A coalition of labor and community groups scored a major victory when the Los Angeles City Council voted unanimously to renegotiate an interests rate swaps deal with Mellon Bank New York and Dexia, a Belgian financial services firm.
The deal has cost the city millions of dollars that the coalition said could be used to restore neighborhood services that were cut due to budget constraints caused by the recession and its aftermath.
David Sirota, writing for the International Business Times, reports that Mellon and other Wall Street banks have engaged in deceptive marketing by concealing the high risks associated with interest rate swaps.
The swap deal with Los Angeles brokered by Mellon and Dexia in 2006 was supposed to protect the city from paying high interest rates on public works bonds, but the city is currently paying higher than market interest rates and millions of dollars a year in fees to Mellon and Dexia.
Fix LA, a coalition of unions and community groups, has built a grassroots campaign to get the city to renegotiate the terms of this deal and use the money saved to restore city services to pre-recession levels.
“LA spends more than twice as much on bad bank deals than we do on our streets,” said Tim Butcher, a city employee who testified in favor of renegotiating the swap deal. “We’re asking the City Council to please get the money back so we can do our jobs.”
Butcher is a member of SEIU Local 721, one of the six city worker unions that formed the Coalition of Los Angeles City Unions (CLACU) to negotiate a collective bargaining agreement that covers 20,000 diverse city workers.
City workers have been working under the terms of an agreement that expired on June 30.
The biggest obstacle to reaching an agreement has been a tight city budget burdened by nearly $300 million in yearly fees paid to Wall Street banks for deals like the Mellon and Dexia swap.
Last spring, CLACU began working with community groups to find money that would make a fair collective bargaining agreement possible.
As a result of this work, Fix LA was formed.
CLACU bargaining proposals, which the coalition calls Bargaining to Fix LA, reflect the concerns of Fix LA, which include using local, fairly paid labor to repair the city’s dilapidated streets, fix sewage overflows and other neighborhood problems, improve the environment, add park space, and fund child care and after school programs and other initiatives that will make Los Angeles a better place to live.
Fix LA issued a report saying that money being used to pay excessive fees to Wall Street banks could be better used to improve city services. The report focused on one deal in particular–the interest rate swap deal engineered by Mellon and Dexia.
According to the the report, the city is paying Mellon and Dexia $4.8 million in fees for the deal that was supposed lock in low interest rates but hasn’t.
The report goes on to say that the city will have to continue paying these fees until 2028 unless a way can be found to get out of the deal. If the city is unable to do so, it will cost Los Angeles an additional $65.8 million.
Mellon and Dexia won’t let Los Angeles out of the deal unless the city agrees to pay a $24.7 million termination fee.
The City Council voted to renegotiate the terms of the deal in such a way that allows the city to terminated the swap deal without paying termination fees.
The City Council is justifying its position by claiming that the banks hid the risky nature of the swaps.
David Sirota reports that there is substantial evidence showing that the sellers of interest rate swaps including Mellon and Dexia knowingly misrepresented these risks.
“More often than not, local governments do not know they are getting a bad deal,” said former Goldman Sachs Vice President Walter Tuberville, who was quoted by Sirota. Tuberville goes on to say that mispricing and the excessive risks associated with these deals are usually intentionally hidden from customers.
By voting to renegotiate the Mellon and Dexia swap deal, the City Council made Los Angeles the largest city to join a growing list of local governments that are challenging “ballooning Wall Street levies that accompany similar interest rate swap deals throughout the nation,” writes Sirota.
“SEIU Local 721 and our partners in the Fix LA coalition applaud the brave and principled stand taken by Councilmembers Paul Koretz, Gil Cedillo, and Bob Blumenfield and the rest of the LA City Council,” said a statement by the union on its webpage. “We will continue to strongly support the LA City Council as they take swift and decisive action to reverse these bad bank deals.”