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Unions ask City to reclaim $800 million lost in toxic swaps

{ Submitted by Adam.S on Fri, 2014-09-19 21:34 }

Local unions in Chicago have asked the City to take action now to reclaim $800 million in City funds lost in risky speculation. The City, it is said, had invested public funds in Interest Rate Swaps (IRS). An IRS is a kind of >derivative.

Most people are familiar with Credit Default Swaps (CDS), another kind of derivative. Billions - perhaps trillions - were lost on these risky investments, as the US economy nearly foundered. Swaps are a kind of insurance policy.There are no guarantees against losses. An IRS is a kind of insurance policy, used to guarantee the value of bonds. The City is said to have pledged its reserves to guarantee IRS's, believing them to be safe investments. The were said to be rated AAA. Here is the danger, however. Part of the reason the mortgage obligations were rated AAA was because they were backed by insurance policies, the CDS's. Should the the City's credit rating drop, the City forfeits its money.

There is a Federal program to help municipalities reclaim losses on IRS's. Other communities have filed claims to get their money back. The City needs to have filed a claim to recover its losses by a deadline.

So far, the City does not appear to have responded. This might be understandable. If Mayor Emmanuel files to recoup City losses, some of the Mayor's Wall Street campaign contributors might be offended. They might be left holding the bag. Rumor has it, the Greens hear, that some of the Mayor's contributors might have been the same people who sold the CDS's to the City.

The story is complicated by a requirement in the CDS agreement fine print, that the City maintain a specified minimum credit rating. This could explain why Mayor Emmanuel has become so desperate to shed the City's pension obligations. He hopes to put off the day of reckoning until someone else occupies the 5th Floor.