by Alex Taliadoros
In an incredible feat of investigative journalism, the Chicago Tribune has published a three-part series exposing how Chicago Public Schools (“CPS”) gambled and lost tens of millions of taxpayer dollars though complex financial deals with Wall Street banks.
The first of the Tribune articles outlines how public officials issued more than $1 billion worth of auction-rate bonds and interest-rate swaps despite the excessive risk associated with these financial products. As described by the second article, big banks designed these deals so that they could profit regardless of what happened. To persuade CPS officials to sign on to these costly long-term agreements, banks offered large sums of upfront cash to the school district and vastly misrepresented the stability of the auction-rate market. When the market collapsed in 2008, Chicago Public Schools were left with an additional $100 million in debt burden. Today, Chicago students are paying the price. The same school district that closes schools, lays off teachers, and forces its students to walk through dangerous gang territories to get to class currently pays millions of dollars to Wall Street as interest each month.
The third Tribune piece reveals another troubling aspect to these financial deals: the laws that make them possible. Before 2003, the complex financial tools that CPS used would have stood on shaky legal ground, but legislation passed that year changed that. The bill was drafted by an attorney at a major Illinois bond law firm, sponsored by a Senator who admittedly didn’t understand it, and passed with little public debate. As soon as it became law, CPS began a massive borrowing spree that would ultimately hurt Chicagoans but benefit the banks and law firms that were involved. The whole affair demonstrates that cozy relationships between public officials and special interests can distort the priorities of our elected representatives.
There are more lessons to be drawn from the Chicago Tribune’s exposé. For starters, public institutions will go to great lengths to withhold information about their financial conduct. It was only after the Tribune hired a lawyer that CPS handed over relevant documents—nearly eight months after the initial request. Secondly, officials who claim that these financial deals saved money may be playing loose with the facts. In this case, the school district’s treasurer ignored the future costs of the swaps and the potential savings from refinancing that were forfeited due to the swaps’ prohibitive termination fees. Any reasonable analysis would consider these factors and conclude that CPS lost a substantial amount of public funds with its reckless borrowing practices. Finally, the newspaper’s investigation dispels the myth that local governments are sophisticated investors on equal footing as major banks. This fact is important because it bolsters the case that banks violated federal law requiring them to “deal fairly” with municipal borrowers.
Jackson Potter from the Chicago Teachers Union sees evidence that banks did break the law with their deceptive behavior and that CPS is entitled to legal remedy. In an editorial published in the Tribune this week, he argues that the school district could recoup all of the taxpayer money it lost by filing for a third-party review of the swaps through the Financial Industry Regulatory Authority—the organization that regulates U.S. capital markets. His call is echoed by a coalition of community organizations, labor groups, and think tanks across the country that is fighting to hold Wall Street accountable for its predatory behavior. After all, what happened to CPS is not an isolated event. On the contrary, it is part of a national epidemic of financial abuse that has drained our communities from the funds they need to thrive.
To quote Mr. Potter, “it is no longer an option for the mayor to act; it’s a necessity.”