Daily Digest - September 18: The Hashtag of Democracy

Sep 18, 2014Rachel Goldfarb

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From #Ferguson to #OfficerFriendly (Bloomberg View)

Roosevelt Institute Fellow Susan Crawford explains what the New York Police Department will need to do in order to make its new social media initiatives successful.

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From #Ferguson to #OfficerFriendly (Bloomberg View)

Roosevelt Institute Fellow Susan Crawford explains what the New York Police Department will need to do in order to make its new social media initiatives successful.

Census Report Shows Rise in Full-Time Work, Undercutting Claims by Health Reform Opponents (Off the Charts)

Paul N. Van de Water says the Census Bureau report proves that the Affordable Care Act isn't leading to a large increase in part-time work. In fact, part-time work has decreased.

Fed Signals No Hurry to Raise Interest Rates (NYT)

Binyamin Appelbaum reports on the Federal Reserve's latest policy statement, which affirms the necessity of continued stimulus in the form of near-zero short-term interest rates.

What Cutting Jobless Benefits Wrought (U.S. News & World Report)

Pat Garofalo points to the cutting of federal extended unemployment benefits as one of the sources of our continually too-high poverty rate.

The Occupy Movement Takes on Student Debt (New Yorker)

Rolling Jubilee, which buys up debt and cancels it, may be among the Occupy movement's biggest successes, writes Vauhini Vara, but its real hope is for debtors to organize.

Meet the Domestic Worker Organizer Who Won the 'Genius' Grant (Bloomberg Businessweek)

Josh Eidelson profiles Ai-jen Poo, director of the National Domestic Workers Alliance, who plans to use her MacArthur "Genius Grant" to endow an organizing fellowship for domestic workers.

Want to Live in a State with No Income Tax? Make Sure You're Super Rich First (The Guardian)

Siri Srinivas looks at a new report on state-level taxes, which shows that most Americans think fair taxes should be progressive by nature, emphasizing income and property taxes over sales tax.

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Wall Street Swindled Local Governments, Too. Here’s How They Can Get Their Money Back.

Sep 17, 2014Saqib Bhatti

Predatory lenders drove municipal governments and taxpayers into debt with risky interest rate swap deals that may have violated federal regulations.

The story of how Wall Street banks steered unsuspecting homebuyers towards complex mortgages with hidden risks and hidden costs has been well-documented. In fact, the typical sales pitch for adjustable-rate mortgages was premised on the false notion that home values never fall and that borrowers could refinance their loans before interest rates jumped.

Predatory lenders drove municipal governments and taxpayers into debt with risky interest rate swap deals that may have violated federal regulations.

The story of how Wall Street banks steered unsuspecting homebuyers towards complex mortgages with hidden risks and hidden costs has been well-documented. In fact, the typical sales pitch for adjustable-rate mortgages was premised on the false notion that home values never fall and that borrowers could refinance their loans before interest rates jumped.

Less widely understood is the fact that a very similar story played out with cities, states, and other municipal borrowers that were also steered into predatory interest rate swap deals riddled with hidden risks and hidden costs. Banks pitched these deals as a way for municipalities to save money on bond issuances: instead of issuing a traditional bond that had a fixed interest rate, they could take out a cheaper variable-rate bond that had an adjustable interest rate, but use a swap to protect against the risk of interest rate spikes.

Under this structure, municipalities made fixed-rate payments to banks on their swap deals, while the banks gave them back a variable-rate payment that was intended to offset the interest rate that the municipality had to pay its bondholders. The idea was that this would allow borrowers to get a “synthetic fixed rate” on their debt that was cheaper than what they would have to pay on a comparable conventional fixed-rate bond.

However, there were numerous risks embedded in these deals. For example:

  • The variable interest rate that the banks paid to the municipality could fall short of the rate that the municipality owed bondholders, creating a shortfall.
  • These deals contained many termination clauses that would allow the banks to cancel the deals and charge municipalities tens or even hundreds of millions in termination penalties.
  • Rather than rising, interest rates could crater, causing the net payments on the swap deals to skyrocket and leaving the municipalities unable to take advantage of the low-interest environment unless they terminated their swaps and paid hefty termination penalties.

