Tag Archives: Goldman Sachs

future-generations-debtCalifornia Watch published a very important story last month about the massive debt loads that capital appreciation bonds have heaped upon at least 400 school districts in California. Called CABs for short, many cash-strapped districts have resorted to these types of bonds in order to finance necessary buildings and infrastructure upgrades. Unfortunately without CABs, and because of California’s gutted property tax and slack economy, it would otherwise have been impossible to fund school construction over the last half decade in many regions.

Unlike normal bonds used by local governments to finance capital projects, CABs allow for repayment of interest and principal spread over longer time frames, often with no need to begin paying back principal immediately. This means easy money here and now, but it also means that the borrower will pay back much more over the term of the bonds than a regular loan, sometimes as high as 23 times the original borrowed sum.

There’s one error in how California Watch framed their story, however. Following State Treasurer Bill Lockyer, the reporters and editors imply that CABs shift the debt burden onto future generations – the kids. It’s right there in the story title, “Controversial school bonds create ‘debt for the next generation’,” and then it gets restated in the intro:

[School district administrators] have borrowed $9 billion that will cost taxpayers $36 billion to repay over the next 40 years, according to data compiled by California Treasurer Bill Lockyer. He called it “debt for the next generation.”

“The average tenure of a school superintendent is about three and a half years, so they aren’t going to be around in most instances to worry about paying that off,” Lockyer said in an interview. “Nor will the voters, probably, that enacted it in the first place.”

The idea that California’s children will be stuck paying the the debts of their irresponsible parents might be a catchy news frame, but it’s not economically accurate. It also de-politicizes the issue at hand and gives the story an uncontroversial gloss because it’s the “next generation” in the abstract that is losing out.

What’s actually happening is not a shifting of the burden to future Californians yet unborn, but rather an immediate transfer of income between classes and races, with the working and middle class residents of these various school districts being forced to pay out a greater share of their incomes to a small elite of rentiers who will come to hold these capital appreciation bonds when their investment managers purchase them in the bond market.

The idea that public debt is a burden to future generations rests on the idea that the current generation is acting as a spendthrift, carelessly buying what they want now in a fit of irresponsible pleasure seeking, and allowing the payments to come due in later years. This is wrong, however. We’ve known this generational theory of indebtedness to be wrong for over a century. One of the earlier logical refutations of the future-generations debt burden myth was provided by political economist Arthur Pigou. In his classic A Study In Public Finance Pigou wrote:

“It is sometimes thought that whether and how far an enterprise or enterprises ought to be financed out of loans depends on whether and how far future generations will benefit from it. This conception rests on the idea that the cost of anything paid for out of loans falls on future generations while the cost met out of taxes are borne by the present generations. Though twenty-five years ago this idea could claim some respectable support, it is now everywhere acknowledged to be fallacious.”

Twenty-five years prior to the time Pigou laid out this refutation was 1898.

Rather than constituting inter-generational transfers of wealth, Pigou explains how these are transfers of wealth in the present.

“[…]interest and sinking fund on internal loans are merely transfers from one set of people in the country to another set, so that the two sets together —future generations as a whole— are not burdened at all [….] it is the present generation that pays.”

Like a lot of liberal economists of his era, Pigou unfortunately also managed to obscure the inherently political nature of the problem by referring to “set[s] of people.” By “set” he really means that income and wealth is being transferred via debt between different classes. Large public debts tend to work as redistributive mechanisms that allow the truly wealthy to claim much larger shares of the total national income through the regressive taxes paid the working and middle classes.

This is exactly what’s happened with respect to California’s capital appreciation bonds. After decades of tax cuts, primarily via property taxes, and cuts to federal income and capital gains taxes passed on to local governments as cuts to federal aid to states, the wealthiest Americans now possess more of the income and wealth pie than they have since roughly the late 1920s. Lacking these untaxed dollars that have piled up in the bank accounts of the top 1 to 5 percent of America’s wealthiest residents, local governments have resorted to ever-increasingly desperate forms of debt financing to pay for everything from schools to healthcare. The wealthy have loaned their politically-gotten surplus of dollars to governments that no longer have the power to tax. The result is a current transfer of even more income and wealth to the rich in the form of higher interest rates paid back over longer periods.

Paul Krugman has commented on the fallacy of the future-generations debt burden trope also, and his take is worth reading for further clarity.

What the California Watch reporters did do well is name the names of some of the financial advisors and debt underwriters who have gotten rich off the fees they charge for recommending CABs to school districts. It will probably come as no surprise that the likes of Piper Jaffray and Goldman Sachs, among others, have made millions by facilitating the CAB boom. Financial advisors like Caldwell Flores Winters, Dale Scott & Co., and KNN Public Finance have reaped millions also.

Need I point out that the finance sharks who staff these companies are of course the same high net worth individuals who own the bond funds that gobble up CABs and other debt securities?

housing-market-recoveryThe US Federal Reserve’s quantitative easing program has created a mismatch in interest rates, rates of return on various securities, and home prices, that has prompted big-money investors to place billion dollar bets on what is being called a “recovery” of the US housing market. But if there is a recovery, it’ll be a strange one that benefits only a relatively few well-heeled investors who are making speculative bets on these possible price gains.

Home prices are in fact rising again, according to various housing indices. Home values increased almost every month on a year-over-year basis in 2012 compared to 2011, but this doesn’t necessarily reflect an increased demand from would-be middle class home-buyers. Without an actual rise in real wages and a drop in unemployment, and with a continuing backlog of foreclosures in process, it looks as if the number homeowners in America is still falling. Renting, meanwhile, is becoming the only viable option for millions.

So if it’s not a housing recovery that involves getting American back into their homes as owner-occupiers, what kind of recovery is it?

The answer is that it’s a price recovery. The prices of homes as securities, or commodities if you prefer, are recovering, and they’re doing so in a way that is more or less independent of the actual welfare of the average American.

In September of 2012 the Fed announced that its third round of quantitative easing would include purchases of $40 billion in agency mortgage-backed securities every month into 2015, a buying spree that could total $800 billion. The goal of this, say the central bank’s policymakers, is to support the nascent housing market recovery, which is necessary for a more general economic recovery.

Buying up mortgage-backed securities drives up demand for the smaller pool of mortgage bond bundles in the market, thereby driving down the yields on these remaining bonds, and theoretically promoting reductions in lending rates for home-buyers. Seeing lower mortgage rates, more Americans are expected to buy a first, or second, or bigger home.

