Interview by Oriana P. Roerkraeyer
TS: My name is Tom Sgouros, I’m from Rhode Island and I contributed to the chapter called “the feasting on the public commons” about the financialization and the privatization of public goods and about predatory public finance.
OPR: What has Wall Street done to our municipal governments?
TS: Well, they’ve treated them as mines from which to take what they can and it takes a bunch of different forms. Sometimes it’s pretty simple just stealing you know, padding bond sales or flipping bonds to increase the number of commissions that are sold and sometimes it’s a little more subtle where the bank fixes it so the bondholder actually has a claim on tax revenue or sometimes it’s even more subtle than that where through financialization the private interest wind up owning what ought to be a public good. You know in the city of Chicago they sold all the rights to the parking revenue to a private corporation and now they can’t have parades and street festivals anymore because if they want to have a parade they owe the parking vendor money for all the parking spaces that can’t be used that day.
OPR: Can you give me some examples of the extreme theft that is happening? How did GE capital steal from the municipalities?
TS: That was a relatively simple and straightforward kind of thing. They were just talking about rigging prices and the prices that they rigged, the commissions on investment funds,…they seem small but the volume of money that goes through is so large that even a half a basis point, a basis point is a 100th of a percent, even a half a basis point is a lot of money when you are talking about billions of dollars. But there’s other stuff that is out there that is as egregious and infuriating. The city of San Diego two years ago borrowed $105 million on a kind of a bond that is gonna cost them $877 million in interest by the time they are done paying for it. That kinda thing is outrageous.
OPR: And what about JP Morgan? What did they do to Jefferson County?
TS: Oh that was….you have to laugh or else risk crying. JP Morgan, they came into Jefferson County and they said we have a way to help you finance some improvements to the infrastructure in Jefferson County and when that turned out to be maybe a little bit more than Jefferson County could afford, they very helpfully offered to refinance it and then they offered to refinance it again and each time Jefferson County was getting further behind, just like a customer at a pay day lending store who can’t ever seem to pay off the original loan and keeps turning it over and keeps getting further and further into debt. JP Morgan even paid Goldman Sachs $3 million to stay out of Jefferson County so that could have it for themselves because they had such a great thing going. And now Jefferson County is utterly bankrupt, indebted for hundreds of millions of dollars to bondholders,…Jefferson County just doesn’t have the resources to pay off that kind of stuff.
OPR: So basically Wall Street is enslaving our local governments in a sense. How widespread is the problem of Wall Street’s relationships with those local governments?
TS: It’s pervasive. There’s very little in the way of fiduciary duty that a bank owes its customers. Basically they have to give you your money back when you ask for it but that’s about it. The banks have really gone to town where they can. A lot of times they have been upbedded by mayors and legislators who are more interested in the short term than the long term, like that deal with San Diego…The mayor of San Diego was fully aware of what was happening but he didn’t care since the first debt payments don’t happen for twenty years, he’ll be dead by the time it’s a disaster for them.
OPR: In the book you said something about how Philadelphia was involved in an interest rate swap. Could you explain this further?
TS: Yes. The city of Philadelphia had a bad bond rating so and so all they could really get was a variable rate bond. When they went to borrow money, they would get a variable rate bond. A bunch of banks had fixed rate debt and they offered to swap it. They said, Philadelphia you pay our debt service payments and we will pay your debt service payments and they gave Philadelphia some money to do that. It’s like a little exchange of risk you know, except that the difference is that once the risk was exchanged Philadelphia essentially still had some risk but it was the opposite kinda risk. Philadelphia now feared interest rates going down whereas before they had feared interest rates going up. The banks on the other hand, because they were actually funding variable rate investments with these variable rate loans, they actually extinguished their risk, so for them, Philadelphia now feared funds rates going down and the banks didn’t care which way they went, so what happened is that in 2008 interest rates went rock bottom, they went all the way down and so the money that the banks were paying Philadelphia went to almost zero whereas the money that Philadelphia was paying on the banks debt stayed very very high. So it’s the city of Philadelphia and the School Department of Philadelphia. So this year the School Department had to lay off about 3,000 people and there’s pretty much nobody in the Philadelphia School Department who isn’t a teacher, that means no nurses, no aids, you know, no assistant principles, few enough janitors and it’s basically all from this exchange of risk. Philadelphia thought it was gonna be a good deal for them but they were really wrong.
OPR: So basically they made a bad bet you could say, but then something happened which was the crisis…
TS: Well remember, it’s not just that they exchanged risk. When the swap was done, Philadelphia had a different kinda risk than they had before and the banks had no risk at all and so it’s not really fair to say that it was a deal that benefitted them both, because it benefitted banks in a big way and it benefitted Philadelphia maybe only a little bit. In the end it didn’t benefit Philadelphia at all. The analogy I make is that hedging risk, it’s like…you’re on a cruise and some banker offers to exchange his cabin for yours because yours is closer to the life boats, and that’s hedging risk. But hedging risk has nothing to do with what happens after the boat sinks. So now the boat sinks so the bankers in the life boat and there you are, you are swimming to the life boat. What happens? Does the bankers say, oh a deal’s a deal and pushes you away from the boat? That’s horrifying, that’s not hedging risk. What happened in Philadelphia is roughly like that. A hedge was there, and ok, the hedge was mutually beneficial but then when the disaster happened for the banks to just to insist that a deal’s a deal and they can’t do anything to help, that’s appalling.
OPR: It’s appalling but it’s still legal…
TS: O yes. The thing that you learn when you do public policing research, that’s my stock and trade, you learn that really all of the most appalling stuff is legal. That itself is pretty appalling but all of the most egregious abuses, they’re all perfectly legal, there’s all these signed documents,…wasn’t there that Woody Guthrie song, somebody can steal more with a pen than somebody else can steal with a gun…? I’m getting that wrong but that’s the idea and it’s really true.
