by Don Washington on 2012/04/03
“Boldness is nothing new to Chicago. It’s in our bones. It’s part of our DNA.” – Mayor Rahm Emanuel
Yes, boldness is certainly in Mayor Emanuel’s DNA even if he isn’t from Chicago. When it comes to the Infrastructure Bank, that is going to happen to our fair city, I think it wise to remember that this idea is being put together by a band of financial criminals whose concept of fiduciary responsibility ranks somewhere just above a hungry shark’s sense of compassion for a bleeding swimmer.
You may have been reading for weeks about how Rahm the Builder, is going to use this I-bank scheme, (Yes, I called it a scheme.) to employ tens of thousands of Chicagoans and shore up our infrastructure. You have even heard how it is set up to provide the kind of transparency of an eclipse at midnight. What I bet is also true is that you have precious little idea how it works. That’s okay our media friends probably think this would bore you and that colorful stories about our Mayor single-handedly saving the city and walking on water makes far better copy. They are right about the copy but that boring stuff is not so boring and it will make you a far better citizen knowing it. You can learn a lot about what’s going on and what’s going wrong from reading this from the brilliant Julie Roin.
After you read this paragraph you can stop because you will know enough to go down to your Alderman’s office and metaphorically beat him and her within in an inch of their political lives for even thinking about going along with this nonsense. I call this paragraph: “How We Could Pay for Stuff.” We sell bonds, our own debt and pay back the investors over time via taxes and fees, which is what governments usually do. Straightforward and the preferred way that corporations fund their capital improvements when they can’t blackmail, bribe or compel some poor governmental body of chumps to pay for it. We borrow money from a bunch of corporate pirates who charge us payday loan type interest that would be the infrastructure bank. There are two other options but they are somewhere between fairy dust and impossible. One is a public bank where we CONTROL the interest rates and the other is that we just drop enough cash on the infrastructure to buy it up front; insert your own maniacal laughter. Mayor Emanuel has chosen option corporate pirate… I’m sorry he’s chosen to subsidize a private bank... umm... I mean start an infrastructure bank.
An infrastructure bank is not that different from a bank. It offers loans and credit assistance enhancement products, (Like collateral, insurance, third party guarantees like letters of credit or even securitization and if some of things remind you of companies like AIG or instruments like Mortgage Backed Securities it should because those would be examples of credit enhancement.) to public and private sponsors of infrastructure projects. Do not zone out on me. Hold on to that last bit about public or private sponsors because we are talking about a bank to build public things using private money. The phrase you are going to hear a lot of is Public-Private Partnership and you better translate this to mean thievery. I say that because it’s not working in Canada and it was suggested by the still incorrectly named Civic Federation. If the Civic Federation thinks something is a good idea then you had better beleive that it is a case study in economic inequality and free market avarice that will boggle the mind and shame the soul.
Typically, when a government wants to build a thing they sell bonds, their own debt and they do this for the same reasons that corporate CFO’s would rather beat a nest of killer bees while wearing a speedo than get a bank loan when they could issue bonds. Banks are lenders of last resort; which is a fancy way of saying don’t go to a loan shark unless you have to and you are going to have the money and “vig” they want when they want it. This because if you don't have the cash and the vig there will be broken legs and long rides from which you won’t return. Yet that is exactly what we're going to do... on purpose. For big enough entities, like governments and corporations, borrowing money from a bank fills one with trepidation because banks have debt covenants to protect their interests. For example, the interest rate of the loan might “balloon” substantially if certain things happen. When the Mayor says things like flexibility he might be talking about things like this. If this sounds like what happened in the housing market you are now paying even more attention to a possible bubble/scandal and that should make you nervous.
