The Oakland City Council has voted unanimously to end a contract with Goldman Sachs that locked it into a financial deal called an high interest rate swap. The city signed on with the bank in 1998 on the premise it would reduce costs of its bonds amid rising interest rates. But after the 2008 financial meltdown, the Federal Reserve cut interest rates to near zero. As a result, Goldman’s rate dropped to 0.15 percent — even as it continued to require Oakland to pay a rate of almost 6 percent. The city council is calling on the city to refuse to do business with Goldman Sachs unless it ends the deal without requiring a $15 million payout. The vote comes after a long campaign by city workers, unions, the Occupy movement and local clergy members. "It’s really been through direct action and public pressure that we’ve been able to build for this," says Alysabeth Alexander, political action chair for SEIU Local 1021, who helped organize the Oakland community and present testimony to the council members. "This is actually the second swap that SEIU 1021 has taken on and we’re going to continue to do this with our community partners and take on Wall Street. It’s not right that, in this fiscal crisis, that they’re profiting off of our local governments." [includes rush transcript]
This is a rush transcript. Copy may not be in its final form.
AMY GOODMAN: We end today’s show looking at the breakthrough vote in Oakland, California, that could have implications for cities struggling with budget deficits around the country. Last Tuesday, the Oakland City Council voted unanimously to end a contract with Goldman Sachs that locked it into a financial deal called a high interest rate swap.
Oakland signed the deal with Goldman Sachs in 1998 on the premise it would reduce the costs of its bonds as interest rates were expected to rise. But after the 2008 financial meltdown, the Federal Reserve cut interest rates to near zero. As a result, Goldman’s rate dropped to 0.15 percent, even as it continued to require Oakland to pay a rate of almost 6 percent. Since then, the city has paid more than $4 million annually in bonds, $26 million more than it originally owed.
The resolution passed Tuesday calls on Oakland to refuse to do business with Goldman Sachs unless it ends the deal without requiring a $15 million payout. The vote comes after a long campaign by city workers, unions, the Occupy movement and local clergy. This is one of the group members testifying Tuesday before the city council.
REV. DANIEL BUFORD: My name is Reverend Daniel Buford, and I’m a minister from the Allen Temple Baptist Church located in East Oakland. And I’m from a community that is of the opinion and the belief that cities should be too big to fail, and not banks. I think the city should be bailed out, and not banks. I think with respect to the agenda item that has been moved and your concern about legalities, you should be concerned about the legality of doing business with a corporation that is being investigated by the FBI, that is being investigated by the Securities and Exchange Commission, and is the subject of at least four different class action suits filed in United States against banks, including Barclays, over the issue of Libor fixing. Libor, the London Interbank Offered Rate, which Joe Keffer and Reverend Kuhwald referred to before, right now, as we’re having this meeting here in the United States, the banks that have conspired to create the Libor rate are in turmoil. Check the international headlines right now about what’s going on in Britain with Barclays and 15 other banks, including Goldman Sachs, that they’re including in their investigations for criminal activities. The problem is, is that the flaw in the system is that banks can estimate their own Libor rates. You, as the city of Oakland, we, as the city of Oakland, have bought into a synthetic rate that was concocted by Libor people who were betting on your failure. So then, how can you honor a contract with people that were betting on your failure and made money off of your failure on the international market?
AMY GOODMAN: That’s Reverend Daniel Buford testifying Tuesday before the Oakland City Council voted unanimously to end its interest rate swap contract with Goldman Sachs.
For more, we’re going to University of California, Berkeley, J-School, the journalism school, to speak with Alysabeth Alexander, political action chair for SEIU—that’s the Service Employees International Union—Local 1021. She helped organize the Oakland community and present testimony to the council members.
Talk about the significance of this vote.
ALYSABETH ALEXANDER: Thank you so much.
This is very significant because, in the past, we’ve been looking at budget cuts in the city of Oakland, just like we have throughout the entire country, where it’s, you know, workers being asked to give up more or the public being asked to accept fewer services. And this is the first time that a city is actually standing up and demanding that Wall Street actually do the right thing and get them out of this really toxic contract. And, you know, the libraries and schools and roads and all kinds of important services have been cut in the city of Oakland, and yet Goldman Sachs has continued to profit off of the city of Oakland. And this is—
AMY GOODMAN: I want to play—
ALYSABETH ALEXANDER: —the city council has stood up and said no.
AMY GOODMAN: —a part of an SEIU video explaining interest rate swaps.
SEIU VIDEO: States sell IOUs, called bonds, to people and businesses, with the promise to pay them back with interest over a certain period of time. States use that money to pay for important services, like roads, police and schools. Now, the interest rates that states pay on bonds can vary. Usually, when the economy is bad, interest rates go up. The prospect of rising interest made state and local governments a little nervous. So Wall Street banks made them an offer they couldn’t refuse. If the governments agreed to pay the banks a flat fee, just a little higher than the current interest rate, the banks would take over interest payments.
