Why We Must Regulate Financial Firms

occupy wall st

Americans seem to love their rich folk. They look at them as superheroes that have somehow shook the bonds of terrestrial powers and made themselves above other humans. Thus we tend to think that those who have money are not bound by the laws and rules that bind us mere mortals. Often those in state legislatures and national congresses share that love of the rich. So there are those in law making bodies that believe we should free the rich from the laws which restrict them.

As John Steinbeck once observed
“Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.”

Therefore America has a lot of poor folks who are wannabe rich folks who do not want restrictions on those they see as what they will be someday soon. All this is to preface some discussion of the role of Goldman-Sachs in governmental bankruptcies from Greece to Detroit and beyond. Despite the shenanigans that led to a near world meltdown in 2008 to 2010, companies like Goldman-Sachs remain pretty much untouched even bankrolled to some extent by a so called “government of the people.” Is the reason that so many of us look at the rich as some kind of uber mensch who stand above laws and rules of men? Is it because so many of us see ourselves in those roles someday?

A recent article in The Nation illustrates that under so many of the public financial difficulties around the world lie Wall Street financial firms:

The crisis was exacerbated years ago by a deal with Goldman Sachs, engineered by Goldman’s current CEO, Lloyd Blankfein. Blankfein and his Goldman team helped Greece hide the true extent of its debt, and in the process almost doubled it. And just as with the American subprime crisis, and the current plight of many American cities, Wall Street’s predatory lending played an important although little-recognized role.

In 2001, Greece was looking for ways to disguise its mounting financial troubles. The Maastricht Treaty required all eurozone member states to show improvement in their public finances, but Greece was heading in the wrong direction. Then Goldman Sachs came to the rescue, arranging a secret loan of 2.8 billion euros for Greece, disguised as an off-the-books “cross-currency swap”—a complicated transaction in which Greece’s foreign-currency debt was converted into a domestic-currency obligation using a fictitious market exchange rate.


Then the deal turned sour. After the 9/11 attacks, bond yields plunged, resulting in a big loss for Greece because of the formula Goldman had used to compute the country’s debt repayments under the swap. By 2005, Greece owed almost double what it had put into the deal, pushing its off-the-books debt from 2.8 billion euros to 5.1 billion. In 2005, the deal was restructured and that 5.1 billion euros in debt locked in. Perhaps not incidentally, Mario Draghi, now head of the European Central Bank and a major player in the current Greek drama, was then managing director of Goldman’s international division.

Greece wasn’t the only sinner. Until 2008, European Union accounting rules allowed member nations to manage their debt with so-called off-market rates in swaps, pushed by Goldman and other Wall Street banks. In the late 1990s, JPMorgan enabled Italy to hide its debt by swapping currency at a favorable exchange rate, thereby committing Italy to future payments that didn’t appear on its national accounts as future liabilities.


Goldman-Sachs used much of the same tactics to plunge American cities into debt way beyond their means:

Three years ago, the Detroit Water Department had to pay Goldman and other banks penalties totaling $547 million to terminate costly interest-rate swaps. Forty percent of Detroit’s water bills still go to paying off the penalty. Residents of Detroit whose water has been shut off because they can’t pay have no idea that Goldman and other big banks are responsible. Likewise, the Chicago school system—whose budget is already cut to the bone—must pay over $200 million in termination penalties on a Wall Street deal that had Chicago schools paying $36 million a year in interest-rate swaps.

A deal involving interest-rate swaps that Goldman struck with Oakland, California, more than a decade ago has ended up costing the city about $4 million a year, but Goldman has refused to allow Oakland out of the contract unless it ponies up a $16 million termination fee—prompting the city council to pass a resolution to boycott Goldman. When confronted at a shareholder meeting about it, Blankfein explained that it was against shareholder interests to tear up a valid contract.

Another fine example of predatory lending and complicated contracts that choked local government happened about 4 years ago in Jefferson County (Birmingham) Alabama. This time it was JP Morgan in charge:

Yesterday, Jefferson County, Alabama, filed the largest municipal bankruptcy in U.S. history, the final step in a sordid tale involving sewers, credit swaps, and some of the nation’s biggest banks. The bankruptcy became necessary “after an agreement among elected officials and investors to refinance $3.1 billion in sewer bonds fell apart.”

The swap deal that sunk Jefferson County was crafted by the mega-bank JP Morgan Chase (in concert with other banks, including Goldman Sachs). As Rolling Stone’s Matt Taibbi put it when describing JP Morgan’s actions in Jefferson County, “here you can see a trail that leads directly from a billion-dollar predatory swap deal cooked up at the highest levels of America’s biggest banks, across a vast fruited plain of bribes and felonies — ‘the price of doing business,’ as one JP Morgan banker says on tape.” And while Jefferson County was pushed over the cliff, JP Morgan has bounced back to record profits, and its municipal business has continued “unscathed.”

Meanwhile workers are furloughed and pensions are cut.

These are but a few examples that easily illustrate why financial firms must be regulated with hard enforcement and real penalties for their reckless actions.

About Dave Bradley

retired in West Liberty
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