The American Interest
Analysis by Walter Russell Mead & Staff
Wall Street Fleeces Stockton Pensioners

Nearly everyone’s a loser in the pension crisis. Workers lose when the city fails to pay their pensions. Municipal governments lose when they run out of cash or make risky investments to cover the shortfall. But a few guys never seems to lose. Chief among them are the Wall Street banks, who scam cities into high-risk investments that leave them worse off than they were before.

A New York Times piece on the Stockton bankruptcy lays out exactly how this scam works. When Stockton ran into trouble paying off its debts to Calpers, Lehman Brothers stepped in with a seemingly irresistable offer:

Stockton could raise the $152 million all at once in the municipal bond market, send the money to Calpers and get rid of the unpayable loan. The municipal bond market would charge Stockton just 5.81 percent interest. The city would come out way ahead.

As is often the case, however, it was what Lehman didn’t say that was most important:

What the bankers did not say was how seldom such pension bets ever pay off. . .

If Calpers’s investment earnings 30 years from then did not average out to at least 5.81 percent a year, he said, the bond would have been a bad idea. But then he dismissed this possibility, saying that if Calpers could not earn that much over time, “you have much bigger problems.”

Calpers’s investments lost about 25 percent of their value in the financial turmoil that began in 2008. That meant the city had a new debt to Calpers, compounding at 7.75 percent, on top of its debt to the bondholders. Stockton was worse off than ever, with 29 more years to go.

This story is a must-read for anyone who wants to understand how public sector unions, poor municipal governance, and shady Wall Street dealing combine to fleece taxpayers and stiff workers from Stockton to New Orleans.

Published on September 4, 2012 2:50 pm