OPR: The fraud would have been if they could have foreseen there was a crisis coming.
TS: Well fraud is a crime and I’m talking about things that are not actually fraud. They are just astonishing abuses of morality and common sense. I mean they are the kinds of things that should get you shunned in polite society but they don’t.
OPR: Why are these local governments and school districts dealing with financial institutions anyways?
TS: Well there’s a couple of reasons. One is that they all have been underfunded for years. They are all on starvation diets. In Philadelphia, the School Department is actually financed by State contributions. The State took it over some years ago and the State is being run by right-wing Republicans who think that any dime spent on Philadelphia school children is a dime wasted.
OPR: Let’s talk about public space. In what ways is Wall Street taking over public space?
TS: There’s public space in the sort of concrete sense like a park or something. I’m not sure that that’s happening anymore than other things, but there is a place where public goods are being taken over and here’s a financial example: there’s something called a TIF, Tax Increment Financing, …the idea is that with a TIF, it’s a kind of a bond, but the bond is going to be repaid by the increase in taxes that are available from the development or the project that happens. Now suppose you have a project that is some mall or something like that and the city might finance with a TIF bond, it might finance some traffic improvements or a parking lot or something like that on behalf of the commercial developer. Now what’s happened when you do that is you’ve given the commercial developer, because of the improvements the city makes are sort of on behalf of the commercial developer, you’ve given that commercial developer a legal claim on tax revenue that might have once been thought to belong to the common good, the use to fund public schools, the use to fund the Police Department but instead it’s being used to fund some kind of traffic improvement for that mall. In Rhode Island, there’s a mall in downtown Providence, the Providence Place Mall that is in year in 18 or 19 being funded by sales tax. So if you are going into that mall and you buy something that has a sales tax on it, that sales tax never makes it to the State. That sales tax is collected by the mall operators and used to pay off bonds that were issued on their behalf by the State. So that sales tax is no longer going to fund the government, no longer going to fund the things that are important to all of us. It’s going to fund the mall and that is a place where we privatized what used to be obviously public goods.
OPR: What about a park? And then I’m thinking mostly of Zuccotti Park. That’s a private public space, what is that?
TS: My understanding is that it’s a private space that is sort of deeded to the public but it winds up with a private owner. A private owner is able to say what happens in the park or not. I don’t know too much about Zuccotti Park, you know I contributed to chapter six but I didn’t write it.
OPR: Where does democracy fit in when everything becomes privatized?
TS: That’s the big question. When we have signed over things, like I said, we have signed over tax revenue, when we have signed over utilities, when we have signed over things as basic as parking spaces on the city streets, we have signed over pieces of city streets, when we have signed these all over to private companies and we have done it with these enforceable legal agreements then essentially what you’ve done is, you have delegated what used to be thought of as part of the polity to the private companies. You have just given it away and that is not democratic, that is just the opposite.
OPR: The way the financial system works, talking about how it creates money, ..how does that relate to the privatization of the commons? In the chapter you were talking about, or your partner was talking about the EMO’s..
TS: A bunch of us wrote it…
OPR: A bunch of you,…. how many of you wrote that chapter?
TS: I couldn’t tell you.
OPR: So yeah, I wanted to talk about the Educational Management Organizations that was very intriguing, the EMO’s.
TS: Right, well people are rightly suspicious I think of for-profit companies …so a lot of charter schools that happen, they are actually non-profits, so the charter school is actually non-profit so that people can say, oh no no, it’s ok, it’s a non-profit…well, yeah maybe it is but the charter school itself is being run by an Educational Management Organization which turns out to be a for-profit company. And that’s sort of a sneaky way that they have privatized quite a lot of public education and not only privatized it but privatized it for-profit. You know, that you have these financiers thinking of school districts as a profit center and that’s astonishing.
OPR: But actually what is that an Educational Management Organization?
TS: It’s the guts of the school. It’s the organization that hires and fires the teachers and gets the principal and the school leadership. But all being run in service of this private corporation that’s behind it.
OPR: So the EMO’s got their hands all over the K12, the public schools.
TS: Right, the charter schools are all about the privatization of public, elementary, middle and high schools and the EMO’s are a component of that push. I mean you have all this money that’s out there, money that is funding the education reform movement that is basically about sort of hollowing out public education, to the extent that it can turn public education into job readiness programs but also making certain that the public education system remains a place where private financiers can earn a profit from investment. And we’re not talking about investment in something basic as a textbook or a service that the schools can use. We’re talking about essentially a take over of public education. They are actually doing the management of the public schools, they are paying the teachers, they are hiring the teachers,…You can call it a leveraged buy out of public education if you wanted to and you wouldn’t be so far from actual reality of it.
OPR: There were a couple of famous names I came across in the book in relation to these EMO’s like Magic Johnson and Andre Agassi. Do you know anything about their involvement?
TS: No, no, ..those guys were fronting for some financiers who were involved in some other kind of investments but it wasn’t, to my knowledge direct involvement in educational things. It was the same financiers behind them though.
OPR: Is there a correlation between the growth of the financial sector and the rate of increase of the privatization and securitization of the commons?
TS: Well yeah, I think that there probably is because the kinds of things that we’re talking about are sources of tremendous profit for the financial industry. And to the extent that they define the sources of tremendous profit they make a lot of money and solidify the power that they have over the public debate and over the mechanics of how State and local government is run. And with that power they wind up opening up new doors to more profit and sort of accumulating more and more power over us. So I think they feed of each other: the more profitable predatory public finance gets, the more opportunities for predatory public finance arise.
