Will Detroit’s Pensioners Lose out to Big Banks?

Seal_of_Detroit,_Michigan_svg

Respectfully Submitted by Lawrence E. Rafferty (rafflaw)-Guest Blogger

On July 18th, 2013, the City of Detroit made news because the state appointed emergency manager officially filed for a Chapter 9 bankruptcy. “Detroit filed the largest municipal bankruptcy in U.S. history on Thursday, setting the stage for a costly court battle with creditors and opening a new chapter in the long struggle to revive the city that was the cradle of the American auto industry.

The bankruptcy, if approved by a federal judge, would force Detroit’s thousands of creditors into negotiations with the city’s Emergency Manager Kevyn Orr to resolve an estimated $18.5 billion in debt that has crippled Michigan’s largest city.” Tribune

There is no dispute that the City of Detroit has been mismanaged for years, but now that the Emergency Manager has filed the bankruptcy, just who will lose the most in the bankruptcy process?  

You may recall that in March of this year I wrote an article describing the Joint FDIC-Bank of England plan to grab depositor’s funds in order to  bail out banks here in this country, in a similar move to the deposit grab in Cyprus.  In that case, the individual bank customer would potentially lose their life savings in order to balance the books of the ill managed banks.  Here in this Detroit debacle, the bankruptcy court is being used to fleece Detroit pensioners of their earned and state constitutionally guaranteed benefits in order to pay off creditor banks.

We need to look at a short history of who Detroit borrowed from and what kind of lending instruments, like interest rate swaps that were used to procure the necessary funds to keep the city alive.

Interest rate swaps – the exchange of interest rate payments between counterparties – are sold by Wall Street banks as a form of insurance, something municipal governments “should” do to protect their loans from an unanticipated increase in rates. Unlike ordinary insurance, however, swaps are actually just bets; and if the municipality loses the bet, it can owe the house, and owe big. The swap casino is almost entirely unregulated, and it is a rigged game that the house virtually always wins. Interest rate swaps are based on the LIBOR rate, which has now been proven to be manipulated by the rate-setting banks;…”  Nation of Change

These Interest Rate Swaps were sold to the City of Detroit by Bank of America and UBS AG and they have proven to be costly to the City of Detroit and in the end, costly to the workers whose pensions may be at risk.  These banks are given super priority in the bankruptcy court pursuant to Dodd-Frank and the 2005 Banruptcy Act.

“Under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured. In a major derivatives fiasco, derivative claimants could well grab all the collateral, leaving other claimants, public and private, holding the bag.”  Web of Debt 

Why would these risky derivative products and the banks that sell them get super priority from Congress?  One possible answer is to follow the money and see who donated to the legislators involved in allowing this super priority to be included.  Another answer is the response that Banksters always use. ” We are too big to fail and if we go down the whole financial system goes down with us. ”

The argument for the super-priority of derivative claims is that nonpayment on these bets represents a “systemic risk” to the financial scheme. Derivative bets are cross-collateralized and are so inextricably entwined in a $600-plus trillion house of cards that the whole financial scheme could go down if the betting scheme were to collapse. Instead of banning or regulating this very risky casino, Congress has been persuaded by the masterminds of Wall Street that it needs to be preserved at all costs.”  Nation of Change
Could this disaster in Michigan be repeated in cities across the country?  The  answer is a disturbing yes.   “Detroit’s bankruptcy poses no systemic risk to Wall Street and global financial markets. Fine. But it does pose a systemic risk to Main Street, local governments, and the contractual rights of pensioners. Credit rating agency Moody’s stated in a recent report that if Detroit manages to cut its pension obligations, other struggling cities could follow suit. The Detroit bankruptcy is establishing a template for wiping out government pensions everywhere. Chicago or New York could be next.” Nation of Change
Wall Street makes risky loans and sells risky interest rate swaps to those same borrowers and then throws its hands in the air when those very same borrowers fall prey to a falling market and bad bets on the interest rate swaps.  When will we as a society actually make those who create and sell these risky loans pay for their bad products?  Since Congress has been paid to agree with Wall Street, there is no incentive for Wall Street to actually end their risky bets.  Dodd-Frank may have outlawed bank bail-outs, with an ever-increasing range of exceptions.  However, that legislation has actually allowed for bail-outs when it also granted the banks super priority in bankruptcy court actions.
What can Main Street and cities and states do to protect themselves from a banking system that is rigged in favor of Wall Street?  One possible measure that has been proposed in the article of the Nation of Change article cited above, is for states to follow the lead of the State of North Dakota and establish its own state bank.
“Interestingly, Lansing Mayor Virg Bernero, Snyder’s Democratic opponent in the last gubernatorial race, proposed a solution that could have avoided either robbing the pensioners or scaring off the bondholders: a state-owned bank. If the state or the city had its own bank, it would not need to borrow from Wall Street, worry about interest rate swaps, or be beholden to the bond vigilantes. It could borrow from its own bank, which would leverage the local government’s capital into credit, back that credit with the deposits created by the government’s own revenues, and return the interest to the government as a dividend, following the ground-breaking model of the state-owned Bank of North Dakota.” Nation of Change
While a State owned bank cannot prevent individual cities and towns from being mismanaged, it can make financing those towns and cities projects a cheaper and safer investment.  It can also prevent Wall Street from profiting from their own risky investment products.   The Detroit Emergency Manager was willing to agree on the banks getting 75 cents on the dollar from the big banks that aided this financial mess.  Will he be as willing to only reduce pensions by 25% to the workers who did not mismanage the city or sell the city risky financial products?  Does the Michigan Constitution’s guarantee that pensions can’t be reduced going to survive this attack through the bankruptcy court process?
Are the teachers pensions in Illinois and other states next on the chopping block?  What’s your guess?

