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?
SOURCES
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)
You are right Elaine!
I think we need Jesse James.
Otteray,
What stinks on Wall Street is the stench of rotting morals and business ethics.
Sewage is not the only thing that stinks in Jefferson County, Alabama.
rafflaw,
I’d say “kind of” is an understatement.
Great link Elaine. Kind of incestuous, don’t you think?!
Otteray Scribe 1, January 8, 2012 at 10:08 pm
Dredd, are you referring to the building, or the people who financed it? Or both?
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LOL.
Yep. The ground hog and the hog, the Taj M’Hog.
Dredd, are you referring to the building, or the people who financed it? Or both?
Gene,
Speaking of that revolving door–have you read this Rolling Stone article written by Matt Taibbi?
The S.E.C.’s Revolving Door: From Wall Street Lawyers to Wall Street Watchdogs
http://www.rollingstone.com/politics/blogs/taibblog/the-s-e-c-s-revolving-door-from-wall-street-lawyers-to-wall-street-watchdogs-20110330
Excerpt:
The SEC last week announced that Anne Small will serve as the SEC’s new deputy general counsel. Small worked in Wilmer Hale’s litigation department before snagging this post. She’ll be replacing Mark Cahn, who worked at – wait for it – Wilmer Hale for 20 years, until joining the SEC last March, when he stepped in to work for a fellow named Andrew Vollmer, who had served as the SEC’s Deputy General Counsel since 2006. Cahn will now be kicked upstairs into the General Counsel spot.
But guess who his predecessor Vollmer worked for? That’s right, Wilmer Hale. So a Wilmer lawyer comes in to replace a Wilmer lawyer, who replaced a Wilmer lawyer. Hence the firm’s nickname – “SEC West.”
Besides Cahn and Small, there are other ex-Wilmerites at the Commission. There’s Joseph Brenner, the chief counsel of the Enforcement Division, and Meredith Cross, who heads the Division of Corporate Finance. Both were Wilmer partners.
Of course it’s not like the traffic doesn’t go in both directions. Last year the SEC’s head of trading and markets, Daniel Gallagher, left to become a Wilmer partner. And the SEC’s former Director of Enforcement William McLucas is now the head of Wilmer’s securities department. The firm hired the head of the SEC’s Los Angeles office, Randall Lee, in 2007. And so on and so on.
Exactly how tough do you think all these ex-Wilmer lawyers will be on current Wilmer clients like Goldman, Citigroup, Morgan Stanley, General Electric, Credit Suisse, and practically every other major financial services company? The shamelessness factor is growing by the minute.
puzzling,
What’s your point? That banks should be regulated–or that they shouldn’t be regulated?
Taj Manure?
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Great article, Elaine. A perfect illustration of why the revolving door between the Government, the financial services sector, and lobbying should be nailed shut and filled in with concrete.
puzzling 1, January 8, 2012 at 7:32 pm
Why is government borrowing to build a “Taj Mahal” of sewer treatment plants in the first place?
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I think the scholarly term is “Terds Mahal” isn’t it?
Government “charters” these banks in the first place, and allows them to put new money into circulation through fractional-reserve lending.
Can you or I lend money we don’t have?
Why should banks be able to do so?
Would you or I lend an unemployed worker $500K to speculate on a new house with no money down in LA’s Inland Empire?
Would you or I lend Birmingham, Alabama part of their billions for the Mother-of-All sewers?
Would you or I lend $200K to student getting their master’s in social work?
puzzling,
Did I say that JP Morgan was he ONLY guilty party?
What is the cure for unethical and greedy bankers? No government regulations?
Why is government borrowing to build a “Taj Mahal” of sewer treatment plants in the first place?
This corrupt transaction was envisioned and then sponsored by government itself:
Former Jefferson County Commissioner Gary White sentenced to 10 years in prison
Jefferson County should have declared bankruptcy back in 2008. Instead, government continued to screw with local fees further robbing citizens who could ill afford it. I expect that some of them may have even been cut off from water and sewer services in the process.
JP Morgan is hardly the only guilty party here.
What is the cure for corrupt government? Ever more government and government regulators?
It’s no mystery why this has been going on for generations, when coupled with the fact that corporations are given free rein to corrupt our election process.
Non-living legal constructs that are solely motivated by greed, and driven by their charters to create profits by any means necessary, work as hard as they can to deceive the gullible wherever they can find them. This includes dumping large sums of money into campaigns to ensure the elections of their puppets, or those they know to be sufficiently naive as to do their bidding, and it includes bribery and fraud and blackmail and any other tools they choose to use. Coupled with the near lack of any significant penalties when caught, it makes business sense to operate in this manner.
Expecting a different outcome from these collective inputs is what is really naive (and I don’t mean you, Elaine, but rather those who persist in blaming the patsies for being taken in by such scams).
There will always be sociopaths, and they are concentrated in the finance industry. Sociopaths do not care anything about the outcome, other than that they profit from it. This is the M.O. of those perpetrating these scams against the people.
Has anyone else noticed how much more of their daily lives are consumed just trying to avoid being screwed out of what little they still have? The average person does not have a chance when up against professional criminals–and that is what our finance system has become.
Is it any wonder the finance industry has been such a foe of the CFPB? They want to keep their position at the top of the heap by continuing to screw anyone who comes within their sight!
Fighting this enduring battle is the very reason for regulation in a civil society, and we are seeing what happens when regulations are gutted and/or ignored; the sociopaths will always win.
swarthmom
he talks a good game, but he going to be up against some strong players with lots of money and influence. obama and holder both will have to back him up and his appointment will have to go through the courts.
time will tell,but do we have the time or the will
Quite so Elaine.
What tends to mystify me is that this has been going on for generations, but our society seems to have some sort of amnesia about it.
In that sense the Ground Hog Day movie is non-fiction.