Stockton and the Politics of Austerity


Stockton and the Politics of Austerity

We are marking the 10th anniversary of the invasion of Iraq. This is equally the anniversary of the media treachery that justified this crime against humanity. In this light, the votes are in for the Donald Rumsfeld Award for Deception in Media for the first week of April. The award is now presented weekly since there are so many outstanding lies, distortions and deceptions in the news these days.


And the winner is… the Oakland Tribune!! They tried some dirty stuff this time!


On Monday, April 1, US Bankruptcy Judge Christopher Klein held that the city of Stockton, California, is allowed to go bankrupt. Stockton is a port town of 300,000 people on the river delta, about 50 miles east of San Francisco. This is the biggest municipal bankruptcy of a city in US history.


It is also a sign of things to come. Cities and government agencies commonly sell bonds to raise money for projects from city halls to sewer districts. The bonds are sold to the banks and hedge funds of the financial industry. The Banksters sucked the cities of America into various “debt swap” deals before the 2008 Financial Meltdown. Now some 80% must pay huge fees every month to Wall Street. San Bernardino will soon eclipse Stockton. Detroit will swamp them next. Cities are waiting in line to go broke. This is Austerity in action. Who benefits here?


First Wall Street hooked homeowners into fraudulent sub-prime mortgages. They followed this up with tons of illegal foreclosures. Far more foreclosures will be coming down the pike. Then they turned students into debt slaves, re-establishing debt peonage in America. Students (like felons) can no longer go bankrupt to pay off their loans; they must work for life to pay them off. Now the Banksters are beginning to foreclose on the cities. The debtor is tied more closely to the banker than the slave was to the master.


The Oakland Tribune addressed this issue in a Wednesday, April 3, editorial entitled “Who will pay for Stockton’s bankruptcy?” First, the editors set up the trick: who, they wonder, “will have to take a haircut?” Could it be the bondholders? Could it be the California Public Employees Retirement System, the country’s largest pension fund? Could it be the “irresponsible managers” or could it be the workers?


This formulation implies “a fair and balanced” look at the issue. But the editorial is far from impartial. It makes two horrific statements to distort the significance of the bankruptcy. Funny thing – each goes to obscure the role of the Banksters and advance their agenda. The full editorial is appended at the end of this commentary.


The distortions:

“But what happens when a California pension showdown reaches federal bankruptcy court? This is new legal territory. “There are very complex and difficult questions of law that I can see out there on the horizon,” Judge Klein said, in what can only be described as understatement.

“We would not be here but for the irresponsible behavior of past Stockton officials. They thought the housing boom would never end, that the level in the property tax well would continue to rise. (1)


Here’s the case. Decide for yourself:


Let’s begin with a story printed in the Oakland Tribune on Tuesday, April 2, the day before the editorial, entitled “City OK’d to Pursue Bankruptcy”. Apparently the editors don’t pay too much attention to what is in their own paper:


“In a blistering critique, the judge assailed major Wall Street bondholders, Assured Guarantee Corporation and National Public Finance Guaranty Corp., for acting in a heavy-handed manner by refusing to negotiate the city’s bond debt unless Stockton took actions to cut its massive employee pension obligations.

“Klein concluded that National Public Finance and Assured “each took the position that there was nothing to talk about” unless the city sought concessions from the California State Employees Retirement System, to which it was paying $29 million a year. The city and CalPERS argued that pension costs had to be met.

” ‘The translation (was that) if you don’t intend to impair CalPERS, we’re not going to talk to you,’ Klein said of the creditors. “They absented themselves from all discussions….And, having voted with their feet, there was no point in talking to them further.”

“The judge ruled that Stockton had put forth a reasoned effort to resolve its massive fiscal debt but received “nothing but a stonewall on the other side.”

“He also chastised the city’s creditors for refusing to pay their required share of costs of pre-bankruptcy mediation, declaring, “The capital market creditors did not negotiate in good faith. And therefore, they do not have the ability to complain.” (2)


So the problem here is NOT irresponsibility of Stockton officials. But the Banksters are arguing something else. They are demanding that the city go after the CALPERS pension fund, the country’s largest. The city refused to take this step, which plays a role in determining who is “first in line” to get paid off from the bankruptcy. When a corporation goes bankrupt, the creditors are usually first in line and the workers, who may not have received wages for weeks, are last in line. But its new territory when a city goes bankrupt.


