How Goldman Trashed a Town

When Wall Street's most profitable bank teamed up with a billionaire hedge-fund manager, the people of Cedar Rapids paid the price

By Stephen Gandel Monday, July 05, 2010
    • Danny Wilcox Frazier for TIME

    Lisa Kuzela, in her flood-wrecked house, if facing higher trash fees because of a city investment gone bad

    Starting in July, Liza Kuzela of Cedar Rapids will pay $0.44 more a month to have her trash collected. The amount is trivial, but the reason is not. Two years ago, Cedar Rapids lost $2.6 million on an investment tied to a Goldman Sachs bond deal Abacus that the Securities and Exchange Commission claims was rigged to fail. When the bond went bust, hedge-fund manager and Goldman client John Paulson pocketed a billion dollars. Kuzela, her neighbors and others around the country with no ties to Wall Street are picking up the tab. The case of Cedar Rapids and Goldman illustrates how everyday Americans end up paying for Wall Street's big paydays.

    Goldman sold its bond deal to German bank IKB. That bank then packaged the bond along with some other risky ones into a structured investment vehicle called Rhinebridge. SIVs sell the type of commercial paper that city and other local government typically buy. So when a broker from Wells Fargo suggested Cedar Rapid buy $6 million of Rhinebridge notes with the reserve account of the town's dump, Cedar Rapid Treasurer Sue Vavroch did just that. She had never heard of Rhinebridge and had no way of knowing she was essentially gambling her town's money on sub-prime mortgage bonds. Within months, the town had lost 45% of its money.

    As a result, the city has had to raise the fee it charges residents to pick up trash and recycling in order to help replenish the dump's reserve cash fund. Goldman denies it did anything wrong, and says there is no direct connection between the bank's deal and the rising garbage rates in Cedar Rapids.

    Regulators have begun to bring charges against firms that constructed and managed the complex financial transactions that were struck at the height of the housing bubble. Many look like they were purposefully set up to fail. Some have asked why the SEC and indeed all of us should care about these deals that have long gone belly up. Kuzela and her neighbors know. "The derivatives that Wall Street sold were, No. 1, risky and, No. 2, phony," says Kay Halloran, who was the mayor of Cedar Rapids at the time of the investment. "And that matters. It matters to a lot of somebodies. The losers were the people of Cedar Rapids."