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?

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)

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. Mitt Romney’s Bain Capital Bailout: GOP Candidate’s Firm Profited From Company That Required $44 Million Federal Bailout
    Reuters
    http://www.huffingtonpost.com/2012/01/06/mitt-romney-bain-capital-bailout_n_1189227.html

    Excerpt:
    It was funny at first.

    The young men in business suits, gingerly picking their way among the millwrights, machinists and pipefitters at Kansas City’s Worldwide Grinding Systems steel mill. Gaping up at the cranes that swung 10-foot cast iron buckets through the air. Jumping at the thunder from the melt shop’s electric-arc furnace as it turned scrap metal into lava.

    “They looked like a bunch of high school kids to me. A bunch of Wall Street preppies,” says Jim Linson, an electronics repairman who worked at the plant for 40 years. “They came in, they were in awe.”

    Apparently they liked what they saw. Soon after, in October 1993, Bain Capital, co-founded by Mitt Romney, became majority shareholder in a steel mill that had been operating since 1888.

    It was a gamble. The old mill, renamed GS Technologies, needed expensive updating, and demand for its products was susceptible to cycles in the mining industry and commodities markets.

    Less than a decade later, the mill was padlocked and some 750 people lost their jobs. Workers were denied the severance pay and health insurance they’d been promised, and their pension benefits were cut by as much as $400 (258 pounds) a month.

    What’s more, a federal government insurance agency had to pony up $44 million to bail out the company’s underfunded pension plan. Nevertheless, Bain profited on the deal, receiving $12 million on its $8 million initial investment and at least $4.5 million in consulting fees.

  2. Bron,

    Then perhaps you should be clearer in your presentation.

    Finance is but one of many subjects those in Congress could and should be better educated on, including technology, science, Constitutional law and – last but certainly not least – ethics.

  3. I’ve read much of Rothbard he’s a fabulous read. But I don’t find people’s minds are closed here, Elaine has been very polite and never dismissive. I’ll check out the book though thanks.

  4. Gene H:

    “Actually you did make that argument by implication. You did it when you said “Most of the elected government officials in this country along with the general population know nothing about money and finance” the implication being that government should be run by people who understand finance because they are allegedly financial professionals.”

    More baloney, I specifically recommended people be taught finance and economics in high school. Since America is all about business and finance it seems like a good idea that people know something about those subjects, that way the financial types on wall st. would not have superior knowledge.

  5. Jill:

    “Mr. Vacco continued: “What’s at the end of the string? The defense may be that ‘at the highest echelons of the financial institutions, we were in regular contact with the government.’””

    what is so earth shattering about that? Government is the problem, we need a separation of government and the economy. Laissez Faire is the only way to go. Dog eat dog and let the buyer beware. Granny gets conned now and we have a massive regulatory state which is totally impotent, it is a Potemkin Village, just there to make stupid feel secure.

    In a free market those “banksters” may still have been able to do what they did, but that is doubtful, but they absolutely would have paid the price through loss of their companies, personal fortunes [or substantial portions thereof] and they would not have been touched by any reputable company for the rest of their lives. In short they would have been done.

  6. Dave and Bron,

    I’d recommend a book by Nomi Prins titled “It Takes a Pillage: An Epic Tale of Power, Deceit, and Untold Trillions.” Prins is a former managing director at Goldman Sachs.

  7. Dave S:

    It is from the Mises Institute, it couldnt possibly have anything good to say. Well at least to many of the closed minds on this blog.

    Have you read Rothbard’s analysis of the causes of the Depression of 1929-1946/8? Very interesting reading.

  8. Revolving Door: From Top Futures Regulator to Top Futures Lobbyist
    By Matt Taibbi
    January 11, 2012
    http://www.rollingstone.com/politics/blogs/taibblog/revolving-door-from-top-futures-regulator-to-top-futures-lobbyist-20120111

    Excerpt:
    While America focused on New Hampshire, a classic example of revolving-door politics took place in Washington, going almost completely unnoticed. It’s a move that ranks up there with the hire of Louisiana congressman Billy Tauzin to head the pharmaceutical lobbying conglomerate PhRMA — at a salary of over $2 million a year — immediately after Tauzin helped ram through the Medicare Prescription Drug Bill, a huge handout to the pharmaceutical industry.

    In this case, the hire involves Walter Lukken, who toward the end of the Bush years was the acting head of the Commodity Futures Trading Commission. As the chief regulator of the commodities markets, it was Lukken’s job to spot and combat speculative abuses and manipulations that might have led to artificial price hikes and other disruptions.

    In 2008, the last full year of his tenure, Lukken presided over some of the worst chaos in the commodities markets in recent history, with major disruptions in the markets for food products like wheat, cotton, soybeans, and rice, and energy commodities like oil.

    Most notoriously, 2008 saw a historic spike in the price of oil futures, an enormously destructive speculative bubble that peaked in July of that year at the lunatic high price of $146 per barrel (Goldman, Sachs at the height of the mania was telling investors oil might go to $200 a barrel).

    It was Lukken’s job to spot the speculative abuses leading to disruptions like that bubble, but he didn’t do it. Instead, he repeatedly insisted that there was nothing untoward going on, most notoriously through testimony before the House and the Senate at the height of the oil boom.

    In testimony that summer, Lukken continually insisted that the price surge was due to normal supply-and-demand forces, ignoring the far more obvious explanation of a massive inflow of cash from commodity index speculators.

