Oakland is poised to become the first city to cut ties with Goldman Sachs if the investment bank refuses to cancel an investment deal that will cost the city nearly $4 million this year.
Responding to demands from union and community leaders, the City Council voted unanimously Tuesday to stop doing business with Goldman if no agreement is reached on canceling the investment within 70 days.
"When (Goldman) made a bad bet, they took our money to bail them out," Councilmember Rebecca Kaplan said. "Now, when it comes to Oakland, they're saying that what was good for them is not good for us."
However, Oakland might not legally be able to boycott Goldman, according to council members who read a still unpublished opinion Tuesday from City Attorney Barbara Parker. The council nearly delayed the vote two weeks to further examine the opinion.
Oakland is not alone among jurisdictions finding themselves on the short end of an interest rate swap with investment banks. Public agencies have entered into about 1,100 such investments that are costing taxpayers about $2.5 billion a year, said Saqib Bhatti of Service Employees International Union.
The union and its allies are campaigning to shame Wall Street into terminating the deals and hope that other jurisdictions will follow Oakland's lead. They say the banks are profiting from their role in the 2008 financial collapse, which forced the Federal Reserve to slash interest rates and consequently turned the interest rate swaps dramatically in the banks' favor.
"Tonight was a huge victory both for the City of Oakland and for people throughout the world living under the boot of interest rate swaps," said Luz Calvo of the Coalition to Stop Goldman Sachs.
Oakland entered into the deal with Goldman to protect itself from potential interest rate spikes on city bonds issued in 1998 to fund police and firefighter pensions. But interest rates have remained low, and the city continues to pay Goldman a fixed interest rate that is much higher than the prevailing rate Goldman pays Oakland.
The city has paid Goldman about $32 million more than it has received so far on the deal, union officials said, and projects to lose another $20 million before the investment expires in 2021. The losses are being footed primarily by property owners, who pay a special parcel tax to fund the pensions.
City negotiators have been talking to Goldman for six months about reducing the estimated $15 million cost to terminate the agreement. But there is little precedent of banks allowing public agencies to cancel such deals at below market costs.
It is unclear whether the city's threat to cut ties with Goldman might help it at the bargaining table. Oakland does not provide the volume of investment banking business that, if removed, could financially dent a major bank, officials said.
Because Oakland issued bonds in 1998 with fluctuating interest rate payments, it had little choice but to enter into an interest rate swap or find another form of insurance to protect it if interest rates went through the roof, Assistant City Administrator Scott Johnson said.
The swap agreement has had some benefits for the city, he added. Goldman paid Oakland about $20 million up front, which helped the city save $3 million in debt service charges. Also the interest rate the city pays Goldman is still lower than the rate Oakland would have paid if it issued bonds with fixed interest rates in 1998 and is lower than the interest rates the city had been paying on the initial pension bonds that were issued in 1985.
The city's overall work to refinance the initial pension bonds is projected to save Oakland $37.5 million, Johnson said, even with the projected losses from the Goldman swap.
Contact Matthew Artz at 510-208-6345.