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Potential contractor to complete Phase 2 of Oakland’s DAC surveillance system, URS Corp is the largest nuclear weapons contractor for the United States. The company is so integrally involved that it’s “federal” web page includes a picture of a nuclear missile-armed submarine.

In March of 2013 the city of Oakland signed a contract with Science Applications International Corporation (SAIC) for design and construction of the first of two phases of a city-wide surveillance system called the Domain Awareness Center, or DAC. The basic infrastructure to link up cameras and sensors with servers running powerful software, hosted in several command rooms at the Port and in the city’s Emergency Operations Center, is now mostly complete. Oakland’s DAC surveillance system is not yet fully up and running, however, until Phase 2 work is completed. In July of 2013, against an outpouring of public protest against building the surveillance system, the Oakland city council approved a contract modification for SAIC to complete Phase 2.

Recently, however, the Oakland city council learned that its prime contractor for the project is involved in the U.S. nuclear weapons program, a fact that violates Measure T, a city voter proposition that makes Oakland a nuclear free zone. Measure T and Ordinance No. 11062 C.M.S. bar any contractor that is involved in nuclear weapons work from doing business with Oakland, and SAIC’s contributions to nuclear weapons are well-documented.

Oakland paused work on the project, and in October the city council authorized its administration to drop SAIC and return to the original pool of vendors who responded to the city’s first request for proposals (RFP) issued one year ago. The original pool of vendors who expressed interest in bidding on the surveillance project included 25 corporations, so surely another with a clean record could be found?

It appears, however, that SAIC’s ties to nuclear weapons aren’t unusual inside the industry that sells mass surveillance systems. Many of the contractors that specialize in building giant surveillance systems like the DAC also have nuclear weapons and other arms manufacturing contracts with the Pentagon. Mass surveillance and nuclear weapons appear to go hand in hand in the thinking of the executives who run these companies.

For example, engineers with URS Corp responded to Oakland’s original RFP for the DAC. URS Corp is a prime contractor for theU.S.nuclear weapons research, design and testing laboratories at Los Alamos, New Mexico and Livermore, California. URS is part of two for-profit limited liability corporations that manage theU.S.nuclear weapons labs for the National Nuclear Security Administration. URS also operates the salt mines in southern New Mexico where deadly radioactive waste from theU.S.nuclear weapons programs is buried.

Schneider Electric also responded to the original RFP and appears to be in the running to get the DAC Phase 2 contract. But again, like URS and SAIC, Schneider Electric has ties to nuclear weapons. In marketing materials Schneider lists Los Alamos National Laboratory, the nuclear weapons facility managed by URS, as one of its clients. Schneider Electric also lists the Pentagon, Lockheed Martin, and Wright Patterson Air Force Base as clients. Lockheed Martin has long been one of the prime nuclear weapons contractors for the United States government. Wright Patterson Air Force Base hosts several units that research and deploy nuclear weapons. Schneider Electric’s Pelco subsidiary has installed surveillance systems at the Navy’s Kings Bay Strategic Weapons Facility, a port that harbors nuclear armed submarines.

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Marketing materials created by Kratos Defense and Security Solutions, Inc., another potential contractor that might build Phase 2 of Oakland’s Domain Awareness Center.

Another company in Oakland’s vendor pool that is being considered for Phase 2 of the DAC is Kratos Defense. Very much like SAIC, Kratos is another San Diego-headquartered arms merchant that thrives on Pentagon and Department of Homeland Security (DHS) contracts. In their most recent report to shareholders, Kratos’ executives straightforwardly describe their company as “a specialized security technology business,” whose “principal products and services are related to Command, Control, Communications, Computing, Combat Systems, Intelligence, Surveillance and Reconnaissance (“C5ISR”).” Kratos’ major business segments include “Electronic Warfare/Attack,” drones, known in industry-speak as “Unmanned Aerial Vehicles,” and “Missile Range Operations.”

And Kratos has direct links to nuclear weapons too. Kratos designed, built, and manages a security system for the National Nuclear Security Administration’s use at the Nevada Test Site, a testing ground for nuclear weapons that in recent years has been considered as the site of a possible radioactive waste dump. Last year Kratos won a multi-million dollar contract from the U.S. Strategic Command (STRATCOM) to provide “worldwide Radio Frequency (RF) interference geolocation services” for the Pentagon’s use. Among other things, STRATCOM commands the nuclear weapons forces deployed by the Air Force and Navy, and Kratos’ contract relates to this nuclear mission.

The list of potential Oakland DAC contractors includes still more companies deeply involved in weapons manufacturing, including nuclear weapons.

Two representatives from Unicom Global attended the Port of Oakland’s October 22, 2013 pre-proposal meeting for the DAC. Unicom Global is owned by Beverly Hills entrepreneur Corry Hong, formerly a lead guitarist in a South Korean rock band who became a software designer after immigrating to the US. Unicom is a holding company owns several major federal technology contractors including GTSI. GTSI was suspended from doing business with the federal government in 2010 due to accusations the company was scamming the Department of Homeland Security. Hong and Unicom bought GTSI last year, and since then GTSI and Unicom have regained considerable business with the military and DHS.

Unicom’s GTSI has even contracted with the National Nuclear Security Administration. A 2009 brochure from GTSI that is available on Unicom’s web site discusses one such contract in which GTSI provided the U.S. nuclear weapons laboratories with “classified removable electronic media,” or CREMs. CREMs are storage devices which have been used to save nuclear weapons design information and testing data.

Oakland’s list of potential DAC Phase 2 contractors just keeps turning up companies with links to nuclear weapons. G4S Technology, part of the security company G4S, also responded to Oakland’s DAC RFP and attended to the mandatory pre-proposal contractor meetings. G4S Government Solutions has the prime contracts to guard most of the U.S. nuclear weapons complex across four states. G4S mercenaries are stationed at the Y-12 National Security Complex and Oak Ridge National Laboratory in Tennessee, the Savannah River Site in South Carolina, the Nevada Test Site, the Sandia National laboratory Tonopah Test Range, also in Nevada, and the Hanford Site in Washington state.

So can Oakland actually pick a contractor to complete its mass surveillance system who doesn’t violate the city’s anti-nuclear ordinance? Perhaps a more important question is the one being asked by a growing coalition of residents opposed to the project: should Oakland even build the DAC?

