It isn't just at the national level. State officials are notorious for taking what are tantamount to bribes and kickbacks from large banks. State and local governments need and use a wide array of financial services. Big banks on Wall Street are more than happy to help and market their products similar to how defense contracts work using bidding systems that are often completely shrouded in secrecy and with services that aren't even standardized. Political connections--in other words corruption--often determines many times who wins a contract. States and governments thus hire big banks to manage pension funds, finance long term investments such as schools and roads, and even manage how tax money is spent. Transaction costs levied by banks for these services is often 1-2 percent, and every year the banking industry pulls in roughly $25-50 billion a year off of states. If pension officials simply took all the money for their state workers and invested it into a friendly investment firm like Vanguard, with only a 0.15% fee for their index funds, the difference in cost would range from $20-45 billion a year in saved tax dollars.
The banking industry has now also devised schemes to fleece tax payers even more for their money. Instead of financing project with locked in interest rates on 10-30 year bonds like what used to be typical (so states could gradually accumulate money to pay off debt), banks now sell "auction rate securities" to states, investments completely inappropriate for public investors. Instead of locked in rates, these auction rate securities breaks up debt into short 30 to 90 day intervals. At the end of the interval, the loan must basically be refinanced. Banks argue that short term interest rates are usually lower than longer term fixed interest rates, so less should be paid. This is the same argument JP Morgan used when they sold Jefferson County Alabama auction rate securities. When the interest rate changed for the worse, raising the cost of borrowing for Jefferson County, JP Morgan tried to get $647 million dollars in fees from the country to excuse Jefferson County from its contract. However, later it was revealed that JP Morgan paid $235,000 to Larry Langford, the president of the County Commission at the time.
How about Eerie, Pa? JP Morgan sold Eerie, Pa complex derivative packages called "swaptions" along with $750k upfront that could be used "for school repairs". All a swaption is in the end is a high risk bet on interest rates, with the seller taking the risk. When the interest rates ended up increasing, Eerie had to pay $2.7 million to JP Morgan to get out of its commitments. In total 107 schools in PA were involved with swaptions.
Deals like this are way more common than you think. Major banks, the ones too big to fail that we bailed out with our tax dollars, make billions of dollars every year selling states and local governments extremely complex financial packages that almost no one understands except for those within the banks. The banks then make billions of dollars in profits while bankrupting local and state governments once their financial packages don't go as planned or go belly up. It's nothing more than preying on small government and tax payers bymassive banks looking to reap tons in fee money.
And people wonder why states are broke? Oh, but it must be because of those damn state employees and their overly generous retirement packages and pensions. Yeah right...
