There has been a great deal of heat, but far less light shed on the state of affairs surrounding the financing of public debt and investments through the use of speculative and risk laden derivatives. Like impressionable juveniles, officials of cities, municipalities, public pensions and utility coops were lured into investment schemes that promised euphoric high returns. Once hooked, they scarcely paid notice to the perilous provisions tied to a failure to pay for the continuing “fix” or the cost of “withdrawal” should the entity need to divorce itself from these derivative schemes. After all, Congress and the White House had driven regulatory monitors underground and given a clear green light to these bankers and financiers to peddle these feel good products. Why should the cities and municipalities worry about a downside?
The underbelly of these wonderful "investment opportunities" was indeed ugly. Let us start with the fees. Many of these derivative peddlers charge the funds they speculate with a management fee of from 1% to 3% of the total fund. A reasonable charge for dedicated expertise you say? Well, consider the Texas Teachers Retirement Fund with assets of more than $15 Billion. Do the math! THEN consider that the dedicated expertise has resulted in a loss of between 15% and 33% of the Fund’s value. Retirees under the Fund have not seen a cost of living increase since 2001 and are very unlikely to see another in the lifetime of many beneficiaries. Yet the investment managers continue to get paid the investment management fee. In addition, penalty clauses for failure to make payments or for withdrawing from these toxic deals can reach into the hundreds of millions of dollars, in addition to the lost values of assets suffered.
The fact that these funds are public assets should not be overlooked. Many of these assets are needed to serve very important functions, like providing public transportation, keeping public schools open and maintaining public utilities. The collision of two very interesting forces created this perfect storm. The first was the desensitized condition of public officials. They had been so used to constant operation on the verge of financial crisis because of tight budgets, continuous borrowing and shifting funding levels that they believed that they would be able to find some solution, somewhere. The lure of investments that promised to save on borrowing costs and provide potential breathing room was a seductive offer. The second force was the GOP mantra, essentially anti-government, that created a public hatred of any suggestion of tax increases. Even when things actually COST more, the ideology was that taxes should not be raised to generate the money to pay those additional costs. The combination of these forces drove the public officials into the waiting arms of the derivative peddlers.
The result, in human terms has been the cut of public services, the reduction of educational programs and closure of schools, public transportation systems required to push aged equipment to the margins of safety, and the reduction of police and fire safety services. Social services, or what was left of them from the anorexic taxation philosophy being employed, have nearly disappeared in many larger cities hit by these derivative scams.
But all this is merely prologue to the real punch line, the genuine travesty in all this. In the starving and emaciated condition of the cities as a result of decreased tax revenue when the housing bubble burst, municipalities and public coops faced failure to make payment on these speculative investments. The federal government responded by giving billions of dollars to the bankers and financiers to bail them out and relieve them from the pressure of the failed and reckless investments. This decision apparently reflects a belief that, while the cities and the people of the country whose tax money was being thrown about were not important enough to save, the banks were “too big to fail.” It is not at all clear why a moratorium on termination payments or late payment penalties could not have been used, and the federal money used to help cities and municipalities meet their current payment obligations in the form of federal no interest loans. The process seems to stand the notion of public finance [emphasis on public] on its head.
To add insult to injury, the banks and financier receiving taxpayer bailouts have taken hundreds of millions of dollars of the public bailout funds to pay bonuses to executives whose primary accomplishments have been to dupe investors, lose their assets and hoodwink the federal government into handing over billions of bailout dollars.
It may be too much to ask, but perhaps someone in charge of the federal public funds should take a moment to peruse the US Constitution and see what purposes taxpayer money was supposed to be collected and used for. I doubt that paying bonuses to Wall Street charlatans who have helped to bankrupt cities and endanger citizens through starvation of capital and public services would fit under even the most tortured reading of the founding document.
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