How the Bankers of Wall Street Are Helping to Bankrupt America

Submitted by Elaine Magliaro, Guest Blogger

I’ve heard many politicians talk about what they believe were the causes of the financial meltdown of 2008 and the money problems facing our federal, state, and local governments today. These causes include: collective bargaining, pensions, healthcare costs for public workers; subprime mortgages taken out by poor people who couldn’t actually afford to buy homes; the high costs of Social Security, Medicare, and Medicaid. Many of these same politicians rarely put the blame for the financial crises we are experiencing in this country today on the cost of waging two wars—or on the financial shenanigans of the big banks of Wall Street.

In February of 2010, Mike Elk wrote an article for the Huffington Post titled How Big Banks’ Greek-Style Schemes Are Bankrupting States Across the U.S. In it, he talked about a financial instrument called the “interest rate swap”—which is a kind of unregulated derivative.

Here’s an excerpt from Elk’s article:

Just when you thought Wall Street couldn’t get any more clever in their attempts at predatory lending, they have.

Big Banks have created an exotic financial instrument that is the equivalent of a payday loan for cash-strapped state and local governments, innocently labeled an “interest rate swap.”

In the United States, states and local governments cannot run deficits. This year states face a $357 billion budget shortfall and local governments are facing an additional $82 billion budget shortfall. States have begun cutting basic services like snow removal, reduced garbage pickup, and in Colorado Springs they went to the pawn shop – selling police helicopters on the Internet.

In a desperate effort to meet budget needs, states and local governments over the last decade have gone to the big banks to ask for exotic instruments known as interest rate swaps. These desperate state and local governments were taken advantage of in the same way that Greece was by Goldman Sachs. Likewise, these swaps are threatening the economic health of local cities and states.

Shouldn’t there be more discussion on news programs and in Congress about these “exotic financial instruments” that may be a big contributing factor to the poor financial health in which many of our states and municipalities find themselves?

In Looting Main Street, an article Matt Taibbi wrote for Rolling Stone in the spring of 2010, the author detailed how interest rate swaps were helping to bankrupt Jefferson County, Alabama. Jefferson County’s troubles began when it had to finance a new sewer project and went looking for money. Then the vultures of Wall Street came swooping into town.

Taibbi wrote:

In 1996, the average monthly sewer bill for a family of four in Birmingham was only $14.71 — but that was before the county decided to build an elaborate new sewer system with the help of out-of-state financial wizards with names like Bear Stearns, Lehman Brothers, Goldman Sachs and JP Morgan Chase. The result was a monstrous pile of borrowed money that the county used to build, in essence, the world’s grandest toilet — “the Taj Mahal of sewer-treatment plants” is how one county worker put it. What happened here in Jefferson County would turn out to be the perfect metaphor for the peculiar alchemy of modern oligarchical capitalism: A mob of corrupt local officials and morally absent financiers got together to build a giant device that converted human shit into billions of dollars of profit for Wall Street …

He continued:

And once the giant shit machine was built and the note on all that fancy construction started to come due, Wall Street came back to the local politicians and doubled down on the scam. They showed up in droves to help the poor, broke citizens of Jefferson County cut their toilet finance charges using a blizzard of incomprehensible swaps and refinance schemes — schemes that only served to postpone the repayment date a year or two while sinking the county deeper into debt. In the end, every time Jefferson County so much as breathed near one of the banks, it got charged millions in fees. There was so much money to be made bilking these dizzy Southerners that banks like JP Morgan spent millions paying middlemen who bribed — yes, that’s right, bribed, criminally bribed — the county commissioners and their buddies just to keep their business. Hell, the money was so good, JP Morgan at one point even paid Goldman Sachs $3 million just to back the fuck off, so they could have the rubes of Jefferson County to fleece all for themselves.

According to Taibbi, the original cost for the sewer project was estimated to be about $250 million. That amount was reported to have ballooned into a total indebtedness of $5 billion for Jefferson County over the years. Because of the sewer debacle, the county was not only “saddled with an astronomical debt on its sewer project, it also saw a downgrade in its overall credit rating, which left it paralyzed in its attempts to borrow money to pay for general expenditures.” This is why people’s sewers bills exploded by 400%! This is why the county had to lay off many of its employees—who also lost their health insurance. This is also why Jefferson County had to file for bankruptcy last fall.

