While Mayor Rahm Emanuel got most of his new bond authorizations through Finance Committee yesterday, the Progressive Caucus and the Chicago Teachers Union say the city has not done enough to push back on banks over hundreds of millions of dollars of termination fees and other payments for swap deals. Meanwhile, taking an unusual step, Chicago’s Chief Financial Officer Carole Brown made herself available yesterday for a conference call with reporters to rebut those accusations.
CTU and the Progressive Caucus charge the city’s move to unwind its previous swap agreements for bonds is premature, and the $100 million in termination fees the city plans to pay for ending variable rate bond deals so they can move them to fixed rate deals is too much.
“The Mayor is voluntarily choosing the pay the termination fees,” says CTU spokesperson Matt Luskin. Instead, the city should be using political leverage and legal means to push banks into better deals.
Pressed by reporters on this issue yesterday afternoon, CFO Brown pointed to a 2014 outside counsel study conducted on behalf of the city to determine if there was a legal basis. The report, written by a pair of financial securities law experts, attorneys Dan Collins and James Kopecky, found, “no evidence that would support a claim that the City’s swap agreements were procured by fraud or that any of the City’s swap counterparties made any material misrepresentations or omissions of fact.”
Asked for examples of how the city has worked to reduce the fees it owes, CFO Brown said that bankers who work with the city appreciate how important a client Chicago is. There is no need to threaten to take away anyone’s business, she said.
“It’s not lost on anybody [working] on the transaction how important the City of Chicago is to business lines for the banks and to individuals,” said Brown.
Deputy Comptroller Jeremy Fine said, “In our estimate we were able to save $20 million or so with the help with our advisors.”
In CTU’s opinion, a great deal more could be done. “They have a whole range of options,” said Luskin. “They could rank banks, based on the impact they make on the community,” and threaten to take away city business if they don’t reach a certain threshold. Last September, Treasurer Kurt Summers proposed a similar ranking for determining if banks should be used as municipal depositories.
CTU also has their own expert, who claims the Emanuel administration’s experts are wrong. Former Congressman Brad Miller (D-NC), an attorney who sat on the House Financial Services Committee and led passage of a number of consumer-activist federal measures, has been consulting for CTU and disputes the city’s 2014 study.
“The study does an excellent job of demolishing arguments never made,” said Miller, who says common law in Illinois has no statute of limitations on claims against banks. He says banks who underwrote bonds for the city made fraudulent representations on the variable rate bonds the city is now attempting to replace.
Illinois’ fraudulent concealment law says there’s a duty to disclose information about the risk of a deal and what could go wrong, says Miller. The banks who underwrote the deals Chicago made did not disclose they were the main buyers of the bonds, and that as soon as buyers lost interest in the bonds, the rates would spike and the market would collapse.
Deputy Comptroller Fine, who oversaw the variable rate bond sale and was interviewed for the city’s 2014 legal study, told researchers, “the City’s debt management team was well informed about the risk factors associated with swap agreements.”
In other words, if the guy in charge of the city’s bad deal says he went into it with eyes wide open, you don’t have much of a legal case for fraud.
“Sure. This would be embarrassing,” responds Miller. “They would be played for chumps, and nobody wants to do this. [Attorneys suing the banks] would have to show they did not understand.”