Philadelphia School District May Sue Banks over Financial Losses

Philadelphia Schools are mired in debt with many on the brink of closure, driven to apocalyptic desperation, some claim, by the stewardship of Broad-trained capitalists who've descended upon urban districts peddling their wares of education reform.

In the latest round of the war for education redemption, the district is being encouraged to pursue a lawsuit against big name banks the likes of Wachovia/Wells Fargo, Merrill Lynch, Goldman Sachs, and Morgan Stanley and could expand to include Citi, JPMorgan, RBC, BofA, Barclays, Credit Suisse, Deutsche Bank, RBS, and UBS, according to the Naked City Blog at the City Paper.net. (http://www.citypaper.net/blogs/nakedcity/Philly-schools-consider-suing-Wall-Street-banks-for-fraud-induced-losses.html)

Philadelphia schools lost $161 million from interest-rate swaps, according to a 2012 report by the left-leaning Pennsylvania Budget and Policy Center. Interest-rate swaps set borrowing costs for bond issuers (such as municipalities and school districts) at a fixed rate. The banks — and this is where it gets confusing — then pay the bond issuer based on a floating interest rate, determined by an index such as Libor, short for London Interbank Offered Rate.

Swaps protect public entities from rising borrowing costs. But after the federal government drove interest rates down to spur economic growth in the wake of the economic crisis, cities and school districts were stuck paying banks at a high interest rate even while banks paid public entities at a low one. Cities and districts often paid heavy termination fees to exit the costly agreements. One 2012 report from the Refund Transit Coalition finds that 1,100 swaps with public entities — including fiscally distressed SEPTA — cost taxpayers $2.5 billion each year.

The issues are convoluted at best - Did Philly and similar districts engage in a risky lending practice?  Could have the financial stewards foretold the recession and the artificial manipulation of interest rates to help drive the recession recovery?  Probably not.  

Banks on the other hand, many of the ones listed above, have been tied to the manipulations, specifically libor fraud, that cast the country into the Great Recession:

But recently, the moral and political case against interest-rate swaps has gained a sharp legal edge: It was revealed that banks were manipulating the Libor, an index tied to $300 trillion in financial instruments set by banks with no external oversight. Banks report how much they would pay to borrow from other firms on a given day. On the honor system.

Yep, the honor system.  This lack of regulatory oversight has led to an estimated $176 billion in libor fraud. Of note, the City of Philadelphia has already filed suit and the banks named are all part of the British Banker's Association.  

Now all eyes on the school district - Will they sign on?  And will a suit such as this one even work its way completely through litigation before today's kindergarteners are high school graduates?