Bloomberg reported that Jefferson County’s Chapter 9 filing left creditors like JP Morgan “facing hundreds of millions of dollars in losses” and that it could “revive concern that defaults may rise in the $2.9 trillion municipal bond market.” The filing also leaves county residents uncertain as to how much they may be charged for sewage fees in order to repay the debt. Bloomberg also reported that JP Morgan agreed to a $722 million settlement with the SEC in 2009 “over payments its bankers allegedly made to people tied to county politicians in order to win business.” According to a Reuters report, at least twenty-two individuals have been convicted on charges of corruption, bribery, and fraud.

So…corrupt county officials and contractors have gone to jail. So…JP Morgan pays a multi-million-dollar fine to the SEC. So what? Does it fix things for all the people in Jefferson County who lost their jobs and health insurance because unethical politicians, contractors, and bankers were made to pay for their crimes? Does it help the poor people who can’t afford to pay their water and sewer bills? Does it help the poorest residents of Birmingham who say they can no longer afford to pay for running water?

One gentleman who lives in Birmingham says he has found it cheaper to purchase water from a gas station and to pay a sanitation company to remove waste from his “porta-potty” than to pay his water and sewer bill—which can amount to $300 some months. One Birmingham woman said that after she pays her water and sewer bill she doesn’t have much money left from her monthly $600 Social Security check to pay for food and electricity.

And so it goes. No help for the poor of Jefferson County. Yet, the wizards of Wall Street who are helping to bankrupt our communities are making a killing!

I’d say we need some REAL financial reform in this country NOW…before we become a third world country. Shouldn’t interest rates swaps and other “exotic financial instruments” be regulated? What do you think?


How Big Banks’ Greek-Style Schemes Are Bankrupting States Across the U.S. (Huffington Post)

Jefferson County Files for Chapter 9 Bankruptcy Protection (JEFFCOnline—The Offical Website of Jefferson County, Alabama)

Looting Main Street: How the nation’s biggest banks are ripping off American cities with the same predatory deals that brought down Greece (Rolling Stone)

Jefferson County, Alabama: Screwed By Wall Street, Still Paying (Rolling Stone)

“Looting Main Street”–Matt Taibbi on How the Nation’s Biggest Banks Are Ripping Off American Cities with Predatory Deals (Democracy Now)

Alabama county files biggest municipal bankruptcy (Yahoo/Reuters)

Alabama’s Jefferson County Declares Biggest Municipal Bankruptcy (Businessweek)

The Fleecing of Alabama: The Bills Come Due (Bloomberg)

The scandal of the Alabama poor cut off from water (BBC)

117 thoughts on “How the Bankers of Wall Street Are Helping to Bankrupt America

  1. Wall Street Executives Expected To See Smaller Paychecks As Industry Restructures

    Wall Street firms will be getting a more modest payday this year, though how long it lasts will be anyone’s guess.

    Executive paychecks at big financial firms are expected to come in around 30 percent smaller this year than they were in 2010, according to a recent report in the Wall Street Journal. The projections track with an overall expectation that quarterly earnings will prove underwhelming at some of the country’s largest banks when they are reported in a few days.

    That executives could suffer alongside lower-level employees would be a slight shift away from recent expectations. While pay reductions are in store for bankers and executives at all levels of the corporate ladder, according to a separate WSJ article, it’s generally been the youngest and least-seasoned employees on Wall Street who have been most at risk for layoffs, and who stand to lose the most in salary and bonuses this time around.

    And if history is any guide, this year’s salary declines might only prove a temporary setback, as banker pay dipped in the immediate wake of the financial crisis but rebounded relatively quickly.

  2. Federal Reserve Preoccupied With Inflation, As Housing Market Collapse Approached

    In 2006, while a housing bubble was swelling that would eventually trigger a near-collapse of the American economy, the Federal Reserve was more preoccupied with inflation than anything else, according to recently released transcripts of Federal Open Market Committee meetings.

    The transcripts, which give word-for-word accounts of what was said at eight Fed meetings that took place in 2006, reveal that while some of the nation’s top bankers spotted the trouble brewing in the housing market, many more of them — including people who have since gone on to positions of greater prominence, like Secretary of the Treasury Timothy Geithner — believed their top priority should be heading off a rise in inflation.

