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 ChangeCould 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 ChangeWall 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 ChangeWhile 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?
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Will Detroit’s Pensioners Lose out to Big Banks.
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yes
New Bank Investigations: Real Action, or More of the Same?
By MATT TAIBBI
POSTED: August 8, 2013
http://www.rollingstone.com/politics/blogs/taibblog/new-bank-investigations-real-action-or-more-of-the-same-20130808
Excerpt:
A lot of interesting things happening on the white-collar enforcement front. Evil hedge fund SAC Capital and its villainous ruler Stevie Cohen were run through the gauntlet, Goldman Sachs patsy Fabulous Fab took a beating in civil court (I love the detail that emerged, that Goldman executives now call him “the poor kid”), and now, apparently, a pair of high-profile investigations have been launched against Bank of America and J.P. Morgan Chase for subprime mortgage fraud. The latter investigations seem to be designed to answer criticisms that nobody is going after the real doers of evil systemic crimes.
The Chase case apparently involves a criminal investigation, which is indeed interesting. The company admitted as much yesterday, saying federal investigators out West have “preliminarily concluded” that Chase brazenly violated securities laws when it sold subprime mortgage-backed instruments in 2005-2007.
But I’m skeptical it will turn into a real criminal investigation. All of the stories that broke in the last day or two noted the same detail, that Chase has beefed up its estimates for litigation/settlement costs:
As the investigations drag on, the bank is racking up significant legal costs. To help cushion against potentially hefty payouts to the authorities, JPMorgan recorded a $678 million expense for additional litigation reserves in the second quarter, up from $323 million in the same period a year ago, according to the filing on Wednesday.
The bank also estimated it could incur up to $6.8 billion in losses beyond its reserves, nearly $1 billion more than the first quarter of the year.
The government may very well decide to go after Chase in what it considers a big way. It may do the same for Bank of America, and then it may keep going on down the line to other banks, until it has collected a billion dollars or so from all the usual suspects, who were virtually all engaged in the same kinds of schemes, gathering and selling to customers radioactive mortgage bonds they knew were likely to explode, or were ridden with fraud and faulty underwriting.
But to me, these investigations will be meaningless unless one of two things happens, once they reach the inevitable stage of concluding painstakingly-crafted settlements with the inevitable teams of high-priced lawyers for the offending firms:
1) Someone goes to jail.
2) The company is ordered to break itself up into smaller pieces.
As to point one, here’s the thing. If criminal laws were violated, then the government certainly has discretion to exercise mercy and seek non-criminal sanctions against the individuals responsible. But they can really only do that and not be total hypocrites if they also simultaneously implement leniency programs for ordinary street criminals at the same time.
Laissez faire is what got us into this mess. Just look at what the Friedmanites and their economic world view did in September 2008.
Joy stated it succinctly: “Reinstate the Glass-Steagal Act repealed by Clinton and tantamount to casino bank legitimization.”
When the Glass-Steagall wall came down, the casino ensued and the Friedmanites couldn’t control their greed.
rafflaw,
We know how well run some of those big banks and investment firms were. That’s why we tax payers had to bail out Wall Street. Thanks to the banksters financial shenanigans, many pension funds lost a lot of money.
Great catch Elaine.
CAMERON,
If not bank tied the hands of any city official to take the risky loans, then no city officials tied the hands of the banks hands so they should have to take responsibility for loaning to a bad customer instead of sucking the pensioners money.
anon,
You may want to double check your facts on your claim that public workers have it a “million times better than the average worker” and that teachers are pretty well compensated. Ask a teacher and ask the public workers in Detroit.
davidm wrote:
“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.”
*****
Twinkie CEO Admits Company Took Employees Pensions and Put It Toward Executive Pay
Hostess company continues to screw over its workers.
http://www.alternet.org/corporate-accountability-and-workplace/twinkie-ceo-admits-company-took-employees-pensions-and-put-it
Excerpt:
December 11, 2012
Twinkie-maker Hostess continues to screw over its workers. The company is in the process of complete liquidation and 18,000 unionized workers are set to lose their jobs. More troubling – they could lose their pensions.
