A New Plan for American Cities To Free Themselves of Wall Street’s Control

Arbitrary financial fees are sucking cities and states dry. But they can change the terms if they band together and bargain collectively.

Saqib BhattiAugust 31, 2015

In August 2014, the Los Ange­les City Coun­cil debat­ed whether to call for the rene­go­ti­a­tion of the city’s finan­cial deals. A report by the labor-com­mu­ni­ty coali­tion Fix L.A. found that the city had spent more than twice as much on bank­ing fees in fis­cal year 2013 as it had on street services.

Just three U.S. cities—New York, Los Angeles and Chicago—together with their related agencies and pension funds, do nearly $600 billion of business with Wall Street every year.

To try to bal­ance its bud­get, Los Ange­les had enact­ed hun­dreds of mil­lions of dol­lars in cuts over the pre­vi­ous five years. City jobs had been slashed by 10 per­cent, flood con­trol pro­ce­dures had been cut back, crum­bling side­walks were not repaired and alleys were rarely cleared of debris. Sew­er inspec­tions ceased entire­ly; the num­ber of sew­er over­flows dou­bled from 2008 to 2013.

The cam­paign slo­gan wrote itself: Invest in our streets, not Wall Street!”

At the city coun­cil debate, Tim­o­thy Butch­er, a work­er with the Bureau of Street Ser­vices, got up and said, I don’t know a whole lot about high finance. I’m just a truck dri­ver. But I do know, if I go to a bank and they give me a bad deal, I don’t deal with that bank any more. And I don’t under­stand why the city can’t use the same kind of con­cept on some of these big banks, say­ing, Hey, help us out or, you know, we’re not going to deal with you any more.’ ”

The City Coun­cil approved the res­o­lu­tion unanimously.

It was a blow against both the aus­ter­i­ty agen­da and the iron grip of Wall Street on Amer­i­can cities. State and local gov­ern­ments in the Unit­ed States rely on Wall Street firms to put togeth­er bond deals, man­age their invest­ments and pro­vide finan­cial ser­vices. For this, banks charge bil­lions of dol­lars in fees each year. Pub­lic offi­cials believe they have lit­tle choice but to cough up. When there are rev­enue short­falls, cities typ­i­cal­ly impose aus­ter­i­ty mea­sures and cut essen­tial com­mu­ni­ty ser­vices, but Wall Street gets a free pass — pay­ments to banks are con­sid­ered untouchable.

Pub­lic offi­cials assume (wrong­ly) that finan­cial fees are set in stone because they are based on so-called mar­ket rates. How­ev­er, mar­ket rates aren’t pre­or­dained by God. Banks set them, and pub­lic finance offi­cials sim­ply don’t demand any­thing sub­stan­tive­ly lower.

So, what if cities took a page from the labor move­ment and bar­gained col­lec­tive­ly over inter­est rates and oth­er finan­cial deals?

The sim­ple rea­son why anti-union politi­cians are wag­ing a war on col­lec­tive bar­gain­ing by work­ers is that it works: There is pow­er in num­bers. The basic idea behind such bar­gain­ing is to shift the bal­ance of pow­er in the employ­er-employ­ee rela­tion­ship and empow­er work­ers to nego­ti­ate with own­ers on a more equal footing.

But col­lec­tive bar­gain­ing does not have to be lim­it­ed to the work­place. Stu­dent orga­ni­za­tions such as Unit­ed Stu­dents Against Sweat­shops have forced uni­ver­si­ty admin­is­tra­tions to nego­ti­ate over labor stan­dards for their mer­chan­dise ven­dors. Con­sumer unions press retail­ers over issues like pric­ing and safe­ty stan­dards. Com­mu­ni­ty orga­ni­za­tions are able to nego­ti­ate com­mu­ni­ty-ben­e­fit agree­ments with major cor­po­ra­tions in their cities and win ben­e­fits such as local hir­ing poli­cies and com­mu­ni­ty invest­ment standards.