Even though banks tried to downplay or dismiss these risks in order to push interest rate swaps, all of them materialized in the aftermath of the 2008 financial crisis:

  • When interest rates on a type of variable-rate bond known as an auction rate security shot up, the bank payments on the corresponding swaps could not cover those payments, and cities and states across the country were stuck paying double-digit interest rates to bondholders.
  • When Lehman Brothers filed for bankruptcy and defaulted on its swap payments with municipalities, it triggered termination clauses on the bank’s swaps. In an ironic twist, cities and states actually had to pay penalties to Lehman because of the way the termination clauses were written.
  • When the Federal Reserve slashed interest rates in response to the financial crash, it also drove down variable rates on swaps, causing the net payments on the swaps for cities and states to soar and preventing taxpayers from enjoying any of the benefits from the low rate environment.

As a result, municipalities across the country have been hit with large bills to Wall Street at the same time that they are trying to close record budget shortfalls amid the biggest economic downturn in 80 years. The Detroit Water and Sewage Department is shutting off water to families who have missed just a couple of payments on their water bill so that it can pay off more than $500 million in termination penalties on its swaps. The City of Chicago is now paying $72 million a year on its swaps as a result of the low interest rates, even as entire neighborhoods on the south and west sides of the city fall into disrepair. The school district in Chicago is paying another $36 million a year on swaps, while the Board of Education is invoking budget problems to justify the largest mass school closing in national history. In Wisconsin, the state is now paying $25 million a year on its swaps and making catastrophic cuts to state healthcare programs. These are just a few examples of a trend cropping up everywhere in the U.S.

It is no accident that the same communities that were disproportionately targeted for predatory mortgages are also bearing the brunt of these predatory municipal finance deals. Across the country, working class communities of color are disproportionately impacted by cuts to public services, and austerity measures serve to exacerbate the crisis in those communities in particular.

Luckily, there is something that public officials can do to stop the bleeding. Under Rule G-17 of the Municipal Securities Rulemaking Board (MSRB), a federal regulator charged with protecting the interests of municipal borrowers, banks that pitch deals to public officials must “deal fairly” with them. According to the MSRB, this means that they “must not misrepresent or omit the facts, risks, potential benefits, or other material information about municipal securities activities undertaken with the municipal issuer.” In other words, they must not downplay the risks associated with deals like interest rate swaps, and they must not mislead public officials about the likelihood of such risks materializing. The banks must ensure that public officials truly understand the risks of the deals they enter into.

This is a burden that was not met in the typical swap transaction. As a rule, bankers highlighted the upside and minimized the potential downside in pitching these deals. This was in violation of MSRB Rule G-17 and municipalities like Chicago and Detroit have legal recourse to potentially win back hundreds of millions from Wall Street. Cities, states, and other municipal borrowers can pursue these legal claims by filing for arbitration with the Financial Industry Regulatory Authority (FINRA).

The Baldwin County Sewer Service, a privatized utility in Alabama, successfully used a similar legal argument earlier this year to win back its swap payments and get out of its deals without any termination penalties. The total value of the award was approximately $10 million. The potential claims could be many magnitudes higher for cities and states that had significantly greater swap exposure.

However, officials in municipalities with swaps need to act fast, because time may be running out. FINRA has a six-year eligibility period on these claims. Because many of the risks associated with swaps materialized in October 2008, when interest rates plummeted as a result of the federal response to the financial crisis, it is possible that the clock could run out on these claims as early as October 2014. Public officials like Mayor Rahm Emanuel in Chicago and Governor Scott Walker in Wisconsin should act now to potentially recover millions for their constituents before it is too late.

Saqib Bhatti is a Fellow at the Roosevelt Institute and Director of the ReFund America Project.

Image via Thinkstock

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Daily Digest - September 17: Who's Taking Part in Our Unequal Democracy?

Sep 17, 2014Rachel Goldfarb

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Fighting Inequality in the New Gilded Age (Boston Review)

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Fighting Inequality in the New Gilded Age (Boston Review)

Roosevelt Institute Fellow Sabeel Rahman reviews three new books that ask who is engaging in democracy and how they are doing so in light of today's economic inequality.

Home Free? (New Yorker)

James Surowiecki looks at Utah's Housing First and Rapid Rehousing programs as examples of a better approach to solving social problems: investing in prevention.

At the Uber for Home Cleaning, Workers Pay a Price for Convenience (WaPo)

Lydia DePillis compares HomeJoy, an app-based cleaning service, to traditional services that count workers as employees, complete with worker's compensation for a job that involves harsh chemicals.

Do State Retirement Pensions Belong with Wall Street Hedge Funds? (The Guardian)

Suzanne McGee looks to current arguments in Rhode Island to explain why the high risks and high fees associated with hedge funds make some pension managers think twice.