73 thoughts on “Will Detroit’s Pensioners Lose out to Big Banks?”

  1. Looting Main Street
    How the nation’s biggest banks are ripping off American cities with the same predatory deals that brought down Greece
    By Matt Taibbi
    March 31, 2010
    http://www.rollingstone.com/politics/news/looting-main-street-20100331

    Excerpt:
    If you want to know what life in the Third World is like, just ask Lisa Pack, an administrative assistant who works in the roads and transportation department in Jefferson County, Alabama. Pack got rudely introduced to life in post-crisis America last August, when word came down that she and 1,000 of her fellow public employees would have to take a little unpaid vacation for a while. The county, it turned out, was more than $5 billion in debt — meaning that courthouses, jails and sheriff’s precincts had to be closed so that Wall Street banks could be paid.

    As public services in and around Birmingham were stripped to the bone, Pack struggled to support her family on a weekly unemployment check of $260. Nearly a fourth of that went to pay for her health insurance, which the county no longer covered. She also fielded calls from laid-off co-workers who had it even tougher. “I’d be on the phone sometimes until two in the morning,” she says. “I had to talk more than one person out of suicide. For some of the men supporting families, it was so hard — foreclosure, bankruptcy. I’d go to bed at night, and I’d be in tears.”

    Homes stood empty, businesses were boarded up, and parts of already-blighted Birmingham began to take on the feel of a ghost town. There were also a few bills that were unique to the area — like the $64 sewer bill that Pack and her family paid each month. “Yeah, it went up about 400 percent just over the past few years,” she says.

    The sewer bill, in fact, is what cost Pack and her co-workers their jobs. In 1996, the average monthly sewer bill for a family of four in Birmingham was only $14.71 — but that was before the county decided to build an elaborate new sewer system with the help of out-of-state financial wizards with names like Bear Stearns, Lehman Brothers, Goldman Sachs and JP Morgan Chase. The result was a monstrous pile of borrowed money that the county used to build, in essence, the world’s grandest toilet — “the Taj Mahal of sewer-treatment plants” is how one county worker put it. What happened here in Jefferson County would turn out to be the perfect metaphor for the peculiar alchemy of modern oligarchical capitalism: A mob of corrupt local officials and morally absent financiers got together to build a giant device that converted human shit into billions of dollars of profit for Wall Street — and misery for people like Lisa Pack.

    And once the giant shit machine was built and the note on all that fancy construction started to come due, Wall Street came back to the local politicians and doubled down on the scam. They showed up in droves to help the poor, broke citizens of Jefferson County cut their toilet finance charges using a blizzard of incomprehensible swaps and refinance schemes — schemes that only served to postpone the repayment date a year or two while sinking the county deeper into debt. In the end, every time Jefferson County so much as breathed near one of the banks, it got charged millions in fees. There was so much money to be made bilking these dizzy Southerners that banks like JP Morgan spent millions paying middlemen who bribed — yes, that’s right, bribed, criminally bribed — the county commissioners and their buddies just to keep their business. Hell, the money was so good, JP Morgan at one point even paid Goldman Sachs $3 million just to back the fuck off, so they could have the rubes of Jefferson County to fleece all for themselves.

  2. rafflaw,

    “Are the teachers pensions in Illinois and other states next on the chopping block? What’s your guess?”

    Our government would prefer to bail out the banks/banksters than the working people of this country!