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Screenshot from SAIC’s jobs web site. SAIC develops surveillance technologies for many branches of the federal government, as well as local governments and police agencies.

In 1988 the Oakland city council passed the nation’s most ambitious anti-nuclear ordinance, banning any and all activities that would advance the development and deployment of nuclear weapons. It was a big deal, not like the previous mostly symbolic ordinances passed by other towns and cities far from the nation’s nuclear labs and military bases.

The city of Oakland lies just south of Berkeley where in the 1940s and 1950s much weapons research was conducted. Weapons and components were transported through Oakland’s Port and across roads and highways and rail road routes traversing the city. Atomic weapons that later decimated the environments of South Pacific islands, causing cancers among islanders and destroying their homes were shipped through Oakland. In the 1960s Berkeley’s research was consolidated at Lawrence Livermore Laboratory in southern Alameda County, but for decades Oakland was host to nuclear weapons contractors and federal offices involved in the design and deployment atomic weapons. (In fact this is true today, the subject of a future blog post perhaps.) The Navy sought to home port a nuclear-armed squadron in the Bay Area in the 1980s, and Oakland’s anti-nuclear ordinance was a direct effort to resist the further nuclearization of the region.

In 1990 a federal judge appointed by Ronald Reagan slapped down most of Oakland’s anti-nuclear law, calling it unconstitutional and claiming that it interfered with national security. However, one portion of the anti-nuclear ordinance stayed on the books. Oakland would continue to refuse to enter into contracts or otherwise spend city funds on work done by corporations involved in the US nuclear weapons program.

Both the spirit and letter of this law were thrown out three years ago when the Oakland city council summarily agreed to the massive port-city surveillance system called the Domain Awareness Center. The contractor building Oakland’s camera and sensor network is Science Applications International, a giant military-industrial corporation that has helped the US Defense Department develop, build, and deploy nuclear weapons, among many other killing technologies.

And the Oakland contract with SAIC would seem to violate the spirit of another city of Oakland resolution, the anti-SB 1070 law that was passed in 2010 to oppose Arizona’s anti-immigrant law. Oakland’s anti-SB 1070 resolution requires the city to boycott Arizona, and companies with headquarters in Arizona, due to the state’s racist and militarized immigration policies. SAIC has a major office in Arizona and has helped the federal government build a massive border wall and surveillance system.

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A portion of the gigantic wall built by SAIC along the US-Mexico border, a portion of which spans Arizona.

SAIC’s anti-immigrant technologies probably don’t violate Oakland’s anti-SB 1070 ordinance because the company’s contracts are with the federal government, and not the state of Arizona. SAIC is headquartered in Virginia, and only has branch offices in Arizona. Nevertheless, SAIC is perhaps the single largest provider of border surveillance technology to the government. SAIC has multiple offices in Arizona where its assists the Department of Homeland Security in its historically unprecedented effort to wall off the US-Mexico border and deport millions of human beings.

On SAIC’s web site the company proudly advertises the 60-mile border wall it helped build for the Department of Homeland Security in Arizona.

SAIC has developed the major surveillance, biometric, and alarm systems used by the DHS along the US-Mexico border throughout Texas, Arizona, New Mexico, and California. SAIC claims to have executed at least $200 million in border security contracts in the last five years, work that includes developing the “Integrated Wide-Area Surveillance System,” or IWASS, which we are told, in promotional material on the company’s web site: “safeguards the homeland through an intelligence-based operational solution for border security.”

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Screenshot taken from SAIC’s jobs web site. SAIC is hiring interrogation trainers to teach US military personnel how to interrogate captives and prisoners. The work is carried out at Fort Huachuca, an Arizona military base where SAIC also assists in drone training and operations.

SAIC has dozens of job openings at its Arizona offices currently. The company is hiring biometric technicians to develop camera-linked computer systems capable of discerning identity from facial recognition and body shapes. These technologies could someday be incorporated into Oakland’s Domain Awareness Center system, according to discussion between SAIC and city officials.

At its Fort Huachuca office SAIC is hiring staff for its “human intelligence” program, a major military contract to train interrogators and spies within the US military. SAIC is deeply integrated into the US military’s espionage and surveillance activities. Arizona is one of the major locations where SAIC and the Army develop these technologies.

Fort Huachuca, located in southern Arizona near the Mexico border, was founded in 1877 by the US Army during their war of extermination against the Apache nation, and other southwestern Indians. For Huachuca grew afterward as an outpost against Mexico from which the United States had seized a quarter of North America.

Today the desert outpost is also one of the US military’s major drone warfare bases. SAIC is one of the main contractors providing technology and training for Army and Navy drone weapons systems at Fort Huachuca, and drone surveillance systems based at Fort Huachuca are reportedly used in border patrol operations, but mostly in overseas theaters of war. As the LA Times reported in 2011, SAIC employees are part of the “kill chain” in drone warfare, carrying out crucial roles in the drone missions employed by the Obama administration to kill thousands in the Middle East and Central Asia. Just last month the military re-upped SAIC’s drone contract to assist Army personnel in operating and maintaining the new weapons.

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Screenshot of SAIC’s jobs web site, advertising employment opportunities for drone operators. SAIC’s staff are in the “kill chain” of the US military’s controversial drone warfare programs.

SAIC’s nuclear weapons contracts are too numerous to try to list. SAIC has contracted with the US nuclear weapons complex since the mid-1980s. SAIC has taken billions in payments from the US Department of Energy and the National Nuclear Security Administration to conduct studies and carry out contract work for nuclear weapons development as well as lead up the government’s site planning and environmental compliance efforts at the major weapons labs in New Mexico and California. One of SAIC’s latest nuclear weapons-related contracts is a $228 million work order with Sandia National Laboratories in Albuquerque, New Mexico. In addition to designing and testing nuclear weapons, Sandia also develops weapons and surveillance technologies for the CIA, NSA, and other federal spy agencies.

SAIC also serves the military branches that deploy nuclear weapons. For example, in 2009 SAIC was paid $10 million to help the Air Force reorganize its nuclear weapons command structure.

Atmosphere

Part of San Francisco’s Union Square hyper-lux retail offerings, the De Beers store which features armed guards at the entrances. Ferrari recently opened a store a block away on Stockton Street. Haute Couture names obscure fill the district’s buildings offering items of conspicuous consumption.