‘A National Admissions Office’ for Low-Income Strivers (NYT)

David Leonhardt says Questbridge, a non-profit connecting low-income students to full-ride scholarships at top universities, has an innovative approach that is shifting the admissions process.

Americans' Stagnant Incomes, in Two Depressing Charts (Vox)

Danielle Kurtzleben looks at new data from the U.S. Census Bureau, which confirms that U.S. household income remains stagnant and income inequality hasn't shifted either.

New on Next New Deal

Wall Street Swindled Local Governments, Too. Here’s How They Can Get Their Money Back.

Roosevelt Institute Fellow Saqib Bhatti explains how Wall Street harmed municipalities with risky interest rate swap deals, and argues that those deals may have been illegal and should be fought in court.

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Daily Digest - September 16: It's Time to Rethink the Purpose of Corporations

Sep 16, 2014Rachel Goldfarb

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The Overpaid CEO (Democracy)

Roosevelt Institute Fellow Susan Holmberg and Mark Schmitt argue that exorbitant executive pay cannot be addressed without reconceptualizing a corporation as more than just an agent of its shareholders.

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The Overpaid CEO (Democracy)

Roosevelt Institute Fellow Susan Holmberg and Mark Schmitt argue that exorbitant executive pay cannot be addressed without reconceptualizing a corporation as more than just an agent of its shareholders.

Independence Has Costs and Benefits (The Scotsman)

Roosevelt Institute Chief Economist Joseph Stiglitz argues that Scotland should base its decision about independence on values rather than short-run economic gains or losses.

The Myth That Sold the Financial Bailout (AJAM)

Letting the investment banks collapse wouldn't have caused a second Great Depression, says Dean Baker. Between the FDIC and stimulus deals, the economy would still have recovered.

Why Pensions Went Away: A Theory (WSJ)

Lauren Weber looks at a new study on pensions, which suggests that the increase in influential investors who buy large blocks of stocks is tied to dropped pension plans.

Income Inequality is Hurting State Tax Revenue, Report Says (WaPo)

A new study from Standard & Poors shows the impact of inequality on state budgets, writes Josh Boak. S&P says that changing state tax codes won't be enough to solve this problem.

What the Poverty Rate Tells Us About the Overall Economy (NYT)

Jared Bernstein expects that the 2013 data will show that the poverty rate has continued to hold steady around 15 percent, because the recovery hasn't reached low-income households.

Scott Walker Wants To Fight Feds Over Welfare Drug Tests (HuffPo)

Federal law does not allow drug testing for food stamps or unemployment insurance, but Arthur Delaney reports that the Wisconsin governor wants to push back on that rule.

Unseen Toll: Wages of Millions Seized to Pay Past Debts (ProPublica)

Paul Kiel looks at the rise of wage garnishment for consumer debts, a system that has few protections for debtors and causes great financial hardship, since up to 25 percent of a paycheck can be taken.

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Daily Digest - September 15: Violence Against Women is Still a Threat, Abroad and at Home

Sep 15, 2014Rachel Goldfarb

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Hillary Clinton Seeks End to Gender Violence by Terrorist Groups (CBS News)

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Hillary Clinton Seeks End to Gender Violence by Terrorist Groups (CBS News)

Clinton also spoke about issues of violence against women in the U.S., reports Hannah Fraser-Chanpong, reiterating her stance that domestic violence requires criminal, not cultural, responses.

White House Photo Ops, Old School (NYT)

Roosevelt Institute Senior Fellow David Woolner says the new Ken Burns film The Roosevelts: An Intimate History highlights the interconnectedness of the lives of Theodore, Franklin, and Eleanor.

Shareholders Say, ‘Show Me The Money’ (In These Times)

David Sirota explains the fight over corporate political spending disclosures. A proposed Securities and Exchange Commission rule has significant public support – and plenty of corporate pushback.

  • Roosevelt Take: Roosevelt Institute Fellow Susan Holmberg looks at the costs and benefits of mandating corporate political spending disclosure.

Workers Go on Strike at Hammond Automotive Seats Plant (Chicago Tribune)

The workers are "tired of being treated like fast-food industry employees," writes Alexandra Chachkevitch. They are asking for the elimination of a salary cap instituted during the financial crisis.

Workers in Maine Buy Out Their Jobs, Set an Example for the Nation (Truthout)

Rob Brown, Noemi Giszpenc, and Brian Van Slyke explain why the creation of the Island Employee Cooperative in Deer Isle, Maine is a particularly groundbreaking achievement.

