This entire article is just too scary to print in its entirety. Full of
facts showing how such risky refinancing in order to borrow more is a
big, and unfortunately still legal reason why states and municipalities
are unable to get out of debt, with some consequences of the lack of a
gold standard thrown in for seasoning. I've posted the only section
describing a glimmer of public resistance.
Natalia
http://dollarsandsense.org/archives/2012/0512bondgraham.html
(snip)
Drop the Swaps
On an unseasonably warm February day this year, several dozen activists
including members of the Association of Californians for Community
Empowerment, Riders for Transit Justice, union members of SEIU 1021 and
Transit Workers Union 250A, along with community college students,
gathered in front of San Francisco's old Bank of America Building.
Locals have long derided the edifice as a "Darth Vader hat" because of
its shape, but the ominous nickname also hints at the tenants inside,
mostly elite investment banks and private equity firms. Goldman Sachs
has offices perched high above the ground floor.
The activists were roaming the financial district, entering bank
branches and attempting to penetrate security cordons to enter express
elevators, thereby gaining access to the offices of senior bank
executives. Once inside they would demand an audience with management,
explain the problem of how rate swaps are putting enormous financial
burdens on already-strapped public schools, transit authorities, and
cities, and then demand the branch fax a letter to headquarters.
Activists responded to uncooperative bank staff with chants of "drop the
swaps," and "make banks pay!" The letter's message: cancel the swaps.
Refund public goods.
While resistance against the rate swap crisis has developed slowly and
unevenly, it may now be gaining steam in some important places. In
Pennsylvania the problem was identified early on by officials like the
state's auditor general Jack Wagner. Since 2009 Wagner has been
imploring local and state leaders to ban their agencies from entering
into interest rate swaps. Wagner's office conducted one of the earliest
(and maybe the only) official audits of swaps in the United States after
the financial crisis, finding that Pennsylvania governments had entered
into 626 individual interest rate swap agreements with a mere thirteen
banks, linked to $14.9 billion in public debt.
Wagner concluded:
the use of swaps amounts to gambling with public money. The fundamental
guiding principle in handling public funds is that they should never be
exposed to the risk of financial loss. Swaps have no place in public
financing and should be banned immediately.
His office has so far succeeded in convincing the Delaware River Port
Authority to ban itself from using rate swaps in the future, while also
introducing a bill in the state legislature to ban future swap
agreements by Pennsylvania governments.
Wagner's efforts have been bolstered by the Pennsylvania Budget and
Policy Center's statewide study of swaps, referenced above. Most
recently the Philadelphia City Council has convened hearings to
investigate how interest rate swaps affecting the city's agencies and
school system were created. The resolution calls for the city to assess
"whether corrective actions, including legal remedies, should be
pursued." Philadelphia is considering litigation to determine if banks,
government employees, or advisers misrepresented or otherwise
fraudulently put taxpayers on the hook for millions by obscuring the
risks involved, or purposefully structuring them to implode to the
banks' benefit.
Back in California, it's been harder to convince officials to take
action. Oakland's City Council has told activists that they would like
to drop the swap, but that termination by the city would result in a
roughly $16 million fee. Nevertheless City Council members say they're
negotiating with Goldman Sachs to end the deal. California's
Metropolitan Transportation Commission has rebuffed the entreaties of
transit advocates to seek renegotiation of their astronomically
expensive swap liabilities. The Peralta Community College system has
reportedly been discussing renegotiation of its rate swap with Morgan
Stanley since at least last December, to no avail. But even with these
detours and roadblocks, community activists keep pressing the issue.
Confronting Swaps, Confronting Capital
One of the traps that activists who are beginning to address the rate
swap crisis can fall into is framing the problem solely as one of
"greedy banks" that used "esoteric" derivatives to "hoodwink" public
officials. In some cases this does seem to be what happened. In Milan,
Italy, for example, JPMorgan Chase, Depfa, UBS, and Deutsche Bank were
brought to trial in 2010. Bank and city employees have been accused of
fraud in connection with rate swaps that were attached to over $2
billion in municipal debt. Today Milan is reportedly in talks with the
banks to settle the case, with the banks set to pay $526 million to the
city.
The vast majority of swap agreements, however, are not the product of
fraud. Framing the issue as one of greedy banks that conned the public
has led so far to reformist proposals that will neither create pressure
to systematically repair the financial injustice of the rate swap
crisis, nor address the deeper structural problems associated with the
rise of derivatives.
Rather than defining derivatives as scams, or as esoteric instruments
used in a make believe world of finance capital, we should recognize
them as central instruments of contemporary capitalism. Doing so leads
to a more comprehensive explanation of why the rate swap crisis
happened, and what should be done about it. It also connects the problem
to wider struggles against capitalist globalization and avoids diverting
energy into shallow reformist laws and regulations that will only be
circumvented.
As instruments designed to allow local governments to reduce their risks
in a world of global capital flows and floating interest rates, swaps
seemed to work perfectly fine for over a decade. During this "normal"
run of the economy, individual governments were able to reduce their
exposure to interest-rate volatility, and even save money. What this
obscured, however, was the systemic risk that was building up through
the entire financial sector. By pursuing their own individual security
as agents in the neoliberal global marketplace, organizations of all
kinds, including business firms and governments, actually created mass
insecurity. Along with systemic risk, the new globalizing economy
powered by derivatives was characterized by more intense and widespread
forms of corporate predation across the globe, from the U.S. housing
market, to the currencies of Thailand and Indonesia.
When the system's own contradictions finally became too much, the vast
global web of derivatives that spread risk to every corner of the earth
became the toxic germ that threatened to wipe out capital. In response,
the architects of this system bailed out the largest banks directly with
public funds. No similar bailout was offered to local governments,
however. The public has been left holding derivative contracts that are
currently not much more than agreements to subsidize banks further with
taxpayer dollars. Meanwhile the global financial system made possible
through swaps and other derivatives is being tweaked, slightly, so that
it can proceed to expand if and when a new cycle of global investment
kicks off.
This blatantly unjust, but perfectly legal, outcome reveals several
things about the rate swap crisis. First, the crisis is caused by an
inherent contradiction in the project of capitalist globalization. The
management of inter-market risks at the individual firm or consumer
level causes a heightened level of social risk at the global level.
Second, in response to this crisis, the architects of this system have
revealed that the true goal of globalization through derivatives is to
expand and protect private capital, not public wealth and local
communities. By bailing out banks and protecting the debt held by hedge
funds and private equity, while offering no similar assistance to local
governments, the elites who occupy positions of power in the central
banks and global financial corporations displayed the logic of the
system for all to see. Finally, derivatives are not being dropped, but
instead subjected to regulations that will attempt to prevent the
buildup of systemic risks. These regulations, however, will do nothing
to check the global predation of corporations, empowered as they are
with derivative instruments.
In confronting derivatives by demanding a just solution to the rate swap
crisis, we are doing more than just contesting one aspect of the larger
economic crisis that began in 2008. We are in fact confronting the
dangerous instruments that have facilitated globalization of capital
over the past three decades by socializing risks and privatizing
profits. In this respect the rate swap crisis, and community responses
to it, can be contextualized in capital's push toward globalization, and
the ongoing resistance of communities to this project.
*DARWIN BONDGRAHAM* is a sociologist, historian, and staff member of the
Los Alamos Study Group.
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