Oakland’s Goldman Sachs Rate Swap
How did this all start?
On December 1, 1988, Oakland issued variable rate bonds, 1 going into debt to finance city needs.
On December 1, 1988, Oakland issued variable rate bonds, 1 going into debt to finance city needs.
What’s a bond?
When cities need to borrow large sums of money they sell bonds. Bonds are basically long-term loans. Some bonds have fixed interest rates. Others have rates that vary with the market.
When cities need to borrow large sums of money they sell bonds. Bonds are basically long-term loans. Some bonds have fixed interest rates. Others have rates that vary with the market.
What’s a rate swap?
A rate swap allows a city to replace variable rate payments on a bond with a fixed rate. Big banks like Goldman Sachs make rate swap deals with cities like Oakland promising them protection against the possibility that interest rates will rise.
A rate swap allows a city to replace variable rate payments on a bond with a fixed rate. Big banks like Goldman Sachs make rate swap deals with cities like Oakland promising them protection against the possibility that interest rates will rise.
What happened to Oakland?
On January 9, 1997, Oakland agreed to a rate swap deal with Goldman Sachs to convert risky, variable rate debt payments on $187 million in bonds to a safe, fixed rate of 5.6%. 2 The deal stays in effect until 2021. 3 During the first few years the deal seemed reasonable for Oakland, allowing the city to keep its debt payments low and stable while variable interest rates rose during the housing boom.
The city paid off its old bonds on June 21, 2005. Due to market conditions, the city decided to remain in this contract with Goldman Sachs. The City of Oakland expected that the swap would help us gain $30 million dollars in the long run.4
With the financial crisis that began in 2008 the swap agreement became a toxic asset, draining millions in revenue from the city.
How’s that?
When the economy collapsed in 2008, the Federal Reserve reduced interest rates on loans it makes to big banks to virtually zero. 5 Big banks in turn reduced their rates to less than 1%. Oakland, however, could not renegotiate at these levels, and has been stuck instead paying upwards of 5 percent interest.
When the economy collapsed in 2008, the Federal Reserve reduced interest rates on loans it makes to big banks to virtually zero. 5 Big banks in turn reduced their rates to less than 1%. Oakland, however, could not renegotiate at these levels, and has been stuck instead paying upwards of 5 percent interest.
Why’s it unfair?
Big banks like Goldman Sachs got bailed out. The federal government took their “troubled assets” off their hands and loaned them billions of dollars for free — even though it was the greed of the big banks that caused the crisis! Cities like Oakland haven’t been bailed out. Instead we’re forced to hold our toxic assets like rate swaps and hand over even more money to the banks.
Big banks like Goldman Sachs got bailed out. The federal government took their “troubled assets” off their hands and loaned them billions of dollars for free — even though it was the greed of the big banks that caused the crisis! Cities like Oakland haven’t been bailed out. Instead we’re forced to hold our toxic assets like rate swaps and hand over even more money to the banks.
ESTIMATED PROJECTED COSTS
Year Cost to City
2012 3,911,798
2013 3,474,630
2014 3,048,818
2015 2,634,360
2016 2,231258
2017 1,845,872
2018 1,464,795
2019 1,095,758
2020 726,720
2021 363,360
*Total: $ 20,797,369
Oakland has already paid over $32 million to Goldman Sachs.6 Oakland will continue to pay millions more if we don’t take action.
What can we do about it?
· Educate - your family, friends, neighbors, co-workers. Tell them about this toxic rate swap deal.
· Advocate - write your City Council member and Mayor Jean Quan. Demand that they take action to terminate the rate swap, without penalty to the city.
· Organize - join fellow Oaklanders to build a campaign to terminate the rate swap, and to address other financial injustices : stopgoldmansachs@gmail.com
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1, 2, 4. City of Oakland. A Report to Update the City Council on the Performance of the City of Oakland's Existing Interest Rate Swaps. http://clerkwebsvr1.oaklandnet.com/attachments/14038.pdf
3. City of Oakland. Comprehensive Annual Financial Report. See:http://www.oaklandnet.com/government/fwawebsite/accounting/Pdf/CAFRFY2006.pdf
5. Elk, Mike. Activists Win Against Goldman Sachs’ Greek Style Local Government Ripoffs. March 11, 2010. See: http://www.huffingtonpost.com/mike-elk/activists-win-against-gol_b_494995.html
6. Bhatti,
Saquib. Memorandum, June 19, 2012. Submitted
to AACE and City Council, on file with the City Clerk, June 20, 2012.
*Table based on notional amounts quoted in the City of Oakland’s CAFR documents. http://www.oaklandnet.com/government/fwawebsite/accounting/CAFR.htm
In general, both interest rate and currency swaps have the same benefits for a company. Essentially, these derivatives help to limit or manage exposure to fluctuations in interest rates or to acquire a lower interest rate than a company would otherwise be able to obtain. To know more about Interest Rate Swap Mis Selling Click here.
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