Detroit’s Budget Mess—Created by the Big Banks

Sep 3, 2012

For many months, nearly every politician from the City of Detroit and the State of Michigan and every media personality from the area has put out the idea that the city has no choice but to lay off city workers, slash wages and benefits, and reduce city services. The cuts are necessary, they say, because the city is in a financial state of emergency and has no money.

In reality, the city year after year has handed out huge amounts of money in tax breaks to big corporations, developers, as well as wealthy individuals moving into gentrified areas of the city. And it paid for them through increasingly complicated and shady loans from the biggest banks on Wall Street. As a result, the city now pays more each year to the banks in various forms of debt, interest payments, fees and charges than it does for public services. For the 2011-2012 fiscal year alone, the city paid 597 million dollars just to the banks.

The amount the city owes to the banks has ballooned because of boondoggled deals it made with them. In 2005, for example, the banks advised the city to invest its surplus money in Pension Obligation Certificates (POCs) that would pay out variable rates. These same banks however set fixed rates on the loans they made at the same time to the city. It was an enormously complicated arrangement, which no one had heard of before, much like mortgaged-back securities and credit default swaps that led to the mortgage crisis. When some city council members at first balked at the deal, the Wall Street ratings agencies threatened to lower the city’s ratings if they refused. At that point the city council gave in.

The city was gambling that interest rates would go up so it would make more money on its investments than it paid out in interest. The banks advising city officials knew full well the rates would go down, costing the city extra money.

These were some of the same banks that ripped off countless cities and school districts by manipulating the LIBOR rate, the interest rate the banks pay to one another. That rate sets the rates the banks charge in interest or pay in interest, to cities and to everyone who borrows.

The city of Detroit ended up owing not only on loans from the banks but also on the POCs it held. At the same time, the ratings agencies systematically lowered the city’s bond ratings, costing the city still more money in higher interest payments.

When the city couldn’t come up with the money, the banks forced more onerous payment schedules and double or triple payments. In 2009, for example, when the city couldn’t make an extra 400 million dollar payment on the POCs to UBS, the bank, helped by the state of Michigan, forced the city to turn over all its casino tax revenues and all its state revenue sharing funds to pay toward the debt that the banks had engineered to grow, despite payments the city made.

The city–which is not taxing corporations or wealthy people building new homes in Renaissance Zones and which also pays hundreds of millions each year to the banks–turns to working people, saying they have to foot the bill with high taxes and much reduced or non-existent services.

Detroit is one of the first major cities to fall victim–Birmingham, Alabama already did. But cities, counties and school boards across the country were also sucked into such schemes–and they are sitting on the edge of the same abyss into which Detroit fell.

The banks acted in common, just like the Mafia rigging sewer bids. There is only one answer to the money problems of the cities. Take over the banks. Use the vast fortunes they have accumulated in such criminal schemes to put the cities back into decent shape again.