Through the Financial Crisis and the Great Recession, inequality has intensified through income, housing, and public debt in the Bay Area. Black and Latino communities have lost wealth and power, while white and Asian communities have mostly to recovered. At the top, the wealthiest 5 to 10 percent, have made enormous gains.

Imagine a place where the hills are lined with the mansions of millionaire families, some of them billionaires. Their residences sit atop forested ridge lines with views of a peaceful ocean, or upon oak-studded peninsulas that jut into an azure bay. In this place they want for nothing. De Beers opened a retail store in one of their favorite shopping districts a few years ago, next to haute couture names like Bulgari, Cartier, and Gucci. An investment bank opened a “coffee shop” just a couple blocks from the headquarters of no less than seven Fortune 500 corporations, to catch their employees after work for talks over lattes about what to do with all that money crowding their bank accounts. Posh towers filled with luxury apartments sprout from the city center where multiple cranes seem to perpetually dot the skyline. iPhones pop from the palms of pedestrians like third hands, and newfangled apps like third eyes give them instantaneous information about the latest opulent consumer activities. Everything glows with money and power, a lot of it.

Below the hillsides glittering with wealth are even more expansive terrains of crumbling homes and apartment buildings —many foreclosed upon and awaiting some kind of financial death— packed with families that barely scrape together twenty thousand dollars a year to live on. Their views: smokestacks, port cranes, freeway overpasses, and scrap yards, or, sometimes on a clear day, if they ever think to pause from survival mode, they can see the hills, the mansions, the gleaming skyscrapers beyond reach, the towering campaniles of universities where they can never afford to send their children.

This place is characterized by the crowding of impoverished human beings, most of them of African and Latin American descent, into hollowed out industrial zones where factory buildings and abandoned warehouses echo the bustle of past decades. This economy of yesterday was exported to the new shop floors of China. Among the only things left are the toxic plumes of chemicals spreading slowly under fence lines. In this place entire generations face severe poverty and a decimated public sector – especially the schools. Tens of thousands of adults exist, persist, somehow without meaningful work or income. Tens of thousands of house-less persons —likely no longer even part of the statistical surveys used to calculate joblessness and income— wander the streets and sleep in the cracks of weathered concrete each night. Every few months the police slay a youngster under questionable circumstances. Crime is rampant. Violent crime is hard to avoid, part of the overall suffering.

The splendid heights and stratospheric wealth would not be so contemptible was it not hanging directly over such desperate poverty. Of course the two things are not unrelated.

Welcome to the San Francisco Bay Area, in the Golden State of California.

The West Coast financial center of the United States.

The epicenter of the tech industry.

The global vortex of venture capital.

One of the most brutally unequal places in America, indeed the world.

If measured by the same metrics that are used to gauge income inequality within nation states, the Bay Area’s internal divide between its rich and its poor would place San Francisco between China and the Dominican Republic, making it roughly the 30th most unequal state in the world. China is now the estimated home to 317 billionaires. California counts perhaps 90 billionaires. Half of these, mostly white men, live in San Francisco and Silicon Valley. The Census counted 4.2 million persons slipping below their definition of poverty last year in California.

In the distribution of income and wealth, California more resembles the neocolonial territories of rapacious resource extraction and maquiladora capitalism than it does Western Europe. Oakland is more El Salvador than it is EU. The Bay Area metropolis is more Bangladesh than Belgium.

California is just one of seven states that has the distinction of ranking higher than the national average on three basic metrics of income inequality, as measured by the Bureau of the Census. Its gini coefficient of income inequality was most recently measured at 0.47.

The ratio of income between the top 10 percent and the bottom ten percent, as well as the ratio of income between the top five percent and the bottom twenty percent show staggering divides in economic power that few other places in America, indeed the world, surpass.

IncomeIneqUSNeighborhoods2009

Source: Weinberg, Daniel H., “U.S. Neighborhood Income Inequality in the 2005-2009 Period,” American Community Survey Reports, U.S. Census Bureau, October, 2011.

The only states that compare to California’s harsh inequalities are deep southern states structured by centuries of racist fortune building by pseudo-aristocratic ruling classes, and the East Coast capitals of the financial sector.

StatesIncomeIneqCensus2009

Source: Weinberg, Daniel H., “U.S. Neighborhood Income Inequality in the 2005-2009 Period,” American Community Survey Reports, U.S. Census Bureau, October, 2011.

The economies of Louisiana, Mississippi, and Alabama remain bound by racial inequalities founded in slavery and plantation agriculture; the wealthy elite of all three states remain a handful of white families who control the largest holdings of fertile land, and own the extractive mineral and timber industries, and the regional banks.

Texas, with its sprawling cities, global banks, energy corporations, universities, and tech companies, is more like California in that its extreme economic inequalities are as new as they are old. Stolen land and racial segregation combine with unworldly new fortunes built on the Internet and logistical revolutions in manufacturing and markets to manifest a gaping divide in power and wealth between the few and the many. The Texas border, like California’s, opens up vast pools of Mexican and immigrant labor for super-exploitation by agribusiness and industry.

The same goes for New York, Connecticut, and Washington D.C. the other most unequal places in the United States. New York and Connecticut, like California, have become societies divided by an upper stratum of financial-sector workers and corporate employees whose salaries and investments simply dwarf the bottom half of the population’s earnings, and unlike the South, this extreme level of inequality is rather new in its source of valorization. Washington D.C. is split between the federal haves, mostly fattened contractors who run the military, or who represent the interests of the billionaires in California and New York, and the have-nots, mostly Black and immigrant service sector workers who wait on these technocrats of empire.

It’s a strange club, the super-inequitable states of the U.S. This exclusive list pairs the bluest coastal enclaves of liberal power with the reddest Southern conservative states. In terms of wages and wealth these places have a lot in common.

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San Francisco’s real estate roller coaster. The Financial Crisis cut 20% off home values in San Francisco, but the U.S. Federal Reserve’s bond buying program, coupled with broader tax and fiscal policies, has created a rally in securities markets, handing the wealthiest Americans enormous gains in net worth. These economic policies benefiting the rich are evident in San Francisco’s real estate prices. Secondarily is the Tech 2.0 boom in San Francisco and Silicon Valley, pulling in thousands of new residents to work in Internet, biotech, and other industries where six figure salaries are the norm.