  3. Illinois is probably next, raff, maybe California. Private sector unions made changes, public sector unions did not. They didn’t have to change. All they needed to do was keep electing Dems who gave them money THAT WAS NEVER THERE. “Sooner or later you run out of other people’s money.” That’s what’s happening. I am not unsympathetic to the workers. They were mislead by their union leaders. You know, the ones in DC going to cocktail parties and pulling down 6 and 7 figures.

  4. rafflaw,

    This is an important topic for a post. Thanks!

    Here’s an article that i think you may find interesting:

    The Scam Wall Street Learned From the Mafia
    How America’s biggest banks took part in a nationwide bid-rigging conspiracy – until they were caught on tape
    By Matt Taibbi
    June 21, 2012
    http://www.rollingstone.com/politics/news/the-scam-wall-street-learned-from-the-mafia-20120620

    Excerpt:
    Someday, it will go down in history as the first trial of the modern American mafia. Of course, you won’t hear the recent financial corruption case, United States of America v. Carollo, Goldberg and Grimm, called anything like that. If you heard about it at all, you’re probably either in the municipal bond business or married to an antitrust lawyer. Even then, all you probably heard was that a threesome of bit players on Wall Street got convicted of obscure antitrust violations in one of the most inscrutable, jargon-packed legal snoozefests since the government’s massive case against Microsoft in the Nineties – not exactly the thrilling courtroom drama offered by the famed trials of old-school mobsters like Al Capone or Anthony “Tony Ducks” Corallo.

    But this just-completed trial in downtown New York against three faceless financial executives really was historic. Over 10 years in the making, the case allowed federal prosecutors to make public for the first time the astonishing inner workings of the reigning American crime syndicate, which now operates not out of Little Italy and Las Vegas, but out of Wall Street.

    The defendants in the case – Dominick Carollo, Steven Goldberg and Peter Grimm – worked for GE Capital, the finance arm of General Electric. Along with virtually every major bank and finance company on Wall Street – not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more – these three Wall Street wiseguys spent the past decade taking part in a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America. The banks achieved this gigantic rip-off by secretly colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. By conspiring to lower the interest rates that towns earn on these investments, the banks systematically stole from schools, hospitals, libraries and nursing homes – from “virtually every state, district and territory in the United States,” according to one settlement. And they did it so cleverly that the victims never even knew they were being ­cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime.

    In fact, stripped of all the camouflaging financial verbiage, the crimes the defendants and their co-conspirators committed were virtually indistinguishable from the kind of thuggery practiced for decades by the Mafia, which has long made manipulation of public bids for things like garbage collection and construction contracts a cornerstone of its business. What’s more, in the manner of old mob trials, Wall Street’s secret machinations were revealed during the Carollo trial through crackling wiretap recordings and the lurid testimony of cooperating witnesses, who came into court with bowed heads, pointing fingers at their accomplices. The new-age gangsters even invented an elaborate code to hide their crimes. Like Elizabethan highway robbers who spoke in thieves’ cant, or Italian mobsters who talked about “getting a button man to clip the capo,” on tape after tape these Wall Street crooks coughed up phrases like “pull a nickel out” or “get to the right level” or “you’re hanging out there” – all code words used to manipulate the interest rates on municipal bonds. The only thing that made this trial different from a typical mob trial was the scale of the crime.

    USA v. Carollo involved classic cartel activity: not just one corrupt bank, but many, all acting in careful concert against the public interest. In the years since the economic crash of 2008, we’ve seen numerous hints that such orchestrated corruption exists. The collapses of Bear Stearns and Lehman Brothers, for instance, both pointed to coordi­nated attacks by powerful banks and hedge funds determined to speed the demise of those firms. In the bankruptcy of Jefferson County, Alabama, we learned that Goldman Sachs accepted a $3 million bribe from J.P. Morgan Chase to permit Chase to serve as the sole provider of toxic swap deals to the rubes running metropolitan Birmingham – “an open-and-shut case of anti-competitive behavior,” as one former regulator described it.

    More recently, a major international investigation has been launched into the manipulation of Libor, the interbank lending index that is used to calculate global interest rates for products worth more than $3 trillion a year. If and when that case is presented to the public at trial – there are several major civil suits in the works here in the States – we may yet find out that the world’s most powerful banks have, for years, been fixing the prices of almost every adjustable-rate vehicle on earth, from mortgages and credit cards to interest-rate swaps and even currencies.