The Bankster lawyers refused to participate in the hearings because they are playing a bigger game. They are trying set a precedent to break the pension fund. Privatizing pensions has been an avowed goal of Wall Street for a decade. This case may go to the Supreme Court and may become the precedent by which all other municipal bankruptcies are measured. They are just playing round one in Stockton. That is why they stonewalled the court – refusal to speak leaves no basis to attack this position. The goal is to force the issue up the judicial chain.


The editorial defines this as a problem of “a California pension showdown”, when in fact it clearly is a case of corporate blackmail, plain and simple. This is not “a pension showdown” at all. But the Banksters would like to characterize the bankruptcy this way, to hide their own dirty tricks. The Oakland Tribune openly collaborates with this.


The “Interest-Rate Swaps” Scam

The issue turns on the “credit default swaps” that the banks tricked cities into taking. This is another financial weapon of mass destruction, like sub-prime mortgage loans. Cities issue bonds to get cash for projects, thus they must make regular payments on the bonds. Wall Street is the aggressive party here, not the cities. The financial boys try to sell the cities a form of insurance called an “interest-rate swap”. The deal is that if interest rates stay high, the bank will pay them extra as insurance, but if the rates stay low, then the cities pay the bankers.


Somehow the Banksters were eerily prescient: since 2008, the Fed has kept interest rates at zero “to stimulate the economy”. Now cities, school districts and water boards pay the banks millions of dollars a month. But the kindly bankers do permit cities to pay exorbitant termination fees. Between 2006 and 2008, banks collected at least $28 billion from cities on top of the swap payments. (3)


The Office of the Comptroller of the Currency reported in 2012 that U.S. banks held $183.7 trillion in interest rate contracts. Only four firms represent 93% of total derivative holdings: JPMorgan Chase, Citibank, Bank of America and Goldman Sachs. (4) They are the bedrock of the derivative market.


“Interest rate swaps are today the single largest type of derivative in existence, making up more than 80% of the value of all derivative contracts signed by U.S. commercial banks. Measured by their notional amounts (the “notional” of a swap is a fictive sum of money corresponding to an actual principle on real debt), U.S. banks have an outstanding $202 trillion in interest rate derivative contracts. In other words, U.S. banks are using swaps to transform interest rate payments on $202 trillion in debt, owed by corporations, governments, and other banks, so that these entities can switch from variable rates to fixed, or vice versa, and so that they can peg their debt payments to any number of global rates.

“On a global level the total notional amount of interest rate swaps were most recently estimated at $441 trillion by the International Swaps and Derivatives Association. These trillions of dollars represent the debts of virtually all major corporations and governments. More than any other development in the last thirty years, this new derivatives regime creates the globalized economy. (5)


Let’s put these incredible figures in context. What do they mean? The total GDP of the entire world for one year is around $50 trillion; for the US alone it is about $14 trillion. (6) So the total amount of interest rate swaps for the world is $441 trillion? Eight times the production of the entire world? How could this be?


Wall Street has been the greatest profit-making sector of the US economy since 2000. In 1973, financial returns were 16% of total corporate profits; by 2007, they reached 41%! Since these profits come mostly from loans, this meant the vast expansion of indebtedness throughout the US economy. (7)


Consumer borrowing doubled in the US between 1980 and 2007, but corporate borrowing quintupled, actually reaching 121% of the GDP in 2008! (8) These investments were mostly not in the form of loans; they were for highly speculative, completely unregulated “financial instruments”.


In a warm example of class solidarity, capitalists loan each other money at rates no normal person could ever hope to get. Capitalists “leverage” their debt by exploiting special laws that let them borrow $100 and more for every dollar they have! Most people are permitted by banks to borrow only a tiny percent, say 10% of their financial worth.


