Earlier this month, Oakland Local published a piece on the pending investigation, and potential debarment of Goldman Sachs from doing business with Oakland. As the story goes, in 1997 the city had issued $187 million in bonds that carried a variable interest rate.

In order to hedge their investment, the city made a deal with Goldman Sachs to “swap” the interest rate: Instead of the rate being variable, meaning the amount paid was subject to the fluctuation of a benchmark interest rate, the rate would be fixed at 5.6 percent. Intuitively, this makes sense. It guards against the chance interest rates will rise, and a fixed rate is generally the prudent choice for a municipal government looking to minimize exposure to risk.

Of course, everything went south when the housing market tanked. Interest rates fell to historic lows, and Oakland found itself on the losing end of a toxic deal. Oakland now has to pay the fixed 5.6 percent interest rate annually while Goldman Sachs enjoys the luxury rate of near zero—a nice reward for helping crash the economy, courtesy of the Fed.

As it stands, $226,000 has been approved for an outside consultant to investigate the rate swap. Council members have expressed dismay at the investigation’s costs and, according to recent reports, little progress has been made since allocating the funds.

Still, the toxic deal is costing Oakland $3 million and rising annually. So what is $226,000 if it stops a $26 million leak (projected to increase to $46 million between now and 2021)? Especially when disbarment could set an empowering precedent for other municipalities wrecked by similar rate swaps pushed in bad faith by Goldman Sachs and other banks.

Now, at this point perhaps you’re thinking that it’s unfortunate Oakland made a losing bet on interest rates, but that’s just business. Why punish Goldman Sachs for savvy investing or, more obviously, for being perversely lucky the economy crashed? Surely Oakland cannot just pull out of a deal just because it holds a losing hand?

What needs to be understood about this deal and other deals plaguing American city governments today is this: Goldman Sachs, and the other banks that made similar rate-swap agreements, cheated all the way through. They cheated by collectively rigging the benchmark rate that sets the bond’s interest rate.

The London Interbank Offered Rate, or Libor, is the rate at which banks are able to borrow money from each other. This rate is set every day by the British Bankers Association (BBA) in London as it receives data from 18 of the world’s largest banks about how much they believe they will have to borrow from other banks.

What emerges from the BBA is the daily Libor rate, which serves as the benchmark rate not only on the interest rates on swaps, but car loans, student loans, credit cards, and mortgages. But bank traders have been actively subverting the data by getting the Libor data submitters to submit artificially low numbers, usually in order for the trader to cash in on loaded bets in the financial markets. Stories about the trades made between traders and submitters delve well into the absurd—with everything from bottles of expensive champagne to day-old sushi being exchanged for falsified Libor data.

Yes, Goldman Sachs is implicated in this scandal. So too are UBS and Bank of America, two other banks that conducted rate-swap deals with Oakland before the housing market collapsed. These banks used their relationship with the BBA to rig Libor, push the Libor rate down, and subsequently reap profits on their variable-rate derivative—all well before the economic crash saw the Fed push interest rates to near zero! For Goldman Sachs or any other institution to suggest that Oakland’s desire to end its rate-swap deal is unfair is…well, unfair, because the entire deal itself was unfair from the beginning.

The City Administrator’s office was unable to be reached for comment on the current status of the investigation.

Editor’s Note: This piece reflects an individual opinion and is not a reported story from Oakland Local. Oakland Local invites community residents to share their views about events and issues in Oakland. See our guidelines.

7 Responses

  1. Oakie

    I’m perfectly fine with wasting $226,000 chasing an impossibility–as long as it is deducted from the salaries of the mayor and council members. After all, it was these idiots who signed up for the deal. Why should the taxpayers be punished twice for the stupidity performed by our elected officials?

    Can you imagine… Elihu, Brookes, Brunner and Nadel sitting across the table from the sharks from Goldman Sachs? Holy hell, those simpletons were eaten for a light snack by the time the deal was struck and the door reopened. And now the city thinks it has a right to a do-over. What children.

    And it is true that Libor was rigged, but our tiny $187m deal was hardly a grain of sand in the Empty Quarter of the world monetary system. Surely you jest in relating the two. This is entirely about incompetent leadership elected in our city, pure and simple.

    Reply
  2. A

    I don’t understand, the Mayor said just the other day that Oakland’s finances has been the best she’s seen it in 10 years.

    /sarcasm

    Reply
  3. livegreen

    Re. the cost of the consultant, didn’t the City Council know how much they would be paying? How typical of them to be quick on the draw but not about the $ or budget! Now they’re complaining AFTER they spent the money.

    The article makes a good point about the rigging of Libor. However as I understand what the City of Oakland is trying to do, it’s disputing the entire agreement. Based on the points in the article, mightn’t it be a better tact to piggy back on the lawsuits against the banks re. Libor?

    There’s no reason they can’t do both, and at least this one they have a chance at winning.

    There. & my consulting fee will only be 10% of what there’s is. & I’m willing to contribute most of it to an Oakland based school or charity.

    Reply
  4. livegreen

    BTW, does the consultant’s fees include the legal fees to sue? If not, then how much higher can it go?

    Reply

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