"pensioners: 17 cents on the $; BoA, UBS 75 cents on the $"
Detroit Said to Reduce Swaps Debt by 25% in Deal With Banks . The swaps were a “bet” on the direction of interest rates. With the decline of variable interest rates, Detroit found itself owing to the banks. With the decreased credit rating to B2, the same as AIG, Detroit found itself at the mercy of the banks who demanded their money. Except, there was no President of Congress moving quickly with legislation to establish a fund like TARP did for AIG. Nor did the Fed establish the city as a Bank or buy up its municipals. Even the state of Michigan did little to help the cash strapped city. When the first Michigan Emergency Manager Act was struck down, the Republican dominated legislature reacted quickly, far quicker than voting on the expansion of Medicaid (one year has passed since SCOTUS ruled on the PPACA); but then, this is TBTF and business we are talking about and not ~ 450,000 constituents living with incomes less than FPL. With little delay, the legislature passed a new Emergency Manager Act, Public Act 436 giving derivatives such as the Interest Rate Swaps top priority similar to what the Federal 2005 Financial Services Modernization Act did. Public Act 436 goes as far as to supersede payments to pensioners and child support payments.
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. [ As written by a Republican legislature and signed into law by a moderate Republican, Governor Rick Snyder]
Besides awarding derivative holders and bank first in line status, the Republican State Legislature also took it upon themselves to make sure Public Act 436 can not be overturned through voter referendum. Governor Rick Snyder wasted no time in signing the bill.
The winners in the Detroit crisis are the banks who have reaped $millions in fees, avoided property taxes on partially foreclosed properties (the foreclosures were never completed after driving the owners out of the houses and left the uninformed former mortgage holders on the hook for back taxes), and moved to the front of the line of Detroit debt holders. Typically these Interest Rate swaps are of the variable interest rate variety and are often exchanged for fixed rate through the Swaps. When the Fed drove down the variable interest rates, cities found themselves on the hook for the higher fixed rates. Many of the Swaps are also tied to the London Interbank Offered Rate (LIBOR) which was being manipulated by the largest banks. As a result, the banks owe little due to low variable rates and the cities are on the hook for higher fixed rate costs. Just a measly $1.4 billion of the $3.8 billion Interest Swaps tied to Detroit Pension Funds to which pensioners are being asked to accept far less than what banks are being asked to accept.
The losers? Retirees who have pensions covered by the Interest Swaps. Workers who took and will take wage cuts. Detroit with thousands of partially foreclosed vacant houses which property taxes can not be collected on from the former owners or the banks. The state of Michigan; it will have a black eye for doing little to help the abandoned city over the decades. Without it and its trade with the US largest trading partner Canada, the state would be little more than a large vegetable farm. Banks may take a trim around the ears; but, it will not be anywhere as severe as the haircut the pensioners and workers will have taken when all is sorted out.
Those of us who do not live in Detroit and Wayne County do not want to pay for the decades of mismanagement and corruption.
Detroit unions consistently supported the Kwame Kilpatrick style thugs who looted and destroyed the city. And the loonies on the city council. And the loonies on the pension boards.
The rest of Michigan does not want to pay or suffer for Detroit. Simple. It is likely we will pay anyway in higher borrowing costs.
STR:
Those who live outside of Wayne County are just as guilty as the thugs who looted the city leaving it to its present economic state. The only difference, the fringe counties were discreet about how they and the state legislature walled off the city similar to a ghetto. I could recite the hitory of this for you again? Corruption and mismanagement has happened; but, the impact of both is far less than what collectively the state has done to the city.
Detroit to Earth:
Principle plus Interest is greater than Principle alone
.
The debt, plus interest, cannot be paid with slow money velocity.
Even the fattest kid in the pool can’t keep the inflated beach ball underwater forever.
Michigan didn’t primarily get rich from Detroit. Michigan got rich off of the mineral deposits and their mining on the upper peninsula after the Toledo War.
Senior debt holders (including swaps) ALWAYS have priority in liquidation.
That’s why they are willing to lend under the terms and rates they do. Otherwise they wouldn’t lend under those terms and rates.
Sammy:
Nonsense. Pre- “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” derivtives did not get first-in-line stature. They did not supercede childcare payments, etc. It came only after the passage of this bill. Derivatives previously took their place in line.
Derivitives’ normal place in line is after secured debt and senior debt. In Detroit’s case, as their bet went wrong (surprise!), they pledged their gambling revenue: http://www.crainsdetroit.com/article/20130621/NEWS01/130629981/interest-rate-swap-firms-could-get-paid-first-as-detroit-bankruptcy#
So it was the fault of the Detroit government, whether incompetence or horrible negotiating position (incompetence) that is the source of their predicament.