In San Francisco homes now routinely sell for millions. Not mansions. Not even particularly large houses. Just simple homes built decades ago. In most other markets they would fetch the national median home price of about $170,000. San Francisco, which locals like to call “the City,” sees dozens of real estate deals every month in which a cool million or two pass hands, and afterward the new owner, usually someone with freshly minted tech or finance money, has the modest structure demolished and scraped away. The new thing is to build upward, and lavishly, from scratch. Heated stone bathroom floors and wine cellars are popular. Securing a pad in Noe Valley or Bernal Heights for a few million is seen as a reasonable way to spend money.

In San Francisco the western end of Broadway is known as “billionaire’s row.” Quite a few of the side streets and parallel avenues like Jackson, Pacific, and Washington are lined with estates that trade hands on occasion for a few tens of millions. No tear downs here. The villas and manors along these avenues were built by sugar barons and banking tycoons of centuries past. Silicon Valley’s most senior executives, and the City’s hedge fund managers, buyout barons, bankers, and a few celebrities make up most of the neighborhood’s owners. Their children attend exclusive private schools in Pacific Heights where they are preened for Stanford and Princeton.

It is becoming hard to identify any part of San Francisco as an “elite” enclave. Tech 2.0, as the Google and Facebook-led regional boom is being called now, has vested thousands of twenty somethings as well as senior executives with billions in IPO cash and billions more in salaries to hunt for real estate, and they have chosen San Francisco, nearly all of it, as their preferred stomping grounds. Maybe it will only be another decade until Broadway starts getting called trillionaire’s row.

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Sea View Avenue, Piedmont, California. 71 percent white, only 5 percent of Piedmont’s population is Black or Latino. Median household income is $200,000, and wealth holdings are much more. Piedmont supports its own public schools, police force, parks, and libraries.

Across the Bay is a slightly more modest version of billionaire’s row, probably better called a millionaire’s row running across the ridge line from Oakland north to Kensington. In the middle of Oakland, in fact completely surrounded by the scrappy industrial city by the Bay, is the city of Piedmont. When it was founded in the 1920s its first residents gave it the nickname “city of millionaires.” They restricted housing to single family residential homes on large lots from the start to prevent Black and immigrant families from moving up the hillside. Sea View Avenue is where the big money that wants to show off buys real estate, but the entire city boast a median home price of $1.4 million. The Berkeley hills are similarly rich and populated by an unusually high number of lawyers.

Lawyers, especially tort defense, corporate, and tax lawyers who serve the wealthy and defend corporate America from labor unions, environmentalist, and consumer advocates, also love Marin County. Across the Golden Gate from San Francisco, Marin is not much more than a bedroom community for corporate lawyers and CEOs who want a little more room and sun than San Francisco provides. If Piedmont was a city shelter to exclude the working class, then Marin is similar, but on the level of a county. Despite growing pockets of Latino poverty in older towns like Novato and San Rafael, Marin remains one of the wealthiest counties in the U.S. on a per capita basis. Marin’s Black population is segregated into the tiny Marin City, one of the only places public housing was allowed to be built. Marin City’s residents work in the retail sector and some of the industry along San Rafael’s waterfront. They earn near the bottom of the region’s wage scale and subsist on a fraction of the income their wealthy neighbors take in each month.

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Hagenberger Road, East Oakland. Oakland is over 50 percent Black and Latino. Sections of the city such as the area pictured above are 90 percent non-white. In the typical pattern of environmental racism, residential homes are in close proximity to major roadways, highways, rail lines, industrial facilities, scrap yards, and utilities.

Unemployment stalks the working poor of the Bay Area, threatening to force them into insolvency and bankruptcy, foreclosure and displacement. During the first Dot Com boom of the late 1990s unemployment was at five percent for white Bay Area residents. For those living along the billionaire’s and millionaire’s rows, unemployment is a meaningless concept. The capital invested by the rich, by their clever advisers who run the hedge funds and private equity shops, earns interests and returns on equity far larger than any years honest wage labor can eek out. The tax code provides for this with carried interest and the lowest personal income tax rates for top earners in many decades. Hordes of tax lawyers, many who live in Marin, the Oakland hills, and San Francisco, will eagerly structure a family’s investments and bills to minimize taxes, so long as they possess a minimum of $5 million in liquid assets – preferably more.

Black men in the Bay Area have consistently suffered an unemployment rate double that of white men. Through the entire George W. Bush presidency, a period characterized by an economic policy to benefit the wealthiest with low taxes and interest rates, Black men endured double digit unemployment rates, reaching about 13 percent when Obama took office. The Financial Crisis sent Black unemployment rates skyrocketing in San Francisco, Oakland, Richmond, and Vallejo, upwards of 22 percent in 2010.

UnemploymentCAbyRace1999-2012Economic policies under Obama —both those he championed, and those he compromised on— have been very good for the wealthy, and that’s reflected best by the real estate and consumption bubbles frothing over places like San Francisco. The Federal Reserve Bank’s unprecedented purchases of bonds and its low lending rates have produced rallies in stock and debt markets which have greatly re-inflated the fortunes of the rich.

Pew_Uneven_RecoveryThe Pew Research Center recently summed up this polarizing redistribution of wealth from the bottom to the top by noting simply that since 2009 the wealthiest 7 percent of Americans experienced an increase of 28% in their net worth, while the bottom 93 percent actually lost 4 percent of their savings.

The San Francisco Bay Area’s current tech boom is further dividing the wealthy few from the impoverished masses. Companies like Google, Apple, and Oracle are among the least diverse workplaces places where men outnumber women, and white and Asian employees dominate the ranks of lowly programmers and senior executives. The need to hire thousands of engineers is drawing waves of college graduates to Silicon Valley and San Francisco, and they’re washing over the current residents like a tide of suffocating oil. Some of the tech buses —private transit systems operated by Silicon Valley’s largest firms to shuttle employees from San Francisco to their suburban campuses in Santa Clara County— now run lines into Oakland and Hayward, a sign that their employees are increasingly colonizing formerly undesirable zones of real estate.

The drift apart between the pale wealthy few and the impoverished multitudes of darker-skinned peoples is evident on the level of whole cities. San Francisco enjoys robust public finances, high credit ratings, low per capita debt to income ratios, and many well funded public services. However, two decades of intense gentrification mean that this healthy public sector increasingly caters only to those “citizens” who can afford to live in San Francisco.