OPR: Another one that we haven’t talked about yet is the private prisons. They are emerging everywhere.
TS: Yes they are. In Central Falls, Rhode Island, which we mentioned before, there’s a private prison there and Central Falls recently went through a bankruptcy and all through the bankruptcy the one group of people who could not be touched in the bankruptcy was the bondholders for Central Falls and the bondholders for the private prison that is in Central Falls. The prison has defaulted on its payments to the city of Central Falls years ago, hasn’t made those payments for quite a long time but yet not a single bondholder has lost a dime on any of the bonds that they’ve invested in in Central Falls. The prison there has been nothing but a black eye and a source of pain and anguish for the city when in fact it was sold originally as a boom, it was gonna be jobs and it was gonna be investments and it was be construction in the city but it has been nothing of the kind.
OPR: They say when they build these prisons they are gonna need people to inhabit these prisons, they’re gonna need prisoners and….
TS: Yes, the one in Central Falls…they got a contract from Immigration and Naturalization Service, so they wind up holding INS prisoners. Here’s the thing, if you’re trying to make a profit on a prison, well what aren’t you gonna buy? You’re not gonna buy more prison guards than you actually need, you’re not gonna buy prison medics, you’re not gonna buy medical staff, you’re not gonna buy good food, you’re not gonna and so what happened is that you had a lot of people who were getting really bad medical treatment, you got a lot of people who were getting malnourished and then you had a prisoner die from lack of medical treatment. The INS finally wised up and said, maybe we shouldn’t be putting our prisoners here in Central Falls and they took them away and that’s when the prison started to default on its payments to the city.
OPR: Do you know how many private prisons exist now in the US?
TS: No, I don’t know of the top of my head. Listen, one is an appalling number…
OPR: Yes, I guess they also recruit through the war on drugs right?
TS: Well, there is this problem that major forces are backing and apparently people with a prison to fill find ways to fill it but it’s a little hard to say how that actually works.
OPR: You need lobbyists to make everything legal. What do they usually push for?
TS: Well, whatever they can. The lobbyist is there to help the …if you are talking about one of these deals, the lobbyist is there to defend the deal. They are not necessarily there to defend the public of to defend the public’s interest. They are there to make sure that the banker, the private corporation that is getting involved is able to make the money that they think they ought to make.
OPR: Can we talk about Citizens United and the Super Pacs?
TS: We can. Election finance is not entirely my thing but go ahead. Well, Citizens United…at the bottom line a lot of these laws are being deformed, these deals are being made for the benefit of private corporations not the public. Now the problem is that the Supreme Court has decided that private corporations are equivalent to the public and the Citizens United was sort of a decision where they said, yeah yeah, money- speech, yeah, same thing. That I think sort of made it even easier for that sort of vicious feedback loop to work. You know the feedback loop that says the more profitable the public finance is the more powerful the public financiers are and lobbyists and Citizens United, those are the ways in which those entities maintain their power.
OPR: There’s also ALEC. What is ALEC?
TS: Oh ALEC. The American Legislative Exchange Council. It’s basically a right-wing…they’re a legislation shop. A lot of legislators don’t have a ton of money, they don’t have a ton of expertise and they don’t have a ton of time and so some of their stuff is actually stymied but the fact that people don’t have enough time to write terrible legislation, well that’s ok because ALEC has stepped in to help everybody write terrible legislation. So they are a privately funded group who’s job is to write laws to benefit the corporations that fund them and so they are behind a great deal of destructive legislation all over the country. They are funded by the Koch family and that’s who they are. So I mean in a way it’s sort of a piece of the rest of the stuff because it’s privatizing the drafting of legislation but it’s more….that kind of stuff has happened for a long time, it’s more the scale on which it’s done. It’s like the mass production of bad legislation whereas it used to be handcrafted: one evil deal at a time. Now you’ve got factories churning it out.
OPR: Also lately Occupy has been rallying against the Trans-Pacific Partnership Agreement.
TS: Just like NAFTA, just like GATT, all of these trade deals,…the Trans-Pacific Partnership gives away a great deal of what we used to think of as sovereign rights and gives it away to corporations. Things like environmental protections can be interpreted and are interpreted by these trade laws as restraints of trade and if you sign an agreement that says, we’re not gonna have any restraints on trade, well then your insistence that this company not pollute the river, that could interpreted as a restraint of trade. So that’s what the Trans-Pacific Partnership does. But it does it in just the same way that the GATT did it or the WTO agreements, the NAFTA agreements,…all of the free trade agreements, they all have stuff like this and that’s really what they are.
OPR: So in conclusion, all of this put together, we don’t really have a democracy anymore do we?
TS: Well you know, the reason you do work like this is because you think that we do and you feel that if enough people know about these outrages that there actually is something to do about it. We do have in this country orderly successions of power and you know the goal, the work before is to make sure that enough of our friends and neighbors and colleagues know about these outrages and that they can find something to actually do about it. Force people to take a stand on them and actually try to force some change. The reason that these corporations go after the public commons is that we, collectively, are very wealthy people. We have a lot of resources, we could have a lot of cloud if we chose to have it, but instead we choose to tell our mayors and our governors and our senators, we choose to tell them that these governments of ours should just be passive costumers of the financial industry. Instead I think we have the collective resources to demand that they’d be much more than that, that they take an active part in making sure that they are not screwed and so yes, I think that all of these things are blows against democracy. They are chipping away at the democratic ideals but there are things to do and I think that people ought to do them.
OPR: Thank you.
Chapter 6. New Civics: Feasting on the Commons
(an account of how ascendant finance changes government by taking its money, turning it private, buying its leaders, and keeping itself above the debate)
“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. . . . corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.”