Sim­i­lar­ly, pub­lic finance offi­cials in cities, states and school dis­tricts across the coun­try could apply col­lec­tive bar­gain­ing prac­tices to their finan­cial rela­tion­ships with Wall Street. While there is no estab­lished mech­a­nism for them to do so, there are some cre­ative options worth explor­ing. For exam­ple, cities could estab­lish a non­prof­it or pub­licly fund­ed agency to set guide­lines for munic­i­pal finance deals and refuse to do busi­ness with any bank that does not com­ply. (More on this later.)

This may sound pie-in-the-sky, but the real­i­ty is that Amer­i­can tax­pay­er dol­lars are a tremen­dous source of bar­gain­ing pow­er. Just three U.S. cities— New York, Los Ange­les and Chica­go— togeth­er with their relat­ed agen­cies and pen­sion funds, do near­ly $600 bil­lion of busi­ness with Wall Street every year, more than the gross domes­tic prod­uct of Swe­den. Wall Street wants a piece of that action. If it has to jump through a few hoops to get it, it will. This gives pub­lic offi­cials the lever­age to demand low­er inter­est rates and fair­er terms, free­ing up scarce funds for com­mu­ni­ty ser­vices like parks, libraries and schools.

Run­away fees

Over the last few decades, the bank­ing indus­try has shift­ed its prof­it mod­el away from inter­est. Big banks’ prof­its now rely heav­i­ly on fees — the mon­ey charged for cre­at­ing loans, pack­ag­ing them into secu­ri­ties, sell­ing them and ser­vic­ing them. This struc­ture incen­tivizes banks to push more com­plex and expen­sive deals, like adjustable-rate mort­gages and vari­able-rate bonds, that require fees and add-ons.

Bank­ing fees do not have to bear any rela­tion­ship to the actu­al cost of pro­vid­ing ser­vices. Banks charge what­ev­er they can get away with, which is why fees have shot up as banks have con­sol­i­dat­ed and cus­tomers’ choic­es have nar­rowed. For exam­ple, in 2007, Bank of Amer­i­ca raised its ATM fee for non-cus­tomers from $2 to $3. In all like­li­hood, the bank’s costs hadn’t sud­den­ly risen 50 per­cent, despite a spokesperson’s claim that the fee hike would off­set sig­nif­i­cant” expan­sion and upgrade of its machines. Banks also arbi­trar­i­ly raised prices on cred­it enhance­ments for munic­i­pal bor­row­ers after the finan­cial crash.

For cities and states, which deal in large dol­lar amounts, this nick­el-and­dim­ing hits par­tic­u­lar­ly hard. A 1 per­cent fee on a $200 mil­lion bond is a lot more mon­ey than a 1 per­cent fee on a $200,000 mort­gage. That explains why the city of Los Ange­les paid $334 mil­lion in pub­licly dis­closed fees for finan­cial ser­vices in fis­cal year 2013, accord­ing to the Fix L.A. report. This amount did not include prin­ci­pal or inter­est on any debt, and nei­ther did it include fees that are not pub­licly dis­closed, like the astro­nom­i­cal fees hedge funds and pri­vate equi­ty firms charge pen­sion funds to man­age investments.

In Illi­nois, a pre­lim­i­nary analy­sis by researchers at the Ser­vice Employ­ees Inter­na­tion­al Union (SEIU) — full dis­clo­sure: where I used to work — found that the state’s pen­sion funds spent approx­i­mate­ly $400 mil­lion in pub­licly dis­closed fees in 2014 alone. New York City Comp­trol­ler Scott Stringer has released a report show­ing that near­ly all of the returns from the city’s five pen­sion funds over the past 10 years — approx­i­mate­ly $2.5 bil­lion — have been eat­en up by fees. An inves­ti­ga­tion by the Inter­na­tion­al Busi­ness Times found that New Jersey’s pen­sion funds paid more than $600 mil­lion in finan­cial fees in 2014.

