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/ April 3, 2012
Occupy Wall Street’s MTA Protest Fundamentally Misguided

Last week, protesters offered commuters a free morning subway ride in a protest against alleged mismanagement and corruption in the MTA. Video released this weekend show masked cohorts chaining open the emergency exit doors at 20-25 stops around the city. Fake MTA flyers were posted around the station urging riders to use the emergency door until the labor negotiations are resolved in favor of the Transit Workers Union. While the identities of those involved remain unknown, sources indicate they are a combination of OWS protesters and rank-and-file members of the TWU Local 100.

The Transit Worker Union leadership denies any knowledge of the stunt, but OWS put out a press release taking credit for the actions. Rate hikes, service reduction, poor working conditions, and racism are all cited as reasons for staging the protest, but OWS’s big beef comes with the levels of debt the MTA holds. They state:

“But here’s the real cause of the problem: the rich are massively profiting from our transit system. Despite the fact that buses and subways are supposed to be a public service, the government and the MTA have turned the system backwards—into a virtual ATM for the super-rich. Instead of using our tax money to properly fund transit, Albany and City Hall have intentionally starved transit of public funds for over twenty years; the MTA must resort to bonds (loans from Wall Street) to pay for projects and costs.

The MTA is legally required to funnel tax dollars and fares away from transportation costs and towards interest on these bonds, called “debt service.” This means Wall Street bondholders receive a huge share of what we put into the system through the Metrocards we buy and the taxes we pay: more than $2 billion a year goes to debt service, and this number is expected to rise every year. If trends continue, by 2018 more than one out of every five dollars of MTA revenue will head to a banker’s pockets.”

What’s more troubling than the outlandish notion that anyone is using the perpetually cash strapped MTA as a “virtual ATM” is the fundamental misunderstanding of financial markets. Let’s talk about this for a second.

According to OWS’s understanding, bonds are held by the investment banks, and interest is straight profit for the investment bank. In fact, bonds are not bank loans, and are not held by investment banks. Instead a bond is underwritten (or originated) by a bank for a fee, and sold to institutional investors (pensions, endowments, insurance companies etc.) who receive the interest on the bonds.

That means those $2 billion that allegedly go to “banksters pockets” are actually going to your dad’s 401k or NYU’s endowment — all of sudden those interest payments seem pretty important. And here’s the kicker; Goldman Sachs has no interest in holding onto MTA bonds for the next 30 years to collect their 5% coupon — that’s not their business.

Ok, but if the MTA got more funding from the state, then they wouldn’t need to issue debt in the first place, right? (Fun fact: the MTA received more funding from NYS and NYC this year than last, and had less total debt). Sure, if all of the MTA’s financing was subsidized by the state there wouldn’t be MTA bonds — but there would be more New York State and New York City bonds. Our government runs structural deficits, which means city, state, and federal Governments have to go to public capital markets to fund their spending, and guess who underwrites those bonds? Here’s a list of New York’s State recent bond sales and their underwriters.

The fact is that so long as we continue to run deficits, all governmental spending will be partially funded by debt, regardless of whether it comes from an agency, a municipality, the state, or Washington. Now, this raises an important question of how to fix our deficits, but that’s simply not what OWS is protesting by robbing from the MTA.

The issue of debt in project finance proves itself even more complicated than a simple governmental deficits. In short, the capital needs of a public transportation service is incredibly uneven. If an agency is in the process of a massive infrastructure installment — like that giant hole under 2nd Ave — there will be a need for billions of dollars to finance the project. Government budgets, on the other hand, are very smooth in terms of revenues and expenses. Even a government with a comfortable surplus will not want to accommodate billions for public works irregularly. Due to the mismatching of revenue streams of the government, and capital requirements of a public transportation service, debt issuance will always be a necessity.  Any large scale infrastructure project you can think of has probably been made possible in large part by debt financing.

There are plenty of issues on Wall Street that people should be protesting to change, but debt financing simply isn’t one. The interest payments go to institutional investors, not bankers, and they allow large scale projects to be completed. Whether OWS is willing to admit it or not, debt financing is not a conspiracy of the 1%, but an absolutely essential function of capital markets that enables the development of infrastructure. In this action, OWS robbed from the MTA and the taxpayers with a misguided sense of vigilantism that only highlights their misunderstanding of the financial system.

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