According to a report by the Wall Street Journal, Hostess’ CEO, Gregory Rayburn, essentially admitted that his company stole employee pension money and put it toward CEO and senior executive pay (aka “operations”). While this isn’t technically illegal, it’s another sleazy theft by Hostess executives – who’ve paid themselves handsomely while running their company into the ground. Just last month, a judge agreed to let Hostess executives suck another $1.8 million out of the bankrupt company to pay bonuses to CEOs.
If there’s no way to recover the money for the Hostess pension plans for workers, then the Pension Benefit Guaranty Corp. will have to foot the bill to make sure workers get at least some of the retirement money they paid in.
Elaine, you ought to realize that you are reading a very slanted propaganda piece when it says that a CEO stole employee pension money but it is legal. The word “steal” or “stole” suggests it was illegal. Apparently theft was not involved here, even though the article says it was. Oh, well, I guess they add the word “essentially” so that makes the article accurate.
From what I know, Gregory Rayburn, the CEO at Hostess who is mentioned by the article, took the helm just before bankruptcy proceedings. The actual CEO who made the decision to stop contributions is, of course, gone and unavailable for comment. In any case, the pension contributions from employees was not taken. That really would be theft. The pensions are funded by both the employees and the employer. The actual amounts are negotiated by the union contracts. When the company was running out of money to meet its obligations, usually their obligation to contribute to the pension is the first one that is suspended. One reason for this is the pension is guaranteed by insurance from a company like Pension Benefit Guaranty Corporation. Another reason is that it is human nature to pay the person knocking on your door with their hand out before a pension fund that is for the future. I’m not justifying it, but trying to explain it in real terms. When the company started being unable to pay everybody they owed, their pension contribution was the first that was neglected. That happened maybe a month or two before they gave the formal announcement that they were suspending their pension contributions. It is simply a matter of not having enough money in the checkbook to make the payments, and the delay between realizing you are up the creek without a paddle and your formal announcement that you have messed up big time. Once the pension plan is considered insolvent, the insurance company steps in with their obligation to pay, a fact that your article conveniently omits because it doesn’t stir up the foam of discontent from liberals.
I sincerely suggest you try to add additional sources for obtaining your news. Maybe adding a little Fox News for balance might be a good idea. 🙂
Well done Raff. You have become the blogs go to guy on matters that deal with financial corruption. This is merely another example of the Corporatists attempt to steal from others and in the process impoverish almost everybody. It needs to be seen in psychological,not economic or political terms. It is sociopathy leading those who follow authoritarians blindly such as anon above and those who choose to side with the like DavidM.
anon,
Bad teachers CAN be fired.
I am pro union.
That said
GET RID OF PUBLIC UNIONS.
There are so many issues with public unions. Cant fire bad teachers. Cant fire bad cops.
Taxpayers held hostage while they pay the salary and benefits.
Public workers have it a million times better than the average American worker which btw most American jobs are retail based if you did not know.
This country has become a joke. The only people making out are the rich or the govt workers. Everyone else is royally screwed.
Im not saying teachers are rich but they are usually pretty well compensated, especially in comparison to the avg US worker
Spot on Davidm.
This is what happens when you have gross financial mismanagement and totally inept administration. These incompetents thought they could just keep kicking the can down the road by taking on more and more debt and delaying dealing with the problem at another time. You can only do this for so long before the whole financial disaster blows up in your face. How these fools could have allowed a debt estimated in excess of 18 billion to be run up is bewildering for one city.
No Bank tied anyone’s hands behind their back and forced the stupid city officials to take out loan after loan they could not service and take on other financial instruments that they simply did not understand or were too stupid and lazy to understand. They did this with their eyes open and now they have to pay. It is just too easy to blame the banks and other bond holders in these cases because this is the popular trend now. It appeals to the financial and economic illiterate class that dominate the US.
If cities and States were run with the same financial rigor, standards and competence of long term successful global businesses the results would be very different. Instead many are run and controlled by people who could not run a turkey lottery at a profit.