Every dol­lar that banks col­lect in fees from state and local gov­ern­ments and pen­sion funds is a dol­lar not going toward essen­tial neigh­bor­hood ser­vices. It’s not just the streets and sew­ers of Los Ange­les. Illi­nois is tee­ter­ing on the edge of a gov­ern­ment shut­down. Already, Gov. Bruce Rauner has slashed fund­ing for col­lege schol­ar­ships for low-income stu­dents, tak­en a hatch­et to vital health­care pro­grams like Med­ic­aid, and cut state fund­ing for Cease­Fire, a high­ly regard­ed vio­lence-pre­ven­tion pro­gram with a proven track record.

Most pub­lic offi­cials still resist acknowl­edg­ing that these fees are a prob­lem. When Gov. Rauner tried to cut the munic­i­pal share of state income tax rev­enue by 50 per­cent this spring, the Illi­nois House of Rep­re­sen­ta­tives respond­ed with a first-of-its-kind res­o­lu­tion urg­ing the state to match any such cuts with pro­por­tion­al cuts to finan­cial-ser­vice fees. SEIU also pro­posed a reduc­tion of finan­cial-ser­vice fees dur­ing its con­tract nego­ti­a­tions for state work­ers, but this was round­ly reject­ed by the Rauner administration.

Of course, Rauner has per­son­al­ly prof­it­ed from these fees in the past. Before decid­ing to run for office, he was the man­ag­ing direc­tor of a pri­vate equi­ty firm that did busi­ness with Illi­nois pen­sion funds, GTCR LLC.

But even pub­lic finance offi­cials who don’t have direct indus­try ties typ­i­cal­ly drag their feet on fee reduc­tions. The Los Ange­les City Council’s efforts to pres­sure banks into rene­go­ti­at­ing or ter­mi­nat­ing cost­ly finan­cial deals were met with stiff resis­tance from the city’s finan­cial officers.

There are a num­ber of rea­sons why finance staff can be reluc­tant, if not obstruc­tion­ist, in efforts to cur­tail bank­ing fees. One is the revolv­ing door between pub­lic finance jobs and Wall Street. Anoth­er is the fact that pub­lic offi­cials can be out­flanked by smoothtalk­ing bankers mak­ing dis­hon­est and decep­tive sales pitch­es. But per­haps the biggest rea­son is that offi­cials tru­ly believe they got the best deal they could. Los Angeles’s finance staff point out that even though they paid $334 mil­lion in fees in 2013 alone, they actu­al­ly did bet­ter than many of their peers.

When Coun­cilmem­ber Paul Koretz called for a vote on the motion in Los Ange­les, he skew­ered the City Admin­is­tra­tive Officer’s (CAO) office, say­ing: Our lack of suc­cess in nego­ti­at­ing thus far could part­ly be a fac­tor of CAO say­ing that, Hey, this is a fine deal and we’ve done as well on this as any­thing else we could do.’ ”

Chang­ing the rules

Under the cur­rent sys­tem, Wall Street sets the rules of the game and pub­lic offi­cials think they have no choice but to play on those terms. They may nego­ti­ate around the mar­gins and get a fee low­ered by half a per­cent­age point, but they do not typ­i­cal­ly push back on the illog­ic of the under­ly­ing fee structures.

Cities that con­sid­er tak­ing a stand against Wall Street are rou­tine­ly told that if they do, their cred­it rat­ings will be down­grad­ed, and banks and investors will stop doing busi­ness with them. In real­i­ty, the pub­lic finance offi­cials who claim they have no choice but to pay high fees and accept oner­ous terms from Wall Street banks are like ele­phants afraid of mice. The notion that Wall Street could sus­tain a pro­longed boy­cott against a city or state as pun­ish­ment goes against the very nature of bank­ing. U.S. tax­pay­er dol­lars are among the largest pools of cap­i­tal in the world. If there is mon­ey to be made, there will always be a bank that will step in to get that business.

Sim­i­lar­ly, threats about cred­it rat­ing down­grades are base­less. Rat­ing agen­cies are con­cerned with a borrower’s abil­i­ty to pay back its bond­hold­ers. If any­thing, nego­ti­at­ing low­er fees with banks would free up mon­ey and make cities and states less like­ly to default.