Pushed out of the region’s urban core, in the 1990s and 2000s Black, Latino, and some Asian immigrants found themselves in the affordable locales of Vallejo, Stockton, Richmond and Oakland. Further out towns like Antioch, Brentwood, and Pittsburg became increasingly non-white and working class. In the Financial Crisis these cities hemorrhaged residents and revenues due to some of the highest foreclosure rates in the nation. Vallejo and Stockton went bankrupt after slashing the most basic services. Vallejo is 75 percent non-white. Stockton is 80 percent non-white.

The wealthiest Bay Area communities, the “towns” of Hillsborough, Woodside, Atherton, Los Altos Hills, and the city of Piedmont are three quarters white with median incomes in the six figures. Public finances barely flinched during the Great Recession. A few of these local governments in fact have no outstanding public debt.

Atherton and Los Altos Hills have zero bonded public debt.

Oakland has almost a billion just in bonded debt.

In the tony Marin hamlet of Fairfax the public debt burden resting on each resident is about 1.7 percent of their annual income.

In Richmond the ratio of public debt to personal income for each resident is 16 percent.

Richmond, a quarter Black and a third Latino, is a tangle of oil and chemical refineries run primarily by Chevron. Not a year ago a massive fire at one of the company’s plants spewed toxic vapors and smoke into the sky, poisoning thousands of residents.

Chevron is headquartered in San Ramon, another exclusive, mostly white suburban environment with low municipal debt and a household median income of $121,000 a year.

In February of this year the main airport of Puerto Rico was privatized under a deal that allows a New York private equity group to take control the facility for 40 years. The firm is called Highstar Capital, and their link to Oakland is through the city’s port. In 2009 the Port of Oakland awarded Highstar a lucrative concession to take over the Outer Harbor Terminal for 50 years. Concessions are a form of privatization in which the underlying ownership of a public asset remains legally with a public authority, municipality, or the state, but control over the asset’s revenues, capital investments, and operations is effectively handed over to a private company.

A map of Ports America's terminal leases and concessions. The company, owned by Highstar Capital, is the largest operator of port infrastructure in the U.S.

A map of Ports America’s terminal leases and concessions. The company, owned by Highstar Capital, is the largest operator of port infrastructure in the U.S.

Highstar runs the Oakland port berths through Ports America, a terminal operator the firm purchased in 2007. The Oakland deal gives Highstar a monopoly over a major terminal at the Port in exchange for lease payments made to the Port of Oakland.

Highstar also controls a marine terminal in the Port of Baltimore under a virtually identical 50-year privatization deal. Ports America is the largest terminal operator in the United States, leasing more waterfront facilities than any other company under more traditional lease agreements that usually only extend three to seven years. In California alone, Ports America operates facilities at the ports of Concord, Long Beach, Los Angeles, Port Hueneme, Sacramento, San Deigo, and Stockton, in addition to its privatized Oakland property.

The Concord operation focuses on shipping military goods and ammunition overseas. Several of Ports America’s other operations handle similar military cargoes. The company’s major port operations pass through millions of containers every year with products bound for U.S. and overseas markets.

This is partly why Highstar, through Ports America, controls such a vast swath of the U.S. maritime acreage. Back in 2006 P&O Ports, an independent company, operated most of these marine terminals, but P&O was bought that year by Dubai Ports World, an aggressively expanding terminal operator based in the United Arab Emirates. Various members of the U.S. Congress objected to a company from a Arab nation taking over a good chunk of the U.S. port infrastructure. Behind the scenes Highstar, which was then still a subsidiary of the AIG insurance company, maneuvered to purchase P&O Ports from Dubai Ports World.

Highstar is among a growing number of infrastructure privatization funds focusing on U.S. public assets. These companies utilize their access to cheap debt, their considerable equity (much of it sourced from wealthy individuals and institutional investors like pensions), and their political connections, to take control of highways, bridges, ports, railroads, and other goods.

Highstar is also one of the biggest owners of oil and gas pipelines in North America. And in addition to its ownership stake in Puerto Rico’s Luis Muñoz Marin Airport, Highstar also owns the London City Airport in the U.K.

Wayne Berman, lobbyist, Highstar "adviser," current Blackstone government relations director.

Wayne Berman, lobbyist, Highstar “adviser,” current Blackstone government relations director.

Integral to Highstar’s business strategy is the cultivation of friends in high places, and influence in the halls of government. The company’s executives have never been shy about showering money on political campaigns, and buying the most connected lobbyists to push their interests. Highstar executives have spent over $900,000 to fund the campaigns of federal candidates and the Republican Party since 1990, with most of this spending concentrated in the mid to latter 2000s.

Highstar has spent $3.8 million over the past decade lobbying Congress. Most of this money was used to obtain the services of Wayne Berman, a Republican Party fundraiser who has been on the inside of numerous GOP presidential administrations.

Berman is a super-lobbyist who raises millions of dollars for conservative candidates. Individually Berman has contributed over $800,000 to federal elections campaigns since 1990. Berman is directly employed by Highstar as a “senior advisor.” Currently he is the in-house lobbyist for another private equity group Blackstone, but he remains in the employ of Highstar also.

Picture 2Last month KALW radio invited three guests to talk about the city of Oakland’s fiscal problems. To give the city’s official perspective was assistant city administrator for finance Scott Johnson. Daniel Bornstein of the Oakland Tribune was there to provide his apocalyptic view on Oakland’s budget, especially its under-funded legacy retirement systems. While they’re night and day in their depictions of Oakland’s fiscal health, Bornstein and Johnson tend to agree on solutions; both favor reducing city employee pay and benefits, and both see Oakland’s budget as unnecessarily swollen with debt.

For a community voice KALW chose a somewhat unlikely guest, Jim Blachman of Make Oakland Better Now!, or MOBN!

Blachman wasn’t really a different voice considering the other two guests. He agrees with the general trope of financial scarcity both Bornstein and Johnson take for granted, and the need for the imposition of austerity upon Oakland’s residents.

So KALW set up a discussion between three white male budget hawks to talk about the fiscal problems of a city that is mostly non-white. It’s as if CNN invited Paul Ryan, Charles Krathammer, and Grover Norquist to come on and talk about the U.S. budget situation and pretended this was a reasonably balanced panel – three white men from the government, press, and civil society, all who would like to impose big cuts on state spending, excepting the military/police.

Picture 3The choice of Jim Blachman to represent a voice from Oakland’s engaged activist community was a strange one because MOBN! has by all measures a very small constituency and only fleeting history. MOBN! was established in 2009 by eight individuals with the intention of eventually incorporating the group as a 501(c)4 non-profit. While MOBN! has added and lost a few members over the past three years, its membership remains small compared to other civic leagues and activist organizations involved in Oakland politics.

