Detroit Bankruptcy as "Bail-In"

Interesting piece on the always-thought-provoking CounterPunch site.

The Detroit bankruptcy is looking suspiciously like the bail-in template originated by the G20’s Financial Stability Board in 2011, which exploded on the scene in Cyprus in 2013 and is now becoming the model globally. In Cyprus, the depositors were “bailed in” [[stripped of a major portion of their deposits) to re-capitalize the banks. In Detroit, it is the municipal workers who are being bailed in, stripped of a major portion of their pensions to save the banks.

Bank of America Corp. and UBS AG have been given priority over other bankruptcy claimants, meaning chiefly the pensioners, for payments due on interest rate swaps they entered into with the city. 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; and they were a major contributor to Detroit’s bankruptcy.

http://www.counterpunch.org/2013/08/...ave-the-banks/

This is not a reasonable interpretation of the situation. The swaps were at the front of the line in any case, which is why the bankruptcy judge let the B of A/UBS deal go ahead; because it didn't materially affect the situation of the other claims.

That the deal should probably have never existed in the first place, or at least that the city made a bad bet, and that it cost the city a lot of money it couldn't afford, is undeniable.

Quote:

---

Originally Posted by mwilbert

That the deal should probably have never existed in the first place, or at least that the city made a bad bet, and that it cost the city a lot of money it couldn't afford, is undeniable.

---

But if the bet is fixed, then it's not a bet gone bad so much as a swindle and a crime. See: LIBOR.

Quote:

---

Originally Posted by Detroitnerd

But if the bet is fixed, then it's not a bet gone bad so much as a swindle and a crime. See: LIBOR.

---

If it's a crime, so what? None of those kinds of crimes is ever prosecuted.

It is manifestly not a swindle. If you offer me an unfair bet, and you hide from me that it's unfair, you can swindle me. If you offer me an unfair bet and spell it out precisely, and I take the bet anyhow, then you aren't a swindler; I am an imbecile.

DetroitYES Home » Non Detroit Issues » GoLeft TV » The Detroit Blueprint To Bankrupt America

But they didn't spell it out precisely, which is why so many cities got stuck in this trap. LIBOR wasn't the impartial measure it was purported to be by the people who sold these things. It was instead a fixed set-up to make sure the salesmen made big money off of what turned out to be [[fixed) bets, but were sold as impartial protective instruments.

In my view they are as guilty of a swindle as a gambler who uses marked cards or loaded dice. But it's really worse than that, since the people they really swindled were not just some individual gambler who was taking his chances, but thousands of regular, innocent, taxpaying people who could have no idea that they were paying into a fixed con game designed to steal their money.

Quote:

---

Originally Posted by professorscott

If it's a crime, so what? None of those kinds of crimes is ever prosecuted.

It is manifestly not a swindle. If you offer me an unfair bet, and you hide from me that it's unfair, you can swindle me. If you offer me an unfair bet and spell it out precisely, and I take the bet anyhow, then you aren't a swindler; I am an imbecile.

---

If the terms of the bet include LIBOR, and you don't know that LIBOR is fixed, then you could still be swindled even if you correctly evaluate the terms of the bet--it would be like betting on loaded dice--you know the normal odds, but not that the dice aren't fair. It doesn't require imbecility.

However, in this case that is irrelevant. The manipulation of LIBOR wasn't what made the bet bad.

Quote:

---

Originally Posted by professorscott

If it's a crime, so what? None of those kinds of crimes is ever prosecuted.

---

Well, we have to get back to prosecuting white-collar crime, because it's behind so many of these problems. Or we can let criminal banks and bond raiders destroy our governments one by one and bankrupt our people. Fundamentally, the political dominance of financial interests is the problem at hand. And financial capital needs to be constrained or it will continue to be a destructive force. That's where we're throwing good money after bad: Cleaning up after irresponsible financial firms instead of reining them in.

Quote:

---

Originally Posted by professorscott

It is manifestly not a swindle. If you offer me an unfair bet, and you hide from me that it's unfair, you can swindle me. If you offer me an unfair bet and spell it out precisely, and I take the bet anyhow, then you aren't a swindler; I am an imbecile.

---

It's the former. The LIBOR rate fixing scandal didn't come to light until after the swap deals had been sealed.

Quote:

---

Originally Posted by Detroitnerd

Well, we have to get back to prosecuting white-collar crime, because it's behind so many of these problems. Or we can let criminal banks and bond raiders destroy our governments one by one and bankrupt our people. Fundamentally, the political dominance of financial interests is the problem at hand. And financial capital needs to be constrained or it will continue to be a destructive force. That's where we're throwing good money after bad: Cleaning up after irresponsible financial firms instead of reining them in.

---

Oh, I agree completely; I'm not saying it's a good thing that nobody prosecutes any of this, I'm just stating a fact.

This is the sort of problem that would have enthusiastically been taken up by left-wing politicians, back when there were any left-wing politicians. Someone whose politics leans toward Eisenhower or Nixon would be considered too socialist, by the standards of today, to be a Democratic nominee for President.

You are all on the right track!

Keep following it.

You might also want to look up 'odious debt' and apply it to the oft-stated $18 billion the city is supposed to owe.

Nobody knows anything about most of this so-called 'debt' except that bankers will demand its payment w/ interest and the retirees will lose everything.

The model is really Greece, Portugal and Ireland where pensions were looted to bail out banks.

Quote:

---

Originally Posted by Detroitnerd

It's the former. The LIBOR rate fixing scandal didn't come to light until after the swap deals had been sealed.

---

That would be true if the LIBOR manipulation had been relevant to the city's problems with the swaps. But it wasn't.

Quote:

---

Originally Posted by steve from virginia

You are all on the right track!

Keep following it.

You might also want to look up 'odious debt' and apply it to the oft-stated $18 billion the city is supposed to owe.

Nobody knows anything about most of this so-called 'debt' except that bankers will demand its payment w/ interest and the retirees will lose everything.

---

This is silly. The retirees aren't going to lose everything, and we know what the debt is. What we don't know is correct values of the unfunded pension costs and the retiree health obligations, mostly because those depend upon assumptions about the future about which people can legitimately differ.

Detroit doesn't have the cash or revenue to make good its pension debt obligations. This does look like an attempted bail-in. There are other things Detroit could do first. The art exhibit might have to be liquidated for Detroit to pay its pension obligations. Detroit also owns thousands of vacant lots. If Detroit hypothetically only had enough money to pay fifty cents of each dollar of pensions it owes even after emptying the Art Institute, it could give away lots collectively to unions or individually to pensioners. Admiral William Penn was paid with land when the Crown had no money. Roman Legionnaires were often paid with land. The US government gave the railroads land as an incentive to build a trans-continental railroad. There are lots of precedents of cash short governments paying obligations off with land. It would sure be better than being short changed by accepting just a bail-in.