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.