U.S. President Abraham Lincoln, Nov. 21, 1864 (letter to Col. William F. Elkins)
Before moving on to some possible responses to the host of problems the financial sector has wrought, there is one more set of related issues to address. These concern what the rise of the financial sector has done to our governments, to our sense of certain places or functions as being “public”, and to our core notions of democracy.
Predatory Public Finance
First, it should come as no surprise that with local and state governments collecting billions of dollars from various tax streams, Wall Street was not going to leave this taxpayer money alone. Some of the most outrageous stories concern what happens when local governments —the ones we rely on to provide services like road maintenance, education, and policing —have had to turn to Wall Street for capital. Because of the Wall Street-induced recession, our municipal governments have suffered both a decline in tax receipts and an increase in social service spending. They have been battered by years of corporate fueled anti-government campaigning and they often lack the financial sophistication necessary to win negotiations with bankers. At times, Wall Street banks have employed methods, when dealing with our towns and cities, that are only a bit —and just sometimes —more nuanced than those the 19thCentury Tammany Hall gangsters used to rob New York City. In short, the mixing of the worlds of public service and high-finance has, as you might expect, been disastrous for the 99%.
It is probably most interesting to first review some of the flat-out robberies. Municipal bonds are a 3.7 trillion dollar industry in the U.S. To understand how big that is, the Gross National Product for the whole country was about 15 trillion dollars in 2012. So a smart thief should not be looking to steal a lot from every town or county bond offering. A little should do to make him very rich.
This is what some GE Capital traders figured out, namely how to rig the bidding for municipal investments. They ultimately went on trial and were convicted for it in U.S. v. Carolla.1
Here’s what happened. GE Capital was competing with the likes of Bank of America and Chase to invest the money of various municipalities that were collecting revenue from the issuance of bonds meant to support new or renovated libraries,schools, roads, and such things. The towns did not immediately need the money coming in from the bonds, probably because whatever projects they were funding were not yet ready enough to necessitate major expenditures. So the towns retained middle-men to supposedly get “competitive” bids from financial firms to temporarily invest the money.
Remember, the towns wanted to gethighinterest rates on this money, because they were investing it, and so they wanted the competing firms to bid up the interest rate. Unfortunately, the GE Capital guys and their colleagues in these supposedly competitive auctions figured out that if they tipped one another off about the bids (i.e.engaged in bid-rigging), then the interest rates they ultimately needed to offer to get their hands on the municipalities’ money would come in a bit lower each time. But over ten plus years, that still really adds up.
Exactly how much skimming this all added up to is either too big or too complicated to fully calculate, because we still don’t know for sure. But some of the banks’ settlements to resolve the resulting claims have veered towards the high nine-figures, which gives you a sense of the proportions. As you can see, it is a kind of subtle thievery. That is, you don’t have to break into any vaults, but the extra money you end up with is just as green, and it comes just as much out of the pockets of taxpayers as if it was robbed from the county safe at gunpoint.
If you prefer an example of more old fashioned skullduggery, consider, too, the tale of how JPMorgan recently milked corrupt Jefferson County Alabama administrators to such an extent that the entire county government ended up in bankruptcy.2
In the late 1990s, Jefferson County was required to do some infrastructure work that should have cost about $250 million, but after the work got going and construction firm pay-offs of municipal officials started flowing, the county went wild trying to build and repair more stuff. Where better to go for funding than Wall Street?The bank ofchoice here was JPMorgan, and this deal got so good for the bank that at one point JPMorgan actually paid Goldman Sachs $3 million to stay the heck out of Jefferson County and let it continue to serve as the sole financier of this money-laundering pay-offscam extraordinaire.
It all came crashing down for the really crooked town officials, but not so much for JPMorgan, which paid a mere $25 million fine and handed-over another $50 million to help workers displaced as a result of the County’s financial collapse.
These are not the only stories of this kind, but rather than recite one horror story after another, let’s think a little more about the less extreme examples, just to get a better sense of how widespread the problem of Wall Street’s relationship with local governments is. Let’s look at Philadelphia.
The Philadelphia school district is the eighth-largest in the country, with a $2.3 billion operating budget for 242 schools serving 150,000 children, over 80% of whom are poor. Beginning in 2003, the district (and the city of Philadelphia itself) turned to big financial players like Wells Fargo, Morgan Stanley, Citigroup,and Goldman Sachs to try getting some certainty on their growing debt obligations.
The parties entered into a series of“interest rate swaps”, which means they basically agreed to pay one another’s debt. The Philadelphia school district agreed to paythe fixed-rate obligations the banksheld, and,in exchange,the banks agreed to pay the floating-rate obligations of the schools. Philadelphia’s intent was presumably to make budgeting more predictable and possibly to save some money. Accounts of the motivation differ, however,because things went very wrong.
As interest rates plunged afterthe onset of the 2008 financial crisis (and have remainedat historicallylow levelsever since), the fixed rate payments Philadelphiaowed on the debt it assumed did not fall (Philadelphia, you will recall, opted for the “certainty” of a fixed rate, rather than an adjustable rate).
Philadelphia’s tax-base and support from the State were cut because of the Recession, and the school district was in no position to keep paying interest on the swaps it was locked into way above market rates. These total “costs” have exceeded $300 million based on the combined effect of the interest rate swings and the cancellation fees the municipalities incurred to avoid having to enter into still more such swaps under the terms of the now horrible-looking original deals.3
While Philadelphia has recently sued many of these banks on the grounds that their manipulations of interest rates through LIBOR4(see chapter 5) had a lot to do with these unfortunate “swings”, you might still say that this sounds nothing like the above examples: after all, the banks did not steal this money, they just tremendously benefited from the plunge of interest rates and may have also tremendously out-negotiated the municipal parties (which happens a lot in these cases).
