Detroit, MI — Cha-ching! is the sound of banks registering the new revenue coming their way the very moment Gov. Rick Snyder put Detroit under an emergency financial manager (EFM).
“Who knows what the city has paid? The same stick-up men that went through the neighborhoods (with the foreclosure crisis) are now at city hall,” said Jerry Goldberg, attorney for Moratorium Now.
Tied to every bond issue and loan the city has are “termination events,” Goldberg said. Termination events include a lower bond rating, a late payment or the naming of an EFM. Any one of those events is a trigger, hiking the interest rates and adding penalties to the city’s obligations to the banks. As the city’s financial outlook worsens, the city also gets deeper in debt.
“We will never get out of debt,” Goldberg said March 25 at the group’s weekly meeting, held at their offices at 5920 Second Ave.
Just as consumers pay a fine for a late payment on their credit cards or are hit with interest rate increases and other penalties, so do banks levy fines and charges on cities that experience any of the “termination events,” explained Mike Shane of Moratorium Now.
Detroit now pays $600 million in increased penalties and interest on city debt, Goldberg said. “That equals our deficit.”
Bloomberg News reported March 13 that the city has paid more than $474 million in increased fees since 2005 when the city started borrowing to cover budget shortfalls. Padding the debt owed the banks are “underwriting expenses, bond-insurance premiums and fees for wrong-way bets on swaps,” according to the Bloomberg article.
EFM Kevyn Orr says he has severed all ties with his former employer, Jones Day, the world’s third largest law firm, headquartered in Cleveland. The firm, however, is Mayor Dave Bing’s announced choice to restructure the city’s debt.
Jones Day will have a conflict of interest, Goldberg notes. As reported here, the law firm counts as clients many of the same banks who hold the city’s debt — the same banks that were behind the 68,000 home foreclosures in the last five years in the city. Those banks include JP Morgan Chase, Deutsch Banke AG, The Goldman Sachs Group, L.P., Wells Fargo, Lehman Brothers Holdings, Bank of America, Pershing Square Capital Management and Royal Bank of Scotland.
Snyder has said the EFM must restructure the debt. But when it comes time to negotiate a better loan deal for the city, whose interest will Orr and his former partner, Jones Day, really have at heart, asks Goldberg.
He sees yet another conflict. The EFM law requires Orr to pay the banks, Goldberg says, but these loans are fraudulent. “The city couldn’t get the loan without the interest rate swap. It’s unregulated.”
He said the type of loans the city had to take, the interest swap, are tied to the LIBOR, the rate banks agree to charge each other for interbank loans. Barclays Bank has been found guilty and fined almost half a billion dollars for fraudulently setting those interbank rates. Chase Bank also sits on the committee that sets the LIBOR rate. Chase loaned the city money in a swap deal based on the LIBOR rates, and according to many published reports, any borrowers with loans tied to that rate were cheated.
“Will Orr investigate these loans? The city is not bound to pay for a fraudulent deal,” Goldberg said.
Moratorium Now wants full public scrutiny of the banks’ dealings with the city. The group has scanned and posted copies of the city’s financial documents it received after filing a Freedom of Information Act (FOIA) request. When the city ignored the FOIA request, Moratorium Now sued and won. (See www.moratorium-mi.org and follow the links “Detroit debt” to view the documents.)
The group is looking for those with expertise in complicated financial deals to help decipher the city’s documents. People around the country are expressing interest in the documents, Goldberg said, because Detroit is not alone in struggling with bank debt in predatory deals that favor the banks at the expense of the municipalities.
“There has to be a moratorium on (the city’s) debt obligation. No way can we pay back $15 billion,” Goldberg said. “We’ll be here forever.”
Moratorium Now meets every Monday at 7 p.m. at 5920 Second Ave. The public is invited.
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