The Fed’s purchases of mortgage-backed securities on massive market-moving scale is expected to stimulate demand for securitized housing debt by the investors with capital in search of returns. This in turn should induce banks and other mortgage lenders to reduce rates for home-buyers, thereby tempting millions of renters to take the plunge into home ownership. And if consumers buy homes in droves, shouldn’t the prices rise also?

The funny thing is that home prices have already skipped upward, even though the mass demand has yet to be manifested.

While it’s too early to say if individual buyers will be coaxed back into the market by the Fed, or whether most Americans even have the financial resources left to make such a purchase, two other types of buyers have found the stimulus too tempting to pass up.

Some private equity firms see the historically low housing prices, and the Fed’s actions to drive these prices up, as an historic opportunity to arbitrage a big return for their wealthy clients. According to a recent study of the the burgeoning foreclosure-to-rental business by Keefe, Bruyette & Woods investment bank, firms like Blackstone, GI Partners, and Colony Capital have already allocated between $8 and $10 billion to purchase foreclosed and short sale single-family homes in markets like the San Francisco, Los Angeles, Phoenix, Chicago, Atlanta, Miami, Las Vegas, and other regions with large inventories of empty houses with rock bottom prices.

Blackstone calls its billion dollar housing buy a “single family home rental platform.” Like other private equity investors, Blackstone intends to rent out its housing portfolio to families, many of who recently lost their homes to foreclosure and cannot afford to buy. Bloomberg News reported recently that home prices have ticked upward so fast in some of Blackstone’s targeted markets that the firm is accelerating its purchases in a dash to establish as big a position as possible before the price gains slow.

Rental profits alone have been tempting enough for some of these new private equity landlords. Yields on other possible investments (equities, corporate bonds, government bonds) remain low compared to the profits that can be squeezed from the discrepancy between currently cheap single-family homes, high rental prices, and rising home values. The prices on much of the single family housing in markets like Atlanta, Las Vegas, and Phoenix is said to have “over-corrected” during the financial crisis.

If home prices do keep rising thanks to the Fed’s appetite for mortgage bonds, the new private equity landlords can also cash out, or “exit” their investment, as they say in industry parlance, and book double digit rates of profit. One private equity investor, Oakland, California-based McKinley Capital is buying homes partly for this pure arbitrage opportunity. “McKinley plans to resell the houses in about five years for double what it paid and is targeting 20% annualized returns for its investors, which include wealthy individuals,” explains a 2009 report from the Wall Street Journal.

One of the few publicly traded companies buying up thousands of single family homes, Silver Bay Realty, summarized its business strategy in a prospectus recently filed with the Securities and Exchange Commission; “We believe that rental rates will also increase in such a recovery due to the strong correlation between home prices and rents. This trend also leads us to believe that the single-family residential asset class will serve as a natural hedge to inflation.”

But why own physical real property when the price gains in housing can be harvested in cyberspace trades of synthetic credit derivatives?

The second major play on Wall Street in response to the recent rise in home prices involves financial speculation through some of the same instruments that sped up the housing market’s crash in 2007-08. Hedge fund managers and investment bank traders are currently betting on home price increases through credit default swap purchases, through the ABX.HE Index, and even through direct purchases of non-agency sub-prime mortgage backed securities.

In 2006 a few hedge fund operators used credit default swaps to short-sell subprime mortgage-backed securities. These prescient investors made billions on the trade, billions that were extracted from AIG and other counterparties who expected home prices to continue to rise. Now some of these same gamblers are going long in the same markets.

Goldman Sachs is recommending that its clients buy ABX.HE Index contracts to reap some of the price gains in housing. The ABX.HE Index tracks the prices of credit default swaps that insure against the default of various subprime mortgage-backed securities, many of which collapsed in value during the financial crisis.

Interestingly, the ABX.HE Index was created in 2006, just in time for hedge funds to speculate through it. A 2006 research brief from the Nomura investment bank plainly described the speculative nature of the ABX.HE Index: “As in the indices of corporate [credit default swaps], the synthetic ABS indices allow an investor to express a macro view of the home equity ABS sector by either taking a long or short position in the form of a CDS.” Nomura’s staff offered that investors “may use the index to manage risk and to take advantage of any temporary pricing discrepancies.” In 2006 and 2007 hedge funds and a few investment banks mostly used the Index to take advantage of pricing discrepancies in CDS contracts insuring the toxic bundles of mortgage bonds known as CMOs and CDOs. Prices indicated that these mortgage debts and the insurance contracts on them were safe and high, just as they were collapsing. Now again traders are using the ABX.HE Index to make speculative bets on pricing discrepancies, this time caused very much by the Fed’s intervention.

The Goldman Sachs trader who established that bank’s big bet against subprime debt, Josh Birnbaum, now runs a hedge fund called Tilden Park. Birnbaum has bought perhaps billions worth of mortgage-backed securities in expectations that the Fed’s policies will hike up their values. “Some of these recovery plays are compelling,” Birnbaum told Bloomberg News in October 2012 after it was reported that his fund has gained 30 percent on the year. Others who participated in the 2007’s ‘Big Short’ bet against subprime debts are loading up in the opposite direction now. John Paulson’s hedge fund is said to own billions in mortgage related securities, as is Kyle Bass’s Hayman Capital.

Lucrative returns like this may not be captured by the average American, however. According to the US Federal Reserve Bank of St. Louis home-ownership rates are at a 16 year low. Foreclosures remain a serious problem for many, even if they’ve slowed since the peak in 2008. According to CoreLogic, a firm that sells foreclosure data to the real estate industry, there have been 3.9 million foreclosures completed since September 2008. Fewer Americans will benefit from rising home equity. Instead these gains will accrue to a smaller population of homeowners, with some markets becoming dominated by landlords, including the private equity giants who are gobbling up as much housing as they can.

The city finds it is no easy task to fight what is arguably the world’s most powerful financial corporation

A finance committee meeting of the Oakland City Council today grappled with the interest rate swap that has drained tens of millions of tax dollars over the last five years. A update from the city’s administrator about efforts to terminate the deal contained a harsh message most observers saw coming: Goldman Sachs, the city’s counterparty, absolutely refuses to terminate the swap at zero cost to the city, in spite of Oakland’s threat to cut the bank off from future business.

The swap in question was agreed to in 1997 as part of a larger bond deal in which Goldman Sachs underwrote $187 million in variable rate debt to keep the under-funded Police and Fire Retirement System pension fund solvent. The swap was intended to convert the variable rate on the bonds into a synthetic fixed rate of 5.67%.

