Oakland leaders urge broad battle with Goldman Sachs

Reuters News
Posted: Jul 31, 2012 6:43 PM
Oakland leaders urge broad battle with Goldman Sachs

By Sarah McBride

SAN FRANCISCO (Reuters) - Oakland leaders took their financial troubles to the doorstep of Goldman Sachs on Tuesday, urging other cities to join them in fighting a bank that has become a lightning rod for criticism of the U.S. financial system.

Oakland is trying to get out of a Goldman-brokered interest rate swap that is costing the cash-starved city some $4 million a year. The swap, entered into 15 years ago as part of a bond sale to hedge against rising interest rates, has turned sour for Oakland now that interest rates are near zero.

"I hope that other cities will follow our lead," said Oakland city council member Desley Brooks, addressing about 30 protesters outside Goldman's San Francisco offices. Oakland has had to slash city services and lay off police officers even as it wrestles with a high crime rate and other urban ills.

Oakland is paying 5.68 percent on debt associated with the swap, even with interest rates at record lows. Getting out of the contract would cost the city $16 million in termination fees, it says; it wants Goldman to waive the termination fees.

A $2 million payment on the swap was made Tuesday, according to a person familiar with the city's finances.

A spokeswoman at Goldman declined to comment on its dealings with Oakland.

Many municipalities and agencies around the country face problems with interest rate swaps at a time of unprecedented financial pressure on local governments. Slumping tax revenues in a sluggish economy combined with soaring pension and healthcare costs have hit many local governments hard.

The fiscal crisis facing cities and towns is particularly severe in California: the city of Stockton has filed for bankruptcy protection, the city of San Bernardino is expected to do the same, and local governments around the state are slashing services and trying to raise taxes to balance budgets.

The city of San Francisco will pay around $17 million in swap fees this year to Goldman and other banks connected to debt financing for its airport, San Francisco Supervisor Jon Avalos said at the protest.

Afterwards, he said he planned to explore over coming weeks whether San Francisco should attempt to renegotiate its payments with Goldman.

Other cities and agencies in the region that analysts and unions say must pay swap fees to a variety of banks include the city of Menlo Park, which will pay around $3.1 million this year; the city of Pittsburg, which will pay around $3.6 million; and the Metro Transportation Commission, which will pay around $48.6 million.

In response to a question about the Oakland interest-rate swap at Goldman Sachs Group Inc's annual meeting in May, chairman Lloyd Blankfein said the bank was not in a position to end the contract.

"That's not how the financial system could work," he said, noting that most borrowers would prefer to tear up higher-interest agreements and replace them with today's low rates. "We would be frankly paring the interests of our shareholders and the operations of the company. I don't think it's a fair thing to ask."

But at Tuesday's protest, civic leaders said the bank had benefited from a government rescue package during the 2008 financial crisis, and now it should give a break to cities like Oakland.

"They got bailed out. We got sold out," the protesters chanted. One of them wore a paper top hat bearing the label "Mr. Blank Check", and as part of a skit ripped funds from libraries, firemen and city parks.

The City Council has voted to stop doing business with Goldman if it doesn't let Oakland out of its swap obligation by the end of September.

The city and Goldman have been discussing some sort of break on the payments, but the two sides remain far apart, with Goldman willing to shave a few hundred thousand dollars from the payments, while the city wants to get out of the payments altogether, a person familiar with the discussions said.

"There's a lot of pandering and accusations about perfectly reasonable deals that didn't work out," said Stephen Levy of the Center for the Continuing Study of the California Economy, who said he wasn't familiar with the Oakland swaps. In terms of having to pay up, "Why should the cities be different to anyone else who hedges against corn or oil or uncertainty?" he asked.

The city of Detroit was able to renegotiate its swap agreements in 2009, but a drop in its credit rating could require the city to pay more fees on those swaps.

Goldman ranks fifth for the first half of 2012 as book runner of municipal bonds, according to Thomson Reuters data.

(Additional reporting by Tiziana Barghini and Lauren LaCapra; Editing by Jonathan Weber and David Gregorio)