Can Oakland Boycott Wall Street?

Last week's vote to renegotiate the city's costly deal with Goldman Sachs makes Oakland a leader, and legal test case for cities seeking greater independence from Big Banks.

In an effort to extricate Oakland from its financial bondage to Goldman Sachs, the city council voted last week to direct staff to seek termination of a costly deal between the city and the Wall Street giant. As the Express has reported, the interest-rate-swap deal with Goldman Sachs is costing Oakland taxpayers about $4 million annually, and currently has a net negative value of $15.5 million.

The resolution stipulates that the deal be canceled without the $15.5 million termination fee that is required per the terms of the contract. And in an unprecedented move that provides the city with significant leverage, the council added that “if Goldman Sachs refuses to terminate the swap agreement without termination fees or penalty within 60 days, then they will be excluded from any future business with the City of Oakland.” This hardball strategy was devised by members of the Coalition to Stop Goldman Sachs, who applauded last week’s vote.

The activists say, however, that this is only the first step. Former city councilman and organizer Wilson Riles Jr. said the city hasn’t really won anything yet. “I’m worried that the sixty days will pass and we’ll just keep paying on the swap, and that there will be a lack of follow-through on the intent of the resolution to ban Goldman Sachs from future business,” he said. “I think we should take the next step and find a way to breach the contract, to not pay the swap.”

And yet even as Oakland moves toward a hardball bargaining strategy with the bank, the city has continued to do business with Goldman Sachs. Just last month, Goldman Sachs successfully bid on Oakland’s 2012-13 Tax Revenue Anticipation Notes, short-term debt valued at $83 million. News of the sale — off which Goldman Sachs stands to make several hundred thousand dollars in profit — angered community members and councilmembers at the June 26 council Finance and Management Committee meeting when it was first revealed.

Assistant City Administrator Scott Johnson responded by casting doubt on the council’s plans to boycott Goldman Sachs. “Pursuant to SEC requirements, in an open market auction our policy is to accept the lowest bid. Goldman bought our bonds,” Johnson told incredulous councilmembers. “I think we need a legal opinion, in accordance with SEC requirements, when you’re in the open market, for financial transactions that are being traded in the open market, whether we would be allowed to not accept the low bid.”

Before the full council’s vote on the Goldman Sachs resolution, the City Attorney’s Office prepared such a legal brief. Late in the afternoon of July 3, before the full council meeting, news was circulating that the city attorney was skeptical about whether the city could boycott Goldman Sachs. Several councilmembers who had previously championed the measure hesitated in their support and almost tabled the item.

The city attorney’s opinion was confidential, and has not yet been made available to the public, so the legal authorities it relies on are unknown. “The council can always waive confidentiality if they want to make it public,” said Alex Katz of the City Attorney’s Office. Thus far, the council has kept the opinion private.

The city attorney’s opinion, along with statements from finance staff, has led some to question whether the recently passed resolution is enforceable. But numerous independent legal experts say the city’s proposed ban may be legal. “There wouldn’t be any SEC or MSRB regulation that I can think of that would address this,” said Theresa Gabaldon, a George Washington University law professor who studies municipal securities law. “In general, under the Tower Amendment, the federal government can’t even directly require municipal disclosure, much less dictate trading partners.”

The Tower Amendment of 1975 modified the original federal Securities Exchange Act of 1934, essentially freeing local governments from the laws devised by federal authorities to regulate the sale of municipal securities like bonds and notes. The Municipal Securities Rules Board (MSRB), which regulates the sale and trade of government financial instruments like bonds and notes, is focused entirely on overseeing corporate behavior, due in part to the fact that nearly all past municipal securities fraud has been perpetrated by underwriters, advisers, and brokers in the private sector. “There is no [federal] securities regulation reason it couldn’t be done,” Gabaldon said of the proposed boycott of Goldman Sachs.

According to Darrien Shanske of the UC Hastings College of The Law, the legal basis for determining if and how and city can bar a specific company from doing business with it are likely to be found in state and local contracting laws — and not federal securities law. “I think the answer is in the Public Contract Code and case law interpreting it,” Shanske said.

To counter what they believe to be a negative opinion from the city attorney, members of the Coalition to Stop Goldman Sachs and the union SEIU provided two different legal opinions to councilmembers before their vote. The first, written by lawyers with the Altshuler Berzon law firm, stated that, “the City can reject Goldman Sachs for future City contracts, even if Goldman Sachs is the lowest bidder.” The authors of the memo added that their “initial review found nothing in state or local law to preclude the City from considering Goldman Sachs’ conduct on prior City contracts when awarding future contracts.”

A second legal opinion provided by the Weinberg Roger & Rosenfeld law firm concluded “those proposing the prohibitions or limitations [against Oakland’s threat to bar Goldman Sachs from future business] are taking a far too narrow view of the right of the City as a market participant to choose with whom it will do business.” Citing California case law regarding city contracting, the memo advised that Oakland “has the same rights as other market participants to decide with whom, and under what conditions it will do business.”

In addition, the Oakland Municipal Code gives the council wide discretion in terms of both city contracts and municipal securities offerings. Section 812 of the code states that “the Council may issue revenue bonds for any lawful purpose in such manner and upon such terms and conditions as it may fix and establish by the provisions of a procedural ordinance,” so long as the city generally follows state law.

The relevant state laws governing municipal finance are complex, especially given Oakland’s semi-autonomous status as a charter city, but they also generally support the basis of a boycott against Goldman Sachs. Of particular importance, the California Government Code for cities states: “In selecting any person to provide underwriting services, including financial, advisory or other financial services, involving the issuance of securities” — exactly the sorts of city business Goldman Sachs cares about — “the state or the legislative body of any local governmental entity may consider, among other things, prior conduct of the person.”

Councilwoman Libby Schaaf, who voted for the resolution, said she is confident it will stand, providing Oakland a new means of seeking a fair termination of the interest rate swap. “Oakland has a debarment process that I personally am confident can be used against Goldman Sachs,” she said. And hinting that the council’s confidential legal opinion from the city attorney may not be as negative as is rumored, Schaaf added: “The city attorney agrees.”


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