But the swap with Goldman Sachs had an ulterior purpose also, one that virtually all the city’s elected officials have refused to own up to, and which has gone totally unreported in the press, except for this single article. This ulterior purpose was to free up $15 million to pay down debt on the Raiders Coliseum which had exploded in the city’s face after a disastrous business plan designed to lure the team back from Los Angeles. Later in 2003 the City Council again used the swap to create ‘free’ money to patch a budget hole. Council members amended the swap’s terms, switching the benchmark rate used to calculate Oakland’s payments to Goldman Sachs from SIFMA to LIBOR, a change that re-valued the swap $5.97 million in the bank’s favor. That revaluation was designed to produce an payment of the same sum from Goldman to the city. Oakland used the money to subsidize the Forest City Uptown real estate deal.

Using the swap to free up dollars to subsidize private business ventures like sports teams and real estate developers was a clear violation of the city’s swap and debt policies which it adopted in later years. Even so, the swap was mostly working as it was supposed to with respect to the variable rate bonds it hedged, and these half-too-clever schemes weren’t responsible for what happened next. In 2008 the financial crisis caused the federal government to drop central bank rates to virtually zero. LIBOR, which was already being manipulated downward by the banks that set that rate, followed fast by dropping below 1%. Oakland’s swap turned into a toxic asset overnight, draining millions of tax dollars during what has been arguably the city’s worst budget crisis in history.

The payment schedule for Oakland’s interest rate swap with Goldman Sachs: Assuming LIBOR stays below 1%, Goldman’s obligation to pay Oakland 65% of the 1-month LIBOR rate of a given notional amount in each year until 2021 means that the bank is obligated to pay Oakland virtually nothing. Meanwhile, the city pays 5.6775% of the same notional amount. The operative rate is the net rate produced by subtracting the lower rate from the higher rate. So if LIBOR doesn’t move over the next 9 years, Oakland will be stuck paying upwards of 5% on the decreasing notional amount as determined in the swap contract and summarized in the above table. (Source: “Comprehensive Annual Financial Report,” City of Oakland, FY July 1, 2010 – June 30, 2011, p. 75)

In the Summer of 2012 Oakland’s City Council was spurred to action by the Coalition to Stop Goldman Sachs, a grassroots collection of activists who pointed out the injustice of Goldman’s federal bailout while the bank continued to collect money from the city on a swap deal turned sour by political decisions, and also by the illegal conspiracy of banks that set LIBOR.

Oakland’s elected officials, aware that their constituents were demanding strong action, drew a line in the sand and demanded that the bank terminate the swap at zero cost to the city (it has been valued around $14-16 million in current dollars). If the bank refused, a resolution passed by the full council states that the city will debar the bank from future business, an option already vetted by the City Attorney Barbara Parker.

Goldman Sachs now appears to be calling what the bank thinks is a bluff by city officials. Goldman, which supposedly assigned senior level staff to negotiate with the city, has offered to terminate the swap, but is demanding that Oakland pay fair market value. Oakland’s assistant city administrator for finance, Scott Johnson, delivered a report to City Council members today offering three options:

1. The city can stick with the swap till 2021, making the contractual payments which are pegged at 5.6775% minus 65% of LIBOR, which currently amounts a net rate of 5.54% of $68.9 million. That’s about $3.8 million dollars this year, and similarly calculated, but smaller amounts in future years.

2. The city can issue two promissory notes (essentially obligations to pay a fixed debt) due over the next two years, totaling about $14.7 million dollars to Goldman Sachs. The $14.7 million is the current market value of the swap, about the same amount the yearly payments described above in option 1 would total out to by 2021 (discounted of course to current dollars). Goldman may or may not have offered to take a few hundred thousand off the termination payments through a promissory note, either by not charging interest on the notes, and/or knocking some value off the swap’s termination price, but the city’s administrator was only able to report vague offers made by the bank’s employees to consider doing this. Goldman has offered no firm promise to reduce the termination price.

3. Under the third option presented by the city administrator, the city can continue to negotiate with Goldman Sachs, exploring other means of ending the swap, but it was made clear that Goldman Sachs considers the deal sacred, and the bank will not agree to a termination without some kind of lucrative gain.

Assistant city administrator Scott Johnson also reported that Oakland might have already incurred as much as $100,000 in expenses paid to outside counsel, most likely the BLX Group, a company hired to advise the city about how to terminate the swap.

Members of the finance committee were not pleased with the report. Council member Patricia Kernighan made it clear that the report lacked any details or hard numbers to inform any decisions.

Council member Desley Brooks was visibly annoyed by the staff recommendations, noting that the report, and three options presented by the city administrator, contradicted what the council had directed staff to do back in July when they passed the original resolution calling for the swap’s termination. That resolution called on Goldman to cancel the swap at no cost to the city, and if the bank refused the city would move ahead with debarment. “We need to stop doing business with Goldman Sachs. We have a debarment process,” said Brooks.

Council member Ignacio De La Fuente went the furthest, saying he felt the city should try to find a way to simply stop making the swap payments, in addition to ceasing other business with the bank. “We have to call them on this,” said De La Fuente. “I think we should stop paying.”

Brooks focused the discussion back on the council’s original position saying “the only thing to discuss is how to move forward with some campaign to build pressure against them to terminate the swap. We need to initiate the debarment process.”

Kernighan, who wasn’t initially very interested in the swap issue, made her irritation with the bank known, adding, “Goldman Sachs clearly is not taking this very seriously. If that’s the way they’re going to be, well then fine, we just wont do business with them anymore.” She also expressed concern that negotiations with the bank over the swap were already becoming too costly for the city.

Members of the Coalition to Stop Goldman Sachs told the council members during the public comment period that they supported taking a firm stand against the bank. Beth Kean, a member of ACCE and the Coalition summed up what the council members themselves seemed to be thinking: “Goldman Sachs is basically telling us to go stick it.”

Maurice Peaslee, another member of the Coalition, surmised that Goldman’s offer to cancel the swap in two years time through the use of promissory notes could just be another attempt to outmaneuver Oakland. “If interest rates go up in the future, then the value of the swap goes down. Goldman Sachs is probably betting that interest rates are going to go up in the future.”

“If we agree to a payment of say $12 million now,” Peaslee explained, “but LIBOR goes up, the value of the swap should only be $8 million.” In other words, Goldman’s offer could just be yet another effort to squeeze extra dollars from the city. A promissory note would create an obligation for Oakland to make a set of $7 million payments within two years, whereas sticking with the swap has the possibility that the total cost to the city could actually drop as LIBOR rises.

