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Wall Street's Biggest Heist Yet? How the High Wizards of Finance Gutted Our Schools and Cities

The complex machinations that pitted county treasurers against the deceptive wizards of Wall Street.

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No one has accused SIFMA, the other interest rate benchmark used to set variable rates of interest on municipal bonds, of overseeing a rigged index but it is certainly not a comfort to understand just what SIFMA is.  On its web site, SIFMA defines itself as follows:  “The Securities Industry and Financial Markets Association (SIFMA) represents the industry which powers the global economy.  Born of the merger between the Securities Industry Association and the Bond Market Association, SIFMA is the single powerful voice for strengthening markets and supporting investors -- the world over.”

Notice that the words “Wall Street” do not appear in this description and yet, that is precisely what SIFMA is: a Wall Street trade association that viciously lobbies for Wall Street. (As for “supporting investors,” it should be sued for false advertising.)  In February of this year, it even  sued the top regulator of derivatives, the Commodity Futures Trading Commission in Federal Court to stop it from setting limits on the maximum size of derivative bets that can be taken in the market.

From 2000 through 2011, SIFMA spent $96.4 million lobbying Congress on behalf of Wall Street.  In the 2008 election cycle, according to the Center for Responsive Politics, SIFMA spent $865,000 in political donations, giving to both Republicans and Democrats.

In March 2010, the Service Employees International Union (SEIU) issued a report indicating that from 2006 through early 2008 banks are estimated to have collected as much as $28 billion in termination fees from state and local governments who were desperate to exit the abusive interest rate swaps.  That amount does not include the ongoing outsized interest payments that were and are being paid. Experts believe that billions of abusive swaps may be as yet unacknowledged by embarrassed municipalities.  

In 2009, the Auditor General of Pennsylvania, Jack Wagner, found that 626 swaps were done in Pennsylvania between October 2003 and June 2009, covering $14.9 billion in municipal bonds.  That encompassed 107 of Pennsylvania’s 500 school districts and 86 other local governments.  The swaps were sold to the municipalities by Citibank, Goldman Sachs, JPMorgan and Morgan Stanley.

In one case cited by Wagner, the Bethlehem Area School entered into 13 different swaps, covering $272.9 million in debt for school construction projects.  Two swaps which had concluded at the time of Wagner’s investigation cost taxpayers $10.2 million more than if the district had issued a standard fixed-rate bond or note and $15.5 million more than if the district had simply paid the interest on the variable-rate note without any swaps at all.

And therein lies the rub. Municipalities never needed these nonsensical weapons of mass deception.  Muni bond issuers could have simply done what muni investors have done for a century – laddered their bonds.  To hedge risk, an issuer simply has bonds maturing along a short, intermediate and long-term yield curve.  If rates rise, they are hedged with the intermediate and long term bonds.  If rates fall, the short munis will mature and can be rolled over into the lower interest rate environment.  Municipal issuers are further protected by being able to establish call dates of typically 5 years, 7 years, or 10 years when they issue long terms bonds. They pay moms and pops and seniors across America, who buy these muni bonds,  a small premium of usually $10 to $20 per thousand face amount and call in the bonds if the interest rate environment becomes more attractive for issuance of new bonds.

According to the June 30, 2011 auditor’s report for the City of Oakland, California, the city entered into a swap with Goldman Sachs Mitsui Marine Derivatives Products in connection with $187.5 million of muni bonds for Oakland Joint Powers Financing Authority.  Under the swap terms, the city would pay Goldman a fixed rate of 5.6775 percent through 2021 and receive a variable rate based on the Bond Market Association index (that was the predecessor name to the SIFMA index). In 2003, the variable rate was changed from being indexed to the Bond Market Association index to being indexed at 65 percent of the one-month Libor rate.

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