Opinion: Was City Duped on Interest Rate Swaps? | NBC Chicago
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Opinion: Was City Duped on Interest Rate Swaps?

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    One of the most underreported stories to come out of the 2008 global financial crisis is the relationship between big Wall Street firms, local municipalities and budget decisions. 

    In cities big and small across the country, city officials entered into complex financial deals known as interest rate swaps that in many cases have backfired on them, costing millions in potentially unnecessary payments and fees. 

    Now, activists and others are calling on the City of Chicago and the Chicago Public Schools to come clean about their own dealings with interest rate swaps, charging the city and CPS are dragging their feet in doing all they can to challenge the terms of any bad deals they’ve entered into. 

    The question becomes: what does the city have to hide? 

    Boiled down to their basics, interest rate swaps offer a debt issuer, such as a city or school district, the opportunity to avoid higher interest rates on bonds they issue. They do so by typically exchange fixed rate interest payments for variable rates, determined in large part by how the economy is doing and how specific market indexes behave. 

    Chicago has long used interest rate swaps as a potential hedge against higher interest rates. It even has a publicly listed “Swap Policy”, which details how and when swaps should or shouldn’t be used.

    For it’s part, the Daley administration relied heavily on interest rate swaps as part of its overall strategy for issuing bonds and fixing the city’s budget. However, two factors have conspired to make at least some of those deals go bad: a drop in interest rates and downgrades in the city’s credit rating. 

    The Chicago Sun-Times has reported the city could be on the hook for $200 million because of the deals if the city’s credit rating drops further. Bloomberg is reporting it could cost the city as much as $400 million to get out of the deals entirely. 

    For it’s part, CPS is believed to have spent more than $800 million in payments to banks and financial services firms as part of interest rate swap agreements. 

    Organizations such as the Chicago Teacher’s Union, AFSCME Council 31 and SEIU Healthcare have called on the mayor and CPS leadership to file for arbitration with FINRA, the financial industry’s regulatory body, to seek a refund of payments for what they say were “fraudulent” swap deals.

    As well, the Chicago City Council's Progressive Reform Caucus has called for an end to the interest-rate swap agreements with banks and private investment firms, including Bank of America and Loop Capital. 

    Recently, former North Carolina Congressman and onetime member of the House Financial Services Committee Brad Miller testified before an open CPS meeting, calling on municipal issuers like Chicago and CPS to review the specific documents pertaining to their deals and explore legal options to recover their payments on the grounds that they likely violated state and federal laws. 

    Yet, in another example of how politics and public policy are done in Chicago, the Emanuel administration has said the city has looked into the matter and decided there’s simply nothing to be done

    According to Corporation Counsel Steve Patton, not only have city lawyers concluded that there's no provable case of fraud or misrepresentation here but city officials hired two outside hot shots to make sure: James Kopecky, a former supervisor in the enforcement division of the Securities and Exchange Commission in Chicago, and Daniel Collins, a former federal prosecutor. 

    They just completed their work and found that “there's no claim to be filed,” Mr. Patton said. 

    When it comes to municipalities, much of the success of financial firms leading up to the 2008 crisis and beyond depended on the mismatch between the financial expertise of Wall Street professionals and the lack of sophistication of many town and county administrators.  

    Yet big cities such as Denver, Kansas City, Philadelphia, New York and others all are in the hole on swaps agreements they made with financial firms. 

    In a letter to the editor of the Sun-Times, Saqib Bhatti, director of the ReFund America Project and fellow at the Roosevelt Institute, pointed out that it’s not like the city hasn't been duped before.

    Although the mayor would have us believe that Chicago’s finance teams are too sophisticated to be swindled by banks, the parking meter fiasco demonstrates that city officials have the capacity to be duped. Interestingly, Morgan Stanley, one of the key banks involved in the parking meter deal, was also a major underwriter on the bonds underlying the city’s swaps. 

    Activists such as Miller and the CTU have repeatedly asked both CPS and the city to disclose documents pertaining to the deals that would shed light on how they were made and what banks and financial services firms promised to the city to make the sale. Yet, repeatedly, they’ve been told their requests were too burdensome or the documents wouldn’t be delivered. 

    Which is how things seem to work in Chicago: even as millions of dollars fly out the door, there’s no reason anyone should see how the deals were made.