It’s the holiday season, so if you’re on Wall Street you’re probably asking yourself, is there any way I can repay taxpayers for saving my ass and helping me earn big fat, record-breaking bonuses this year? Turns out there is — finding new ways to hose taxpayers.
I don’t mean Wall Street finding new ways to profit off the mortgage mess they helped create:
Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.
But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.
While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers — at a time when Americans are falling behind on their mortgage payments in record numbers.
That’s gross, but it’s business as usual.
No, I’m talking about a truly special gift — ripping off local and state government by exploiting contract loopholes Wall Street created.
Across the nation, local governments and related public entities, already reeling from the recession, face another fiscal crisis: billions of dollars in fees owed to UBS, Goldman Sachs (GS), and other financial giants on investment deals gone wrong.
The seeds of this looming disaster were sown during the credit boom, when Wall Street targeted cities big and small with risky financial products that promised to save them money or boost returns. Investment bankers sold exotic derivatives designed to help municipalities cut borrowing costs. Banks and insurance companies constructed complicated tax deals that allowed public utilities, transit authorities, and other nonprofit organizations to extract cash immediately from their long-term assets. Private equity firms, pointing to stellar historical gains, persuaded big public pension funds to plow billions of dollars into high-cost investments at the peak of the market. Many of the transactions shared a striking similarity: provisions that protected the banks from big losses and left the customers on the hook for huge payouts.
Now, as many of those deals sour, Wall Street is ramping up its efforts to collect from Main Street. “The banks stuffed customers with [questionable investments] and then extorted money from the customers to get rid of them,” says Christopher Whalen, managing director at research firm Institutional Risk Analytics. The New Jersey Transportation Trust Fund Authority, for instance, must pay nearly $1 million a month at least until December 2011 to Goldman Sachs on derivatives deals tied to municipal debt—even though the state retired the debt last year. The Chicago Transit Authority (CTA), having entered into complex arrangements to lease its equipment to outside investors and then lease it back, could face termination fees of $30 million. The investors could collect penalties because American International Group (AIG), which backed the arrangement, has seen its credit rating tumble.
Got that? First the Fed finds all sorts of creative ways to shore up Goldman Sachs directly. Then, when they take over AIG, they pay Goldman Sachs full price for what they are owed even though its market value is much less. And now Goldman Sachs is using AIG’s failure to loot one million dollars a month from New Jersey on debt Jersey already paid off. I think we have a new definition of chutzpah.
In case there was any remaining doubt, this stab in taxpayers’ back is proof that Wall Street is totally unafraid of Obama or the Democrats — or of us progressives. And no wonder. We haven’t given them a reason to be afraid of pissing us off.
If I were a right-winger, I’d be licking my chops.