    In the meeting records, which were made public on Thursday, the repeated warnings about inflation echo a conversation that has taken place in recent months, with left-leaning economists saying the Fed should make more currency available to encourage spending and investment — and potentially ease the pain of an economy barely in recovery — and conservative economists arguing that this would push the value of the dollar too low.

    “I think inflation risks should remain our predominant concern,” said Geithner, then president of the Federal Reserve Bank of New York, in late October of 2006.

    To be sure, one of the Fed’s primary jobs is to keep inflation in check. Still, it’s notable that as one of the biggest financial crisis in U.S. history approached the nation’s top economists were asleep at the wheel.

  3. “To be sure, one of the Fed’s primary jobs is to keep inflation in check. Still, it’s notable that as one of the biggest financial crisis in U.S. history approached the nation’s top economists were asleep at the wheel.” (from the huff link above)

    Just like Bush’s Administration, the CIA and all other Intelligence agencies just prior to 9/11 … Republicans seem incapable of governing anything without falling asleep at the wheel and thus permitting havoc to reign on we, the citizens.

  4. Banks Probed For Allegedly Steering Homeowners Into More Expensive Insurance

    Let’s say you’re a homeowner facing tough times. You’re starting to fall behind on your home insurance payments, but then, your bank steps in and buys an insurance policy on your behalf. Good news, right? Not if your bank steers you into a policy that’s 10 times more expensive than your previous one.

    This practice, known as forced-place insurance, is the subject of a probe by New York State’s Department of Financial Services into some of the country’s biggest banks, according to reports in The New York Times and Reuters. The inquiry, which is already underway, has implicated a number of major financial firms, including JPMorgan Chase, Wells Fargo, Citigroup and Bank of America.

    The stories of banks making costly, potentially destructive decisions on behalf of homeowners come as millions of Americans are already trying to cope with diminished wealth due to a weak housing market, which many allege was caused in part by banks and lenders pushing risky loans on homeowners.

    Such allegations also recall earlier claims of reverse redlining, in which mortgage servicers systematically preyed on black homeowners and other minorities. Bank of America recently agreed to pay $335 million to settle claims of such discrimination by Countrywide Financial.


    “Winning Our Future has spent $1.3 million so far to book television time in South Carolina, and it said on Thursday that it planned to spend a total of $3.4 million on radio and television ads through the Jan. 21 primary. It is financed by a $5 million donation from a wealthy casino owner in Las Vegas, Sheldon Adelson, who has long supported Mr. Gingrich.”

  6. Have Banks Been Robo-Signing Credit Card Documents Too?
    By Pat Garofalo on Jan 17, 2012

    Several months ago, the nation’s biggest banks became embroiled in the “robo-signing” scandal, when it became clear that they had been approving thousands of foreclosures without verifying the proper documents or guaranteeing borrowers due process. The banks submitted fraudulent documents to courts and were forced to halt their foreclosures processes entirely as they sorted out what happened. “I had no idea what I was signing,” said one Bank of America employee. “We had no knowledge of whether the foreclosure could proceed or couldn’t, but regardless, we signed the documents to get these foreclosures out of the way.”

    Robo-signing people into foreclosure is bad enough. But as it turns out, the practice may not have been limited to residential mortgages. American Banker, in fact, notes that JP Morgan Chase may also have been robo-signing credit card deals:

    JPMorgan Chase & Co. has quietly ceased filing lawsuits to collect consumer debts around the nation, dismissing in-house attorneys and virtually shutting down a collections machine that as recently as nine months ago was racking up hundreds of millions of dollars in monthly judgments…It is unclear whether Chase has stopped pursuing collection on many claims nationwide, or if intends to pursue the debts in some other fashion. The bank has not explained its apparent moratorium and declined comment.