“Apparently we are not sending a strong enough message,” said Joe Keffer, an organizer with SEIU 1021, and also a member of the Coalition. “We’ve got to make it clear their days are numbered.”

When it comes to business with Oakland, members of the finance committee seemed to agree. The finance committee directed staff to move head with the process for debarring the bank from future business, something that must go through the council’s rules committee and then be voted on by the whole council. It’s likely this won’t happen until early next year when several new council members take office.

When Bill Clinton was elected in 1993 US Treasury bond yields were trading around 5 percent. Within a year prices dipped and yields shot upward of 8 percent. The bond market —meaning a relatively elite coterie of highly paid investment managers working for the largest global banks, insurance companies, and mutual funds— was sending a signal to the new administration: cut spending, reduce the federal deficit, and do whatever else necessary to reverse possible inflationary forces. Inflation is the mortal enemy of the rentier whose profits depend on interest rates outpacing the growth of prices.

Clinton complied. As a first-term president hoping for a sequel, Clinton knew that US government bond prices and yields respond to changes in monetary policy. If the bond market’s major players wanted to cause trouble by selling their holdings, as they were already doing, it would become costly to finance federal government. If the bond market’s masters could be appeased, they would hold their securities, purchase more, and yields would drop. Clinton’s team set a contractionary monetary policy in motion. Luckily the economy grew in spite of these measures during Clinton’s first term, leading to his re-election. That appeasing the bond market’s masters also required imposing austerity measures above and beyond what the Democrats had planned for upset some liberals in the administration.

It was in this fix that Clinton adviser James Carville famously quipped, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

That sentiment about sums up the relationship between capital, perhaps most purely personified in the financial rentiers who buy and sell government bonds, and the state, personified by the countless local and state governments always seeking to borrow capital, and always intimidated by those who have it. Capitalism may have emerged as a mercantilist system sometimes at odds with the monarchs and priests who ran early state bureaucracies. Capitalism may have undergone an industrial revolution and seen various phases of hegemony in which the merchant and manufacturer have called the shots, but capitalism’s real center of power all along has been the financier. Lest we forget, the financier emerged not as the venturesome investor supporting the expansion of companies and funding the ideas of private entrepreneurs. Rather, the financier emerged first to fund the state and its wars. Ever since there has existed a relationship between private capital and the government defined by the rentier’s thirst for yields that outpace inflation, and exchange rate changes, and the state’s thirst for access to debt financing.

Of course a half-millennium of history, of economic accumulation, nation building, imperialism, and urbanization has radically transformed the relationship between capital and the state. The nexus of the state’s powers, to borrow, spend and tax, and capital’s powers, to fund and accumulate, has grown incredibly complex. There are countless institutional variations of this meshing of government and business across nations and sub-national governments. (And this of course is to say nothing of the still multi-trillion dollar “informal economies” of mutual aid and criminal venture that escape and subvert the regulated channels of capital and the fiscal state.)

In the US, however, we see the most fine-tuned, rationalized, and massive combination of private capital and state finances. For all the variations between states and among the multitudes of counties and cities in the federal system, the public’s finances are remarkably standardized, and capital’s role, and the power it wields over the people at all levels of government is rather the same whether you’re in Seattle or Puerto Rico.

And what is capital’s role today in the public finance of the United States? What is the power of the bank, the private bond holder, the fund manager, or the broker over the various governmental units of the commonwealth? The state and capital are certainly co-dependents; capital depends on the state’s powers of monopoly violence, law, and regulation; and the state depends on capital for its fiscal life. Capitalism is defined by the private ownership of capital, however. Thus the state itself exists in a world in which fiscal power can only be borrowed and taxed, and not manifested by powers intrinsic to the state itself.

Enough theory though, what of the actual world we inhabit?

What this means for all of us living in actual communities, bounded by the fiscal authority of cities, counties, and states, inside units of government that do not even have the power to print money or set central bank rates, what this means is that a small number of financial institutions that control enormous concentrated pools of capital have a strange kind of power over our collective lives. These modern day lords of finance determine the terms on which our communities’ may access credit and capital. The few banks, insurers, and brokers that dominate public finance markets hold enormous sway over our decisions about whether and how to invest in schools, clean up the environment, pay for public safety, provision healthcare and housing. Or to do the opposite of these very things, to disinvest in public schools, subsidize polluting corporations, build prisons for the poor and luxury apartments for the rich – after all, our politics are hardly always beneficent attempts to provision public goods.

The rentiers do not often directly influence the what, where, and why of public spending, but they do control the how and when. Their over-arching goal isn’t to pick specific winners and losers in local politics – although there are dominant political philosophies popular among the lords of municipal finance, various conservative hues informed by fears of inflation, and hostile to other practical options that tend to foster egalitarian relations (think full employment policies like deficit spending, for example). Really though they don’t care much if cities spend the people’s credit on affordable housing and hospitals or five star hotels and casinos. They only care that they maximize the wealth that can be extracted from the public through claims they make on future state revenues. They draw the blood of cities, mindful that taking too much will kill the patient, but always pushing the limits to secure a maximum rate of return.

Gold in the vault, treasure.

Last week I mingled with the contemporary lords of municipal finance at one of their annual industry conventions, the Bond Buyer’s California Public Finance Conference. This particular gathering holds an important place on the calendars of the financiers. California is the biggest single market for public debt in the United States. With its numerous agencies and regional authorities, its 58 counties and 482 cities, California contains 38 million residents, and encapsulates a $2 trillion economy, a big chunk of which includes state and local spending on everything from the salaries of 352,000 public employees who teach millions of children in hundreds of school districts across the state, to paying the salaries of 31,000 more government workers employed to lock up roughly 400 out of every 100,000 of the state’s residents, mostly Black and Latino men from Los Angeles and the Bay Area cities. Prisons, schools, roads, airports, sewers, bridges, utilities, water, railways, housing, hospitals….

The fiscal affairs of California’s state agencies and local governments are complex due to the state’s tax system, sabotaged as it was by conservative libertarians in the late 1970s who mostly were just interested in securing the interests of parochial real estate rentiers, mere millionaires, apartment owners and small-time commercial real estate tycoons. In doing so they crippled cities and counties, creating an opening for global financial companies to increase their overall claims on the state’s tax receipts. The mismatch between California’s flow of tax revenues, and its actual budgetary requirements, both in terms of timing and magnitudes, makes the Golden State desperate for, well, gold, and lots of it. It’s these gargantuan borrowing needs of California governments that makes the state more important, and lucrative to the financiers than probably any other state. No other market offers so much capacity and has such a desperate need for borrowing throughout the year.