But, we’d argue, think for a moment about what is going on now in Philadelphia.
The banks entered into these “great” deals before 2008. But in 2008, their other not-so-great deals (the ones related to mortgage-backed-securities) sent them into what was probably technical insolvency and almost collapsed the American economy. And that was what caused the interest rates to swing against Philly school kids: bad economies mean less demand for money and lower interest rates.
Yet in the midst of this, who gets bailed-out? In any sane society, you would say… the kids, of course. But that’s not what happened. As we know, the banks got the bail-out, funded, in part, by the tax dollars of the parents of the very same Philly school kids to whom the banks had shown no mercy.
These days governments need banks. Bankers know it and frequently use that advantageto make deals which, in retrospect(and probably often in advance, too),demonstrate the negotiating imbalance between them. Financial transactions involving governmentsare often complex. A bond sale, for instance,can involve asmall legion of bankers and lawyers and take several steps to execute. This offers a maze of nooks and crannies into which fees can be tuckedand costs hidden. Middlemen are often retained to arrange transactions, and, remarkably, they don’t owe the municipalities or taxpayers any fiduciary obligations in handling public monies. There are also many transactions, like the Philadelphia ones, which are intended to transferrisk (always for a fee)andrisk is notoriously hard to quantify. So even when cases are not as obviously corrupt as in the earlier examples of auction-fixing and county-official-bribing bankers, we need to press the issue and not let the questioning and analysis just end there.
Philadelphia made a bad bet, just as a large percentage of the American public did when they bought houses during the Wall Street-induced real estate bubble. But if we are going to teach our kids in Philly and other school systems about the democratic ideals of equal opportunity and civil rights, we also ought to be explaining to them the other dynamic of modern American civics, e.g.how interest rate swaps between cash-starved, financially naive municipalities and Wall Street banks are ubiquitous because they are necessary to maintain basic services, but they almost always end up unbalanced against the governmental party.
They should similarly learn that when things go terribly wrong, when massive market shifts result in real or potential collapses of basic public services like elementary school education, what this society’s civic considerations call for are not terribly consistent with the stated ideals of equal opportunity and civil rights . . . they call for the bailout of the banks.
Privatization and the Securitization of What Was Previously Public
Stealing from and getting the better of local governments is not all Wall Street is doing to undermine our civic institutions. Under the guise of bringing us the “efficiencies” that come with “running it like a business”, an ever-increasing part of the enterprises, spaces, and services that we traditionally have thought of as “public” are being taken over by corporations.
In any individual case, this can seem benign. For instance, the New Jersey town of Bayonne is facing a credit downgrade, so it enters into a deal with KKR’s “energy and infrastructure fund” to turn over management of its water system to the legendary private equity firm “in what bankers say may become a U.S. model.” 5
New York City is looking to save some money on needed park space, so it enters into an arrangement for a corporation to build a park in exchange for the City modifying the zoning rules that affect a different project the company has a stake in. The result is a privately owned “public” park (such as Zuccotti Park) made accessible tous only by virtue of the terms of the commercial agreement between its private proprietor and the City.
When these kinds of things happen, there is a problem. Something we all would otherwise hold in common, something with respect to which we would maintain rights as citizensrather than as customers, disappears. It is critical to remember that the rights we most value in our Constitution are about, and only about, our relationship with a government. In the sphere of things “private”, the Bill of Rightshas no bearing.
Even if a shopping mall is the center of our community, we have no right by virtue of our citizenship to enter it and express our views about things like the so-called War on Terror or the Bush Tax Cuts, just as we have no right under the First Amendment to tell our boss we think he is a bigot or a lecher.
Once spaces and functions are privatized, our rights with respect to them get defined by leases, bills of sale, and other commercial agreements that turn them over to private parties —because the Constitution has precious little to say about the terms on which we serve as customers of companies performing once-public functions.
So when you hear a Congressman reading the full text of the U.S. Constitution to open a Congressional session, remember (and be careful): there is more than one way to erode the Constitution. The hard way is to go right at it and change what it says or means, but the easier way is to pretend you love it (perhaps by reading it aloud in a public forum) but then shrink the only things to which it ever applied, e.g.our governments and the functions and spaces they provide.
Let’s assume for a moment that we don’t buy into the argument that such privatizing efforts bring wonderful “efficiencies” to formerly lackadaisically performed government services. What, we might then ask, does any of this have to do with the financial system, which is, after all, what this book is all about? The answer is: quite a lot.
Recall the basic argument from Chapter 3 regarding the mechanics of the fractional-reserve banking system. If the financial system is, at its core, the mechanism by which our money is made, we learned that two basic ingredients have to be present to make it work “well”. First, banks need to lend, and then they need to have at least some of those loans get paid back with interest earned from borrowers’ successful creation of things of real value.
Second, the financial system’s securitization of some of the new enterprises —either through the issuance of shares in them or the extension of credit based on their perceived “value” —snaps “new money” into the nation’s money supply (broadly construed). Given this, the financial system avoids the tail-chasing death spiral of having to extend new loans just to endlessly pay interest on the old ones —which, by the way, is the hallmark of a Ponzi Scheme.
But for the second part of the cycle to work (let’s call it the securitization part), it turns out that loans don’t actually need to be used to create “new” businesses. They can just as well be made to individuals to capture, in the present, substantially all of their future earning capacity. For example, this is what happens when credit cards, student loans, or mortgages indebt us and are packaged into tradable bundles of things like mortgage backed securities(MBS)and student loan asset backed securities(SLABS).
In addition, loans can fund the purchase of existing public functions, which however valuable to society when they were public, were not contributing to the above-referenced money-creation cycle.