Some cities and states are already blaz­ing the trail. In 2010, then-Mass­a­chu­setts State Trea­sur­er Tim­o­thy Cahill moved state deposits out of Bank of Amer­i­ca, Cit­i­group and Wells Far­go because the banks’ cred­it card oper­a­tions did not com­ply with the state’s usury law, which caps inter­est rates at 18 percent.

In 2012, the city of Oak­land ini­ti­at­ed a boy­cott of Gold­man Sachs because the bank refused to rene­go­ti­ate a deal that had put the city on the los­ing side of a risky inter­est-rate bet cost­ing $4 mil­ion in annu­al fees and payments.

And ear­li­er this year, the Board of Super­vi­sors of San­ta Cruz Coun­ty, Calif., vot­ed not to do any new busi­ness for the next five years with banks con­vict­ed of felonies. The boy­cott affects the five banks, includ­ing JPMor­gan Chase and Cit­i­group, that plead­ed guilty to ille­gal­ly rig­ging for­eign exchange rates.

These actions are first steps. How­ev­er, they would be sig­nif­i­cant­ly more effec­tive if cities and states joined togeth­er. When Oak­land — a mid-sized city of 400,000 peo­ple — boy­cotted Gold­man Sachs, Gold­man didn’t flinch. But if sev­er­al cities, states and school dis­tricts band­ed togeth­er and threat­ened a boy­cott, the bank­ing behe­moth would be forced to take notice.

Pow­er in numbers

In an ide­al world, the fed­er­al gov­ern­ment would estab­lish stan­dards for pro­tect­ing state and local offi­cials against preda­to­ry finan­cial deals. In the same way that there is a Con­sumer Finan­cial Pro­tec­tion Bureau, there is a dire need for a Munic­i­pal Finan­cial Pro­tec­tion Bureau whose top pri­or­i­ty would be to pro­tect tax­pay­ers’ inter­ests. Even though there are already agen­cies with over­sight over munic­i­pal finance — such as the Munic­i­pal Secu­ri­ties Rule­mak­ing Board and the Secu­ri­ties and Exchange Com­mis­sion — pro­tect­ing cities and states from abuse is not their pri­or­i­ty. And they have close ties to the finan­cial ser­vices industry.

Because fed­er­al reg­u­la­tion has proven woe­ful­ly inad­e­quate, and the chances of effec­tive con­gres­sion­al action in the near future are slim to none, cities and states need to step up.

If just New York, Los Ange­les and Chica­go band­ed togeth­er and threat­ened to with­hold their col­lec­tive $600 bil­lion of poten­tial annu­al busi­ness with Wall Street, they wouldn’t have to sim­ply accept the so-called mar­ket rates. They have enough bar­gain­ing pow­er to set their own.

Togeth­er, they could refuse to sign con­tracts that pre­vent them from pub­licly dis­clos­ing fees. If they also get their state gov­ern­ments and pen­sion funds on board, they could alter fee struc­tures for things like bond under­writ­ing. They could require any bank that pitch­es prod­ucts to sign a fidu­cia­ry agree­ment, mean­ing they are legal­ly required to put tax­pay­er inter­ests ahead of their own.

San­ta Cruz Coun­ty Super­vi­sor Ryan Coon­er­ty has already said he is reach­ing out to oth­er juris­dic­tions across the coun­try to urge them to join in refus­ing to do busi­ness with felo­nious banks. If pub­lic offi­cials were to coor­di­nate their demands and present a uni­fied front, they could force the banks to take them seriously.

