[Vision2020] No Banker Left Behind

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>

------------------------------
August 15, 2013
No Banker Left Behind By THE EDITORIAL
BOARD<http://www.nytimes.com/interactive/opinion/editorialboard.html>

The Detroit bankruptcy
case<http://www.nytimes.com/2013/07/19/us/detroit-files-for-bankruptcy.html>has
been cast as a contest between bondholders and pensioners that can be
resolved only by shared sacrifice.

In principle, we have no problem with that, though in practice, the
pensioners’ fair share will have to take into account their extreme
vulnerability<http://www.nytimes.com/2013/07/23/opinion/getting-detroit-back-on-its-feet.html?_r=0>:
Public pensions are not federally insured and many municipal retirees do
not receive Social Security.

What we do have a problem with is shared sacrifice that does not seem to
apply to the big banks that abetted Detroit’s descent into bankruptcy.

Last month, just days before its bankruptcy filing, Detroit reached its first
settlement with
creditors<http://www.bloomberg.com/news/2013-07-16/detroit-said-to-reduce-swaps-debt-by-25-in-orr-deal-with-banks.html>.
The settlement was with UBS and Bank of America, and though the precise
terms will not be nailed down until the bankruptcy judge weighs in, Detroit
is set to pay an estimated $250 million to terminate a soured derivatives
transaction from 2005.

The derivatives, known as interest-rate swaps, were supposed to protect
Detroit from rising interest payments on a chunk of its variable rate debt.
The banks would pay Detroit if interest rates rose, and Detroit would pay
the banks if rates fell. By 2009, both interest rates and the city’s credit
rating were falling, forcing Detroit to pay the banks some $50 million a
year and to pledge roughly $11 million a month in casino-tax revenue as
additional collateral.

In the settlement, Detroit will keep the casino-tax revenue. It will also
reduce its debt load, according to city officials, because the banks have
agreed to a discount of as much as 25 percent off what they are owed. But
the haircut doesn’t mean that the banks will suffer. They have already made
money on the swaps; the true extent of any discount will not be known until
the deal is finalized.

This much is clear:

■ 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.

■ Municipal officials are prey for Wall Street. The Dodd-Frank financial
reform law called on regulators to establish “enhanced protection” for
municipalities and other clients in their dealings with Wall Street, but
the Securities and Exchange Commission has not yet completed rules, while
the Commodity Futures Trading Commission’s rules are so weak as to
virtually invite the banks to exploit municipalities.

■ The special treatment banks receive when debtors are in or near
bankruptcy is unfair and economically destabilizing. Detroit’s agreement
with the two banks requires court approval, but, in general, swap deals by
banks are not subject to the constraints that normally apply in bankruptcy
cases; in effect, the banks are paid first, even before other secured
creditors and certainly before pensioners. That privilege, dating to the
heyday of derivatives deregulation in the 1990s and 2000s, is destabilizing
because the assurance of repayment fosters recklessness.

Detroit’s problems are a reminder of broader challenges, identified but
still unmet: protecting pensions; protecting municipalities from Wall
Street; and, at long last, revoking the obscene privileges of banks that
allow them to prosper on the failings of others.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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