For example, the American public school system —whatever you may think about its quality relative to some foreign ones —is a thing of real value in our country. Without it, we certainly would not have one of the world’s highest literacy rates nor would pretty much the whole population know enough basic math to “break a twenty”.
But prior to the advent of charter schools and the massive use of corporate service providers to develop and prepare kids for “achievement” tests, the public school system did not play a real role in money creation. Sure, teachers and janitors got paid for their services, but this did not create money, it was just a means by which existing money could circulate.
Once a school district, like that of Chicago or New York City, decides to let private entities run previously public schools, all of this changes. Suddenly, the process described in “What Banks Do” regarding the 3Musketeers woodcutting operation is (sort of) at work, only instead of something really new being created from the loans, credit is being extended just so that private businesses can displace public operations.
For example, if the sort of company that administers charter schools, known as an “Educational Management Organization” (EMO), takes over the back-office support for a charter school that has attracted 1,000 kids from a public one Rahm Emanuel or Michael Bloomberg recently shut down as “failing”, then regardless of whether the kids get a better educationat XYZ charter school, one thing is for sure: the monetizable value of the EMO will rise. This is going to affect the value of some 1%er’s holdings, which means he will have more “money” available to pay interest on a loan that might be supporting a different one of his various financial ventures.
So, regardless of what is happening in the much-debated contest of educational test scores in Chicago and New York, one thing will be certain: the shift from public to private schooling will matter to the financial system and it will provide the “securitizing fodder” that is so necessary in the second part of the money-creation cycle to keep the system from too quickly reverting into pure Ponzi-like dynamics.
In other words, as far as the financial system is concerned, cannibalizing us and our existing public institutions, regardless of whether they were previously working well, is actually just as good a money-making strategy (and takes much less imagination) as funding something new that has societal value.
Given this, it should come as no surprise that the extraordinary rise we have seen in the size of the financial sector over the past 25 years has been contemporaneous with a similar rate of increase in the extent to which things we previously held in common have been privatized and securitized. Without the plundering of our previously public enterprises, it’s safe to say that the financial system could not have experienced—nor continue to experience—its meteoric growth.
For example, while we have become accustomed to thinking of our medical system as private compared to that of Europe or Canada, as recently as the 1970s most hospitals were non-profit or public institutions. But the largest for-profit hospital company, Hospital Corporation of America (HCA), was only founded in 1968 (by, among others, Dr. Thomas F. Frist, the father of later U.S. Senate majority leader Bill Frist), and experienced its exponential growth inthe 1970s and 1980s as it acquired hundreds of American hospitals, at one pointowning 255 facilities and managing another 208.6
To give you a sense of how much freshly securitized “value” this added to the monetary base, consider that the company was re-acquired by Thomas F. Frist, Jr.in 1988 for $5.3 billion and in 2006 was purchased by Kohlberg Kravis Roberts(KKR), Bain Capital, and Merrill Lynchfor a total of $31.6 billion, all despite having been mired throughout the 1990s and early 2000s in a series of criminal cases that resulted in, among other things, the company admitting to fraudulently billing Medicare and other health programs by inflating the seriousness of diagnoses and giving doctors partnerships in the business as a kickback for referring patients to HCA. Wall Street has recently been looking for the next big, previously public, enterprise to cannibalize. The push has been relentless and thus too varied to entirely capture here, but consider the following two notable ongoing examples.
Sometimes we just have to thank the 1% for telling it like it is. In a 2007 article about the privatization of K-12 education, Harpers Magazine profiled Nations Bank Montgomery Securities, whose prospectus (according to the magazine’s summary) explained that:
[T]he education industry represents, in our opinion, the final frontier of a number of sectors once under public control thathave either voluntarily “opened” or “been forced to open”up to private enterprise.The education industry, the bank concluded, represents the largest market opportunity since health care services were privatized during the 1970s. While college education can offer “attractive investment returns, the larger developing opportunity is in K-12. EMOs [… are] the Big Enchilada.”7
Until recently, the need to maintain charter schools’ (thin) veneer of “good works” meant that most were registered as non-profits.Almost allof them, however, are administered, in whole or in part, by these for-profit EMOs, a name Wall Street apparently coined with uncharacteristic appropriateness to (dismally) recallthe Health Maintenance Organizations (HMOs)that led the 1970s charge to health care privatization based on a model of skimping on care.
EMOs are often not the public face of charter schools, but they hold contracts to do all, or substantially all, of the actual work of running a school, from leasing space, to paying teachers, to managing the operation in its entirety. With Obama’s Secretary of Education, Arne Duncan, and the mayors of the nation’s two biggest (traditionally Democratic) cities, New York and Chicago, now solidly in the charter school camp, EMOs, and charter-schools more generally, are moving fast to exceed even the robust predictions of the 2007 Nations Bank prospectus. As of 2011, there were 5,400 charter schools in the U.S.educating about 1.7millionstudents, with the market growing by over 14% a year.8
Securitization of this new-found “value” has come more slowly, perhaps because the country has not been so quick to embrace the entanglement of stock-tickers and kids’ math grades. In addition, the nation’s once leading EMO, Edison Learning (founded as “Edison Schools” by Presidents Reagan’s and Bush I’s Assistant Secretary for Education), fell on its face after it went public. At one point, it was trading at a mere 14 cents per share after the NASDAQ charged that it had over-stated its earningsby as much as 41 percent.9
But no worries, other forms of securitization are rapidly evolving to fill the gap. In 2011, Canyon Capital Realty Advisors —a $20 billion real estate fund which had previously partnered with Magic Johnson to fund a so-called urban-improvement project in Brooklyn which used shell entities and cheap labor10—partnered with Andre Agassi to establish a charter school investment fund, the goals of which are charmingly described as:
Provid[ing]investors with current income and capital appreciation by responding to the growing demand for quality charter school facilities in the nation’s burgeoning urban centers and by capturing the opportunities arising out of the current dislocation in the real estate market. 11
And don’t forget about the other important source of K-12 education privatization, the one happening in public schools themselves. Over the past 15 years the insane rise in the “need” to test our kids, as pushed by the Bush II “No Child Left Behind” Act and other laws, has utterly changed what children actually do when they come to class in the morning. The development of virtually all of this testing and “ingenious”technologies to prepare kids for the (same) testing does not come from our school boards or governments, but rather from corporate giants like McGraw Hill and Houghton Mifflin.12
The privatization of prisons in the United States might go all the way back to 1868when, after the Civil War, southern farmers and businessmen turned to convict-leasingbecause they needed a replacement work-force for their freed slaves. However, it took the 1980s to really get this business revving.