Sammy:
No, derivatives was further clarified to have a first in place line in any bankruptcy. Understand what the 2005 act put in place which further clarified 1990 and 1982 legislation. It did not matter if the Interest Rate Swap went bad or not.
run,
What happened was that the swap went bad for Detroit and then they had to renegotiate the terms of the deal by pledging the gambling revenues, making it a secured creditor (1st in line).
Sammy:
It is a Chapter 9 Bankruptcy and banks do not get first-in-line priority.
Wanna see what the US traded for Detroit? Check out::
http://www.businessinsider.com/uss-gerald-r-ford-construction-of-the-most-expensive-ship-ever-2013-7?op=1#ixzz2aJ5YTJHp
Counting the 90 new F35 jet fighters its going to carry, just about $30 billion total.
That’s what the bankruptcy of our nation looks like: Gold plated plumbing while the foundations are allowed to rot.
I am confused how can the MI voters overturn Federal law through referendum? Federal law gives derivatives safe harbors and seniority in bankruptcy proceedings.
http://www0.gsb.columbia.edu/faculty/moehmke/papers/BoltonOehmkeDerivatives.pdf
Matt:
The key word in the paragraph describing the new Michigan State Law is “similar.” Michigan voters can not overturn Federal Law; but, they can overturn state law and they have done so in the past.
With little delay, the legislature passed a new Emergency Manager Act, Public Act 436 giving derivatives such as the Interest Rate Swaps top priority similar to what the Federal 2005 Financial Services Modernization Act did.
Michigan does this quite a bit. My point being; the state legislature is adament and will pass laws already covered by federal law to block actions be pensioners. Michigan did the same with a new RTW law too. A big however is, the Federal Government and Michigan has the ability to do something for pensioners and won’t.
Thanks Run.
My big questions is why this was all allowed to fester for the past 23 years, when in 1990 it was pretty clear where Detroit was headed IMO. Baltimore was in a similar boat then.
Matt:
Some of it is a hostile mayor such as Coleman Young, some of it is the fleeing of the white population outside of the city and Wayne county, some of it the federal courts overturning decisions on segregation and the busing of children, etc. Their is a lot of blame to go around; but, I would argue with clarity this can not be laid at the feet of Kwame, Coleman, etc. Chicago had similar corruption problems under the first Daly and they made it through. Of course Daly was able to get state and federal aid to rebuild the south Loop area and for other places as well. When I was growing up in Chicago, the south Loop area was like a bombed out war zone. Some interesting reading:
“White Flight to the Suburbs” http://www.irp.wisc.edu/publications/focus/pdfs/foc32a.pdf
Perhaps, you also missed the legal story of Milliken vs Bradley? This court ruling and the resulting deterioration of Detroit adds to Frey’s points. This ruling closed the door on Detroit early on and well before corruption became a synonym for Detroit. What was allowed to happen in Minneapolis St.Paul was closed to Detroit. I can not think of many other rulings having such a disastrous impact other than Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp or the Untied Citizens ruling. Economically Detroit was cut off from the rest of the state through arbitrary state policy and the court system. One can wonder why or just assume NIMBY when it comes to race. Read my longer comment here: http://angrybearblog.strategydemo.com/2013/03/the-tragedy-of-detroit.html#comments
“Squandered Opportunities Leave Detroit Isolated” http://www.remappingdebate.org/article/squandered-opportunities-leave-detroit-isolated?page=0,3
Detroit is little more than a black ghetto deliberately walled-in economically. Jed seems to think the state would have prospered with just mining. Those mines pretty much petered out by 1960 (other than salt). They are enlarging the seaway into the great lakes and Detroit is a perfect port of call for these ships which will probably inlude ro-ros. At present, Detroit is the largest port of entry ($dollars) for our #1 trading partner – Canada. In 2012, Detroit was #6 in the nation as a Trade Hub:
6. Detroit
Type: Land
Imports: $48.2 billion
Exports: $62.8 billion
There is also another bridge being built to accomodate more Canada trade besides the Port Huron and present bridge in Detroit. The city is ripe for something good to happen.
As someone on Economists View said, the FED could buy up Detroit municipals and end much of the present day deficit issues. The FED can buy pretty much what it wants to.
run,
makes you wonder if some of those city pensioners and potential pensioners are likely to sign on with some of those rustic militia types, arm themselves, and blow the man away. It is definitely the man who is doing this.
If pensioners want to get screwed less they should hire better lobbyists.