How the banks bamboozled Chicago

The City of Chicago and Chicago Public Schools pay more than $100 million annually on interest rate swaps. These deals became particularly costly after the financial crisis when a host of risks embedded in the deals materialized. An investigation by the Chicago Tribune details many ways that banks misled CPS about the risks involved with these deals and finds that the complex financing schemes involving auction rate securities and swaps likely could cost CPS at least $100 million more than plain vanilla bonds.

When asked at a press conference last week why he wasn’t trying to recover any of this money, Mayor Rahm Emanuel responded, “There’s a thing called a contract.”

Yes, there is a thing called a contract, and the banks broke it when they unlawfully steered CPS into these deals without making adequate disclosures about risk. For example, even though Bank of America officials knew that the auction rate securities market was headed for a “meltdown,” they still pushed CPS into the deals anyway without disclosing their concerns.

That violated the federal “fair dealing” rule, which prohibits financial institutions from misrepresenting or omitting “facts, risks, potential benefits, or other material information” when doing business with municipal clients like the city or CPS. In other words, banks may not downplay the risks associated with finance deals and they may not mislead public officials about the likelihood of those risks materializing.

Because abuses like those described in the Tribune expose were standard practice, the city was likely misled about its deals as well. I have submitted information requests for the documents necessary to analyze the city’s deals, but officials there are stonewalling. It took the Tribune nearly a year to get similar documents from CPS.

Nevertheless, contrary to what Emanuel would have us believe, there are many options at his disposal for recovering money for both the city and CPS.

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