Only Wall Street Wins in Detroit Crisis Reaping $474 Million Fee (Mar 2013)

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Source: Bloomberg – Only Wall Street Wins in Detroit Crisis Reaping $474 Million Fee

Notable excerpts:

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.

The city started borrowing to plug budget holes in 2005 under former Mayor Kwame Kilpatrick, who was convicted this week on corruption charges. That year, it issued $1.4 billion in securities to fund pension payments. Last year, it added $129.5 million in debt, 9.3 percent of its general-fund budget, in part to repay loans taken to service other bonds.

Detroit, which is trying to avoid becoming the largest U.S. municipal bankruptcy, struggles to serve residents after revenue declined when the auto industry collapsed and the city began to empty. Michigan’s Republican governor, Rick Snyder, is preparing to name an emergency manager, who will have to address debt and derivatives taken on in the last eight years.

“We have no lights, no buses, poor streets and now we’re paying millions of dollars a year on our debt,” said David Sole, a retired municipal worker and advocate for Moratorium Now Coalition, a Detroit group that fights foreclosures and evictions. “The banks said they need to be paid first. But there is no money.”

Banks including UBS AG (UBS), Bank of America Corp.’s Merrill Lynch and JPMorgan Chase & Co. (JPM) 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.

The largest part is $350 million owed for derivatives meant to lower borrowing costs on variable-rate debt.

Municipal borrowers from the Metropolitan Water District of Southern California to Harvard University in Cambridge, Massachusetts, have paid billions to banks to end interest-rate swaps that didn’t protect them.

The home town of General Motors Co. (GM) has been running general-fund deficits of $155.4 million to $331.9 million since 2005

While his client ran Detroit, the city embarked on two of its most expensive bond issues, first paying $46.4 million in fees to UBS and others to borrow $1.4 billion for pension obligations.

A year later, the city paid $61.8 million, including insurance costs, for UBS to sell $948.5 million in bonds, replacing two-thirds of the debt sold the previous year.

Detroit also entered into swaps contracts with UBS and SBS Financial Products Co., which serves as a counterparty on swaps transactions.

The city has advisers working on a plan to deal with the debt, in part by reducing retiree health-care liabilities, said Martin. He declined to comment on fees negotiated before he joined the administration.

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