The corporate form MOBN! is aiming to become, a 501(c)4, is classified as a non-profit “charity” under the IRS tax code. These types of charities are allowed to participate in political campaigns, and in recent years the Super PACs used by wealthy individuals to shape national politics have proliferated under the 501(c)4 form. A search of the IRS database for charities shows no record of MOBN! having obtained recognition of exemption yet from the federal government.

Founding members of MOBN! back in 2009 included current City Council member Libby Schaaf, as well as a couple real estate agents, and a political campaigner linked to Larry Tramutola. Jim Blachman was there too as an executive officer of the group, and remains a board member today.

The discussion on KALW, which included a lot of echoing statements by Bornstein and Blachman was illustrative of what MOBN! thinks would create a “better” Oakland. Basically the group sees Oakland’s budget problems as a crisis caused by inflated municipal employee salaries, healthcare, and retirement benefits. In all of their materials they ignore the fact of dramatic declines in tax revenues available to California cities in recent decades, and widening inequality between the top one to twenty percent of America, and the bottom 90 percent.

Their political solutions therefore call for attacking labor unions and employees, and cutting services that predominantly benefit the city’s poorest residents. They do not call for progressive tax measures to raise more revenue, or other means of reducing wealth and income inequality and access to public resources within and beyond Oakland.

Here’s how Jim Blachman ended the interview with a call for massive budget cuts, layoffs, and/or slashing of benefits in order to fund a bare minimum of infrastructure and police:

“When you are making decisions as a city about what your priorities are or what you wan to spend money on, if you are going into these things without questioning what you are promising in terms of pensions, what are you promising in terms of compensation, what are you promising in terms of healthcare, and what is that gonna cost? You have to realize how expensive these things are in real terms today. Then you have to ask yourself, do I want to spend $30 million for someone’s retirement and their healthcare, or would I rather spend that money on road streets and highways, or police officers and the like? [….] We have some very hard choices that we’re going to have to make.”

Blachman is a typical California anti-tax, pro-austerity activist focused on attacking labor unions and undermining services that urban communities of color rely upon for survival. Like prior conservative activists who focused on slashing budgets and cutting taxes in the Golden State, Blachman and other MOBN! activists don’t focus on culture war issues – in fact some of them are rather liberal on issues of gender, sexuality, women’s rights, and they’d even claim to be racially progressive, notwithstanding the fact that the economic and political reforms they’re calling for would disproportionately harm Black, Latino, and Asian immigrant communities.

Instead these conservative budget activists fixate on spending, and they make arguments that are logical, but only within a de-politicized framework in which we have to accept the current state of inequality as a given. Blachman is similar to other prototypical California conservatives in that the political solutions to the budget problems he focuses on are linked to his day job; he works for powerful and wealthy interest groups that have spent enormous sums to shape tax laws and exploit tax loopholes in order to hoard capital amongst the wealthy and owners of real estate, favoring a privatized vision of society.

Blachman’s day job is with Advisor Partners, an investment advisory company located in Lafayette. Advisor Partners develops various technical strategies for use by investment management companies to maximize wealth retention for high income individuals.

One of the company’s marquee services is known in the industry’s parlance as “active tax indexing.” When you boil down all the complicated steps involved in active tax indexing, you’re left with a tax avoidance strategy that allows wealthy individuals to avoid paying capital gains taxes on stocks and other traded securities, or to carry these tax write offs over and thereby offset other taxes on the wealth and incomes of high net worth individuals.

The Advisor Partners web site explains that avoiding, and lowering the amount of taxes paid by the wealthy, is part of the firm’s “investment philosophy.”

“We seek to minimize costs and taxes by thoughtfully managing turnover, trading costs, and tax impact.”

In an article about “smart strategies to shelter and protect” the incomes and assets of the wealthy, Blachman’s boss at Adviser Partners, Dan Kern, complained that recently enacted federal tax laws meant to fund Obamacare are, “extremely unfriendly for the ultra-high net worth and somewhat unfriendly for people who have significant investment portfolios.”

Kern went on to describe how active tax indexing helps the wealthy avoid federal taxes: “if an advisor creates an index-oriented portfolio, a harvesting program will look at identifying stocks that are going down and sell them to generate a tax loss, which can be used to offset gains elsewhere. You replace the stocks that were sold with stocks that have the same or similar economic impact—such as selling Chevron and replacing it with Exxon.”

“With the Bush tax cuts set to expire at the end of this year,” wrote Blachman in 2010, “advisors need a plan for actively managing Uncle Samʼs upcoming bills for high-net-worth investors.” Blachman advocated his company’s active tax indexing strategy to thwart the federal government’s tax collectors:

“Indexed-based SMAs also provide ongoing tax management advantages, such as tax loss harvesting using a short-term capital loss to offset capital gains. If a California resident at the highest marginal tax rate (35% currently, 40% when the Bush tax cuts expire) invested $1 million and the advisor was able to harvest 6% in losses, the advisor has lowered his clientʼs tax bill by $24,000—hardly chump change.”

Blachman called this “the quest for tax Alpha,” referring to the somewhat mythical quantity of the fully maximized rate of return on an investment.

As I noted in a previous post most Oaklanders are living below the state’s median family income of $57,000, and only a small proportion of the city’s residents own stock and other securities holdings in significant amounts.

Oakland’s leaders are currently investigating how the conspiracy of a few global financial companies to rig the London Inter-Bank Offered Rate affected the city’s finances. Sources in City Hall say that the theft may amount to more than $300,000.

Oakland’s losses are due most likely to interest rate swaps the city agreed to with several banks in the mid-2000s. In 2004 Oakland sold $117 million in variable rate bonds. The underwriters of these bonds, Bank of America and UBS attached interest rate swaps to these variable rate bonds. The swap payments involved a two way flow of funds between the city and the banks that was intended to convert the variable rates on the bond debt into a “synthetic” fixed rate.

Under the terms of the two deals with Bank of America and UBS, Oakland paid the banks 3.533 percent, and in return the banks paid 58 percent of the 1-Month LIBOR rate, plus a “spread” of 350 basis points (0.350 percent). The LIBOR-linked rates the banks paid Oakland were intended to mimic the variable rates on the bonds, thus passing through Oakland to service the bond debt, leaving Oakland paying the fixed rate of 3.533 percent (thus the “synthetic” label).

