Should Goldman Bailout Oakland? Not Quite
Oakland City apparently has a beef with Goldman Sachs. 15 years ago, Oakland entered a swap including a sale of bonds with GS. Oakland is now paying 5.68% interest while interest rates remain close to zero. In addition, getting out of the swaps would cost the city 16 million. So what does Oakland want? They want out of course, according to an article by CNBC.
Now before you attack the left and liberals, there's an underlying sympathy that can't be ignored. First, the economy isn't getting any better. Cities are having a harder time with fiscal austerity with rising costs and "sluggish taxes". As you might have heard, a few cities have already filed for bankruptcy protection including Stockton, San Bernardino and possibly others. Many public services have already been slashed, such as the police force, as crime rates are less than ideal. Protestors have already staged a protest outside of Goldman's offices, inducing Blankfein to respond with what most capitalists would have expected:
In response to a question about the Oakland interest-rate swap at Goldman Sachs Group Inc's annual meeting in May, chairman Lloyd Blankfein said the bank was not in a position to end the contract."That's not how the financial system could work," he said, noting that most borrowers would prefer to tear up higher-interest agreements and replace them with today's low rates."We would be frankly paring the interests of our shareholders and the operations of the company.
I think most of you, including myself, would agree with Blankfein. Capitalism and the financial markets rests on all parties honoring their contractual agreement. Such behavior would also induce 'moral hazard'. And Blankfein's right: he'd be at odds with his shareholders in terminating their swaps with Oakland. Not surprisingly, many have criticized GS for hypocritically receiving bailout money not too long ago. And to be fair, Oakland has saved more in the past; it's the future payments that will hurt them, according to an article by KQED:
Assistant City Administrator Scott Johnson said in an email that to date, the city has not lost money on the swap deal. Instead, Oakland has realized a net savings of roughly $9 million because of key actions connected to bond debt savings and payments to the variable rate index. In addition, "The city has benefited by approximately $3 million to date in debt service savings due to the lower net interest rate the city paid on the swap compared to what would otherwise have been paid in debt service payments pursuant to the original debt payment schedule on the bonds," Johnson wrote.
During talks, GS proposed to reduce some of the payments or delay payments while Oakland wants to rid all of its contractual obligations on the swaps. The city has also threatened to never do business with GS again and encourages other cities to join its fight. While GS technically doesn't have to compromise, their PR isn't getting any better. Other cities may fall suit in boycotting Goldman too. Personally, I sympathize with both parties. A compromise like a delayed payment until Oakland can restore fiscal austerity and pay back their obligations would be my plan, like how most financial institutions have paid back their bailouts post crisis.
What do you think? Do you sympathize with Main Street or Wall Street? Or somewhere in the middle and how do you compromise? If you're in favor of GS, which I expect most of you are, were you also against bailout money for banks during the financial crisis and why?
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Comments
by signing the SWAP contract,
by signing the SWAP contract, Oakland took on the risk of falling interest rates. while i "sympathize" with oakland, i don't see how this is goldman's problem.
Money Never Sleeps? More like Money Never SUCKS amirite?!?!?!?
San Bernardino filed for
San Bernardino filed for bankruptcy today and I'm sure more cities will follow especially in high debt states like California.
Let the liberals be purged.
Let the liberals be purged.
It's not so easy to ignore
It's not so easy to ignore Oakland. There's repercussions that you should consider. And no, I don't think GS should just give in, but the problem's much more complicated.
Moneyball
See my other WSO blog posts
http://dealbreaker.com/2012/0
http://dealbreaker.com/2012/08/how-much-did-goldma...
No charts, but still does a good job..
I think the biggest mistake
I think the biggest mistake is allowing government entities go into bankruptcy. If the government isn't credible than what is?
Robert Clayton Dean: What is happening?
Brill: I blew up the building.
Robert Clayton Dean: Why?
Brill: Because you made a phone call.
Moneyball: Oakland City
Oakland City apparently has a beef with Goldman Sachs. 15 years ago, Oakland entered a swap including a sale of bonds with GS. Oakland is now paying 5.68% interest while interest rates remain close to zero. In addition, getting out of the swaps would cost the city 16 million. So what does Oakland want? They want out of course, according to an article by CNBC.
