NYT: Detroit Bankruptcy Shows How Wall Street Wins

 

Detroit's bankruptcy case is another example of how Wall Street wins, according to The New York Times.

Fixing Detroit's financial dilemma is supposed to be done by "shared sacrifice" between pensioners and municipal bond investors. Nice idea in theory, but the big banks — which helped cause the city's financial problems — don't seem to be sharing that sacrifice, according to The Times' editorial board.

Meanwhile pensioners are vulnerable, as their pensions are not federally insured and many do not get Social Security.

Under its settlement in the works with creditors, the city will pay approximately $250 million to UBS and Bank of America to settle derivative deals, know as interest rate swaps.

In the swap deals, the banks would pay the city if rates rose, while the city would pay the banks if they fell. As it turned out, rates fell and the city had to pay the banks about $50 million a year and pledge $11 million a month in casino tax revenue as collateral.

Under the settlement, which still needs to be approved by a bankruptcy judge, the banks agreed to take a 25 percent haircut. That doesn't mean they'll suffer, The Times notes, as they've already made money of the swaps.

"The banks' 25 percent hit is nothing compared with the 90 percent cut to pensions suggested by the city — a cut that would be disastrous in both human and political terms and that the State of Michigan must prevent from happening," The Times argues.

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