Interest rate swaps wreak havoc around the country

OAKLAND, Calif. – Like many states and local governments around the country, Oakland is being victimized by the banking industry – in this case specifically by Goldman Sachs – through an interest rate swap deal negotiated in the mid-90s, and a faith, labor and community coalition is fighting back.

The recently-formed Oakland Coalition for Social and Economic Justice, including Allen Temple Baptist Church, the faith-based Oakland Community Organizations, SEIU, the International Longshore and Warehouse Union, Occupy Oakland, and others, brought the issue to the City Council last month, and the council’s finance committee is slated to discuss the matter April 24.

The big banks, including JPMorgan Chase, Bank of America, Goldman Sachs and others, originally encouraged state and local governments to trade interest rates on their variable-rate bonds for a fixed interest rate. The rates supposedly would roughly balance out over the life of the contract, and governments would have something like a fixed rate bond.

In 1997 Oakland agreed with Goldman Sachs to switch variable rate payments on $187 million in bonds for a fixed 5.6 percent rate, in an agreement slated to last until 2021. It seemed a good deal in the first few years, and again when rates soared during the housing boom.

When the city paid off the bonds in 2005, it decided to stay in the contract, thinking it could ultimately gain some $30 million.

Then came the financial crisis, and federal action driving down interest rates. That left the banks continuing to collect the higher fixed rates from Oakland and other cities while only having to pay very low rates themselves, reaping billions as a result. Governments face huge cancelation penalties if they decide to opt out.

Since paying off the bonds, a deficit-ridden Oakland has so far paid Goldman Sachs an additional $26 million. If it stays in the deal, the city will pay another $20 million before the agreement expires in nine years.

The coalition says Goldman Sachs should give Oakland back the $26 million, and waive the $19 million penalty for ending the pact.

“That money should be used to build clinics, hire more cops, provide job training in West Oakland, do something constructive for the school system,” Allen Temple Church’s Rev. Daniel Buford told a community group earlier this month.

Across the country, Philadelphia faces similar problems.

In a report issued in January, the Pennsylvania Budget and Policy Center said school districts and municipalities in the state took out “risky financial instruments that put them on the wrong side of declining interest rates and led them to pay out millions of dollars to investment banks.”

Pennsylvania’s auditor general says 107 school districts and 86 local governments made such agreements on nearly $15 billion in debt between October 2003 and June 2009.

The Budget and Policy Center said Philadelphia and its school district have lost $331 million in interest payments and fees related to swaps, and the city could lose over $240 million more if interest rates stay low. Meanwhile, the cash-strapped city and its schools face millions more in budget cuts.

Many more cities and government entities across California, and throughout the country, are dealing with similar issues.

Photo: Marilyn Bechtel/PW