Now before you attack the left and liberals, there's an underlying sympathy that can't be ignored. First, the economy isn't getting any better. Cities are having a harder time with fiscal austerity with rising costs and "sluggish taxes". As you might have heard, a few cities have already filed for bankruptcy protection including Stockton, San Bernardino and possibly others. Many public services have already been slashed, such as the police force, as crime rates are less than ideal. Protestors have already staged a protest outside of Goldman's offices, inducing Blankfein to respond with what most capitalists would have expected:
In response to a question about the Oakland interest-rate swap at Goldman Sachs Group Inc's annual meeting in May, chairman Lloyd Blankfein said the bank was not in a position to end the contract."That's not how the financial system could work," he said, noting that most borrowers would prefer to tear up higher-interest agreements and replace them with today's low rates."We would be frankly paring the interests of our shareholders and the operations of the company.
I think most of you, including myself, would agree with Blankfein. Capitalism and the financial markets rests on all parties honoring their contractual agreement. Such behavior would also induce 'moral hazard'. And Blankfein's right: he'd be at odds with his shareholders in terminating their swaps with Oakland. Not surprisingly, many have criticized GS for hypocritically receiving bailout money not too long ago. And to be fair, Oakland has saved more in the past; it's the future payments that will hurt them, according to an article by KQED.
Assistant City Administrator Scott Johnson said in an email that to date, the city has not lost money on the swap deal. Instead, Oakland has realized a net savings of roughly $9 million because of key actions connected to bond debt savings and payments to the variable rate index. In addition, "The city has benefited by approximately $3 million to date in debt service savings due to the lower net interest rate the city paid on the swap compared to what would otherwise have been paid in debt service payments pursuant to the original debt payment schedule on the bonds," Johnson wrote.
During talks, GS proposed to reduce some of the payments or delay payments while Oakland wants to rid all of its contractual obligations on the swaps. The city has also threatened to never do business with GS again and encourages other cities to join its fight. While GS technically doesn't have to compromise, their PR isn't getting any better. Other cities may fall suit in boycotting Goldman too. Personally, I sympathize with both parties. A compromise like a delayed payment until Oakland can restore fiscal austerity and pay back their obligations would be my plan, like how most financial institutions have paid back their bailouts post crisis.
What do you think? Do you sympathize with Main Street or Wall Street? Or somewhere in the middle and how do you compromise? If you're in favor of GS, which I expect most of you are, were you also against bailout money for banks during the financial crisis and why?
This is like asking me to sympathize with people who took out ARM's and didn't realize that down the line their payments would probably be more than they could bear. Tough. But really, even worse is that I have no lost love for California and any of the stupid things they decide to do out their to piss away all their taxpayer money. Have you seen that silly new train they want to build out there? They are not, will not, and cannot be fiscally responsible and I think this tiny contract with Oakland is the least of their problems out there. Why don't we start with their overall fiscal budget and work back from there.
Now, did Goldman screw or mislead them when advising them on this? Who knows, I'd highly doubt Goldman did anything to dissuade them from doing it or were anything but accommodating towards them. Why would they be. So no, I don't sympathize with Oakland.
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Do I think GS has any
Do I think GS has any "responsibility" to the public to let Oakland free? Absolutely not. This is a free market system, and calling GS hypocritical because they took TARP misses the point. You don't solve one wrong (banks being too big to fail) with another wrong (ignoring the rule of [contract] law). Letting Oakland off the hook wouldn't just do harm to GS shareholders, it introduces bad practices and precedents to the system at large too.
What I would be interested to learn more about though is how Oakland got into this contract. Was it something that was in their best interest (some sort of hedge) and then they were just unlucky, and are now just complaining (extremely possible). Or did Oakland get into a contract that wasn't in their best interest (we don't have information that suggests this is the case, but its certainly possible, and has happened with municipalities before). If it were the latter case, I'd be interested in learning more about how municipalities make financial decisions, and how to align incentives and structure governance so they think long-term in their decisions, and always do what's best for their city.
There is already a book on you. That book is already being written. And if I talked to your friends, your teachers, your professionals, your family, I would know so much about you I wouldn't even have to meet you. You write the book the way you want to be
This is fucking dumb. GS most
This is fucking dumb. GS most probably hedged the swap and clipped 2bps. It's not like GS' prop position vs. Oakland. That's what investment banks do.
Dumb people will always amaze me.