Friday, May 4, 2012

Oakland's Treasurer Recommends Terminating Goldman Sachs Deal

By Darwin BondGraham
Fri, May 4, 2012 at 9:35 AM

In a recent memo, Oakland's Treasury Manager Katano Kasaine advises that the city council approve a negotiating effort to terminate Oakland's costly interest rate swap deal with Goldman Sachs no later than the end of the next fiscal year. The swap currently costs Oakland taxpayers about $4 million per year and has put serious pressure on the city's budget. As such, Kasaine is recommending that the city attempt to terminate the swap "at a below market value cost."

Under interest rate swap agreements, a party seeking to terminate a deal on which they are losing money is contractually obliged to pay a hefty penalty, usually the "market value" of the swap. Market value corresponds to about what the party would be expected to pay over the full term of the agreement. In Oakland's case, the penalty is currently about $15 million, about the same amount Oakland would otherwise be forced to pay Goldman Sachs, spread out between now and 2021 when the swap expires.

Kasaine's memo, and the unusual "below market value" request it contains, are the result of a grassroots effort by activists who revived the issue in early February after it had fallen of the council's agenda. Calling themselves the Coalition for Economic and Social Justice in Oakland, the group congealed after Reverend Daniel Buford of the Allen Temple Baptist Church convened meetings in early this year. The Coalition attended a February 21 meeting of the city council, packing the chambers with fifty constituents from churches, labor unions, and community organizations, all calling for an end to the deal with Goldman Sachs. They characterized the swap as "unjust," and explained how the financial crisis, and the reduction of variable interest rates in line with the Federal Reserve’s decisions since 2007 have transformed the once "prudent hedge" into a "toxic asset." Several members of the council responded affirmatively to the message, implying they would act on it.

In early April, Councilwoman Rebecca Kaplan attended a coalition meeting in East Oakland at the Allen Temple Baptist Church, whereupon she spoke in support of the goal of canceling the swap. "We can tell Goldman Sachs that their behavior is not ok," said Kaplan about the bank. "When our tax dollars were used to bail [Goldman Sachs] out, that was so they could pay it forward. They got bailed out and have a moral responsibility to release the city due to the fact that everyone is struggling under the stress of what they did," concluded Kaplan in reference to the financial crisis of 2008 which was largely caused by enormous, risky financial bets and predatory home loans made by the nation's largest banks, including Goldman Sachs.

While recommending that the city exit the swap agreement, Kasaine's memo contends that Oakland has in fact saved money because of the deal. According to the city treasury manager and the BLX Group, a firm hired to analyze the swap's impact, "the City has realized a net benefit of approximately $37.5 million in present value savings from the Swap [....]"

This claim hinges, however, not so much on the swap itself, but rather on the refunding of various bonds with newer bonds at cheaper rates, say critics of the deal. The swap agreement was intended to hedge these newer variable-rate-refunding bonds, making these cost savings safer to pursue. According to Kasaine's memo, and other city documents, the interest-rate swap with Goldman Sachs was signed in 1997 to protect the city against volatile swings in variable rates on bonds that were to be issued the following year. These 1998 variable-rate bonds were issued to refund a previous set of fixed-rate bonds issued ten years prior. By refinancing the older fixed-rate bonds with a lower-variable-rate-set of bonds Oakland was able to save considerable money. At the same time though, the city ran the risk that variable interest rates would climb much higher than the previous fixed rates. The swap was intended to create a synthetic fixed rate for the city to pay, one that would still be lower than the fixed rates on the previous bonds the new bonds refunded. This complex practice of refinancing city debt occurred two more times in the 2000s, and the swap deal remained in place, albeit only loosely associated with each newer issue of bonds, however.

Members of the Coalition for Economic and Social Justice, which have since renamed their group the Coalition to Stop Goldman Sachs, say that claims by the city's finance staff that the swap saved Oakland money are misleading for these reasons. They are also wary of the city getting itself into further trouble with complicated deals to get out of the swap. "Let’s keep light on the negotiations," said Tim Thomas of Occupy the Hood, a member of the Coalition to Stop Goldman Sachs. "I don't trust backroom dealings."

"Our work has clearly had an effect," said Deborah Berman Santana, another member of the Coalition. Santana and other activists have already submitted their own brief and recommendations to the city council and plan to attend a hearing on the issue set for next Tuesday, May 8.

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