The modern public finance industry has devised innumerable novel products for California’s governments in perpetual search for more elastic money. No longer does the market rest on auction rate general obligation bonds – the boring traditional securities traded once upon a time by prudent Anglo-Saxon men with degrees from Yale and Stanford, managing their balanced portfolios, clipping their coupons in the same Manhattan and San Francisco offices where bonds were bought and sold over a century ago.

Government entities now routinely borrow using revenue anticipation notes tied to expected tax or fee income collected later in the annual cycle. Expectations are more speculative. The volatility of the economy weighs heavily on everything. Bonds and notes have proliferated into numerous varieties tied to specific taxes or fees and now often have variable interest rates.

California municipalities like Oakland and Sonoma County invented the pension obligation bond to pay down scandalously expensive pensions for retired cops and bureaucrats, and devised parcel taxes and other tax overrides to pair with said debts.

Cities like San Francisco devised lease revenue bonds to channel incomes generated by public assets like parking garages, parking meters, buses and street cars, to investors.

Cities and counties across the state have utilized lease-leaseback and sale-leaseback deals, tax increment financing, business improvement districts, private activity bonds, and numerous other novel finance arrangements to raise capital over the past several decades. All raised money, but at what cost? As the types of debt instruments have grown in number and complexity, and their financial impact on communities becomes more difficult to discern, what has become clear is how these products enable private parties to harvest value from the social product of the city.

In the 1990s and early 2000s even more complicated and opaque financial innovations multiplied in both the asset and liability columns of the public’s books. Cities, counties, and other agencies agreed to complicated interest rate swap agreements to trade variable rate debt payments for synthetic fixed obligations on billions in nominal debt. Other derivatives like guaranteed investment contracts (GICs) or even CDOs were purchased by local governments because the banks told them they were safe, temporary places to park public dollars. Some public officials even gambled on derivatives.

Along with these innovations in public finance (which often costs governments dearly, even if the financiers made their bucks back) are new experiments in infrastructure procurement. So-called public private partnerships have been authorized for highway and road projects across the state, and there’s even a courthouse in Long Beach that will be built and managed by private companies who will in essence lease it back to the state. Proponents of these forms of privatization claims such complicated P3 agreements will stretch public dollars across a greater number projects, getting more miles of asphalt out of every borrowed dollar. Whether they will or not remains to be seen. The track record is mixed on California’s first two P3 highways. Even so the state’s big public pension funds are rumored to be interested in placing money with infrastructure investment funds controlled by private equity groups and investment banks.

What they do immediately accomplish is clear. P3 deals provide yet another way for private investors to make claims on the wealth that the people as a social totality generate. Alongside these privatized highways, the Golden State’s ports are now being handed over to private consortiums of financiers who back terminal operating corporations. It’s yet another twist on the privatization of infrastructure that stops short of actually selling the assets off to investors, but still provides them with all the benefits a private owner would have.

The Bond Buyer’s California Public Finance Conference included all the chatter you would expect about these and other opportunities for the lords of finance to magnify their claims on the social capacity to produce wealth. A workshop was scheduled to discuss San Francisco’s privatized road Presidio Parkway, effectively sold to a German construction company and a French bank. It’s a model privatization project that is soon to be replicated in the Los Angeles region with other highways. Spanish, German, French, Australian, and US corporations and investment banks are said to be circling Sacramento, Los Angeles, San Francisco, and other regions in search of billion dollar infrastructure concessions. Toll roads that will be owned by private investors were discussed in another workshop under the guidance of a managing director from JP Mogan Securities. Another workshop delved into profitable investment strategies for those looking to purchase “distressed” debt from struggling cities, of which there are plenty in California. “Asset sales and other ways of restoring fiscal balance,” was one of the conference’s concluding sessions. Schwarzenegger tried to sell off state buildings during the last months of his presidency in 2010. The net proceeds would have been about $1.2 billion for two dozen edifices. California’s budget gap was almost $10 billion in 2011.

But before the main event and all these insightful workshops promoting strategies to intensify extraction of profits from the state was a pre-conference luncheon and discussion for the investors seeking an inside track. In the Merchant’s Exchange building, described as the city’s “commercial club,” a place “where city leaders and businessmen [meet] to socialize and address the issues of the day,” Bond Buyer conference attendees crowded in for lunch with California’s Treasurer Bill Lockyer. Lockyer told the audience, mostly middle-aged men in grey and blue suits with short haircuts, that he plans to sell $7.5 billion in state bonds through the next fiscal year, a big jump over the previous twelve months.

Some of the sponsors of the Bond Buyers’ annual California conference.

The elephant in the room?, California’s reputation as the most indebted state, and the recent bankruptcy of Stockton. The financiers, packed into the Merchant Exchange’s lavish Julia Morgan Ballroom, 15 floors above the “Wall Street of the West,” the intersection of Montgomery and California Streets, speculated with one another between speeches about the ability of local governments to repay debt. Would defaults ensue? Their co-dependence on the state was apparent, their anxiety palpable.

These fears were quickly addressed by speakers from credit rating agencies and current and former city officials. Their general conclusion was to assure the investors: “I genuinely believe these cities are outliers,” said Bill Statler, a conservative public finance director retired from San Luis Obispo who is well-liked by the rentiers. The fear among bondholders with Stockton, Vallejo, and few other California cities that have gone into bankruptcy, has everything to do with privilege, and maintaining their capital against the general deflation that has struck most plebeians. They should not be subject to the loss of capital that workers, children, the poor and elderly of indebted cities are.

James Spiotto, a lawyer who represents a few lords of municipal finance, complained of unfairness to capital: “the bondholders and insurers’ concern is, look, if we provide money to help these people are we just second-class citizens?” Such histrionics is typical when profitable yields are threatened by the collapse of a community due to growing poverty and geographic disinvestment whose social realities are brutal and violent on the ground. Stockton and Vallejo have become harsh places to live for those who cannot escape behind the walls of gated communities and private schools. Those left behind in California’s hollowed out post-industrial, post-Prop 13, post-dotcom, post-housing bubble towns have been abandoned by corporate capital and the state’s wealthy households, but are still expected to pay back debts that harken back to prior eras and bygone social contracts.

