Mayor Rahm Emanuel has so far rejected Treasurer Kurt Summers’ advice that the city join antitrust lawsuits to recover money lost in interest rate swap deals. Meanwhile, Gov. Bruce Rauner has just hired consultants – who will get $525,000 over the next two years – to “reduce [the state’s] exposure” in similar deals.
Among Rauner’s new consultants is Katten Muchin Rosenman, former Mayor Richard M. Daley’s law firm, which advised Daley on the city’s ill-fated parking meter privatization deal 10 years ago.
“I believe they’ll advise the state to terminate the swaps and pay off the fees, the same approach Emanuel took with Chicago’s swaps,” said Saqib Bhatti of ReFund America, which has urged the city and state to take legal action to recover funds lost in the deals.
Buying out its swaps could cost the state nearly $300 million at a time when it doesn’t even have a budget, Bhatti said.
Summers wrote to Rauner last month urging that he explore joining class action lawsuits charging that banks “engaged in collusive, anticompetitive behavior that enabled them to maintain control of the interest rate swap market resulting in billions of dollars of unjust enrichment.”
The governor hasn’t responded, said Drew Beres, general counsel for the treasurer’s office.
Summers also wrote similar letters to three of Chicago’s pension funds, where they may be taken more seriously, if only because Summers sits on their boards. He hasn’t written Emanuel, but a mayoral spokesperson has said that while it’s fine for pension funds to sue banks, it’s inappropriate for the city to do so. Summers disagrees with that assessment.
Emanuel has relied on a legal opinion which said the city didn’t have a case that the banks selling swaps to the city had committed securities fraud. That opinion was challenged by Bhatti and others, including attorney Brad Miller, a former colleague of Emanuel’s in the U.S. House of Representatives, where Miller was a prominent Wall Street critic while Emanuel was one of Wall Street’s most valuable players.
But this strategy is different, according to Beres. A securities fraud claim is “a high bar,” requiring proof of misrepresentation in an individual deal; an antitrust claim is far more straightforward, alleging that banks colluded to shut out competition in a market – and there’s plenty of evidence for it in this case, he said.
That’s the approach of class-action lawsuits filed by the pensions funds for Chicago teachers and police officers and, more recently, by the city of Philadelphia.
It’s also the basic approach that worked in a class-action suit charging that the same banks conspired to limit competition in the credit-default swaps market, Beres said. In April a federal judge approved a $1.89 billion settlement in that case. And in March, a federal appeals court reinstated a similar antitrust claim against the banks related to interest rate manipulation.
Unfortunately, antitrust actions typically produce smaller settlements than fraud claims. Fraud claims can potentially require a refund of losses – and Chicago has lost a half-billion dollars on interest rate swaps, on top of nearly $300 million in termination fees paid last year. An antitrust settlement would be based on the difference between the price paid for a product and an estimate of what it would have cost in a competitive market (successful plaintiffs are entitled to triple damages). Beres said that could amount to tens of millions of dollars for the city and its pension funds, which is still a lot of money.
If Rauner and Emanuel want confirmation of the anticompetitive behavior of the banks they’ve gotten swap deals with, they could check with their friends at CME, or with Ken Griffin, who’s the largest contributor to both politicians. Both are cited in the lawsuit filed by the teachers’ pension fund.
The suit details the way the banks that sell swaps “conspired” – actually meeting and undertaking code-named “operations” – to block efforts to launch transparent, competitive exchanges for interest rate swaps. One such effort was a European electronic trading platform that began working with CME in 2006 on a project to expand to the U.S. swaps market using CME’s clearing facilities.
The banks selling swaps boycotted the new operation and agreed to direct all transactions to a clearinghouse they controlled, LCH Clearnet, according to the lawsuit. The new trading platform was never launched.
It was one of three major efforts to modernize the swaps market that the banks torpedoed, according to the suit.
What’s left is basically an “over-the-counter” system in which sellers have all the power. Griffin has called it “clunky and outdated.”
Summers’ effort to raise this issue has been treated in the media as the first salvo in the next mayoral campaign. Maybe so, though Beres insists he’s merely upholding his responsibility as a fiduciary of the city and its pension funds.
Indeed, you could look at it as Summers offering Emanuel a chance to score political points. Emanuel could counter his image as “Mayor 1 Percent” by directing the city to follow up on Summers’ recommendation. Instead, he seems to be reinforcing that image by rejecting that option out of hand.
“There are a variety of strategies we could use to recover money from swaps, but it’s clear that the mayor isn’t interested in doing anything more than paying off the swaps – and then saying he has no money,” Bhatti said.
As for Rauner, this is a chance for him to show whether his rhetoric about “corruption” and “insider dealing” applies to anyone besides his own political opponents.