Wall St. “Job Creators” strangle the futures of American cities
by David Atkins
Our glorious “job creators” hard at work:
Jeffrey A. Michael, a finance professor in Stockton, Calif., took a hard look at his city’s bankruptcy this summer and thought he saw a smoking gun: a dubious bond deal that bankers had pushed on Stockton just as the local economy was starting to tank in the spring of 2007, he said.
Stockton sold the bonds, about $125 million worth, to obtain cash to close a shortfall in its pension plans for current and retired city workers. The strategy backfired, which is part of the reason the city is now in Chapter 9 bankruptcy. Stockton is trying to walk away from the so-called pension obligation bonds and to renegotiate other debts.
After reviewing an analysis of the bond deal, underwritten by the ill-fated investment bank, Lehman Brothers, and watching a recording of the Stockton City Council meeting where Lehman bankers pitched the deal, Mr. Michael concluded that “Stockton is entitled to some relief, due to deceptive and misleading sales practices that understated the risk.”
“Lehman Brothers just didn’t disclose all the risks of the transaction,” he said. “Their product didn’t work, in the same way as if they had built a marina for the city and then the marina collapsed.”
Financial analysts and actuaries say essentially the same pitch that swayed Stockton has been made thousands of times to local governments all over the country — and that many of them were drawn into deals that have since cost them dearly.
Read the whole thing. What Wall Street did here was disgusting. But more disgusting is that while the banks were made whole, the cities that got conned by them are still left holding the bag, in many cases forced to declare bankruptcy. This is wrong on more levels than it’s possible to count.
In the old days there would have been tar and feathers–and worse–for a situation like this. That the city of Stockton and others like it should declare bankruptcy even as Wall Street profits return to record highs is injustice of untold magnitude. Cities should be able to trust high-rated bonds. If they can’t, the financial entities selling them have little value to society. And when those financial entities get bailed out at the expense of everyone else, they quickly have negative value to society.
Which is where we are now.
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