exempted from performing their fiduciary duty to make the best deal possible for a municipality whose bonds they may be underwriting. The loophole is supportive of criminality.
Score: 1 for GS; 0 for Municipalities.
Wall Street Rolling Back Another Key Piece of Financial Reform
By Matt Taibbi - Rolling Stone (Taibblog)
. . . .
So what did Wall Street lobbyists and trade groups like SIFMA (the Securities Industry and Financial Markets Association) do? Well, they did what they’ve been doing to Dodd-Frank generally: they Swiss-cheesed the law with a string of exemptions. The industry proposal that ended up being HR 2827 created several new loopholes for purveyors of swaps and other such financial products to cities and towns. Here’s how the pro-reform group Americans for Financial Reform described the loopholes (emphasis mine):
For example, any advice provided by a broker, dealer, bank, or accountant that is any way “related to or connected with” a municipal underwriting would be exempted from the fiduciary requirement. A similar exemption would be created for all advice provided by banks or swap dealers that is in any way “related to or connected with” the sale to municipalities of financial derivatives, loan participation agreements, deposit products, foreign exchange, or a variety of other financial products.So basically, if you’re underwriting a municipal bond for a city or a town, and you happen also to give the city or town advice about some deadly swap deal that will put the city into bankruptcy for the next thousand years, you don’t have a fiduciary responsibility to that city or town. The banks’ view is that being asked to perform the merely-technical function of underwriting a bond is very different from advising someone to take on an exotic swap deal – so if a bank is mainly an underwriter and happens to offhandedly recommend this or that swap deal, it just isn’t fair to drop this onerous financial responsibility, this weighty designation of municipal financial advisor, on its shoulders.
Please read the rest of the article here