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It's good to be the king banker

Cross-posted from Eclectablog.


[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.

Originally posted to Eclectablog - eclectic blogging for a better tomorrow on Mon Mar 18, 2013 at 09:32 AM PDT.

Also republished by ClassWarfare Newsletter: WallStreet VS Working Class Global Occupy movement, Michigan, My Michigan, In Support of Labor and Unions, and American Legislative Transparency Project.

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Comment Preferences

  •  It's a win-win for banks (5+ / 0-)

    First, they make money off of the taxpayers, yet again.  But here's another thing to keep in mind.  How many of the Detroit properties are in foreclosure, or are available for pennies on the dollar?  Then, consider if you were a bank, how much money you could potentially save by moving your entire process to Detroit.  

    •  The banks are almost certainly hedged here, (0+ / 0-)

      meaning that they're losing money on a similar deal where they've taken the other side (ie, where they're short LIBOR).  

      Banks receive special dispensation and protection
      Well, no, the law is aimed at making sure that cities don't default on debt.  Who owns muni debt?  Individuals own most of it, not banks.  
      •  you know all this how, again? (0+ / 0-)

        The rat once again squeaks... but subtly, sneakily...

        Here's a little primer for the kinds of "individuals" who own muni bonds, which says they are owned by "households," which are not Betty the Hairdresser in Old Detroit but high-net-worth people who are commonly referred to as the 0.1 percent. And note this bit of text from the document, a great couple of laugh lines:

        What are some benefits of purchasing municipal securities?

        Municipal bonds and notes can be an important part of a diversified investment portfolio. Because bonds and notes typically have a predictable stream of payments of principal and interest, many people invest in them to preserve and increase their capital, or to receive dependable interest income. Additionally, the interest earned on municipal securities typically is exempt from federal and state income taxes.

        It is important to remember that investment objectives, and the best strategies for achieving those objectives, depend on an individual investor's particular circumstances. The tax advantage investors reap from tax-exempt securities will vary according to their income level.

        What are some risks involved in investing in municipal securities?

            Credit Risk - Risk that the issuer is unable to pay scheduled principal and interest on a timely basis. To evaluate the credit quality of an issuer, examine its credit rating and review the Preliminary Official Statement of the offering, which contains detailed financial information of the issuer.
            Interest Rate Risk - When interest rates decrease, bond and note prices increase, and when interest rates increase, bond and note prices decrease. Interest rate risk is the risk that changes in interest rates may reduce (or increase) the market price of a security. For investors who own a bond or note until its maturity, interest rate risk is not a concern.

        http://www.bondview.com/...

        If you are a Detroit muni bond holder, the Big Banks, not "the law" that includes the municipal bankruptcy code provisions that have started to be used recently, are making sure that all that crushing debt gets re-fi'd (for a fat fee, of course.) The same fu_ing banks that laugh at REAL individual starving householders who seek a re-fi of a mortgage that is under water because the fu_ing "financial industry" that hides behind the common faith in and understanding of what "banks" used to be.

        So of course, as with the effing German "bankers" who own all that Eurodebt, there is no effing "credit risk," now is there? Privatize, socialize...

        wurster the whisperer...

        "Is that all there is?" Peggy Lee.

        by jm214 on Tue Mar 19, 2013 at 04:37:21 AM PDT

        [ Parent ]

  •  We've been told the banks own the place, which (3+ / 0-)

    has long been true, and they're just making sure they really do own all places.  Just a beginning if they aren't stopped and we know our own government won't stop them.  It's the same thing worldwide.  In Portugal and Spain, it's "Screw the Troika", the Troika being the IMF, World Bank and the EU.  

    "The Global War OF Terror is a justification for U.S. Imperialism. It must be stopped."

    by BigAlinWashSt on Mon Mar 18, 2013 at 09:55:46 AM PDT

  •  Infographic shows how Libor scam hurt cities... (7+ / 0-)

    Business Insider has a chart simplifying and explaining the Libor scam and how it skimmed money from cities across the country.  At the end of the graphic, there's this quote:

    "Give a Man a Gun and he can rob a bank.  Give a Man a Bank and he Can Rob the World. "
  •  First Jean Klock Park, then a stadium for .. (4+ / 0-)

    ..pennies on the dollar now this:

    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.
    ..it's like these private profiteers are picking over a carcass, then walking away.

    This EM takeover of Democracy worked in how many of these jurisdictions -Three Oaks?

    And Rachel Maddow shows how gerrymandering made it so that even as many more peole voted for democrats more republicans were elected across the board - the same kind of "democracy" that held the U.S. house for republicans - more democratic votes yet more republicans elected via gerrymandering

    Thx Eclectablog for all of your work on these issues - tough job..

  •  My big fear right now is what happens (4+ / 0-)

    with the water situation.

     http://www.freep.com/...

    This regional water authority leases the asset from Detroit for $50M a year.  But, if a bank comes in for assets in a bankrupcy, then does that mean they could own the water asset?  And does that mean that water is now a for-profit, privately owned resource?

    I do not think any of this is clear.

    I would say people who live with well water are protected from this mess, buy they have a potential threat from the possibility of fracking.

  •  Maybe they could just steal 10% of (2+ / 0-)
    Recommended by:
    alwaysquestion, AoT

    everyone in Detroit's bank deposits and give it to the bankers. They seem to be getting away with it in Cyprus without crashing the global economy (though we don't know what depositors will do when (if?) the banks reopen there).

    We have only just begun and none too soon.

    by global citizen on Mon Mar 18, 2013 at 11:04:49 AM PDT

  •  LIBOR manipulation wouldn't hurt... (1+ / 0-)
    Recommended by:
    alwaysquestion

    ...anyone who consolidated their variable rate bonds via interest rate swaps like Detroit did, since they weren't paying anything variable based on LIBOR.

    As for walkaways, the responsible party is still the original property owner, as the bank never gained the title via foreclosure.  Many of them may not know they are tax deadbeats, or couldn't pay if they did know.  

    Perfectly legal on the bank's part.  Nothing requires them to actually take possession of a property with negative value.

    •  Isn't that the point of the diary? (2+ / 0-)
      Recommended by:
      AoT, Eric Nelson

      The laws are protecting the powerful banks and screwing the home owners and tax payers.

      Perfectly legal on the bank's part.  Nothing requires them to actually take possession of a property with negative value.
      Just because it is perfectly legal doesn't mean that the little guys aren't getting screwed.  How can they kick you out of a house you are still legally financially responsible for?  Once a person is forcibly removed from their home, they should no longer be responsible for it and the evictor should be on the hook for all taxes and bills associated including fines for upkeep and hazards.

      "Perhaps the sentiments contained in the following pages, are not YET sufficiently fashionable to procure them general favour..."

      by Buckeye Nut Schell on Mon Mar 18, 2013 at 03:34:14 PM PDT

      [ Parent ]

  •  Long story short: (2+ / 0-)
    Recommended by:
    Balto, alwaysquestion

    cities refinanced from variable rate loans to fixed rate loans, and now they want a do-over.

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