In May, Citigroup, JPMorgan Chase, Barclays, Royal Bank of Scotland and UBS Group AG pled guilty to felonies, while Swiss Bank had cooperated with federal authorities early on; all had manipulated international exchange rates and national currencies, ruining millions of lives. The federal government made them pay paltry fines. Nobody went to jail and no serious threat to any of those banks' profits exists.
Fed up with this kind of garbage, County Supervisors in Santa Cruz, California, directed the county not to do business with any of those banks for five years--after which they'll be subject to review. The idea was widely lauded and the press coverage widely shared. Citizens are pressing for similar measures in San Louis Obisbo, and in Sonoma County, a private citizen, Judith Iam, saw what Santa Cruz County had done and wrote an engaging email to Efren Carrillo of Sonoma's Board of Supervisors asking that Sonoma make a similar decision. Supervisor Carrillo gave the email to David E. Sundstrom, Sonoma County's Auditor-Controller -Treasurer-Tax Collector, who then responded to Ms. Iam that he could not "recommend pursuing the suggestion that we cease doing business with the five banks indicated because such a change would ultimately harm the County and/or the Treasury," which does "some business with a couple of the firms listed and cannot operate by dealing with local banks only since they are not able to provide the safety and liquidity needed for Treasury operations."
Chicago teachers feel differently. Risky interest rate swaps have ruined the funding source for Chicago public schools. In the early 2000s, Chicago Public Schools, taking the advice of traders rather than responsible policymakers, switched from bonds that had reliable fixed interest rates to bonds issued at floating rates that could be "swapped" with other bonds, hopefully to decrease the impact of cost fluctuations. As market conditions deteriorated, the swapped payments got much, much higher, a worst-case scenario that CPS had failed to consider.
But teachers and their allies are fighting back in a way that honors Santa Cruz and the need for a national strategy. According to Chicago public schoolteacher Jim Vail:
I along with almost a thousand other people quickly signed onto the latest Chicago Teachers Union email blast to boycott the Bank of America for helping wreck havoc on the Chicago Public School system.
"I pledge to Boycott Bank of America until they renegotiate toxic swaps that have cost Chicago Public Schools and the City of Chicago more than $1 billion. I also ask that Illinois Attorney General, Lisa Madigan, begin public hearings to investigate the tremendous financial damage caused by toxic swaps on Chicago and our schools."
The CTU email further stated that Bank of America among others (how about JP Morgan - Chase?) manipulated the real estate market that caused the Federal Reserve to bring interest rates down to almost zero percent and then cities like Chicago lost millions having bet that interest rates would rise.
The Bank of America "knew that the market was headed for a 'meltdown,' (but) the bank did not warn CPS, which is in violation of the federal fair dealing rule," the flyer reads.
Chicago recently paid $200 million to terminate the "toxic" deals, about the same in cuts to school funding by the Emanuel administration, CTU further states.
But Vail asks:
where should CTU members (almost 30,000) put their money? Into other too big to fail banks like Chase or Citibank who also negotiate toxic swaps with cities and screw the schools?
The answer, of course, is a public bank, and Vail and his group should sit down with Amara Enyia and others in Chicago to discuss the benefits of either Illinois legislation or a Chicago-specific public bank.
That's also an answer to skeptical county officials in Sonoma, of course. Where the credit process is made public and easy for reliable and important public entities, there's no need for risky behavior, or for cities and counties to do business with criminals--convicted or unconvicted. What better way to guarantee the oversight and "fiduciary duty" Mr. Sundstrom writes of than for the city or county to run its own bank?