The U.S. prison population exploded in the 1980s due to, among other things, the “War on Drugs” and, soon enough, the firsttrue U.S. corporate-run prisonswent on-line in 1984 when the Corrections Corporation of America(CCA) took over facilities in Tennessee and Texas.
CCA and its competitors havedramatically expanded since then. Today,about 8% of the total U.S.prison population is housed in privately operated state prisons, mainly in Southern and Western states (although there are private federal facilities too). 13
Securitization of this “value” has required another stroke of corporate good luck to get moving, namely 9/11 and the resulting mass increase in the detention of immigrants. Since those attacks, CCA stock has gone from a meager $4.75 a share to its price as of this writing of $33.37, a tidy 702% increase. The company now has a total market value of $3.86 billion. GEO Group (formerly Wackenhut Securities) began publicly trading in February of 2002, and its stock has similarly risen from about $5.40a share to its current price of $33.00a share,with a market capitalization of $2.36 billion.
This means that in the last 13 yearsor so, these two companies alone have added around $6 billion of newly securitized “value”to our monetary base by displacing pre-existing public institutionsand activelylobbying to increase the national ratesof incarceration(seethe discussion below regarding ALEC). Both companies have actually shamelessly tried being classified for tax purposes as “Real Estate Investment Trusts”. Yes, they no longer evenpretend to be working towards the rehabilitation of criminals; they just provide “real estate” services to tens of thousands of “customers” who are involuntarily residing in their depressing facilities.14
The above stories demonstrate, once again, that to keep the money-making engines primed, it turns out that 1%ers don’t have to extend loans to innovators set on improving people’s lives. Instead, they can just give it to people set on encroaching into once-public spaces.
The Financialization of Politics and De-Politicization of Finance
Money and Politics
As you would expect, all of this plundering of public functions does not happen without corporate lobbyists who pressure and pay our legislators to adopt policies that undermine public functions. Once the cannibalizing industries are in place, the early revenue they generate can be used to pay corporate lobbyists to push for further legislative changes to grow these “fresh” markets, such as stiffer criminal penalties to benefit private prison owners, and the dictatorial powers given to mayoral-appointed heads of school systems to close down struggling inner-city public schools. As a result, our nation’s politics become financialized.
Money has long been part of the diet of American politics, but with the job of a Congressman increasingly over the last 25 years entailing fund-raising rather than legislating, the issue reached a point of such severity in 2002 that our federal government (shockingly, perhaps, in retrospect) actually did something about it by passing the McCain-Feingold campaign finance law. The U.S. Supreme Court’s 2010 decision in Citizens Unitedstriking down key parts of that law has become the symbol of the present era of utterly financialized politics, in a way similar to how the court’s 1954 decision in Brown v. Board of Education became the symbol of the (far prouder) Civil Rights era. In Citizen’s United, the Supreme Court nauseatingly concluded that spending money on political propaganda is on par for constitutional purposes with acts of actual political engagement, in part because corporations are treated for such purposes as “persons” entitled to the same constitutional protections as wehuman“persons”. The result has been the formation of Super PACs extravagantly funded by the 1%of the 1% through their personal and corporate treasuries, all for the purpose of propping up their ever-beholden favorite candidates.
Political financialization has also been dramatically revealed in the workings of the corporate-supported American Legislative Exchange Council (ALEC), which, functioning under the guise of a tax-exempt non-profit organization, has crafted cookie-cutter bills for adoption by sympathetic (and well wined-and-dined) member-legislators.
The bills rolling off ALEC’s conveyor belts are skillfully crafted to benefit the bottom lines of its corporate sponsors such as gun manufacturers (e.g.the “Stand Your Ground” laws), the energy-sector (the Koch brothers are huge supporters), and the previously discussed private prison operators and EMOs. ALEC similarly drafted Wisconsin’s law that gutted public-sector collective-bargaining rights, and Michigan’s law preventing unions from including provisions in their contracts that dis-incentivize workers from enjoying union representational services for free, i.e.“Right to Work” legislation.
Just as financialized politics happens when the 99% lack the financial means to compete with this kind of “political engagement”, it happens too when the staggering increases in the amounts of personal debt the system has laid upon the necks of ordinary Americans works to psychologically and socially isolate and disempower them.
There seems to be a surprising scarcity of well-publicized research on the correlation between personal indebtedness and activities like voter participation and civic engagement, but it probably does not take an advanced degree in sociology or psychiatry to figure out that heavily indebted people are frequently depressed and socially isolated, and these traits don’t make any of us model public citizens.
The contributors to this book have had enough experience with heavily indebted folks (who are included among our ranks) to know that they are frequently socially isolated and often too busy dealing with their own personal miseries to “waste time” thinking about how their predicament might be generalized to the larger society.
