Earlier this week, City Treasurer Kurt Summers sent letters to three of the fiveChicago employee pension funds recommending they join a growing federal class action suit against banks for selling them interest rate transactions, or so-called “toxic swaps”. Two other employee pension funds, those for teachers and the police, have already made moves to join the suit, with the police deciding to join just last week, according to the Treasurer’s Office.
While the merits of a potential case are still to be decided by the courts, Summers’ support for suing the banks puts daylight between him, Mayor Rahm Emanuel and city CFO Carole Brown, who told reporters last January that the city found “no evidence that would support a claim” against banks for toxic swaps purchased by city financial managers. But Summers is pushing a different angle than the city, his team says.
Summers, who sits on the boards of all city employee pension funds, also happens to be an oft-discussed 2019 candidate for Mayor.
It’s a highly technical, but important piece of daylight, since unions and aldermen in the Progressive Caucus have been accusing the city siding with banks first, ensuring bankers get paid while raising taxes and cutting city services.
A statement issued by the Chicago Teachers Union earlier this week lauded the Treasurer’s move. “Summers’ letter confirms what the Chicago Teachers Union, parent and student activists, and community organizations have been saying for years—our city, our school system and our state must pursue the recovery of profits unjustly taken through Wall Street greed.”
This morning the Council Progressive Caucus also released a statement supporting Summers. “We are pleased to hear that the Treasurer has broken from the Emanuel administration’s position that suing the big banks over toxic swaps is impossible,” said Ald. Ricardo Muñoz (22). “The banks have reaped historic and unjust profits in these deals.”
Treasurer Summers’ team contends there’s no political motive behind his recent promotion of a class action suit. “There’s no special timing to it other than he’s trying to do his job as a fiduciary,” said spokesperson Alexandra Sims. “He has a job to be transparent, that’s what he’s doing.”
The anti-trust suit Summers suggests pension funds join is in its early stages, months away from applying for class certification, and is vastly complicated, stretching over multiple jurisdictions. It hinges on the ability of the complainants, which is made up of city and state pension funds from across the country, to demonstrate that the banks were purposefully keeping swap transaction markets murky, so banks would always make money.
“You’d have to go directly to the banks, and these banks have worked together to keep the open markets from seeing the light of day. If you had a market platform, you would have had more efficient pricing, and you could have saved money on the whole transaction,” says Drew Beres, General Counsel for the Treasurer’s Office.
The potential defendant list is a mile long, including every big investment bank you’ve ever heard of, and the case, even if it does manage to win class certification, will likely take years to grind through federal court. But, if the pension funds win the case, because it’s an anti-trust case it could result in treble damages from the banks, equaling tens of billions of dollars. To give you a sense of the stakes, a similar, much smaller case was settled by investment banks for $1.87 billion in 2015.
But regardless of how the case goes, Summers may have just shot the first salvo in the 2019 elections.