    Despite data showing that the amount of commodity index speculation had grown from $13 billion in 2003 to more than $260 billion as of March 2008 — in other words, the amount of money betting on a rise in commodity prices had risen by a factor of twenty during that time — Lukken on May 7, 2008 told the Senate that a more likely explanation for the surge could be found in the growth of industrial demand from places like China, and also, get this, in changes in the weather:

    These are extraordinary times for our markets with commodity futures prices at unprecedented levels. In the last three months, the agricultural staples of wheat, corn, soybeans, rice and oats have hit all-time highs. We have also witnessed record prices in crude oil, gasoline and other related energy products. Broadly speaking, the falling dollar, strong demand from the emerging world economies, global political unrest, detrimental weather and ethanol mandates have driven up commodity futures prices across-the-board.

    On top of these trends, the emergence of the sub-prime crisis last summer led investors to increasingly seek portfolio exposure in commodity futures. As the federal regulator of these products, the CFTC is closely monitoring these growing markets to ensure they are working properly for farmers, investors, and consumers. To date, CFTC staff analysis indicates that the current higher futures prices generally are not a result of manipulative forces.

    By insisting that the spike was “not a result of manipulative forces,” Lukken helped Wall Street in its efforts to avoid reforms that might have prevented such abuses, like the closing of a series of loopholes and exemptions that allowed a handful of major speculators to play a lopsided role in the setting of commodity prices.

    So what was Lukken’s reward for helping the financial services industry avoid such reforms? Well, Lukken has just been named to head the Futures Industry Association, or FIA, the chief lobbying arm of futures investors.

    This follows the Tauzin pattern of revolving-door hires: a government official carries water for a powerful industry, then moves on to take the cushy job with the industry’s lobbying arm once he leaves office.

    Among people who follow these markets for a living, the Lukken hire had an embarrassingly over-the-top quality, like a CEO who goes the appearances-be-damned route and puts his 23 year-old secretary/mistress on the board of directors.

  9. As far as banking regulations, it’s clear that the rules in place favour banks now, the only way to correct this imbalance would be to look at the structure of fractional reserve banking which is another topic.

  10. Yes Elaine that was exactly my point I said bc we socialized their loses they feel no moral obligation to correct their mistakes, hence moral hazard.

  11. This is by Bill Black. Find it at naked capitalism: “he New York Times published a column by its leading financial experts, Gretchen Morgenson and Louise Story, on November 22, 2011 which contains a spectacular charge against the Obama administration’s financial regulatory leaders. I have waited for the rebuttal, but it is now clear that the administration does not contest the charge.

    The specific example that prompted the NYT article (“Financial Finger-Pointing Turns to Regulators”) was a civil action against a former executive
    of IndyMac. IndyMac was supposed to be regulated by the Office of Thrift Supervision (OTS). OTS was the worst of the federal financial regulators – which is a large statement. It was so bad that the Dodd-Frank Act killed it. I used to work for OTS. One of the things I did to make myself unemployable during the S&L debacle was to testify before Congress against the head of our agency, Danny Wall, and our head of supervision, Darrell Dochow. Wall resigned in disgrace and Dochow was demoted and sent back to run the obscure office he had once run in Seattle.

    Ms. Story and Ms. Morgenson’s column discusses how an IndyMac manager is defending himself against suit by arguing that Dochow told him to file false financial statements. OTS’ senior leaders knew from my book exactly what they were getting when they promoted Dochow and made him the top (anti) regulator for all the top S&L originators of fraudulent liar’s loans.

    This column addresses a more general point, the charge that Obama’s financial regulatory leaders actively oppose the prosecution of elite financial criminals and the regulators who conspired with them (to use the term the article quotes Professor Kane as insisting upon).

    “Any financial crisis case that named a regulator probably would turn into a huge political battle, because it would question many of the nontransparent acts that bank regulators take while trying to save banks, said Denise Voigt Crawford, former commissioner of the Texas securities board and now a law professor at Texas Tech University.

    In any prosecution of bank regulators, she said, “you’d have the Justice Department in a fight with the policy goals of the Department of Treasury. Particularly in this environment, you know the banking regulators would fight it tooth and nail.”

    Some longtime lawyers go further and say the overall scarcity of cases related to the financial crisis might be in part because regulators want to avoid scrutiny of their own kind.

    “It’s not just one 30-year-old wunderkind who was responsible for the financial crisis,” said Dennis C. Vacco, who was the New York State attorney general in the 1990s and now is a lawyer at Lippes Mathias Wexler & Friedman. “Once you start pulling the string through in these complex cases, you might be surprised what you find at the other end.”

    Mr. Vacco continued: “What’s at the end of the string? The defense may be that ‘at the highest echelons of the financial institutions, we were in regular contact with the government.’”

    These charges are exceptionally severe. Senior former regulators are willing to be quoted by name asserting that Obama’s (not Bush’s) financial regulatory leaders are blocking lawsuits against fraudulent financial elites and their anti-regulatory co-conspirators because they fear embarrassment. That would be a disgraceful policy. Indeed, it is hard to think of a worse reason for granting the elite white-collar criminals that caused the crisis and the Great Recession immunity from prosecution. The fact that Obama has no response rebutting this grave charge against his administration’s integrity sounds loud, but not proud.”

  12. SwM,

    Good lord … I’ll contribute again. This huge amount could also work against Brown … people refusing to sell their vote to Wall Street.

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