Does it seem right to you that a state's ability to stay afloat should be the stuff of secretive betting pools? That's just what's happening. While states like California struggle to pay their teachers, librarians and cops, traders are gambling -- by buying credit default swaps -- on the fate of our biggest state. And that's just half the story.
The very same banks that sell and profit off the swaps, at the same time underwrite and price the state's assets -- their municipal bonds. That means that even as JP Morgan Chase, Barclays, Goldman Sachs and Citigroup deal out the bonds that the state issues to raise cash, they're making money, separately, on the risks involved. They get their fees coming and going.
It's the same double-dip banking-and-betting scenario that's accused of bringing Lehman Brothers down. What's being done? In Europe, after Greece came dangerously close to sucking itself down the debt-swap sinkhole, EU leaders called for stiff regulations; reining in or even banning certain types of derivatives trading and demanding far greater transparency.
New laws proposed here, however, hardly put a dent in the way derivatives are handled. No one's worrying too much because the federal government keeps selling bonds; debts keep on rising, debt- buyers keep on profiting and state schools and libraries and police and fire departments shrink and shrink.
California's state treasurer, Bill Lockyer, finally wrote to the big banks this week, asking for clarification. Being in hoc to a croupier is bad enough, but when you're paying the croupier you want to know he's not working for peeople betting against you. Californians pay fees to the banks for all that bond underwriting. The state has a right to know: Just who are the banks working for? And we the taxpayers have that same right. In case you didn't notice, taxpayers are the all-round losers here. Public coffers are taking on everyone's risk (the states' as well as the banks') even as public services shrivel. Lovely.
The F Word is a regular commentary by Laura Flanders, the host of GRITtv which broadcasts weekdays on satellite TV (Dish Network Ch. 9415 Free Speech TV) on cable, and online at GRITtv.org and TheNation.com. Support us by signing up for our podcast, and follow GRITtv or GRITlaura on Twitter.com.