Corporate debt is thus vastly greater that federal debts, state debts, credit card debt, student debt and personal debt combined! That is what the $441 trillion represents. This debt is principally used to speculate on everything from food prices to student loans to interest rate swaps. Corporate debt drives Austerity today. This policy is a mechanism to transfer local assets into corporate assets so that corporations can go even more deeply into debt and borrow in order to speculate. Historically, debt and speculation have been a mechanism to centralize the ownership of everything into the hands of the 1%.


The Swaps Crisis was guaranteed by a second, related scam that many call the biggest single financial crime in history. This is the Libor scandal. Libor stands for London Interbank Offered Rate. This is supposed to reflect the rate that banks would pay to borrow from other banks. This is used as an indicator of how banks perceive their risk based on loans they issue. Libor is used to establish loan rates around the world, including adjustable rate mortgages, credit card payments and US student loans.


It is abundantly documented that Wall Street banks conspired to keep Libor low when the US government was bailing them out. By keeping the rates low, the price of the useless bonds they were turning over to the government were high. Citibank, for example, was reporting low borrowing costs to Libor, even though their credit default prices were sky high. (9)


Libor was likewise used to manipulate interest rate swaps across the country. As the economic crisis deepens, banks that “are too big to fail” are becoming “too big to jail”. On March 30, a US District judge in New York dismissed charges against Bank of America, Barclays and JPMorgan Chase, absolving them of their role in Libor.


If the Oakland Tribune or any other newspaper were really representing the public interest they would spread the word that the people of this country are paying the Banksters twice. The government Bail Out to the banks was at least $16 trillion. This was free money at a dollar-for-dollar rate, unheard of in the history of finance. This money could have and should have been used to pay off all outstanding debts from personal debts to student debts, mortgage debts and city debts. After all, if you owe someone money, and then pay him off, you don’t have to keep on paying. Isn’t that how things work?


So why should we pay them a second time? This open collusion by the government to guarantee bank profits at the expense of everything else in America is the 21st Century expression of how Mussolini famously defined fascism – the merger of the corporations and the state.


The economist Michael Hudson describes it this way:


“Today’s economic warfare is not the kind waged a century ago between labor and its industrial employers. Finance has moved to capture the economy at large, industry and mining, public infrastructure (via privatization) and now even the educational system. (At over $1 trillion, U.S. student loan debt came to exceed credit-card debt in 2012.) The weapon in this financial warfare is no larger military force. The tactic is to load economies (governments, companies and families) with debt, siphon off their income as debt service and then foreclose when debtors lack the means to pay. Indebting government gives creditors a lever to pry away land, public infrastructure and other property in the public domain. Indebting companies enables creditors to seize employee pension savings.”  (10)


The Politics of Austerity


Austerity is implemented across the world in various forms, but mostly this is accomplished through extra-legal measures. Leaders of the G20 countries, the biggest national economies, met in Toronto to decide how to address the economic Melt Down. Surrounded by the army to hold off the protestors, these leaders “agreed” to implement Austerity across the board. There was no treaty. No legislation was proposed. No plebiscite was held to find out the will of the people. Austerity was simply imposed.


The same extra-legal process occurred earlier this year with the so-called $90 billion Sequester that permanently cuts social programs for millions of people in the US. A bi-partisan Congress that is supposedly broken and not capable of functioning passed the Sequester more rapidly than any legislation since the Bail Out. While the process was disguised with a few hearings, and did end with legislation, the process occurred completely outside of the legally established fact finding process. No one was legally sworn in to hold them accountable for their testimony and bogus inflammatory statements.


Two years ago Michigan passed Public Act 4 – the Emergency Manager bill. This law empowered the governor, at his own personal discretion, to seize any city or municipal government and appoint a financial manager – either a person or a corporation! – with total power to break contracts and sell off public land, parks, buildings, etc to private corporations. In the 2012 election, the people of Michigan voted for a constitutional amendment to void the act.


Two weeks later, the law was simply re-established in a slightly different form by the governor. (11) Then the governor seized the city of Detroit, depriving them of the civil right to vote. These maneuvers completely void the democratic process and confirm the old saying that law is simply the will of the 1%, written down. It is possible that California will see similar propositions proposed in the 2014 election.