New on Next New Deal

How Much are Local Civil Asset Forfeiture Abuses Driven By the Feds? A Reply to Libertarians

Roosevelt Institute Fellow Mike Konczal counters libertarian arguments, showing that the profit motive is bottom-up: asset forfeiture in non-Federal cases is driven by local policy.

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Daily Digest - September 12: Students Shouldn't Go Hungry on College Campuses

Sep 12, 2014Rachel Goldfarb

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How One Student is Fighting the College Hunger Crisis (MSNBC)

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How One Student is Fighting the College Hunger Crisis (MSNBC)

Ned Resnikoff profiles Yvonne Montoya, President of the Santa Monica College chapter of the Roosevelt Institute | Campus Network, and her work to get food stamps accepted on campus.

A Tour of the Roosevelt Family's New York (WSJ)

Sophia Hollander speaks with Roosevelt Institute Senior Fellow David Woolner about the Roosevelt legacy in New York through fourteen sites across the state, in light of the upcoming Ken Burns documentary The Roosevelts.

Measuring the Impact of States’ Obamacare Decisions (WaPo)

Jason Millman looks at a new study on how costs varied for people buying insurance based on their states' approach to the Affordable Care Act. States with successful exchanges had the lowest costs.

Why Co-ops Are the Future of the American Economy (AJAM)

Worker-owned businesses should appeal to liberals and conservatives alike, writes Matthew Harwood, because conservatives see ownership as building self-sufficiency and liberals appreciate the higher wages.

The Inflation Cult (NYT)

The investors and economists who continue to insist that runaway inflation is coming to destroy the U.S. economy are a sign of just how polarized our society has become, writes Paul Krugman.

Allentown Bets Big to Shed its Former Image (Marketplace)

Tommy Andres looks at how tax incentives structured through a Neighborhood Improvement Zone have begun to revitalize Allentown's downtown.

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Daily Digest - September 11: Funding Universal Preschool Means Taking Banks to Task

Sep 11, 2014Rachel Goldfarb

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Bright Future Chicago Pushes for Universal Preschool (Chicago Tonight)

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Bright Future Chicago Pushes for Universal Preschool (Chicago Tonight)

Roosevelt Institute Fellow Saqib Bhatti explains one way that universal preschool could be funded: Chicago could pursue legal claims against banks for bad interest rate swap deals.

Jerry Brown Signs Bill Requiring Employers to Give Paid Sick Leave (The Sacramento Bee)

California is the second state to enact state-wide paid sick leave, but David Siders reports that labor groups aren't in full support of the new law because it excludes home health care workers.

Asset Limits Are a Barrier to Economic Security and Mobility (CAP)

Rebecca Vallas and Joe Valenti explain how asset limits on social safety net programs prevent low-income families from building necessary economic stability, and lay out a plan for reform.

The Federal Reserve's Too Cozy Relations With Banks (WSJ)

Stephen Haber and Ross Levine suggest ways to limit banks' influence with the Federal Reserve, including requiring ex-Fed officials to agree to a waiting period before taking jobs in financial services.

Student Debt Collections Are Leaving the Elderly in Poverty (Bloomberg Businessweek)

Federal student debt among the elderly has increased sixfold since 2005, and a law meant to keep garnishments from putting retirees in poverty is in dire need of an update, reports Natalie Kitroeff.

Who Needs a Smoke-Filled Room? (NYT)

Thomas Edsall lays out an example of the complicated structures that allow tax-exempt "social welfare" organizations to spend millions of dollars on political campaigns with little accountability.

These Charts Are Good News if Your Employer Pays for Health Insurance (TNR)

Jonathan Cohn says that the slowed premium increases for employer-sponsored insurance this year are another sign that the Affordable Care Act is keeping health care costs down.

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Daily Digest - September 10: Could a Left-Wing Tea Party Unite Progressives?

Sep 10, 2014Rachel Goldfarb

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Why We Need a Left Wing Tea Party (The Daily Beast)

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Why We Need a Left Wing Tea Party (The Daily Beast)

Sally Kohn calls on progressive factions to follow the Tea Party's lead and throw all their weight behind uncompromising candidates who are strong on every progressive issue.

Labor Market Unchanged According to July Job Openings Data (EPI)

Comparing job openings data to unemployment, Elise Gould points out that over half of the unemployed were not going to find work in July no matter what they did, because the jobs don't exist.

Government Debt Isn't the Problem—Private Debt Is (The Atlantic)

Richard Vague writes that financial crises can be tied to too-high and rapidly growing private debt, which means policy solutions need to focus on debt relief for low- and middle-income people.

