How Wall Street Fraudsters Plunder Public Finances, And How to Fight Back

http://www.alternet.org/economy/wall-street-and-municipal-fraud



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How your community became Wall Street prey

Many municipalities invested in flawed “structured finance” deals on the advice of bankers who said these complex transactions would give them a better deal than simpler, traditional products. So trusting public finance officials lined up to follow their advice — only to be told later that advice was not to be relied upon.


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Breaking the basic laws of finance

These structures violated a basic law of finance. The municipalities failed to match long-term borrowing with their long-term investments in infrastructure and other obligations. Instead they financed these long-term commitments with short-term borrowings that needed to be indefinitely refunded, week after week, often for as long as 20 years or more. All of the structures put in place to protect the borrowers — the letters of credit, the interest rate swaps — failed when put to the test by the financial crisis.

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Banks get rewarded for failure

The cities and states got a nasty surprise, and found themselves paying penalty interest rates to their bankers not because they’d done anything wrong, but because bank credit ratings had plummeted! Usually, the purpose for including a penalty rate in a standard letter of credit is to protect creditors from a borrower’s shortcomings. Here, cities and states were forced to pay a penalty rate for their bank’s shortcomings. Rather than being penalized for the failures and unsafe banking practices that caused the financial crisis and led bank credit ratings to nosedive, banks were instead rewarded with higher interest payments— a windfall. Needless to say, the cities and states had nothing to do with boneheaded banking moves.

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No recovery in sight

Very little’s been done to get this money back. Elected state and municipal financial officers certainly don’t want to level with constituents about just how badly they were hornswoggled by bank derivatives sales teams. An even bigger problem is our corrupt campaign finance system. National political parties control large war chests necessary for governors and other state officials to run successful state political campaigns. Much of these campaign funds come from financial institutions. You do the math.