An ad in the Bond Buyers’ conference guide, shoe shines brought to you by BNY Mellon, the largest custodial bank in the world, entrusted with the funds of thousands of governments and agencies.

“During the Great Depression we saw 5000 bankruptcies. We’re not seeing anything like those sorts of numbers,” Statler reassured the bondholders. “Does Stockton tell us anything? There’s over 400 cities in California that just emerged from the worst economic crisis in over seventy years, and just a few have declared bankruptcy.” Bankruptcy could require that the lords of municipal finance take a hair cut, a loss on their returns, rather than requiring public employees to be axed, schools to close down, and healthcare services to be withdrawn. Most of the professionals who work for local governments in their finance offices are fiscal conservatives who, thanks in no small part to meet-and-greets like the Bond Buyer conference, identify more with the rentiers who lend the money, than the working families in the cities who employ them. It’s routine for public finance officials to make upwards of $100,000.

Oakland is one of California’s most bled patients. The “five-and-dime” port city across the Bay from imperial San Francisco has issued billions in bonds and notes over several decades, not always under favorable terms. Scott Johnson, Oakland’s finance director, was called on to address the rentiers, as a representative of on their most lucrative, but also troubled sites of wealth extraction. Johnson’s message was reformist in tone, explaining austerity reforms his team of budget crafters has advanced.

“We have trained our city council,” said Johnson of the lengths his staff have gone to keep local elected officials from seeking to restore badly needed services. “We keep them better informed about the realities. There have been many times in closed session negotiations with the labor unions, if there’s a surplus of funds, members of the City Council will say, ‘can’t we give some of that back?'” Johnson sees his job as inspiring fiscal discipline in his bosses, the City Council, in order to appease the bond markets and secure cheaper loans. It’s a situation of forced austerity not unlike that described by James Carville.

“When I came in as finance director the reserve was low, and we had to work with the Council and employees to re-establish reserve levels,” said Johnson, who actually makes a relatively modest salary compared to others in his position, about $83,000 in total compensation last year. By comparison Mark Bichsel, the finance director of Piedmont, the affluent “city of millionaires” in the hills above Oakland, indeed completely surrounded by Oakland like some archaic city-state that has raised the drawbridge around the moat to protect its exorbitant home values from the working class urban swamp below, earned $243,000 last year.

Reserves are maintained to ensure the rentiers that their bonds will reap full repayment, of course. A city is by no means required by any natural laws of economics to maintain high reserves, or to comply with many other austere measures favored by today’s public finance professionals. The existence of such standards is more a measure of the power of capital over local government, than a measure of any sort of rational or humane economic system.

With the end of the pre-conference panels the financiers left the Merchants Exchange, walking down California Street to the Hyatt Hotel, where the main events were schedule for the next two days. Greeting them out front, a picket of workers, foreclosed homeowners, SEIU 1021’s militant rank and file, Occupy San Francisco activists, Oakland’s the Coalition to Stop Goldman Sachs, activists with ACCE, among other rabble. The Hyatt’s own cleaning staff are currently engaged in a battle with the hotel’s management, and some labor leaders urged public officials to boycott the Bond Buyer conference because of its location.

Across the broad and busy expanse of Market Street a woman yelling into a megaphone at the packs of tourists and suited professionals bee-lining from one tower to another: “are you disgusted by the homeless protesters camped out in front of the Federal Reserve?”

The US Federal Reserve Bank of San Francisco (est. 1913), not as old as the Bond Buyer Magazine (est. in 1891), and arguably too much the servant of the bond markets, was since September of 2011 the gathering point of Occupy protesters. Occupy San Francisco established a camp in front and stacked literature about economic inequality, political corruption, and policy brutality on tables for pedestrians to pick up. The police busted the camp and tables down several times. Like everywhere else Occupy on the ground has been a street battle between the activists and cops. “Don’t label it. Don’t call it Occupy!,” screamed the voice under the corporate towers of the city’s financial district, before the glass facade of the Federal Reserve.

“Call it waking up!”

Inside the Hyatt the conference officially began with a panel moderated by Ian Parker, a vice president at Goldman Sachs: “[the] global economic and interest rate environment, and how munis are priced as a result.” Parker runs the public sector and infrastructure banking group in Goldman’s west coast office, located just five blocks up from the Hyatt in the old Bank of America building.

Protesters outside the Bond Buyer conference.

As he set into his introductory remarks came shouts from the crowd, protesters who had infiltrated the conference. “Stop the swap! We demand that your company stop the swap with Oakland,” they yelled, lifting signs above the balding heads of piqued bankers and lawyers. Parker knew immediately who they were and what they wanted.

In 1997 Goldman Sachs signed an interest rate swap agreement with Oakland, promising cheaper rates on $187 million in bonds the city planned to sell the next year. The city’s leaders, influenced by their financial advisers and Goldman Sachs, tweaked the swap deal twice over the next seven years to create more funny money. When the economic crash came in 2008 Oakland was one of hundreds of local governments left holding a toxic swap derivative that sucked millions from the city every year.

The title of the panel about to be moderated by Parker couldn’t have been more appropriate given that the global interest rate environment, determined very much by the political decisions of central bankers and a handful of cartel-like corporate banks working through institutions such as the British Bankers Association’s LIBOR, have the power to raise or lower interest rates, a power that profoundly affects debt-strapped local governments.

Parker pleaded with the protesters, “we are negotiating,” and promised to meet with them later outside for a discussion. “The Goldman Sachs VP came up to us while we were chanting to say that yes, GS was in process of negotiating with Oakland, and that he’d come out later and talk to us about it,” said a member of the Coalition to Stop Goldman Sachs, the grassroots group that has been rallying for financial justice for their city for almost a year now. Quickly security guards threw out the troublemakers. Parker never emerged from the hotel. In response to the same demand made at the company’s annual shareholder’s meeting earlier this year, Goldman Sachs CEO Lloyd Blankfein told another Oakland resident to buzz off: “That’s not how the financial system could work, and were we to do that, we would, frankly, be impairing the interest of our shareholders and the operations of our company. I don’t think it’s a fair thing to ask.”

2012 was a different kind of year for the Bond Buyer conference. The protest created buzz inside. One can only imagine the guilt and worry of various banking executives, wondering if the protest was specifically directed at them, probably hoping it was just abstract frustration. Or perhaps they found it funny, a source of amusement, content to tell one another that the hordes below know not of what they speak. But increasingly they do.