This combination of legal and extra-legal maneuvers, the merging of corporations and the state, demonstrate what political power really is. The Banksters work at it 24/7 and impose it upon the rest of us. We are not going to reverse this class political power by voting every 4 years, or by trying to convince bought-off legislators to see things our way for once. It is time to learn from the masters. The 99%’s struggle for political power must consider how to impose the will of the people, every day and every way, and force government officials to be truly accountable or pay the price.



Steven Miller

Oakland, Ca



1)     Oakland Tribune, April 3, 2013

2)     Oakland Tribune, April 2, 21 July 12, 3013

3)     Pam Martens. “How Wall Street Gutted Our Schools and Cities”. AlterNet July 21, 2012.

4)     Op sit

5)     “The Swaps Crisis”. Dollars & Sense Magazine. May-June 2012

6)     Tom Formeski. The Size of the Derivative Bubble  =  $190K per Person on Planet”. October 16, 2008

7)     Dave McNally. The Global Slump. 2011. P 86

8)     Op sit

9)     “How Wall Street Gutted Our Cities and Schools”

10)  Michael Hudson. “The Finance Industry Has Pried into Every Sector of the Economy, and Has Ended Up Running the Whole Show”. December 31, 2012

11)   Rally, Comrades, March-April, 2013.






Stockton bankruptcy ruling sets stage for landmark pension showdown

Oakland Tribune editorial

Posted:   04/02/2013 12:38:05 PM PDT

Updated:   04/02/2013 01:45:26 PM PDT


Federal Judge Christopher Klein’s ruling Monday that Stockton, the nation’s largest city to seek bankruptcy protection, is indeed insolvent sets the stage for what could be a landmark case that determines who takes a haircut.

Will it be the bondholders, especially the mutual funds, who invested in the city without properly vetting its finances? Or the firms that insured those bonds without adequately assessing the risk?

Will it be the California Public Employees’ Retirement System, the nation’s largest pension fund, which misled Stockton and local governments across the state about the cost of benefits? Or the workers, whose labor unions pushed for more when they knew, or should have known, that fattened pensions could eventually break the budget?

At the center of the showdown over debt write-offs looms the question of whether public employee pensions remain untouchable even at times of financial crisis. California retirement systems work under the legal assumption that a public employee’s pension formula can never be reduced, not even for future work.

The protection stems from the state and federal constitutions, which say government agencies shall not impair contract obligations. While the California Supreme Court has upheld the state protection, the U.S. Supreme Court has said the federal provision is not absolute.

But what happens when a California pension showdown reaches federal bankruptcy court? This is new legal territory. “There are very complex and difficult questions of law that I can see out there on the horizon,” Judge Klein said, in what can only be described as understatement.

We would not be here but for the irresponsible behavior of past Stockton officials. They thought the housing boom would never end, that the level in the property tax well would continue to rise.

So, they promised fat salary and benefit packages to their workers. They borrowed to fund a new City Hall, an events center and arena, housing projects, parking garages, marina improvements, a fire station, a police communications center, and parks and street improvements.

And then, as Stockton became the poster child for the foreclosure crisis, tax revenues sank rapidly.

It was the sort of bet against future income that has become a standard form of school and municipal finance: Promise employees benefits that will become more costly with time. Pay for construction with bonds that depend on rising tax revenues for repayment.

Self-interested bond-sellers and shortsighted labor leaders, who don’t think about repercussions down the line, enable this taxpayer-funded scheme. Campaign-contribution-hungry politicians carry it out.

For those who think public officials have learned their lesson, think again. As they watch Stockton, how many will offer their employees compensation increases that depend on rising revenues? How many will float bonds with aggressive repayment schedules?

And how many of them will someday meet the same fate as Stockton?




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About the author

Steven Miller has taught science for 25 years in Oakland’s Flatland high schools. He has been actively engaged in public school reform since the early 1990s. When the state seized control of Oakland public schools in 2003, they immediately implemented policies of corporatization and privatization that are advocated by the Broad Institute. Since that time Steve has written extensively against the privatization of public education, water and other public resources.