Mayor Rahm Emanuel’s hand-picked city treasurer, Kurt Summers, is breaking away and joining the call of unions, asking Emanuel to sue big banks over controversial interest rate swap deals.
The city entered into the borrowing contracts years ago but has been on the hook for hundreds of millions in payments as its credit rating has tanked to junk status. The city has repeatedly denied it has grounds to sue, but Summers has a different opinion.
Not only should the city of Chicago sue, he says, but so should Chicago Public Schools, Cook County and any other municipality that entered into these toxic deals with banks that have ended up costing taxpayers so dearly. It is something that unions and progressive aldermen have called for, but something the mayor’s financial and legal team have said repeatedly they had no grounds to do. In fact, an independent review ordered by the city concluded there was no fraud in the way these contracts were sold to the city. They were just plain bad deals and the city should have known the risks.
But Summers says there are different grounds for a lawsuit, and a class action suit has already been filed by the Chicago Teachers Pension Fund and the Chicago Police Pension Fund. He says the banks may have violated federal anti-trust laws and possibly colluded with each other to rip off the city and other municipalities.
“This has been a different question that no one around the country has asked until now,” Summers said. “The city of Philadelphia just today joined this lawsuit and they’re in the same position we are as a city. Every municipal government or state has to look at this and pursue it fervently. Our fiscal situation is such that we don’t have a choice.”
The mayor’s office disagrees with Summers, and still maintains – anti-trust case or not – there are no grounds for legal action.
“The city had an outside firm do extensive research regarding the city's swap transactions, and it was determined that the city did not have cause to sue the banks,” said a mayoral spokesperson.
Yvette Shields, a municipal bond writer for Bond Buyer magazine told “Chicago Tonight” that she hasn’t heard of one like this succeeding yet in the U.S. She also says the timing of a lawsuit is horrible, because the city and Chicago Public Schools are in desperate financial straits and need the banks on their side to agree to continue lending despite terrible credit ratings.
The fact that this call is coming from Summers is notable. He is a former investment banker himself and was a senior vice president at Grosvenor Capital Management – the firm of Emanuel’s closest unofficial advisor, Michael Sacks. But Summers says a there is a legitimate case to make.
“The pattern of this stuff – the LIBOR settlement, the foreign exchange settlement, every year you’ve had multibillion-dollar anti-trust settlements from banks to parties like us, so there is a pattern of behavior here that gives us the best case,” Summers said. “This is an anti-trust case, which means damages are rewarded possibly three times the amount, because the federal government wants that much to discourage this kind of bad action.”
The city is currently borrowing to pay $400 million in penalty fees to banks to get out from under these swap deals. It’s a big number, but it would have owed billions more had it continued to pay back the ballooning interest rates it owed.
The move has obvious political overtones. Emanuel’s opponents have long called for the mayor to explore suing the banks. Summers, though handpicked, is widely thought to be exploring a run for mayor in 2019. He says the move isn’t about politics, but simply acting as a trustee of the city’s pocketbook.
Progressive aldermen hailed the treasurer’s move.
“We are pleased to hear the treasurer has broken from the Emanuel administration’s position that suing the big banks over toxic swaps is impossible,” said Ald. Ricardo Munoz (22nd Ward). “The banks have reaped historic and unjust profits in these deals.”
Summers says his staff has reached out to the mayor’s staff and other governmental staffs on the issue.
Check back for details. Follow Paris Schutz on Twitter: @paschutz
March 30: Last week, the Illinois Supreme Court dealt Mayor Rahm Emanuel a huge blow, overturning reforms to two pension funds for city workers. The city argued reforms guaranteed previously unsecured retiree benefits, but the state’s high court wasn’t having it.
March 24: The Illinois Supreme Court dealt Mayor Rahm Emanuel a major setback Thursday in his efforts of saving two of the city’s four public employee pension funds, which city officials say could go broke within the next 15 years.
Jan. 27: After the Illinois Supreme Court ruled a pension reform plan unconstitutional, lawmakers have failed to come up with a solution to a problem that worsens with each passing day. Could some form of federal bailout or bankruptcy restructuring be the answer?