It’s past time for political prioritization.
At a time when the state of Illinois has been unable or unwilling to meet its financial obligations to social-service providers because of the lack of a state budget for 10 months, the state has been paying big banks big bucks for an array of financial services, not the least of which are notorious interest-rate swaps.
“Gov. Rauner and Illinois Comptroller Leslie Munger, who writes the checks for the state, have chosen to let the state’s most vulnerable residents’ needs go unmet at the same time that they have chosen to continue paying Wall Street banks approximately $6 million per month, on average, for toxic swaps,” according to a new report from Roosevelt Institute’s ReFund America Project.
The situation is a stark example of the amoral efficiency of big banks, which can profit from the direst circumstances, and of the immoral actions of a governor more loyal to peers in the 1 percent than everyday Illinoisans.
“Through recklessness and fraud, they crashed the economy, costing millions of people their jobs and their homes,” writes Curtis Black in Chicago Reporter. “Then, as cities and states struggled with the fallout from the crisis, slashing service to their most needy residents, the banks picked their pockets to pull out an additional few billion, just because they could.”
Again, Wall Street banks are getting paid “a lot” while vendors are not and as social services and their clients, seniors, students and more all suffer. Because of interest-rate swaps that went south during the market collapse of 2008, Illinois will have paid out nearly $618 million by the end of Fiscal Year 2015 and could end up paying out more than $1.45 billion total.
Each month, Illinois is paying $6 million for 19 different interest-rate swaps, Black reports.
And in Chicago, where “Gov. Bruce Rauner seems determined to force Chicago Public Schools to go bankrupt, taxpayers recently paid Wall Street lenders $110 million as part of a deal to lend CPS $725 million to pay off old debt,” according to Ben Joravsky in the Chicago Reader. “We get $615 million but have to pay back $725 million because CPS’s credit rating is shot.”
Compelling governments to capitulate to onerous terms at the expense of constituents is a troubling trend, according to Lester Spence, a Johns Hopkins University political science professor and author of “Knocking the Hustle.”
“As federal and state governments reduce local governments’ ability to collect tax revenue, cities themselves are forced to become more ‘competitive’ by remaking themselves for the purposes of capital,” he writes.
Indeed, hedge-fund multimillionaire Rauner “whose office claims he’s exploring financial options” seems to have chosen to give Wall Street banks a free pass despite the budget woes, forcing the most vulnerable people to do without until he gets his anti-union “turnaround agenda.”
Meanwhile, it can get worse.
If the budget crisis continues and the state’s credit rating drops more, Illinois could end up paying an additional $124 million in penalties, ReFund America says.
However, some governmental bodies are taking legal action against the financial interests, the project adds.
Some banks misrepresented the risks accompanying the deals, which “likely violated the federal fair dealing rule,” say ReFund America’s Saqib Bhatti and Carrie Sloan. “The state of Illinois can potentially recover up to $618 million in past swap payments and eliminate the threat that it could have to pay up to $286 million in termination penalties in the future.”
Illinois lawmakers can petition the Securities and Exchange Commission to bring enforcement action against the banks, ReFund America says, adding that Illinois also can sue the banks under state law for fraudulent concealment or misrepresentation.
Elsewhere, at least eight local governments have successfully challenged such swap deals in court, and some have won partial refunds. Baltimore, Houston, Philadelphia and Reno all have active lawsuits against Bank of America, Citigroup and JPMorgan, some of which sold such swaps to Illinois and to Chicago.
It’s past time for elected officials to take action on behalf of the people they’re supposed to represent.