Oakland Wants Out of Deal Paying Goldman Sachs Millions for Old Bonds

Friday, June 29, 2012


The city of Oakland is paying Goldman Sachs around $4 million a year as an insurance hedge on bonds that no longer exist, a deal that stretches to 2021 and the city wants out of now. The company would be happy to oblige, as long as it gets the $15 million termination fee agreed to in 1997 when Oakland signed the contract.

The city entered the agreement as part of a complicated interest-rate swap designed to protect it from volatile swings in variable-rate bonds it held by creating a synthetic fixed-rate instrument. That hedge looked like a prudent move at the time, one that cities do on a regular basis, but when the economy crashed in 2008 and interest rates dropped to practically zero the deal looked like a loser. Oakland has paid $26 million to date and could pay $46 million before it’s done.      

Oakland Treasurer Manager Katano Kasaine recommended in May that the city get out of the agreement, although he maintained that it actually benefited the city and cited a report from a firm hired to analyze the deal that said, “the City has realized a net benefit of approximately $37.5 million in present value savings from the Swap.” Critics of the deal say that assessment was based on the refunding of various other tangentially related bonds with newer, cheaper bonds rather than the deal itself.

Last month, three Oakland residents flew to New Jersey for Goldman Sachs’ annual shareholders meeting to make their plea for relief directly to CEO Lloyd Blankfein. The members of The Coalition to Stop Goldman Sachs couldn’t squeeze into the packed meeting room, so they texted him their request that the deal be abrogated without a penalty. He responded: “That’s not how the financial system could work, and were we to do that, we would, frankly, be impairing the interest of our shareholders and the operations of our company. I don’t think it’s a fair thing to ask.”

–Ken Broder


To Learn More:

Oakland Considers Boycotting Goldman Sachs (by Matthew Artz, Oakland Tribune)

Oakland Residents Ask Goldman Sachs CEO for a Way Out of Rate Swap Deal (by Ryan Phillips, Oakland North)

Sending Goldman Sachs a Message: If You Continue To Rip Off Oakland, We Will Stop Doing Business With You (by Beth Kean and Felipe Cuevos, California Progress Report)

Oakland's Treasurer Recommends Terminating Goldman Sachs Deal (by Darwin BondGraham, East Bay Express)

The Swap Crisis (by Darwin BondGraham, TruthOut)

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