Meanwhile, cities and states across America have been forced to cut essential services because they're trapped in similar deals sold to them by Wall Street banks. Many of these deals have involved swaps analogous to the ones Goldman sold the Greek government.
And much like the assurances it made to the Greek government, Goldman and other banks assured the municipalities that the swaps would let them borrow more cheaply than if they relied on traditional fixed-rate bonds -- while downplaying the risks they faced. Then, as interest rates plunged and the swaps turned out to cost far more, Goldman and the other banks refused to let the municipalities refinance without paying hefty fees to terminate the deals.
Three years ago, the Detroit Water Department had to pay Goldman and other banks penalties totaling $547 million to terminate costly interest-rate swaps. Forty percent of Detroit's water bills still go to paying off the penalty. Residents of Detroit whose water has been shut off because they can't pay have no idea that Goldman and other big banks are responsible.
Likewise, the Chicago school system -- whose budget is already cut to the bone -- must pay over $200 million in termination penalties on a Wall Street deal that had Chicago schools paying $36 million a year in interest-rate swaps.
A deal involving interest-rate swaps that Goldman struck with Oakland, California, more than a decade ago has ended up costing the city about $4 million a year, but Goldman has refused to allow Oakland out of the contract unless it ponies up a $16 million termination fee -- prompting the city council to pass a resolution to boycott Goldman. When confronted at a shareholder meeting about it, Blankfein explained that it was against shareholder interests to tear up a valid contract.
Goldman Sachs and the other giant Wall Street banks are masterful at selling complex deals by exaggerating their benefits and minimizing their costs and risks. That's how they earn giant fees. When a client gets into trouble -- whether that client is an American homeowner, a US city, or Greece -- Goldman ducks and hides behind legal formalities and shareholder interests.
Borrowers that get into trouble are rarely blameless, of course: They spent too much, and were gullible or stupid enough to buy Goldman's pitches. Greece brought on its own problems, as did many American homeowners and municipalities.
But in all of these cases, Goldman knew very well what it was doing. It knew more about the real risks and costs of the deals it proposed than those who accepted them. "It is an issue of morality," said the shareholder at the Goldman meeting where Oakland came up. Exactly.
[This article first appeared in the Nation magazine.]
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