There are winners in Detroit’s financial crisis: the banks – and they are shielded from any risk by the new Emergency Manager law

It’s good to be the king banker


[Caricature by DonkeyHotey from photos by Anne C. Savage for Eclectablog]

There’s a story emerging out of Detroit about the role too-big-to-fail banks have played in the creation of Detroit’s fiscal emergency. Last week, Dave Dayen reported at the National Memo that some banks have begun foreclosure proceedings on homeowners and then simply walked away before taking possession of the property. This leaves evicted homeowners on the hook financially for the home they are no longer permitted to live in. What’s worse is that the banks don’t even have to inform the homeowner or the city of Detroit which no longer receives any tax revenue from the property.

Not only that, banks have been reaping huge profits in debt restructuring fees and, as added salt in the wound of a city in crisis, Republicans have ensured that these same banks will be paid in full as Detroit works to get out from under its crushing debt.

Here’s Dayen on MSNBC’s Jansing & Co. last week:

It gets worse. Bloomberg reports that banks have reaped nearly a half billion dollars in fees charged to help Detroit refinance its debt over the past decade:

The only winners in the financial crisis that brought Detroit to the brink of state takeover are Wall Street bankers who reaped more than $474 million from a city too poor to keep street lights working. {…}

Banks including UBS AG, Bank of America Corp.’s Merrill Lynch and JPMorgan Chase & Co. have enabled about $3.7 billion of bond issues to cover deficits, pension shortfalls and debt payments since 2005, according to data compiled by Bloomberg. Liabilities rose to almost $15 billion, including money owed retirees, according to a state treasurer’s review.

The debt sales cost Detroit $474 million, including underwriting expenses, bond-insurance premiums and fees for wrong-way bets on swaps, according to data compiled by Bloomberg. That almost equals the city’s 2013 budget for police and fire protection. {…}

Wall Street firms could end the deals and call for full payment because Moody’s Investors Service last March cut unlimited general-obligation bond ratings to B2, five levels below investment grade, according to the city’s 2012 financial statement. In November, Moody’s cut the rating again, sending it down two levels to Caa1.

The cuts mean there is “significant risk in connection with the city’s ability to meet the cash demands” under the swap, according to Detroit’s financial report. {…}

The city has advisers working on a plan to deal with the debt, in part by reducing retiree health-care liabilities, said [Detroit chief financial officer Jack] Martin.

There’s more on banks’ profiteering, too. Ned Resnikoff at MSNBC reports that currency manipulation by banks may have contributed to Detroit’s financial crisis:

Walkaways aren’t the only way in which major banks have gouged the city’s finances: According to a 2011 financial report, Detroit also owes $3.8 billion in interest rate swaps. An interest rate swap is a type of financial instrument by which cities exchange the variable interest rates on their municipal bonds for the fixed interest rates offered by banks. However, when the federal government drove down the variable interest rate in the aftermath of the financial crisis, cities were left with a comparatively stratospheric fixed interest rate.

Many of those variable interest rates are tied to something called the London Interbank Offered Rate, or LIBOR. The LIBOR number, regularly updated, refers to the rate of interest at which the biggest London banks pay when they borrow from one another. Recently, as many as 20 of the biggest banks in London have been accused of secretly rigging the LIBOR rate, driving it down so that they could pay lower interest rates.

As it turns out, the variable interest rates involved in interest rate swaps are often pegged to LIBOR—meaning that, even as they stand accused of LIBOR manipulation, banks which hold interest-rate swaps stand to make a fortune off the extremely low variable rates which they allegedly manipulated. While the cities which hold interest rate swaps owed the banks the same flat rate which they always had, the banks, in turn, owed practically nothing. In fact, eight counties in the state of California recently sued two major banks, saying “they were cheated out of higher interest payments on investments such as interest-rate swaps and corporate bonds tied to Libor.”

Again, it’s difficult to measure how much LIBOR manipulation has cost the city of Detroit. But what we do know is that the banks are being asked to sacrifice nothing in order to keep Detroit afloat, even as working-class city employees are told that a 10% pay cut is an insufficient concession on their part.

It’s another example of privatizing the profit and putting all of the risk on American tax payers.

Sadly, it doesn’t stop there. Banks receive special dispensation and protection under the new version of the Emergency Manager law passed by Michigan Republicans and signed into law by Governor Rick Snyder, Public Act 436. The new law replaces one sent to the rubbish bin by Michigan voters last November and goes into effect later this month. One aspect of the law that hasn’t gotten much attention is Section 11(1)(b):

Sec. 11. (1) An emergency manager shall develop and may amend a written financial and operating plan for the local government. The plan shall have the objectives of assuring that the local government is able to provide or cause to be provided governmental services essential to the public health, safety, and welfare and assuring the fiscal accountability of the local government. The financial and operating plan shall provide for all of the following:

(a) Conducting all aspects of the operations of the local government within the resources available according to the emergency manager’s revenue estimate.

(b) The payment in full of the scheduled debt service requirements on all bonds, notes, and municipal securities of the local government, contract obligations in anticipation of which bonds, notes, and municipal securities are issued, and all other uncontested legal obligations.

So, not only have the big banks reaped hundreds of millions of dollars in fees and avoided taxes by walking away from foreclosed properties, they are first in line to get paid when Detroit’s debt problem is resolved. To add insult to financial injury, the banks will be paid “in full”, not risking anything if the city goes into bankruptcy. This is in contrast to other creditors who may get paid only pennies on the dollar if Detroit eventually does go through Chapter 9 municipal bankruptcy, something newly-minted Emergency Financial Manager Kevyn Orr says may be a possibility.

This one sentence buried on page 10 of the 22-page law is a big wet kiss to the banks that have already profited handsomely as Detroit circles the drain. And it’s going almost completely unnoticed.

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  • http://www.facebook.com/people/Steve-Dibert/100000856504338 Steve Dibert

    Between LIBOR rigging and the derivatives swaps, the damage could be in the billions. Keep in mind that the $474 million is only on two bonds. Detroit like other municipalities issues multiple bonds a year. This could turn into multi-billion dollar fraud lawsuit against UBS and others when the numbers are all counted.

  • kirke123

    walking away? no longer have any legal ownership of property? so property belongs to who? the buyer, the city, or the bank?
    just like katrina, shutter, move them out, buy property for nothing, tear it down, shutter more, tear down, and then bings dream comes true, and of course the poor and the elderly, and most crime, will be moved to larger cities where they will disappear and die, but the crime will grow.
    now, where is the court challenge to this new emf?
    and for GOD’S sake where is my democratic party and leader(s)??????
    we have all been forsaken across this state. the wealthy are to big to fall and the fallen are living on a wish and a prayer!
    all dem reps should retire for they have gone the way of the union leadership, afraid of their own shaddows!

  • Roanman

    “Your Democratic Party” are the exact morons who executed the bond deals in the first place. There are damn few victims here, maybe those poor forlorn few who remain in Detroit who don’t happen to be employees of the City of Detroit, State of Michigan or the Federal Government. Every Democrat in City or State government past and present was/is complicit.

    “Your Democratic Party” wanted the money for their own salaries, pensions and benefits and was too stupid to read the contract. I have nothing but contempt for Wall Street, but to claim that Detroit got took is a patent lie.

    Bankruptcy is the future for Detroit, Emergency Manager of not. Hopefully the rats will get cut off at the knees and drown and the poor will be protected.

    But I’m doubtful.

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  • linda amick

    When are Americans going to realize that big banks are coming to get EVERYTHING? And they CAN because they can get legislation passed to legalize the theft. The ONLY weapon the US Citizen has to to take their money out of the banks and try and starve them.

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