In addition, desperation can make people unreliable co-workers when they are pressed by bosses not to unionize. Terrific recent studies by academics like Daniel Dorling, Kate Picket, and Richard Wilkinson have explained the tight correlations between economic inequality and a wide array of personal and social ills, ranging from worse health (among both the well-off and not), higher crime rates, and general morbidity.
Given this, it is not much of a leap to see that when the financial system uses the 99% as the fodder for its securitization efforts, this not only makes moneyfor the 1%, but also commences a negative feed-back loop, the result of which isto sap the 99% of their will to fight back.
What is also under-discussed but critical to the dynamics of the current state of affairs, is the extent to which the inverse of financialized politics is also true: issues concerning how our money is made, cycles through the system, and ultimately flows back to us (or doesn’t), have become divorced from politics.
Back in the day, populist champions like Andrew Jackson (who no doubt had plenty of faults too) and William Jennings Bryan achieved wide support expressly campaigning on issues like the merits of having a national bank and the extent to which alternate currencies should, or should not, be permitted to proliferate.
It should thus strike us as intensely odd that, although we are told by pundits that historical levels of discord between the major parties undermine democratic institutions, the fact is that on the issue that might matter most —money —a Martian who knows nothing else about us, but who reviews the pedigrees, policies, and identities of the people at our financial controls, would be hard-pressed not to conclude that it was visiting a single-party autocracy.
The likes of Lawrence Summers, Tim Geithner, Alan Greenspan, Robert Rubin, Ben Bernanke, Jack Lew, and other WallStreet revolving-door wizards and friends have been manning the financial ship for at least 25 years. Their push for free trade agreements, suppression of financial regulations, bail-out of banks, and use of the Federal Reserve solely to manage bank credit (as opposed to facilitating full employment, which its charter also permits)15, has not varied one bit depending on which of the two (supposedly) competing parties has held the presidency.
Come to think of it, it is hard not to get suspicious that all the public acrimony between the political parties might be best explained as a shared preference for government to bedysfunctional so that we are all pushed ever further towards the “private solutions” about which they seem to be in such accord.
We are not suggesting here that all feuding in Congress is strictly for show or that all of the points about which legislators disagree are unimportant. We are suggesting, however, that sometimes participants in a complex system (think of ant colonies or birds flying in a V-formation) find ways of acting in a manner that furthers the system’s logic and true purposes, even if the individual actors are barely cognizant of the real meaning of the roles they play.
And as a last warning of things to come that might really sound conspiratorial (but it’s true, we swear), beware of the tremendously under-publicized Trans-Pacific Partnership Agreement (TPP). It’s a free trade deal that has been in the works for a long time and is allegedly still under negotiation.
The Obama administration has veiled TPP in secrecy, hoping to submit it to Congress on a “Fast Track” basis that would only allow legislators an up-or-down vote, and apparently (from what little the 99% can glean so far) stands to more fully than ever prohibit national legislation that interferes with the flow of capital across international borders or otherwise impedes corporations’ efforts to seize profit-making opportunities with such cross-border investments. Andrew Jackson would be turning over in his grave.16
Finally, please realize that none of this uniformity of mainstream opinion on the rules governing finance and money is possible without our own unjustified acquiescence to it.
The 1%’s demands that finance be treated as natural science and thus left for the sole consideration of specialists with “successful” investment banking pedigrees (i.e.they made a truck-load of money on Wall Street) or advanced degrees in falsely scientific-sounding fields like “Quantum Finance”.
If you take nothing else from this book, let it be this:that’s bull. Money, throughout history, has always been intensely political. Remember, the same people who want you to treat finance as hard science utterly failed to predict the 2007-08collapse!
Perhaps even worse, the makers of the present apolitical culture surrounding finance want you to believe that they have learned objective laws regarding the creation and dynamics of money, like those regarding gravity, quantum mechanics, or other sub-specialties of the physical sciences. They have not. Money is neither created nor flows naturally, but does so according to the rules and contours that we (the people) establish for it.
1 Matt Taibbi, “The Scam Wall Street Learned From the Mafia”, Rolling Stone, June 12, 2012
2 Matt Taibbi, “Looting Main Stream”, Rolling Stone, March 31, 2010, www.rollingstone.com/politics/news/looting-main-street-20100331.
3 “Bank Swap Deals Continue to Cost Philadelphia City, School District”The Pennsylvania Budgetand Policy Center, January 17, 2012
4 Harold Brubaker, “Philadelphia sues big banks for swap losses”, July 31, 2013, Philly.com.
5 Rachel Layne & JustinDoom, “KKRto Goldman Breach Water Deal Dam in U.S. Commodities”, Bloomberg, May 8, 2013.
6 “Hospital Corporation of America”, Wikipedia.
7 Jonathan Kozol,”The Big Enchilada” Harpers’ Magazine, August 2007.
8 “Canyon Agassi Charter School Facilities Fund”
9 “EdisonLearning”, Wikipedia.
10 HRH Bankruptcy Proceedings, SDNY Bankruptcy Court; see also Sonya Eskridge, “Magic Johnson Cheating Labor Unions“, S2Smagainze.com, September 23, 2011
11 “Canyon Agassi Charter School Facilities Fund”
12 “The Testing Industries BigFour”, PBS Front Line.March 28, 2002
13 “Private Prison”, Wikipedia; see also Bernard Harcourt, “The Illusion of Free Markets, Laissez faire and Mass Incarceration”, University of Chicago Law School Podcast Lecture Series, May 11, 2011; see also “About Private Prisons” Texas Prison Bid’ness, March 21, 2007
14 Christopher Petrella testimony on Vermont bill H 28
15 Lauren Paer, “Misdiagnosis and Malaise: Why the Fed Has Failed to Aid the Job Market”, Kennedy School Review, May 2, 2013Issue.
16 Flush the TPP website