How Do You Run Goldman Sachs Out of Town?

Search form

How Do You Run Goldman Sachs Out of Town?

How Do You Run Goldman Sachs Out of Town?
Wed, 4/17/2013 - by Kevin Roose
This article originally appeared on New York Magazine

In a fluorescent-lit hearing room in Oakland, California, this week, gathered around a crescent-moon table in front of two dozen onlookers, a group of local politicians was locking horns over a question that has baffled this city for more than a year: What's the best way to punish Goldman Sachs?

“I am not a fan of Goldman Sachs,” councilmember Pat Kernighan said. “They are a very greedy business that operates without regard to anything other than their bottom lines. But I am frustrated with the amount of time and effort being put into this.”

The “this” councilmember Kernighan spoke of is the city of Oakland’s long-running feud with Goldman. It’s a scrappy fight that dates back fifteen years, involves millions of dollars and a soured bond deal, and has galvanized activist groups and ordinary citizens in opposition to what many of them feel is a glaring example of financial corruption hurting a struggling city. And it has resulted in one of the odder situations in American municipal politics — namely, one in which a midsize city is trying to run Wall Street’s most powerful investment bank out of town, but can't quite figure out how.

The trouble started in 1998, when the city of Oakland entered into an interest-rate swap with Goldman. Under the terms of the swap, Oakland exchanged $187 million in floating-rate bonds for bonds with a fixed interest rate of 5.7 percent, in order to hedge against the possibility that interest rates would rise to 8 or 9 percent. But when rates fell to nearly zero instead, Oakland was stuck paying an above-market interest rate on its debt, at a cost of roughly $4 million a year, at a time when the city’s finances were in shambles.

In some ways, Oakland's problems are a reflection of the fights between lenders and municipalities taking place all over the country, as cities try to recover from a recession that created crippling budget shortfalls and delayed infrastructure projects. Budget problems are especially bad in California, where one city — Stockton, an hour to the east — became the largest U.S. city to go bankrupt earlier this month. Oakland faces a deficit of between $19 million and $26 million for fiscal year 2013, and shortfalls in previous years have resulted in layoffs and furloughs of public employees.

Oakland's interest rate swap, which expires in the year 2021, was a classic wrong-way bet, and a less proud municipality might have sucked it up and moved on. But Oakland decided it wanted out. Last year, city leaders and activists led protests outside Goldman’s San Francisco offices, and harangued Goldman CEO Lloyd Blankfein at the firm’s annual shareholder meeting, asking Goldman to unwind the swap deal without charging Oakland the $16 million termination fee specified in its contract. The city's position was, essentially: You guys got bailed out of your bad investment decisions. Why can't we, too?

But Goldman refused to back down. "That's not how the financial system could work," Blankfein said last year, in response to an Oakland representative's plea for a get-out-of-swap-free card. "Were we to [cancel the swap at no cost] ... we would be frankly paring the interests of our shareholders and the operations of the company. I don't think it's a fair thing to ask."

So, in December, after an eight-hour deliberation, the city council voted to go ahead with a so-called debarment process, which would involve an investigation, a hearing, and an eventual decision that could ban the bank from doing business with the city for up to five years. But the effort got stuck in the mud. For months, councilmembers have been quarreling with the city administrator's office, which is in control of the debarment process, and at least one has accused it of dragging its feet on purpose.

On Tuesday, the Oakland city council's finance and budget committee met to hear a progress report on the debarment process. The news wasn’t good: A representative for the city administrator told the council members that a full investigation by a hired outsider would take a minimum of three months, followed by another several months to weigh the evidence and conduct a hearing. And some city council members are getting sick of waiting.

“We’ve spent a year talking about this,” councilmember Libby Schaaf said. “It feels like this is taking a lot of staff resources.”

"We need to move the agenda," concurred councilmember Desley Brooks.

Among the questions dividing the committee is whether it's worth going after Goldman at all. Some members say yes, arguing that large financial institutions have taken advantage of cities around the country with complicated rate-swap deals that leave them on the hook for large payments for too long. These people argue that since Goldman and other banks enjoyed the privilege of massive federal bailouts during the financial crisis, they should pay the gift forward to cities around the country.

"The problem is much bigger than Oakland," said councilmember Rebecca Kaplan at Tuesday's hearing. "There still hasn't yet been an adequate response at the federal level, and I am proud for Oakland to be in the lead on that. It's important for us to continue to send a message."

Other members, like Kernighan, expressed that while banning Goldman would be a meaningful symbolic gesture, it wouldn't necessarily accomplish much. There have been no lawsuits filed alleging fraud or misrepresentation of the swap's terms, and few people are claiming that it's Goldman's fault that interest rates have gone down. (The ones who are generally use a roundabout argument that involves Goldman's lobbying efforts and the Federal Reserve's quantitative easing program.) And even some councilmembers are willing to admit that Goldman has no duty — legal or otherwise — to tear up the deal, simply because it ended up going poorly for Oakland.

"The swap deal the city entered into ... is a legal, enforceable contract," Kernighan said. "It is a bad deal, but it’s a deal that the city went into with its eyes open. As much as I would like to get out of it, I don’t think we have the legal grounds."