If you are issuing your own debt via bonds and paying for it over time with fees and taxes that you, the government are collecting for yourself from the public, the revenue side of the equation is yours to control. If you are in a contract with a private entity that has some fancy section of the covenant that doubles the interest rate under some arcane confluence of "market events" where will that money come from all of a sudden when it’s due and the loan shark is wants his vig? Well the public has to pay, socializing the bank’s “risk”, while putting taxpayer money directly into the pockets of private financial titans and rendering the government helpless to control its own financial destiny. I want you to remember the Parking Lot Deal, the Parking Meter Deal and the Skyway Deal and know that this will make all of those look like the tic-tacs and loose change in your pockets in comparison to the money we could be on the hook for.
Now that I have your attention at the heart of the I-bank is that it is a privatization scheme. The government borrows money from private financial entities and insures that they get their money back by taxing and charging fees to the public. The money doesn’t flow into the city’s coffers ever. It goes into public works projects sure but the expectation of repayment is different. One, the money is always flowing into other projects. So it could be construed as loans on top of loans… when they say leverage this is to a great extent, what they are talking about. If that sounds like a house of cards it should because it could quickly become one unless the entities involved are very good at accessing risk and have a history of sound financial judgment and a strong sense of fiduciary rectitude. NONE of the partners in the bank pass either of those tests. If you find yourself wondering if we could end up in a situation not unlike what happened in Jefferson County Alabama with their sewer system, such a thing is not unimaginable as we possess a number of “markers” anti-tax legislature, pro-business administration, self-proclaimed financial wizards, a total lack of even rudimentary transparency and oh yes JP Morgan.
Feeling filled in yet? Not bored by all these little details/possibilities but instead you find yourself somewhere between mildly concerned and consumed with worry? Good, here’s another thought for you to mull over and wonder if anyone, say in the City Council is even aware that they should be thinking about it. The higher the interest rates on an investment the greater the risk. Having a "diverse source of assets to leverage" could well create a blizzard of interest rates that could adjust themselves when say something like 2008 happens again. Our Mayor has been touting this “flexibility” as a good thing. As noted before that flexibility, the amount of risk, the rate of return on investment etcetera; will be defined by the moral flexibility and prudence of those making the loans and those people read like a who’s who of the deeply untrustworthy and morally bankrupt.
You might not want to believe that but here, have a look and the partners in this “bank”. You should also understand that just like Tony Soprano, they will have a clock, they will get their money, they will take it out of our hides to get it and they will every incentive to cheat us at every turn because their PARTNER is the government that is supposed to be protecting our interests … and won’t be. I say that because Section 8 of the ordinance that establishes the bank says: “To the extent that any ordinance, resolution or order of the city is in conflict with the provisions of this ordinance, the provisions of this ordinance shall be controlling.” What Mayor Emanuel is telling you is that if you, kind citizen, get your panties in a twist over something the bank wants to do/destroy/build/invest in and you seek governmental redress there will be none of that. The corporate/private part of the partnership will be getting what it wants in the form of protection from the public/government side of the equation. You don't like what we're doing then you will be shutting up and taking it. What's the word for when corporations and goverments become the same? Who'd have thought a nice Jewish boy would have such a thing in him? Here’s who those benevolent, private partners are…
Citibank and Citi Infrastructure Investors, a recidivist institution that has committed corporate accounting here, something like fraud there and straight up evil here. There's Macquarie Infrastructure and Real Assets, an entity that makes its money privatizing public assets. Do they get the infrastructure if we can’t pay them back like corporations are doing in Greece? Heck, meet J.P. Morgan Asset Management’s infrastructure investment group, a serial, seasoned, financial criminal organization. Finally there is Ullico who can’t be bothered to protect the retirement savings of its members or handle money in any way that should make you want to have any financial dealings with them. To borrow money from these people and to expect them not to engage in criminal behavior at some point is the height of either stupdity, insanity or chutzpah on epic scale... man did say he was bold though. Got to the give the little marmoset that.
So in conclusion let me leave you with something Hyman Roth from the Godfather II said that this whole arrangment reminds me of: “Michael, what I am saying is, we have now what we have always needed, real partnership with the government.