Fighting banks and fighting back in Oakland: the Goldman Sachs “rate swap”

Politicians and financial experts typically describe Oakland’s links to banks and other institutions of finance capital in a language that conceals relationships of domination and exploitation. The spreadsheets, flow charts, and jargon about “best practices” and “fiscal responsibility” make the ongoing extraction of resources from the city and the impoverishment of its residents seem as natural and immutable as the laws of gravity. Of course, beneath all of this are material, tangible interactions between people, which we can name, criticize, and—if we wish—abolish.

A group called the Coalition for Economic and Social Justice (CESJ) launched an important challenge to Oakland’s ties to finance capital at a meeting of the Oakland City Council last February. Led by Minister Daniel Buford of the Allen Temple Baptist Church, members took the podium to condemn a “rate swap” deal that Oakland signed with Goldman Sachs fifteen years earlier. Declaiming this swap as immoral, they ruptured the supposedly “value-free” language customarily used to characterize such deals and implicitly created a context for a much broader discussion of the city’s economy. This is a historic achievement that we must build upon, but, to do so, and to ensure that the coalition’s challenge is not emptied of its richness, we need to put the rate swap in the context of a broad, critical perspective on the city’s economy and its relation to finance capital. This is true for at least two crucial reasons that I will describe below.

But, first, the “rate swap” at issue is an arrangement between Goldman Sachs and the city, in which the financial giant converted $187 million of city debt from a variable rate debt to one held at a fixed interest rate of 5.6 percent. At the time, this “rate swap” seemed like a prudent way to avoid anticipated increases in the interest rate, but subsequent federal intervention in the economy has pushed rates far below 5.6 percent, thus obliterating the fiscal advantages that Oakland had hoped to reap. The pact has turned out to be a bad deal for the city and one that will likely continue costing it several million annually, until its contract with Goldman Sachs expires in 2021.(1)

The CESJ sees the swap as an expensive injustice and argues that the city should extract itself from it. It is unjust, the group contends, because Goldman Sachs accepted funds from the 2008 bank bailout—using taxpayer monies to insulate itself from the financial chaos of the time—but has not renegotiated its contract with the taxpayers of the city of Oakland. In other words, it hoarded all the benefits of federal intervention for itself when it should have shared them. This is especially egregious when one considers that the city has been in continual fiscal crisis due to revenue shortfalls and has had to cut basic services as a result. “If Oakland has $5 million a year to throw into the hole that is Goldman Sachs’s pocket,” Buford told the council, “let’s use that money to build a clinic out in East Oakland, do job programs in West Oakland. Let’s use that money for some constructive purpose, rather than to line the pockets of Goldman Sachs.”

However, it is critical to recognize that the Goldman Sachs deal is not an anomalous case of bank abuse. Nor is it even the most harmful financial injustice afflicting Oakland. Rather, it is one instance of a much broader trend in which elites have compelled cities and their citizens to bear the brunt of their fiscal recklessness—that is, they caused the 2008 economic collapse, but force us to pay the bill. The tsunami of foreclosures that hit Oakland is another example of this. Though banks’ risky lending practices led the housing market to implode, private homeowners are the biggest losers: one report claims that Oakland homeowners will forfeit 12.3 billion in home values as a result of the calamity.(2) With respect to the city budget specifically, the foreclosures are an immense drain: there is disappearing tax revenue but also the vast costs associated with blight, evictions, and homelessness, to name only some of the most onerous burdens. As with the Goldman Sachs rate swap, the banks have been bailed out, but the citizens of Oakland are still paying.

Second, even if Oakland manages to extricate itself from the Goldman Sachs rate swap, international banks and lenders will still have a decisive—and coercive—power over the city’s economy. This problem did not arise because Oakland politicians handed over the city’s fiscal reigns in an act of cowardice or corruption, but rather because of changes in the nature of municipal finance. Specifically, cities have lost millions in revenue as a result of the federal government’s retreat from urban policy over the last thirty years—long gone are the days of expensive programs like Lyndon B. Johnson’s “Great Society” initiative—and, in California, because of the passage of Proposition 13, which greatly reduced access to income from property tax. These developments, in turn, have prompted cities to take costly risks with bonds, rate swaps, and other mechanisms in an often vain attempt to meet obligations and fund basic services. Sometimes these risks work out well for a city, many times they do not (they have not for Oakland), but, in either case, cities are gambling their fortunes in a game that has rules set by inaccessible, unaccountable financial institutions designed to serve the 1%. Oakland’s relation to Goldman Sachs is only one manifestation of this.

CESJ’s efforts are suggestive of the last time that Oakland’s economy was radically politicized. This was in 1973, when the Black Panther Party ran Bobby Seale and Elaine Brown for Mayor and City Council (respectively). Seen as part of the Panthers’ “Base of Operations” campaign, they enlisted the party’s newspaper and countless community events in a vast project of popular education on the nature of the city’s economy, one designed to help people see how it functioned and for whom. Though neither Seale nor Brown won office, their candidacies helped break the grip of the white elite that had run the city for decades and led many to imagine what a truly just, equitable Oakland might look like.

Oakland faces a new constellation of obstacles and possibilities today. The CESJ have done an enormous service by changing the discussion of municipal finance, if only momentarily, and by taking issue with the city’s ties to the world of finance capital. Their refusal to accept the rarified discourse of urban finance reminds us that we have the ability to identify, judge, and terminate relations of injustice. We must do this in the case of the  Goldman Sachs rate swap, but that should be just one step in a much broader effort to extract the city’s economy from the grips of finance capital and to reconstruct it in such a way that it will truly serve the people of the city.

~ Chuck Morse

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1. Darwin BondGraham has authored the most extensive and well-informed articles about the Goldman Sachs rate swap. You can find his exemplary work in the East Bay Express and also on his blog.

2. Figures come from The California Reinvestment Coalition and Alliance of Californians for Community Empowerment, The Wall Street Wrecking Ball: What Foreclosures are Costing Oakland. September 2011. Accessed on April 13, 2012.

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