Detailed knowledge of the economy and public finance, how it actually works, who it harms, and who benefits, can be a dangerous thing. Revelations about the moral system of modern day usury that dominates public finance can be shocking and mobilizing moments. The complaints of bond investors who fear cities might treat them as “second class citizens” by reducing the profits they can harvest on public debt seem perverse when the real second class citizens, children, the poor, and the elderly, must endure school closures, crumbling streets, disappearing social services and the general disintegration of the safety net.

Oakland’s Scott Johnson said it best during his remarks to colleagues at the pre-conference luncheon. When asked what he and his staff in the city of Oakland are doing differently now in light of continuing crises and uncertainty, Johnson observed, “We work in a very political environment,” adding, “the public is paying attention to municipal finance now.”

Workers and community members at the gate of Terminal 59, Port of Oakland, leased by SSA (a subsidiary of Carrix, Inc.).

A coalition of port workers, including members of the unions SEIU 1021 and Unite HERE, and Oakland residents with the Coalition to Stop Goldman Sachs, plus organizers with Occupy Oakland, picketed the Port of Oakland yesterday.

The picket line was “informational” only. Union leaders did not intend to ask other workers, including ILWU longshoremen to not cross the line, a move that would have disrupted a shift and brought operations to a halt. ILWU’s rank and file pride themselves on their solidarity with other unions and routinely do not cross picket lines. Instead, the workers and Oakland residents marching at the port, wanted to make a show of strength, demonstrating their ability to effectively shut a maritime terminal down if they feel the need to do so. They passed out information about their struggle against the Port’s management, and against the financial corporations they say profit from the Port’s current positions in labor negotiations.

SEIU 1021’s port chapter is currently negotiating (along with three other unions) for a new contract that would include a 5 percent cost of living increase. The port’s management has countered that they will give no such increase, and furthermore that they seek increased employee contributions into their pensions. Port management hope to free up more revenue for increased capital investments that will benefit marine terminal operators, shipping companies, and real estate investors.

The Coalition to Stop Goldman Sachs enacting a skit that explains how the interest rate swap has harmed the city’s finances, one of several reasons why city services have been cut in recent years.

Also present at the informational picket were members of the Coalition to Stop Goldman Sachs, a community group that is pressuring city leaders and the bank to terminate a costly interest rate swap that has cost Oakland upwards of $20 million due to the divergence of interest rates following the financial crisis in 2008.

Labor and the community have united around the port because both share an analysis of the major financial corporations that profit from the port’s debt, capital investments, and the trade that flows through the busy maritime and air terminals. Goldman Sachs was specifically singled out because the company owns a stake in the marine terminal operator SSA. SSA’s terminal at the port, Berths 57-59 were the site of the picket.

The Oakland International Container Terminal, operated by SSA. SSA is owned by Carrix, Inc., a Seattle-based corporation. Goldman Sachs owns 49 percent of Carrix.

Goldman Sachs has multiple longstanding interests in the Port of Oakland’s finances and business operations. Goldman Sachs is a party to at least three major areas of Port business.

First and foremost is Goldman’s role as an underwriter or dealer for the Port’s various debt offerings. No other financial company is as important as Goldman Sachs for the Port’s numerous and complex bond and commercial paper deals.

Goldman Sachs also holds a financial interest in the Port’s day-to-day operations. Through several Goldman Sachs investment funds the bank holds ownership stakes in major shipping and logistics corporations that lease Port facilities, or otherwise conduct business through the Port of Oakland.

Finally, Goldman Sachs has attempted to involve itself in the Port’s real estate development activities by teaming up with developers who hold options on waterfront real estate.


Goldman Sachs is among a handful of financial companies pre-qualified by the Port of Oakland to deal its commercial paper. This image is taken from a recent Port of Oakland board meeting agenda.

For several decades now Goldman Sachs has routinely been selected, along with a handful of other privileged banks, to serve as a pre-qualified dealer for various types of debt offerings issued by the Port. For the Port’s Capital Improvement Program, Goldman Sachs has been selected to underwrite or deal in multiple major debt offerings.

For example, in 2000 Goldman Sachs led a syndicate of investment banks to underwrite $400 million in bonds to finance major expansion at the Oakland Airport.

In 2002 Goldman Sachs again led an offering of $620 million in bonds to finance aviation capital projects, as well as construction of new shipping terminals, intermodal facilities, and dredging at the Port. Goldman Sachs remains one of the Port’s key dealers for commercial paper today.

The bank makes millions off this business by re-selling the Port’s commercial paper to investors in the open market at higher prices, as well as by charging a dealer’s fee.

Senior level executives who have worked for both the Port and Goldman Sachs at different times strengthen the bank’s close business relationship with the Port. The Port’s current CFO, Sara Lee, is a former Goldman Sachs vice president who led the bank’s public sector and infrastructure finance group. This group has its offices in Goldman Sachs’ San Francisco branch headquarters at 555 California Street.

When the Port of Oakland hired Lee an official press release explained her familiarity with the Port’s finances: “the Port of Oakland was one of Lee’s first clients upon joining Goldman Sachs and she has participated in virtually every Port of Oakland bond issuance since.”

“Having served as the Port’s senior banker for more than ten years,” added the Port’s executive director Omar Benjamin, “Sara has a solid understanding of our organization and business lines. She thinks strategically and will be of great help to us as we move forward.”

Other Friends in High Places

Goldman Sachs has tended to appoint politically connected individuals to lead its public sector and infrastructure finance group and other divisions. Among its recent senior executives in California were Kathleen Brown and Jeffrey Holt.

Kathleen Brown

Kathleen Brown, the sister of current California Governor Jerry Brown, was State Treasurer from 1991 to 1995, overseeing California’s finances that are a source of immense profits for the investment banking sector. In 2001 she joined Goldman Sachs, working in its San Francisco office as a private wealth adviser. From 2003 to 2011 Brown headed Goldman Sachs’ public finance and infrastructure finance group in California. During this same period (1999-2007) Jerry Brown was the Mayor of Oakland and had considerable influence over the operations of the Port through his appointments and policies.

Upon her brother’s election to the governor’s office she was transferred to Chicago to avoid the “perception of a conflict of interest,” as one Goldman spokesperson said at the time.

Jeffrey Holt worked in the San Francisco offices of Goldman Sachs alongside Brown and focused on financing West Coast ports, among other business lines.

Upon leaving Goldman in 2008 Holt became a managing director at the Bank of Montreal, and chairman of the Utah Transportation Commission. Holt is still active in arranging private financing for ports and is considered an expert on privatization of infrastructure through specialized private equity funds such as the one he oversaw at Goldman Sachs.