My orga­ni­za­tion, the Roo­sevelt Institute’s ReFund Amer­i­ca Project, works with com­mu­ni­ty-labor coali­tions in cities nation­wide that are call­ing for a reduc­tion in bank fees and an end to preda­to­ry munic­i­pal finance deals. Last sum­mer, ReFund Amer­i­ca and Local Progress — a net­work link­ing local elect­ed offi­cials with unions and pro­gres­sive groups — led a small meet­ing called A Pro­gres­sive Vision for Munic­i­pal Finance.” We brought togeth­er orga­niz­ers, pol­i­cy experts and pub­lic offi­cials to dis­cuss var­i­ous pro­pos­als for fix­ing munic­i­pal finance. Among those present were four city coun­cilmem­bers and three rep­re­sen­ta­tives from may­ors’ offices. These offi­cials expressed strong inter­est in devel­op­ing a bar­gain­ing vehi­cle that would allow cities to take col­lec­tive action to stand up to Wall Street.

One idea was the cre­ation of a non­prof­it or pub­lic agency to set munic­i­pal finance guide­lines. Indi­vid­ual cities and states could sub­scribe to these guide­lines and the agency would in effect become the gate­keep­er for banks wish­ing to do busi­ness with them. The more sub­scribers the agency had, the more bar­gain­ing pow­er it would hold. Strict con­trols would help ensure the agency remained scrupu­lous­ly inde­pen­dent of Wall Street. That orga­ni­za­tion could even be the pre­cur­sor to a nation­al Munic­i­pal Finan­cial Pro­tec­tion Bureau.

Peo­ple over profit

Togeth­er, Amer­i­can cities, states and pen­sion funds hold untold pow­er. If they flex their mus­cles and orga­nize around coor­di­nat­ed demands, they can rad­i­cal­ly trans­form tax­pay­ers’ rela­tion­ship with Wall Street.

In 2012, a com­mu­ni­ty leader from Oak­land attend­ed the Gold­man Sachs share­hold­er meet­ing in New York City and urged CEO Lloyd Blank­fein to rene­go­ti­ate its inter­est rate swap with the city to avoid library clo­sures and lay­offs. He said it was an issue of moral­i­ty.” Blank­fein respond­ed, No, I think it’s a mat­ter of share­hold­er assets.”

This is the men­tal­i­ty that led Rolling Stone’s Matt Taib­bi to call Gold­man Sachsa great vam­pire squid wrapped around the face of human­i­ty, relent­less­ly jam­ming its blood fun­nel into any­thing that smells like money.”

It’s not just Gold­man. All of munic­i­pal finance has become an extrac­tive indus­try, pump­ing bil­lions away from the com­mu­ni­ties that need them most. Moral­i­ty is an exter­nal­i­ty that finan­cial firms sel­dom con­cern them­selves with. The finan­cial sector’s fee-based busi­ness mod­el is designed to max­i­mize prof­its, not to pro­tect taxpayers.

Banks may not have a moral com­pass, but their busi­ness con­tracts with our state and local gov­ern­ments can and should. After all, our cities, states and school dis­tricts are not sim­ply fod­der for Wall Street’s insa­tiable greed. Our elect­ed lead­ers have a duty to pro­tect us from preda­to­ry finan­cial prac­tices. Cities and states can force banks to charge dras­ti­cal­ly low­er fees, do away with arbi­trary fee struc­tures and elim­i­nate oner­ous terms that divert bil­lions of dol­lars away from the most vul­ner­a­ble mem­bers of our soci­ety into bonus checks for our nation’s wealth­i­est few.

Gov­er­nors in states like Wis­con­sin, Michi­gan and Illi­nois are wag­ing war on col­lec­tive bar­gain­ing and telling tax­pay­ers that empow­er­ing public­sec­tor unions robs state cof­fers, but the real drain on pub­lic trea­suries is the bil­lions in fees paid to banks every year. And unlike mon­ey that goes into work­ers’ pock­ets, most of these fees are not recy­cled back into the local econ­o­my but sent to off­shore tax havens or invest­ed in com­plex finan­cial schemes. The irony is that col­lec­tive bar­gain­ing is one of the most effec­tive tools avail­able to pub­lic offi­cials who tru­ly want to do right by tax­pay­ers — and cast off Wall Street’s tentacles.

Saqib Bhat­ti is the Co-Exec­u­tive Direc­tor of the Action Cen­ter on Race & The Econ­o­my and the Direc­tor of the ReFund Amer­i­ca Project.
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