Los Angeles now spending more on Wall Street fees than on maintaining roads

By Nathaniel Mott and David Sirota , written on May 6, 2014

From The News Desk

Los Angeles councilman Paul Koretz has called for banks NY Mellon and Dexia to return $65 million in "unfair profits and termination payments" they received between 2008 and 2014. This follows a report (embedded below) revealing that the city spent more than $200 million in fees to Wall Street in 2013 alone.  Koretz says he may push the city to take punitive action against the financial institutions involved if they do not renegotiate the deal.

The report, published by the union-backed Fix LA Coalition, notes that "the City of Los Angeles last year spent more on Wall Street fees than it did on our streets." Indeed, the report notes the city "paid Wall Street $204 million in fees, spending only $163 million on the Bureau of Street Services."

The fees are connected to the controversial interest-rate-swap deal cemented by Los Angeles in 2006. It is a deal similar to those engineered by Wall Street in cities across the country. Those deals have made headlines in recent years in some of the country's most high-profile municipal budget crises.

For instance, a recent study by former Goldman Sachs investment banker Wallace Turbeville found that an interest-rate swap deal was a primary driver of Detroit's fiscal crisis. Noting that the banks used the city's bankruptcy to demand "upwards of $250-350 million in swap termination payments," Turbeville concluded that "a strong case can be made that the banks that sold these swaps may have breached their ethical, and possibly legal, obligations to the city in executing these deals." (A court recently reduced the amount the city has to pay Wall Street to unwind the deals).

Likewise, Rolling Stone's Matt Taibbi documented how interest rate swaps were at the heart of Jefferson County, Alabama's infamous bankruptcy.

Meanwhile, as recounted in a front-page New York Times story about Denver in 2010, a swap deal involving Dexia that was engineered by then-superintendent Michael Bennet blew a hole in the city's school budget. In 2013, Bloomberg News reported that "Wall Street banks collected $215.6 million that Denver's public schools paid to unwind swaps and sell bonds" - a "sum is about two-thirds of annual teaching expenses." But while the city suffered, Bennet went on to raise big money for his subsequent U.S. Senate run from the financial industry - including from J.P. Morgan, which was at the center of the catastrophic deal.

In much the same way public pension systems hide their high-fee deals with Wall Street  from public scrutiny, the interest rate swaps are shrouded in secrecy. In fact, the Fix LA Coalition notes that things in Los Angeles might be even worse than it reports. That's because, the group says, "the fees we were not able to document may exceed those we could document." The report added:

The city makes no secret of how much it spends on our streets. The $163 million spent on streets is reported, plain as day, in the city’s annual financial statement. But the sum total $204 million paid to Wall Street is nowhere to be found. And this could be just the tip of the iceberg.

We arrived at it only by studying the records of nearly a dozen separate city departments, the city’s contract database, its annual and quarterly budget and financial reports, the federal Electronic Municipal Market Access database, and publicly available reports published online by financial institutions with which the city contracts. Underscoring the point about this potentially being only the tip of the iceberg, a spokesperson for the Service Employees International Union told Pando that in the time between releasing the report and Koretz's formal demands, it has already discovered another $100 million in fees, upping the estimate to $300 million (estimate embedded below).

According to a press release announcing his letter, Koretz says that unless the financial firms profiting off the deal agree to renegotiate the terms, Los Angeles should consider terminating any other business with them and move to exclude them from all future business with the city's government.

No Small Fees

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[Photo credit: Aaron Goodwin (Creative Commons)]