    But USA v. Carollo marks the first time we actually got incontrovertible evidence that Wall Street has moved into this cartel-type brand of criminality. It also offered a disgusting glimpse into the enabling and grossly cynical role played by politicians, who took Super Bowl tickets and bribe-stuffed envelopes to look the other way while gangsters raided the public kitty. And though the punishments that were ultimately handed down in the trial – minor convictions of three bit players – felt deeply unsatisfying, it was still a watershed moment in the ongoing story of America’s gradual awakening to the realities of financial corruption. In a post-crash era where Wall Street trials almost never make it into court, and even the harshest settlements end with the evidence buried by the government and the offending banks permitted to escape with no admission of wrongdoing, this case finally dragged the whole ugly truth of American finance out into the open – and it was a hell of a show.

  5. North Dakota State Bank should be growing exponentially w/ that state being a boom town.

  6. I can see the advantages mentioned here about the ND state bank system, and I can agree with that. What worries me is the concept of the Single Point of Failure. When you have a diverse market, with many lenders, if one is mismanaged or becomes insolvent the others, and the others’ depositors, creditors, and investors are not as directly affected. In a single point of failure system everyone, or nearly everyone, is affected.

  7. IT would be interesting to see what would be held to be supreme, a bankruptcy proceeding under Chapter 9 (Federal Law) and a state constitution that mandates that the pensioners get paid. I wonder how that would play out.

  8. when will the people wake up to the scam that wall street is more like it. when will they take their money out of the big banks and begin using municipals instead? maybe they need to finally go read r.duane willings book ” Money the 12th and final religion. we had our own bank if anyone remembers and it came with no debt. that until the elites shut it down and opened the federal reserve. and then all darkness broke loose. shutting down the federal reserve and reopening our bank is what got JFK murdered. the elites didnt like him going against what they told him to do. the bankers own everything for a reason. they attempt to dumb us down and keep us distracted for a reason. and that reason is so we dont realize the enslavement they have forced on us until it is to late. and they have camps for those who think they will fight back and win. there is nothing good about the big banks. and they were created with the intention of breaking everyone and thing except the insiders but even they can and have been broken when they refuse to follow their orders

  9. It’s not certain raff that the bankruptcy Judge is going to allow it to be maintained…. Other issues that are being thought of in this matter is that the Emergency Manager selection maybe in violation of the opens meetings act….. The emergency manager selected by the governor and the filing of bankruptcy to alter the rights of the pensioners is against the Michigan Constitution….. And the Governor is breaking the Law by doing this….

    Two judges in the court of claims have ruled against the city in various ways…. But the COA has reversed them…. But all is stayed pending the bankruptcy…..

    Something interesting is the Emergency Manager has decided the enlist the services of Christie’s Auction House…..to evaluate the DIA…. The Art Museum…. But there is no intent to sell the billion dollar collection…..

    I have a number of things I could and would say….. But, it wouldn’t be nice….

    David, reread what raff wrote…. You haven’t a clue….

  10. http://reason.com/archives/2013/07/23/why-detroit-wont-have-a-second-act

    “Until the city’s politicos treat its humble entrepreneurs with the same respect they show big investors, Motown’s second act will never arrive.”

    “A city that showers subsidies on well-connected businesses while thwarting individual entrepreneurs and ignoring basic services is writing its obituary — not its second act.”

    laissez faire is the only thing that will save Detroit.

  11. Good points on all the derivatives stuff. I read that Congress had to repeal, over ride, or preempt preexisting Bucket Shop laws to permit the derivatives trade. Which, about Bucket Shop laws, Wiki says:

    As defined by the U.S. Supreme Court a bucket shop is “[a]n establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in.”

    Typically the criminal law definition refers to an operation in which the customer is sold what is supposed to be a derivative interest in a security or commodity future, but there is no transaction made on any exchange. The transaction goes ‘in the bucket’ and is never executed. Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market. Alternatively, the bucket shop operator “literally ‘plays the bank,’ as in a gambling house, against the customer.”

    All of which means Congress basically decided to support what had been considered criminal conduct for about a century. Here is a link to more info:

    http://calcorporatelaw.com/2010/08/does-the-dodd-frank-act-revive-the-ca-bucket-shop-law/

    Squeeky Fromm
    Girl Reporter

  12. the problem is not pensioners, the problem is socialism. Detroit is what always happens when socialism has more sway than capitalism. Socialism is like a flock of locusts, it destroys everything in its path. Detroit is no different from anyother place.

    The bottom line is that you cannot spend other people’s money indefinitely, they get tired of it and leave. It happened in England in the early 60’s, the “Brain Drain”, and it happened to Detroit and it will happen to America.

