Philadelphia City Council veteran James F. Kenney, D-At Large, wants "to hold public hearings investigating the use of qualified interest rate management agreements by the City and School District," explore whether it's time to sue banks, lawyers and financial advisers to recover taxpayers' losses, and weigh a ban on interest-rate swaps and other complex financial arrangements.
In his resolution calling for hearings, Kenney cites the multi-million-dollar payouts the city and the Philadelphia School District have had to make as a result of interest-rate swap contracts, which banks that lent the city money said were designed to protect taxpayers against rising interest rates, but ended up costing millions as rates instead fell to near-record lows.
Kenney also cites state Auditor General Jack Wagner's 2009 report documenting swaps abuses in Bethlehem and other upstate school districts and calling for a municipal swaps ban, and the labor-backed Pennsylvania Budget and Policy Center's recent report estimating current and future losses to the city at $330 million.
The center says Goldman Sachs, Citigroup, JPMorgan, Wells Fargo, Bank of America, and other big lenders who sold swaps should refund the city's losses.
But Kenney sees no reason why an investigation should stop there. He also wants to go after the Pennsylvania law firms and investment advisors who recommended swaps after the Clinton administration (in 2000) and ex-Gov. Rendell (in 2003) passed pro-Wall Street laws making swap sales to towns a lot easier.
I noted that School District finance chief Michael Masch and Nancy Winkler, the former Public Financial Management bond adviser who now oversees the city's finances, have both disputed Wagner's and the center's estimates of the size of the city's net swaps losses - though they have failed to supply their own cost-benefit analyses. Both have said it would be a lot of work to reconstruct who sold what when - and they're not inclined to see that as a priority, these days.
Kenney says it's still worth documenting who gained from the city's losses - and maybe trying to get some of it back. "Were we given good advice? Were we misled? Information is not a bad thing. We want some way to regain what we've lost, and to stop these arrangements" from costing millions more."
Indeed, even if Philadelphia's top financial managers aren't interested in probing their private-sector colleagues over long-ago transactions that keep on costing taxpayers, the federal government has shown interest. Kenney's call for hearings comes six weeks after CDR Financial Products Inc., a financial adviser to states and cities, and its founder, swaps salesman David Rubin, pleaded guilty to federal fraud and conspiracy charges last month in New York.
Prosecutors said they rigged municipal bond sales so taxpayers in New York and other, as-yet unnamed states paid extra to raise billions for government projects. Rubin faces up to 35 years in prison; his firm faces as much as $100 million in fines, as Bloomberg LP's Martin Z. Braun reported in December.
CDR was also active in Pennsylvania, where Rubin served on one of Gov. Ed Rendell's transition teams, advising him who to hire for state financial jobs. Among its other duties, CDR advised the state on interest-rate swaps. Like other government financial contractors in those days, Rubin was a contributor to leading politicians - in his case, prominent Democrats such as Rendell.
I suggested to Kenney that his probe could reach influential lawyers and financiers, important people in the Philadelphia and Pennsylvania power structure. "Correct," said Kenney. "It's important to investigate and understand the advice we were given relative to the efficacy of these transactions."