The vampire squid goes cow town

Let’s rewind to 2010: That January, investment-banking behemoth Goldman Sachs kindly offered up its services—for free—to the mayor’s Sacramento First arena task force. Goldman advised this group on how to best orchestrate an arena-financing deal.

In 2012, an agreement—the one with with the Maloofs—was made public. The plan was contentious, but the risk level was generally considered low. Sacramento would privatize its parking operations to generate cash to pay its share. Only $9 million in annual parking revenues were in play, so the so-called arena debt was manageable.

Fast-forward to this week: Goldman is no longer advising; it’s now financing the Kings arena bonds. And the firm, which many finger as a major player in the 2008 Wall Street collapse, is underwriting nearly $300 million for the city.

For the latest deal, Sacramento submits to a nearly $22 million annual arena-debt obligation over the next 36 years. That’s a huge jump, both in debt and risk—one that even Kings arena supporters have privately told SN&R is questionable.

Rolling Stone writer Matt Taibbi, who’s covered Goldman Sachs for nearly a decade, calls the firm a “vampire squid” that’s always “relentlessly jamming its blood funnel into anything that smells like money.” Is Sacramento its latest victim?

Four years ago, around the same time Mayor Kevin Johnson’s arena task force first partnered with Goldman, another local politico, Phil Angelides, was issuing Goldman Sachs subpoenas.

In 2010, the U.S. Securities and Exchange Commission also fined Goldman $550 million for its role in misleading investors about subprime-mortgage derivatives.

It worked like this: Goldman manipulated credit-rating agencies such as Moody’s to give its derivative bonds an A rating. Goldman sold these to the tune of billions upon billions. But when thousands of U.S. homeowners defaulted, the world’s largest financial institutions were left holding Goldman’s junk. This lead to the collapse of Lehman Brothers and other established firms.

Angelides’ investigation, and the SEC fine, left Goldman intact—but with a less-than-trustworthy reputation.

During this time, Goldman was advising Sacramento on the arena deal. Then last year, the Kings’ possible move to Seattle motivated the city council to quickly pass another new arena agreement. Under this latest term sheet, the city would borrow against future parking revenue to pay for its share of a downtown arena.

But the overall arena debt on this deal jumped from a $9 million obligation to more than $17 million annually. This is around when Goldman also decided that, instead of advising Sacramento, it would finance the deal itself.

Watchdog groups such as Eye on Sacramento warned the city that taking advice from an investment firm such as Goldman, who stands to profit from the very deal it advised on, was unwise.

Goldman’s move also may have been illegal.

The Municipal Securities Rulemaking Board, which oversees brokers and banks, says advisers have to act in the best interests of bond issuers, which in this case is Sacramento. A lender or underwriter is not held to these same standards; they’re allowed to jockey for profit. This is called Rule G-17.

The city’s arena agreement released last Friday cites Rule G-17 but insists that Goldman “is not acting as a municipal advisor” on the arena deal. They’re just a purchaser, or financer, the city says.

But that’s not what the mayor announced in 2010, when he said that “with Goldman providing help and advice, we are ready to negotiate from strength” on an arena deal.

There’s no debating that Goldman advised on the arena deal at some point. Did the vampire squid look out for our cow town’s best interests?

Consider: Goldman contracted Orrick, Herrington & Sutcliffe, an international firm with an office in Sacramento, to perform an analysis of last year’s arena deal, including whether the city could issue tax-exempt bonds. Orrick ruled that the bonds would have to be taxable. This judgment dramatically increased the amount the city would have to borrow.

The kicker is that Orrick does business with Goldman, and many of its employees formerly worked there, too. Was Orrick truly an impartial third party?

Because of Orrick’s ruling, today the city is borrowing at least $298.4 million to pay for the arena—nearly 30 percent of which is being used to finance debt, not the actual arena project itself. That’s money going directly to Goldman’s pockets.

The annual arena-debt obligation has shot up almost 25 percent, to $21.9 million, since last spring. And the interest rate for the bonds, which Assistant City Manager John Dangberg pinned at around 5.5 percent last year, has now risen to 6.75 percent (it could be higher this November, when the city plans to finally issue long-term bonds).

Did Goldman milk Sacramento?

City Manager John Shirey and others are doing the media rounds this week, telling everyone who will listen that they’ve done everything they could to reduce the city’s risk on this final arena deal.

But critics, including council members, Eye on Sacramento and local tax groups, say this final arena agreement is the riskiest of all.

Under the new deal, the city needs to pay off $21.9 million in new arena debt each year. The city’s plan is to cobble together arena rent from the Kings, new taxes from the arena and new parking dollars.

The Kings will pay the city $6.5 million a year in rent, beginning in 2017-2018. The rent will increase over the years and averages out at around $7.07 million a year over the next decade, according to city estimates. The city also projects nearly $3 million a year in new revenue from arena parking and taxes.

This leaves around $12.4 million a year in remaining debt. (In six years, the city also will receive an annual influx of $5.9 million in parking revenue, because it no longer has to pay off debts, which will go toward the arena debt instead of the general fund.)

City leaders hope that new parking revenue will make up the difference. The plan is to “modernize” Sacramento’s parking system: new technology, expanded operating hours, more meters. And, of course, rate increases.

The city also thinks that more people will be parking downtown because of the new arena and the revitalized J-K-L streets corridor. (The city did not respond to questions for this story.)

Doubters, however, question how Sacramento can generate more parking revenue when it’s giving away 3,700 garage-parking spaces to the Kings, more than half of its off-street parking inventory. They say parking revenue might actually dip in the next few years.

The city council is scheduled to vote on the arena agreement this Tuesday, just 10 days after the thousand-page agreement’s release to the public.