If I loaned the city money I want it back thank you and so would you but many creditors are going to be badly burned in this exercise.
The obligations to the city pension funds are only as good as the ability to fund them and funding these obligations with loans you cannot repay is a foundation for financial disaster and that is, in part, what has been going on.
Now the city is surely going to have to sell off assets to pay down some of its debt – and so it should. For sure no financial institution or other investors are now going to lend them unsecured funds.
Lets gets get this straight–pensioners and workers did not cause the crash which precipitated Detroit’s bankruptcy and neither did unions. Bankers most assuredly did and they have managed to fix the laws, the law makers and the courts so that they will never have to accept personal responsibility for their actions. I wish some of the commentators could have been a fly on the wall when some of the municipal bond deals that have gotten Detroit in trouble were sold to the CITY.
As to “socialism” in Detroit that is ridiculous the car companies were and still are treated like kings even when they were and are treating their employees like trash. I find it amazing that those who boost “capitalism” never seem to believe that CONTRACTS with humans should be honored but contracts with Corporations are like holy writ!
The banks and bond brokers have already taken their cut of Detroit and now they will get more while the workers who did the dirty work cleaning the streets and taking care of the citizens will get the shaft. Its appalling.
Justice Holmes wrote: “Lets gets get this straight–pensioners and workers did not cause the crash which precipitated Detroit’s bankruptcy and neither did unions. Bankers most assuredly did…”
How did the bankers cause the crash? They only supplied the money, right? The crash was caused by the city managers, who I understand were raging democrat liberals. The problem is that they spent money that they didn’t have. It is the same management methodology that Obama is following. I don’t run my household’s finances this way, so neither should government. But you know what I have observed? Virtually all the governments do this. They borrow money constantly for things they can’t afford. I do not understand why you and others cannot see this as being at the heart of the matter. I have absolutely zero motivation to defend or accuse bankers. Nobody is explaining how bankers caused Detroit to fail.
Bruce,
The unions across the country have made reasonable deals and gave concessions repeatedly. And yet some here think the workers are the problem when state and local politicians of both parties violated those contracts and failed to fund the minicipality’s, state or school district’s share to the pension funds. The bankruptcy process is being used to break unions. How much did this non-elected emergency manager approve for a new sports stadium in Detroit?
Darren,
They’d exactly that….. In 2009……if I recall….
Maybe it might be time for some of these cities to look at defined contribution plans rather than defined benefit ones.
The first to lose their pensions should be the politicians, The politicians and civil service unions saw this a long time ago but refused to make a reasonable deal and cut their pensions, so now they get nothing, greed’s a terrible thing When Obama bailed out G.M. he bailed out the unions. Dealerships were closed, and bond holders lost everything. You can’t keep screwing the money people. In the city of L.A. city services have been dramatically cut, street sweepers, tree trimmers, police services, etc. all while the value of the dollar gets less and less
Darren,
My bet is that the governor could be held in contempt by the bankruptcy judge….. With the shenanigans that have been going on the city of city where the eastern division is located….. Will do hat to this governor…. They, the city have felt the after affects that he has done to this part of he state….
Elaine,
That’s the whole reason that the State has appointed Emergency Managers…. They’ve already put a number of the school districts in bankruptcy…. The pensions are or were vested through the state……in the state of Michigan…..
Foreshadowing the current situation in Detroit, in 2009 on JT’s thread Nutter Threatens to Shutdown Court System and Cut Police ForceI wrote:
Looking back over my notes, in 2010 I wrote
Perhaps if the banks had not loaned money to Detroit, this day of reckoning would have come sooner? And yes – creditors do charge higher rates to higher credit risks.
The root cause of Detroit’s problems have nothing to do with banks or derivatives and everything with a government that over-promised pensions and then systematically underfunded them. Those promises are what elected it. What is happening in Detroit will happen throughout much of the nation, pitting public sector elites against the taxpayers they rule over for years.
I wrote about this back in 2011 when I said