Goldman, which declined to comment for this story, has made some concessions to Oakland, by offering to renegotiate the swap deal in a way that would save Oakland a few hundred thousand dollars. But an independent review last year found that the swap deal, despite its problems, had actually saved Oakland $37.5 million compared to what a comparable floating-rate deal would have cost. And Oakland represents a statistically insignificant part of Goldman's clientele, meaning that while being kicked out of Oakland might create embarrassment for the firm, it's not likely to damage it financially.

Goldman has found some unlikely supporters in Oakland — like Joe Keffer, a local SEIU representative, who spoke at Wednesday's hearing and urged the committee to drop the debarment process to focus on other matters.

"There is already a resolution," Keffer said, referring to city council's December vote to authorize the city administrator to go ahead with the debarment process. "We will have made between $4 million and $6 million more in payments to Goldman Sachs by the time we get to debarment."

Councilmember Schaaf, who at one point urged her colleagues to "Google Rolling Stone" to find a comprehensive public record of Goldman's crisis-era misdeeds, nevertheless opposed kicking Goldman out of town without sufficient evidence that it was in the wrong. ("We gambled. We lost. That happens all the time, and we have to be grown up about it.") She also pointed out that Oakland is currently in litigation with roughly twenty other financial institutions over matters like Libor, the interest-rate benchmark that was allegedly manipulated by a coterie of global banks. If Oakland is barring Goldman from doing business with the city because of dealings it doesn't like, Schaaf wondered, why not those other firms, too?

In the end, the committee passed the debarment issue up to the full city council, keeping the process of kicking Goldman out of town on track for an eventual resolution. But it did so with a spirit of resigned admission that even though Oakland is probably not going to get its money back, it's still worth putting Blankfein and his band of bankers in their place.

"I frankly don’t think they are ever going to let us out" of the swap deal, said Kernighan. "But we can make them uncomfortable."

Originally published by New York Magazine.

 

Article Tabs

Debt Collective, student loans, student debt, Corinthian Colleges, Rolling Jubilee

Organizers of the student debt strike that helped lead to the closure of Corinthian Colleges say the DoE's proposed rules would place a heavy burden on student debtors contesting fraudulently issued loans.

popular movement, radical movements, corporate control

We have to organize around a series of non-negotiable demands, dismantle the mechanisms the rich use to control power – and destroy the ideological and legal system cemented into place to justify corporate plunder.

freedom of assembly, right to assemble, right to free specch, Citizens’ Security Law, Black Lives Matter, First Amendment, gag law

Faced with mounting unrest and unwilling to offer reforms, democratic governments are rolling back traditional rights at an alarming rate. How many rights must be abrogated before a democracy becomes a police state?

U.K. austerity cuts, Independent Living Fund, money in politics, conservative donors, banker donations

Britain’s multiple crises can be traced to big political donations and corporate ties to the U.K. government. On the eve of the country’s General Election, Occupy.com examines how the 1% have gained from investing in politics.

 International Labour Day, May Day, International Workers' Day

Thousands rallied worldwide to celebrate International Workers' Day on May 1. In some countries demonstrations turned violent with police deploying tears gas.

Baltimore protests, Baltimore riots, Freddie Gray, police brutality, police violence, Baltimore Uprising, water shutoffs, Stephanie Rawlings-Blake, Baltimore police, Law Enforcement Bill of Rights

The people have demanded to be heard, and now, the city, state and federal government have to listen – the real fight is just beginning.

Posted 5 days 22 hours ago
Freddie Gray, police violence, police brutality, Baltimore protests, incarceration rates, Wall Street gambling, derivatives trading, public banking, postal banking

The bankers get our money, charge us for taking it and leave cities’ budgets bare. Schools close, small businesses shut down, social programs fold and only the cops remain.

Posted 6 days 18 hours ago
Bernie Sanders, TPP, Baltimore, Eleanor Goldfield, Act Out!

Spring is rising and so are the people – we cover the latest, from marchers in D.C. demanding racial justice to the ongoing protests in Baltimore.

Posted 6 days 18 hours ago

The bill eases barriers to raising capital and allowing people to invest in worker coops, taking a step toward a solution to the state's growing income inequality.

Posted 5 days 22 hours ago

This Friday, the Port of Oakland's rumbling cranes will stand silent as workers rally against recent police shootings and violence.

Posted 4 days 20 hours ago
Chipotle, GMO ingredients, GMO-free

Starting this week, Chipotle’s 1,831 restaurants are now using non-GMO corn and has made a switch from soybean oil to GMO-free sunflower oil and rice bran oil for their cooking.

NSA surveillance programs, Edward Snowden, Patriot Act

Maintaining a database of phone records upends a fundamental premise of the Constitution – the government should intrude on Americans’ private lives only if it has probable cause to suspect criminal activity.

Freddie Gray, #BlackLivesMatter, police brutality, police violence, Baltimore protests

The prosecution of six officers involved in the murder of Freddie Gray probably would not have occurred without an urban revolt in Baltimore.

 International Labour Day, May Day, International Workers' Day

Thousands rallied worldwide to celebrate International Workers' Day on May 1. In some countries demonstrations turned violent with police deploying tears gas.

Coalition to Stop Fast Track, Trans-Pacific Partnership, U.S. Conference of Mayors

While lawmakers are pushing full steam ahead, city officials are making their own concerns about the legislation crystal clear.

Sign Up