PI Original Friday May 20th, 2011, 1:26pm

Interest-Rate Swaps: The Truth About Chicago's “Rotten Deals” (VIDEO)

Progress Illinois is breaking down the truth about the complicated interest-rate swaps with big banks that costs the city of Chicago $74.2 million each year.

Make Wall Street Pay Illinois, a statewide group initiative, has started a petition calling on Attorney General Lisa Madigan to look into interest-rate swaps with big banks that they claim are nothing but million-dollar “rotten deals.” Progress Illinois is breaking down the truth about these complicated transactions that costs the city of Chicago $74.2 million each year.

The petition seeks transparency in the taxpayer-backed loans municipalities and public organizations have gotten and hopes to put pressure on officials and big banks to re-negotiate the terms of the loans. This comes at a time when the cash-strapped state of Illinois and city of Chicago pay a collective $162 million in annual interest on these loans. “It takes a huge amount of pressure for these banks to renegotiate rates,” according to National People's Action's Amanda Devecka-Rinear, who is also an organizer with the Hold Banks Accountable Campaign. “These interest rates need to be dropped so that the money stays in the state. It’s almost unconscionable, this useless bleeding of us to fill [the banks’] coffers.”

To understand this complicated issue, we’ll explain it like this: Municipalities and public organizations often borrow money from big banks to keep cash flowing. Before the Great Recession, the banks offered high interest rate loans to taxpayer-backed organizations like the city of Chicago, the state of Illinois, and the Chicago Public Schools system. The reason to orchestrate an interest-rate swap deal is so that, should interest rates go up, the banks would cover the losses and return some money back to the public organizations by "swapping" a certain percentage back to the organization.

But once the economy crashed -- due in part to the banks in the first place -- the Federal Reserve lowered interest rates to less than half a percent in an effort to bail out the failing banks. And as the banks bounce back, one would logically assume that they would drop their interest rates as they re-lend to public groups, but the truth is apparently not so sensical.

The city of Chicago currently has nine interest-rate swap deals, paying $74.2 million annually in interest rates --a collective $25 million of which goes to JP Morgan Chase and Bank of America alone. The city’s deal with Chase is a $114.98 million outstanding loan at an interest rate of 4.23 percent. At the time the deal was made, the city likely believed they were saving money by forgoing a traditional loan with an interest rate that would have hovered around 5 percent or 6 percent, or a risky variable rate that the banks always cautioned were likely to go up.

But that isn’t what happened. The banks crashed and our economy tanked with it. And now, after the Federal Reserve bailed them out, Chase is paying the city back a measly .37 percent. What this means is two things:

1) The swap that was meant to save Chicago money backfired.
2) The banks are now effectively profiting from the Federal Reserve’s bailout.

Banks, by nature, profit by interest rates -- it is the business of banking. So contractually, the banks face no legal issues here, experts say. The city signed on to an expensive loan and have to deal with the market’s ups and downs. And the feds agreed to save the banks without any applicable conditions.

The injustice, though, lies in that the banks themselves were saved by public money, when the public itself is suffering day in and day out -- with foreclosed homes decimating communities, job growth numbers crawling ever so slowly, and municipalities slashing the services that have always kept people viable. Part of the problem, Devecka-Rinear says, is the fact that most people don’t understand the swap deals to begin with. Even if they do, information on the terms of the loans aren’t easily accessible.

And fraud activity is suspected too, according to Make Wall Street Pay Illinois’ Toby Chow. Attorney generals in California, Connecticut, and Florida and the U.S. Dept. of Justice all have on-going investigations into potentially illegal behavior by banks in connection with interest-rate swaps, including bribing officials for deals and other anti-trust violations.

The Illinois petition, which will be delivered to the Lisa Madigan's office on Tuesday, calls on the attorney general to hold hearings immediately and investigate possible fraud in the deals. “Yes, making money off of interest rates is the business of banking, but this is a rip off and [is] behavior that needs to be looked into and investigated,” Devecka-Rinear said.

Last week, Make Wall Street Pay Illinois also protested outside the Chase Bank Building in downtown Chicago, and rallied in Columbus, Ohio at a meeting of JP Morgan Chase shareholders on Tuesday. Check out video from the group highlighting last week's rally in Bloomington, Illinois:

Devecka-Rinear said Los Angeles and San Francisco are also taking on this complicated fall-out with the banks.

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