Then came the bank-fueled economic collapse. You might have expected bond interest rates to skyrocket, but the Fed stepped in and cut them to all-time lows. Lower interest rates should have helped states and cities keep providing critical services during the crisis, but they couldn’t take advantage of the discount rates, because they were locked into their contract with the big banks. Now the banks are making huge profits on the tens, sometimes hundreds of millions of dollars in fees they’re collecting and paying almost nothing on the state’s bonds. For California alone, the bogus bank deals are costing taxpayers more than $130 million a year. Now, some of these bank deals are secret, so we don’t know how many of our tax dollars are being sucked up, but the estimate is around $28 billion nationwide.
AMY GOODMAN: That’s a video explaining interest rate swaps in 90 seconds or less, made by the Service Employees International Union, saying these interest rate deals are part of the reason states and cities are running out of money, some of them cutting services to pay off banks, as, Alysabeth Alexander, you pointed out. I want to ask you about some of the figures involved. Oakland pays about $5 million each year to Goldman Sachs under the rate swap arrangement. Goldman Sachs has made $26 million in profits from the swap deal so far.
In March, Oakland’s assistant city administrator, Scott Johnson, wrote a memo to the mayor that, quote, "staff had previously inquired of Goldman, most recently in June 2010, on the market value to terminate the SWAP investment instrument. Given the City’s budget/fiscal situation, terminating the SWAP was cost prohibitive since the market value of the SWAP investment was approximately $17 million at that time," unquote. Your response, Alysabeth?
ALYSABETH ALEXANDER: So, well, we believe that Goldman understands that these are bad deals. And we know that because they’re actually approaching governments all over California and saying, "You want to get out of these deals? They’re costing you too much money? This is how much you can pay in order to get out of those deals." So they’re actually proactively going out, and many banks who have similar deals with cities and counties and school districts are actually approaching the governments and saying, you know, "We know these are bad deals, and they’re costing you a lot of money. And this is how you can get out of them." So, and Goldman is saying they want $15 million out of this—for the city of—or, Goldman is saying they want $15 million to get out of the—out of the swap. And these swaps are being renegotiated all over the country, and cities and counties and school districts are choosing to get out of them, because they know that they’re bad deals. And if we had the original term of the agreement, the original agreement would have been a variable swap, we would be—we wouldn’t be in this situation. And Goldman came to the city of Oakland and said, "Let’s do this swap—it’s a side deal—because you’re going to save money." And they came to us with the promise of saving money, and it hasn’t saved us money. So the terms of which we were offered it were fraudulent, or at least now no longer hold up.
AMY GOODMAN: Rolling Stone_’s on">Matt Taibbi has reported on how interest rate swaps are extremely lucrative for banks. When he was on Democracy Now!, Matt described how JPMorgan bribed city officials in Jefferson County, Alabama, to get exclusive rights to finance its new sewer system. The project was supposed to cost $250 million, but the county ended up owing $5 billion in debt after it turned to Wall Street to refinance. An interest rate swap was one of the tools JPMorgan used. Matt Taibbi told Juan González and I how it worked.
MATT TAIBBI: It sounds very, very complicated. Imagine that you have a variable-rate mortgage, so you’re paying a mortgage that—where the payment rises or falls every month along with interest rates. Well, that’s risky. So you might want to get some certainty in your rates. You’ll go to your bank, and you’ll say, "I’ll agree to pay you a fee, if you take over my variable interest payments and give me fixed payments." So basically you’re paying the bank a fee to assume your variable rate risk. And that’s all it is. You’re swapping rates. And so, what happened was Jefferson County had variable interest rates on some of the bond deals that it had done. It wanted fixed rates. It went to JPMorgan and paid them fees to get their fixed rates.
JUAN GONZÁLEZ: So how does that blow up then?
MATT TAIBBI: Well, what ended up—first of all, it costs you something, all these fees. Every time they went and did one of these swaps, it pushed their debt situation farther into the future. And so, they didn’t just do it once or twice; they did it 23 times in Jefferson County. These politicians kept continually pushing the debt into the future. And every time they did that, they added more debt, because of course this costs something. So, by the end, it just ballooned to the point where it exploded.
AMY GOODMAN: That’s Matt Taibbi of Rolling Stone. Alysabeth Alexander, continue, and also talk about how you organized to make this happen, the Oakland City Council passing this, and what Goldman Sachs has to do right now.
ALYSABETH ALEXANDER: So, we’ve been working with a large coalition of union members, of teachers, of community members, of clergy, and we have done action after action. We’ve gone to the Goldman Sachs shareholders’ meeting and called out the CEO to renegotiate this swap. And it’s really been through direct action and public pressure that we’ve been able to build—to build for this.
And the next step, we’re going to continue. We have actions planned coming up at Goldman Sachs headquarters in San Francisco. And we’re not going to stop there. This is actually the second swap that SEIU 1021 has taken on, and we’re going to continue to do this with our community partners and take on Wall Street. It’s not right that, you know, in this fiscal crisis, that they’re profiting off of our local governments.
AMY GOODMAN: What has been Goldman Sachs’s response? At a shareholder meeting last month here in New York City, the chair said ending such contracts would not be in shareholders’ interests. Were you able to hear that, Alysabeth?
ALYSABETH ALEXANDER: Oh, I—
AMY GOODMAN: I think we lost her.
ALYSABETH ALEXANDER: I heard you just then. What was the question?
AMY GOODMAN: But, Alysabeth Alexander, thank you so much for being with us, because we have come to the end of the show, political action chair of the SEIU, the Service Employees International Union.