However, because UBS, Bank of America, and other banks that were part of the panel that set the different LIBOR rates, rigged LIBOR downward over various years, Oakland ended up paying more than it should have. It was theft, plain and simple, even though it occurred through a complex financial architecture invisible to most.

The terms of Oakland’s interest rate swap agreements with UBS and Bank of America can be viewed online here.

To assess just how much money was stolen from Oakland by UBS and Bank of America we must determine when, and by how much the banks manipulated the rates, and in what direction. Financial analysts employed by many local governments and public agencies are currently doing this tedious work, including inside Oakland’s finance and legal offices.

To help the public understand how the conspiracy worked, and just how much it may have affected Oakland, I’ve calculated the following guesstimate.

Let’s assume that since 2004 the banks rigged the LIBOR rate downward by an average of 50 basis points at any given time. This is a really sloppy and imprecise assumption as the banks might have rigged the rate upwards and downwards over time depending on what rates would have benefitted them in the ever-shifting world of finance. Rigged rates could have been jacked up a lot during some periods, while only a little bit during other periods, or downward by big and small margins. For the sake of simplicity let’s just assume the average impact of the LIBOR rigging conspiracy over the terms of Oakland’s swaps with UBS and Bank of America was negative 50 basis points, or -0.05%.

The following table shows what Oakland probably actually paid between 2004 when the swaps were signed, and 2008 when the city terminated the swaps (they were originally intended to run to 2026). Assuming the LIBOR rate wasn’t rigged would mean that after netting out Oakland’s fixed rate against the bank’s LIBOR-linked variable rate, Oakland paid the banks approximately $7.7 million.

OaklandActualSwapPayments

If LIBOR during this period was skewed on average by negative 50 basis points by the banks, it would mean that the variable rates paid by the banks to Oakland were lower. Under this scenario the net flow of payments would have been even further in the favor of the banks. The following table adds fifty basis points back to LIBOR, simulating what the banks should have paid in the absence of the conspiracy. Under this hypothetical scenario the banks should have only received $7.45 million from Oakland.

OaklandIdealSwapPaymentsAssumingLIBORRigging

The difference of a quarter million here is the amount that the banks might have stolen from Oakland.

Then there’s the termination payment that would have been made in the Spring or Summer of 2008 by Oakland to close out the swaps. These termination fees are calculated using the “fair value” of the swap. The swap’s value depends on where LIBOR is at, and where it’s trending. Thus if the banks had been rigging LIBOR downward over time, and pressing down very aggressively during the financial crisis, Oakland’s termination payments would also have been skewed in the favor of the banks. So an estimate of $300,000 seems to be a reasonable, if conservative, estimate of how much was stolen from Oakland by UBS and Bank of America.

cityoflondon

The City of London, the world’s most central financial hub and site of the biggest Eurodollar money market which LIBOR was created to govern.

The importance of uncovering the complete truth about the LIBOR rigging conspiracy cannot be overstated for local communities across the United States, especially here in California.

It’s been five years since a few academics and journalists began to dig up evidence that something was wrong with the London Inter-Bank Offered Rate, or LIBOR (pronounced appropriately as “lie-bore.”) The data that curious researchers were compiling couldn’t be explained using the prevailing definition of what LIBOR supposedly was: a trustworthy interest rate that accurately gauged the market price of borrowed US dollars held overseas by the world’s biggest banks. Instead, their findings pointed toward something other than an idealized neoliberal market, influenced only by impersonal supply and demand forces. Many began to realize that the data could easily be explained if the banks were rigging the LIBOR rate in their favor. Strange discrepancies in LIBOR’s correlation to other rates, and to the economic fundamentals of the bank companies responsible for formulating the rate, showed something seriously amiss, but it made sense if the banks were cheating.

The motives of the banks have been clear from the beginning. A few banks that dominate the marketplace for derivatives stand to make billions if LIBOR moves in their favor on particular days when contractual payments between them and their customers come due. They therefore suppressed the rates in order to skim billions of dollars off derivatives and investments. Later these same banks suppressed LIBOR rates to create the illusion that their balance sheets were robust during the financial crisis. This also allowed them further rounds of money-siphoning from their unwitting derivatives customers.

Barclays-logoUntil recently LIBOR rates have been set by a panel of banks that are members of the British Bankers Association (BBA). The BBA is a private industry group established almost 100 years ago to lobby for the financial industry in one of its global hubs, London. The BBA really came into power in the mid-1980s with the creation of LIBOR. LIBOR was created to further integrate the giant global money market in US dollars held in overseas banks or holding companies, and therefore unregulated by the US Federal Reserve. Called “Eurodollars,” because they originally were dollar savings accumulated in European banks, especially banks in London, these funds quickly became a de facto global currency. LIBOR began as a way for the banks to standardize investment products for these vast pools of American dollars flowing through Europe, and later Japan, the Middle East, and Latin America. By the 1990s LIBOR had become such an important set of interest rates, and US dollars held overseas had becomes such an important source of credit for US consumers, that LIBOR became the key global interest rate around which many financial products were pegged. As LIBOR became more and more important to the globalization of finance, it accrued a sort of official, trusty gloss; nearly everyone assumed that LIBOR was a market rate reflecting competition. Instead, LIBOR has probably all along been a fudged rate, determined less by vast market forces and invisible hands, and more by the vulgar self-interest and power of the elite banks that set LIBOR rates.

citiLast year government investigations into this globe-spanning crime —rightly called the biggest financial scam in all of history— led to multi-billion dollar fines against Barclays, the Royal Bank of Scotland, and UBS, the 7th, 8th, and 20th largest banks in the world, respectively. Criminal investigations spearheaded by US, UK, Japanese, Canadian, Swiss, and Singaporean authorities are ongoing and aimed at other banks such as Citigroup, JP Morgan, Bank of America, and other “too big to fail” institutions. More details of the crime will be forthcoming as e-mails, internal documents, phone tapes, text messages, and other evidence, is made public, and as the banks are forced to pay significant fines, and sign plea agreements.