    Socialism is a great concept of love and brotherhood but it creates neither.

    http://watchdog.org/96532/10-reasons-for-detroits-historic-failures/

  13. Trolls, they just crawl out of the woodwork at every opportunity with their neocon/libertarian talking points and their refusal to notice that when their soulless masters get exactly what they want- deregulation or its flip side, protectionism for the 1%- economic destruction for working people ensues. And then they blame the victims. Shame on you. Shame on you.

  14. david2575,
    You may want to re-read the article. I stated early on that Detroit was mismanaged for years, but the loans from Wall Street banks that were risky at best added to the mess that the city is in. Secondly, why should Banks have a super priority in a bankruptcy proceeding when their risky loans made the financial situation much worse. Shouldn’t they have to take personal responsibility for their actions? The workers and unions did not create this problem.
    If the state of Michigan, much like the State of Illinois had not underfunded its required contribution for years, through Republican and Democratic administrations, the pension part of the problem would have been much less. When Wall Street makes a contract, they expect it to be honored, even if they sold the customer a bill of goods, so why should blameless pensioners not expect the City to honor its commitments as guaranteed by the Michigan constitution?

    1. rafflaw wrote: “why should Banks have a super priority in a bankruptcy proceeding when their risky loans made the financial situation much worse. Shouldn’t they have to take personal responsibility for their actions?”

      I’m sure you know the law better than me, but isn’t the priority pretty much set in Section 507 of the United States Code? You kind of make it sound like the Banks strong armed the city to take the loans rather than the other way around. When a bank chooses to make a risky loan, they certainly may end up not getting paid, but it does not mean that they are not expected to get paid. And when they make a loan, they do so knowing the law and what place in line they hold if bankruptcy is declared.

      rafflaw wrote: “The workers and unions did not create this problem.”

      Are you saying that the workers and unions did not put pressure upon the city to pay the workers benefits larger than they would be able to pay? I don’t know the exact history, but I assume that they did. Remember how Hostess was forced into bankruptcy because its workers went on strike? Sometimes workers just do not believe it when managers say they don’t have the money to give them what they demand.

      It seems to me that people just imagine that the money is there somewhere, all they have to do is yell loud enough or make the best arguments why someone else should not be paid what they are owed so enough will be left over for the others.

      rafflaw wrote: “why should blameless pensioners not expect the City to honor its commitments as guaranteed by the Michigan constitution?”

      We would all hope that they could be paid, but if the money is not there, it might not happen. If the State can raise the money and pay it, and by law they are obligated to by their constitution, then yes, they should pay it.

      Unfortunately, it has been heralded for a long time that cities and states and even the federal government are going to start going bankrupt, and the primary problem are promised pensions. It is very much like the Social Security problem. Pensions are the easiest promise for them to make without having to make good on it. It will be years before someone screams for the money, and by that time, the actual politicians who made the promises will be long gone.

      I’m not saying that I agree with it all. It is not fair. On that, I agree with you. I’m just saying a lot of people warned about this. Granted it has mostly come from the Republican side of the aisle, but it is basically common knowledge. I have heard it for many, many years. When Detroit bankruptcy was announced, I said, “Uh oh, here it comes, the first of many to come.”

      Having said all this, I am way outside my area of knowledge on this one. I’m just sharing what it looks like to me. I certainly welcome you or others to tell me the law and how it really is. I imagine that my understanding could be adjusted quite a bit on this one.

  15. Banks create jobs, pensioners don’t. We have to take care of the job creators first. Bankers are high-minded professionals. Union leaders are
    grubby, corrupt bullies.

  16. A State bank seems like an idea that is too late in coming. Government really should not be borrowing as much as they do. They are the one entity in society that could operate on a cash basis, if only they did not have such a desire to spend, spend, spend.

    The Detroit problem is the same problem in the rest of the country. Pensions are the easiest promise to make, a way to kick the can down the road and let someone else deal with making the real payments. Every government agency, local, State, and federal, will start to fail financially first with pensions because of the history of corrupt politicians who do not manage money wisely. Many have seen this coming from many years back, but few have listened to their warnings and calls for fiscal responsibility. Instead they have blamed these people for being unloving and uncaring for the workers of society. They have blamed them for caring only about the interests of the wealthy and corporate leaders. Now that reality is hitting home where the rubber meets the road, they still will not wake up to what has caused the problem. It is still Wall Street’s fault somehow. Certainly it could not be mismanagement or the worker unions incessantly hollering to care for the workers and give them the wages and benefits they rightly deserve, despite the money not being there to do it.

  17. Reinstate the Glass-Steagal Act repealed by Clinton and tantamount to casino bank legitimization.

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