Were Fast-Food Workers Paid to Strike and Protest? (The Guardian)

The answer is no, writes Jana Kasperkevic. That rumor is a corruption of the union strike fund, a pool set aside to help pay for striking workers' arrest fines and lost wages.

Warren Faults Banking Regulators for Lack of Criminal Prosecutions (WSJ)

While Senator Warren focused on the Federal Reserve, Senator Shelby blamed the DoJ for seeking fines instead of jail time for banking executives, report Ryan Tracy and Victoria McGrane.

Want to Fix the Jobs Crisis? Build a Federally Funded Worker Education Infrastructure (TAP)

Good job training programs – the kind that see both students and employers as clients – can be highly successful, writes Paul Osterman, but they're small and difficult to scale up.

The OECD’s Latest Report is Burdened by Economic Myths (AJAM)

Philip Pilkington says that until economic policymakers stop assuming that economies rebalance themselves and that high government debt is the real problem, good policy change is unlikely.

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Daily Digest - September 9: Block Grants Won't Solve Poverty -- They'll Make It Worse

Sep 9, 2014Rachel Goldfarb

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The Republican Playbook for Cutting Anti-Poverty Programs (The Nation)

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The Republican Playbook for Cutting Anti-Poverty Programs (The Nation)

Roosevelt Institute Fellow Mike Konczal and Bryce Covert write that block grants, like those that make up Paul Ryan's anti-poverty proposal, effectively freeze funding for their programs.

Can Republicans Be Convinced to Help Improve the Affordable Care Act? (TAP)

Looking at Mike Konczal's suggestion for improving the Affordable Care Act, Paul Waldman says that more specific proposals will force Republicans to act.

Democrats Have a Depth Problem. It’s Largely Their Own Fault. (WaPo)

Aaron Blake blames Democrats for not investing in developing young leaders, as the Republicans have done for 25 years, and credits groups like the Campus Network for starting to build that pipeline.

Ferguson Sets Broad Change for City Courts (NYT)

Frances Robles reports on the changes announced at Ferguson's first city council meeting since Mike Brown's death, including a cap on how much of the city's budget can come from court fines.

Dignity (New Yorker)

William Finnegan profiles one McDonalds employee on her work and her labor activism as she struggles to support her kids on $8.35 an hour, her wage after eight years on the job.

This Is What It's Like To Sit Through An Anti-Union Meeting At Work (HuffPo)

Dave Jamieson reports on recordings published by the Teamsters in which employers claim over and over that unions just want employees' money, not to improve the workplace.

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Daily Digest - September 8: What Ever Happened to the Public Option?

Sep 8, 2014Rachel Goldfarb

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To Improve ‘Obamacare,’ Reconsider the Original House Bill (AJAM)

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To Improve ‘Obamacare,’ Reconsider the Original House Bill (AJAM)

Roosevelt Institute Fellow Mike Konczal argues that the House's public option for health care reform, which was missing from the Senate bill that became law, would greatly strengthen the Affordable Care Act.

SEC Faces Renewed Pressure to Consider a Corporate Disclosure Rule (The Nation)

One million comments submitted to the Securities and Exchange Commission have called for requiring companies to disclose political donations to shareholders, writes Zoë Carpenter.

  • Roosevelt Take: Roosevelt Institute Fellow Susan Holmberg finds that corporate political spending disclosure has substantial benefits.

Why the Worst Governments in America Are Local Governments (NY Mag)

Jonathan Chait looks at the problem of "Big Small Government," meaning local governments that act as oppressive forces. He says neither Democrats nor Republicans offer useful solutions.

Paid Sick Leave is Healthy for Business (SFGate)

Carl Guardino, a Silicon Valley CEO, explains the business advantages of instituting paid sick leave in California. He focuses on improvements to health, safety, and economic security.

Some Retail Workers Find Better Deals With Unions (NYT)

The retail union in New York City has secured protections for its members that other retail workers are fighting for, like plenty of advance notice on schedules, says Rachel Swarns.

Unemployment Rate Continues To Be Elevated Across the Board (Working Economics)

The combination of declining real wages and elevated unemployment rates for college graduates indicates the impossibility of a skills mismatch in today's labor market, writes Elise Gould.

Nearly a Quarter of Fortune 500 Companies Still Offer Pensions to New Hires (WaPo)

Since companies are scaling back the generosity of these pensions through hybrid plans that cost workers more, Jonnelle Marte says that number sounds deceptively good.

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