While this scandal might seem worlds away, concerning complex financial concepts and obscure money market instruments dealt by bankers out of skyscraper offices in the City of London, the importance of uncovering the complete truth about the LIBOR rigging conspiracy cannot be overstated for local communities across the United States, especially here in California.

ubsWhy? First, LIBOR has been used since the 1990s to determine cash flows on interest rate swaps that local governments have purchased from banks to insure themselves against wild swings in variable interest rates owed on billions of municipal debt. Messing with LIBOR messes with the payments due on these instruments.

Second, LIBOR has also been used as a main interest rate of reference for an array of investment products that yield a variable return, dipping and rising in concert with LIBOR. Local and state governments have used these investment products, called “municipal derivatives reinvestment products” to temporarily park public funds, while pension systems and government enterprises like utilities use them make investments. Governments and public agencies earn LIBOR rate returns on their dollars invested in numerous kinds of municipal derivatives, so if LIBOR is illegally fixed downward, they earn less income.

jp_morgan_chase_logo_2723Through both of these forms of exposure, local governments have potentially been harmed by LIBOR-fixing perpetrated by the banks, often times the very same banks that have sold them swaps or municipal derivatives investment products.

California is fast emerging as a center of investigation and litigation into the LIBOR-fixing conspiracy. California is the largest single municipal debt market in the United States, and one of the largest in the world. Last year alone the state of California and its cities, counties, school districts, and other public entities issued $65.7 billion in total public debt. Because of California’s regressive tax structure and chronic budget crises, the state’s multitude of governments have been among the most aggressive in issuing variable rate debt hedged with interest rate swaps.

The Golden State’s local governments have also been the largest purchasers of municipal derivatives contracts from banks because streams of tax and fee revenues often don’t match up with the dates that payments to public employees and contractors come due. Collusive suppression of LIBOR rates by the 16-member panel who were trusted to provide accurate quotes could mean that California local governments have paid untold millions to their interest rate swap counterparties (the banks) that should otherwise have remained in budgets and used to fund school construction, bus lines, street paving, water and sewerage services, etc.

In the 1990s and 2000s local governments across California increasingly issued bonds with variable rates. Investment bank underwriters and municipal debt advisers from the private sector encouraged variable rate bond financing because it promised lower interest rates for California’s cash-strapped municipalities. To hedge against the risk that variable rates might explode, as they did in the 1980s, the banks sold interest rate swaps to local governments. The swaps effectively converted floating rate debt into a fixed rate. Under a typical swap contract the bank seller agrees to pay a floating rate designed to mimic the variable rate interest on the bond debt, and in return the local government agrees to pay a fixed rate. I’ve written elsewhere about how this deal blew up and created a financial injustice when variable interest rates plummeted during and after the Financial Crisis, but the LIBOR rigging conspiracy adds to these harms. The US government bailed out the banks and assisted them in taking “toxic” derivatives assets off their hands, but stood idly by while cities, counties, and public agencies suffered without aid during the Financial Crisis, allowing derivatives instruments on the public’s books to blow up and drain budgets. At this very moment the banks perpetrated an illegal scam to suck even more money from the public via further depression of LIBOR.

Barclays, RBS, UBS, and other banks worked together to suppress LIBOR below even the depths to which it sank after 2008. A number of lawsuits filed by various cities, counties, and public agencies in California asserts the banks did this to skim off an unknown, but very large, amount of money from their public victims, and also to bolster their own balance sheets during the crisis. By suppressing LIBOR the banks ensured that the net difference between the variable rates they owed, and the fixed rates the public was paying on swaps, was wider than it would otherwise have been. This net difference meant that the public owed the banks higher amounts when the interest rate swap payments came due (usually twice a year).

For San Francisco this could mean that millions have been stolen from the capital budget of its Airport. SFO currently has seven interest rate swaps it has purchased to convert variable rate bond debt into synthetic fixed rates. The airport’s counterparties on its swaps included JP Morgan Chase, Merrill Lynch (owned by Bank of America), and Goldman Sachs. Each of these banks likely benefited from conspiratorial suppression of LIBOR, even if it was by just a few basis points (hundredths of a percent). JP Morgan Chase and Merrill’s parent Bank of America are both members of the panel that sets LIBOR, and are both believed to have played a role in the conspiracy.

San Francisco’s pension system may have also been raided by the banks through its speculative investments in swaps. According to the most recent audit of the San Francisco Retirement System’s portfolio, the city’s pension system holds two interest rate swaps on its books with a notional value of $15 million. In prior years, SFERs held other swaps. In 2010, the Retirement System’s audit showed three interest rate swaps with a total notional value of $41 million. Over the last two years these swaps drained $5.3 million from the pension system, and some of these losses might have been due to the downward manipulation of LIBOR. Also on the Retirement System’s books are other investments in bank loans, options, and other securities that might have been impacted by the LIBOR fraud.

San Francisco’s LIBOR damages are probably small in comparison to other local governments and public agencies. The East Bay Municipal Utility District has already filed a lawsuit in federal court alleging damages from bank rigging of LIBOR. The water district’s complaint, filed in January of 2013, alleges that LIBOR suppression drained potentially millions, again from interest rate swap agreements with some of the very banks that sit on the LIBOR-panel: Citibank, JP Morgan Chase, and Bank of America. East Bay MUD lists nine interest rate swaps potentially affected by LIBOR rigging in its lawsuit.

East Bay MUD’s swaps had a total notional amount of $481 million in 2012, according to the utility’s most recent financial report. Downward manipulation of LIBOR by just 10 to 50 basis points (1/10th to 1/2 of a percent) could have drained between $481,000 to $2,400,000 through East Bay MUD’s swap payments every six months. Over a few years, say the conspiracy’s 2007-2010 time-frame alleged in EBMUD’s lawsuit, this would add up to millions of dollars stolen by the banks.

EBMUDswaps

The cities of Richmond, San Diego, and Riverside, and the County of San Mateo, are other California governments that have now filed lawsuits against the banks responsible for setting LIBOR. All of these lawsuits have been consolidated into a larger class action case currently being heard in the U.S. District Court, Southern District of New York, before Judge Naomi Buchwald. There are now about two dozen LIBOR manipulation lawsuits that have been filed and consolidated in New York. The lead case is the City of Baltimore and the New Britain Firefighters’ and Police Benefit Fund lawsuit against the 16-bank LIBOR panel, filed in April of 2012.

More California cities, counties, and public agencies are expected to file their own lawsuits soon, however. CalPERS, which has numerous investments that fluctuate in value and yield with LIBOR, is also said to be investigating its own exposure to rate rigging.