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?