A slide drawn from Jeffrey Holt’s presentation “Attracting Private Sector Investment in Public Ports,” given at the American Association of Port Authorities conference last year in Portland, Oregon. Holt says the privatization of Oakland’s Berths 20-24 by Ports America (owned by the Highstar Capital private equity group) is a successful example of the new trend in port finance.

Holt is currently a member of the Carlyle Infrastructure Partners (CIP) management team. Holt’s biography in a recent CIP document says that while with Goldman Sachs he provided “advisory services associated with acquisitions include the purchase of a minority stake in Carrix Inc., an international terminal operator,” and that he also “[assisted] Highstar Capital and its Ports America team on several terminal acquisitions.” The latter is probably a reference to the Ports America $700 million 50-year concession at the Port of Oakland that replaced APM Terminals and other comapnies as the operator of Berths 20-26, among the busiest and most valuable operations at the Port.

Goldman’s Ownership of Shipping Companies and Port Operators

Through its infrastructure group, and its asset management division, Goldman Sachs holds significant equity stakes in numerous shipping and infrastructure companies. Several are active at the Port or Oakland, further linking the investment bank’s profits to the Port’s operations.

Goldman Sachs’s infrastructure group owns 49 percent of the privately held Carrix, Inc. Based in Seattle, Carrix owns SSA Marine, one of the largest US port terminal operators. SSA operates the Oakland International Container Terminal (Berths 57-59) and the Charles P. Howard Terminal near Jack London Square.

When Goldman’s minority purchase of nearly half of Carrix was completed in 2007 the Financial Times observed that, “the sale of the stake in Carrix is at least the ninth significant deal in the past year in which ownership of stakes in US port assets has transferred from specialist transport companies to a new breed of funds investing in infrastructure.” Goldman Sachs is a leader among financial corporations that have moved to take control over transportation infrastructure, especially ports, in recent years.

Asset management at Goldman Sachs, as well as other major investment banks, is a service offered to wealthy families and institutions whereby the bank manages money to attempt to produce a return on value that beats the market, or at least outpaces inflation. In return for their services to these wealthy families and institutions, Goldman often charges a management fee and takes a percentage of profits made through these investments. To be a client of Goldman Sachs asset management you must have tens of millions of dollars to invest through its various funds. Kathleen Brown worked in this area for several years before becoming the head of Goldman’s public finance and infrastructure group. At least one Goldman Sachs asset management fund is invested in the stocks of corporations that do business at the port.

The Goldman Sachs Structured Intl Equity A fund owns a small number of shares in the AP Moller-Maersk corporation which is the parent company of APM Terminals. Until recently APM Terminals operated Berth 24 at the Port with three cranes and was one of the Port’s larger grossing operations. AP Moller-Maersk still imports through Oakland as one of the major servicing lines.

Through the same Goldman Sachs Structured Intl Equity A fund, Goldman Sachs owns a small stake in Kawasaki Kisen Kaisha, Ltd., also known as K-Lines, a major shipping company that imports through the Port. K-Lines owns International Transportation Service, a company that was the fifth largest revenue generator for the Port in 2010 and 2011 according to the Port’s most recent CAFR.

An excerpt from a recent Goldman Sachs Real Estate Securities Fund report shows a significant equity investment in Prologis.

Goldman’s sources of profit deriving from the Port of Oakland don’t stop there. According to a report from the Goldman Sachs Real Estate Securities Fund, an investment vehicle that focuses on the stocks of real estate companies, Goldman Sachs owns a significant stake in Prologis.

Prologis is one of the developers of the planned logistics facility that will be built on the former Oakland Army base. Prologis also owns a warehouse near the Oakland Airport used in airfreight shipping. Goldman Sachs reports that it recently “trimmed” its position because of the company’s stock value decline, however the bank still has around 3.7 percent of its Real Estate Securities Fund invested in Prologis, making it a top 10 investment.

On the debt underwriting side, most recently Goldman Sachs has been selected as dealer for the Port’s 2011 and 2012 $200 million commercial paper loans to finance various capital projects including “site preparation and redevelopment of the former Oakland Army Base, and remaining costs associated with the deepening of the navigational channels to 50 feet,” as well as “funds to facilitate development plans for the Oak-to-Ninth District.”

In other words, Goldman Sachs is stands to doubly profiting by dealing the Port’s commercial paper. The first profit comes from the spread earned by acting as dealer. The second source of profit will be derived from the improved infrastructure that will be used by companies such as Prologis, AP Moller-Maersk, and K-Lines, which the bank owns small equity stakes in, or from the Oak to 9th project.

Real Estate

Developer’s rendering of the Oak to 9th project.

Rounding out Goldman Sachs’ nearly ubiquitous presence in the Port’s finances and operations is a proposal that allows Goldman Sachs to participate in the redevelopment of Oakland’s waterfront. The Oak to 9th project, ostensibly led by Bay Area-based developers incorporated as Oakland Harbor Partners LLC, involves building housing, retail, and parks on large land holdings owned by the Port.

In 2008 the Port’s board voted to allow Goldman Sachs to potentially take part in the venture through the bank’s urban investment group, which also has offices in San Francisco. A board agenda from the meeting where the item was approved describes the complex change to the previously approved developer contract that allows Oakland Harbor Partners to bring in Goldman Sachs, without future approval by the Port’s leaders;

“The proposed amendments to the Option Agreement, along with the form Purchase and Sale Agreement and form Ground Lease, broaden the category of assignments that do not require Port approval to include a joint venture comprised of the current principals of Oakland Harbor Partners LLC and Pacific Coast Capital Partners, LLC or Goldman Sachs Urban Investment Group, as long as the principals of Oakland Harbor Partners LLC participate in the management and operation of the newly formed entity on an equal basis. Pacific Coast Capital Partners, LLC and the Bay Area Smart Growth Fund 1 were identified in the Developer’s response to the Port’s original Request for Qualifications (RFQ) as an entity comprised within the Oakland Harbor Partners LLC team and are not a new entity to the proposed project transaction. Goldman Sachs Urban Investment Group, while not specifically mentioned in the Developer’s RFQ response, are a well capitalized investment group with a substantial track record of investment experience in urban area residential development projects, on both private development projects and public-private partnership projects. Thus, staff believes that potential future inclusion of a financial partner with the capital strength and experience of these two entities mentioned above in the transaction agreements is consistent with the originally contemplated structure of the deal.”