    Chase’s halt does, however, follow scattered defeats in state courts and a whistle-blower’s allegation that it falsely overstated the balances of thousands of delinquent accounts it sold to a third party. Former Chase employees and debt collection experts insist that the bank would not have abruptly retreated from its collections efforts in the absence of trouble. […]

    Robo-signing, or the high-volume production of signed legal documents, has been a key element of the governmental and media foreclosure reviews. Chase’s current pullback raises at least the possibility that at least some banks may have documentation problems in other business lines…”If sloppy record keeping and problems with false affidavits is a problem with mortgages, it’s 100 times bigger in credit card accounts,” says Michelle Weinberg of the Legal Assistance Foundation of Metropolitan Chicago.

    As one finance blogger put it, “When a bank leaves money on the table for no obvious reason, you know that something’s not quite right.” It seems that JP Morgan, and who knows how many other banks, were attempting to collect on debts without being certain that the amount they were asking for was accurate. One whistle blower looked at $200 million in JP Morgan customer accounts and claims to have found that “half the accounts lacked adequate documentation of judgment and one-sixth listed the wrong amounts owed.”

    Banks have been robo-signing documents since as least 1998, as an Associated Press investigation found, and its not all that surprising that a practice that worked so well for so long (at least in the eyes of the banks) would have migrated to other areas.

  7. Obama Is on the Brink of a Settlement With the Big Banks—and Progressives Are Furious
    George Zornick on January 23, 2012
    The Nation

    For months, a massive federal settlement with big Wall Street banks over their role in the mortgage crisis has been in the offing. The rumored details have always given progressives heartburn: civil immunity, no investigations, inadequate help for homeowners and a small penalty for the banks. Now, on the eve President Obama’s State of the Union address—in which he plans to further advance a populist message against big money and income inequality—the deal may be here, and it’s every bit as ugly as progressives feared.

    The Associated Press reports that a proposed deal could be announced within weeks. Five banks—Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC)—would pay the federal government $25 billion. About $17 billion would be used to reduce the principal that some struggling homeowners owe, $5 billion more would be used for future federal and state programs and $3 billion would be used to help homeowners refinance at 5.25 percent. Civil immunity would be granted to the banks for any role in foreclosure fraud, and there would be no investigations.

    There are several reasons why this is could be a terrible deal. For one, the dollar amount is inadequate in relation to both the tremendous loss of wealth via mortgage fraud and the hefty balance sheets of these massive companies. Furthermore, the banks might be allowed to use investor money instead of their own funds—this makes the penalty even lower. Beyond all that: it’s extremely hard to justify the absence of investigations and punishment for mortgage fraud that was so widespread and so damaging to people’s lives.

    There are also many other, more serious problems besides a lack of punitive action. The small amount of money—and the federal government’s recent inability to truly help underwater mortgage holders, of which there are currently 11 million—means that the victims of mortgage fraud might not see enough relief. And perhaps most importantly, with no real punishment for widespread damaging fraud, what are the incentives on Wall Street not to engage in similarly destructive practices once again?

    On a major conference call this morning, many leading progressive voices inside Washington and out blasted the deal.

    Senator Sherrod Brown of Ohio characterized the rumored deal as “not much more than a slap on the wrist,” and added that while banks were always know to be too big to fail, they were now apparently “too big to jail.”

    “When laws are broken there need to be full investigations,” Brown said. “Wall Street should not get another bailout.”

    Brown urged Obama to reject the deal and order investigations into the banks’ practices immediately. Simon Johnson, an economist at MIT and well-known progressive voice, also called for no deal and immediate investigations.

    “This is not just the right thing do, and not just good politics, it’s good economics,” Johnson said. “What’s at stake here is the rule of law.”

    Robert Borosage, co-director of the Campaign for America’s Future, blasted the rumored deal as well and urged the administration to consider the political optics.

    “No one who robbed a bank would be offered immunity, a modest fine, and no admission of guilt before there was an investigation,” Borosage said. “Americans are increasingly cynical with the ability of democracy to deal with special interests.

  8. Hey Jonathan Turley and friends.

    How do I get a story to you on Bain & Goldman Sachs attorneys confessions to lying under oath and admitting intentional fraud on the court?

    Case still open after 11 years and Court stated lying under oath 34 + was NOT proof of Perjury, While the US Attorney in DE (Connolly) refused to investigate or prosecute Goldman Sachs, Bain and its law firm MNAT.

    But Colm Connolly also had his OWN issue of a serious Conflict of Interest.

    he was a partner at MNAT in 2001

    The very year the crimes began.

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