Detroit's crisis is Wall Street's $474 million gain

The city's finances are a shambles, and millions in fees to big banks -- often on soured investments -- are only making things worse.

By Aimee Picchi Mar 15, 2013 7:19AM

A car drives past the remains of the Packard Motor Car Company in Detroit, Mich., on November 19, 2008 (© Spencer Platt/Getty Images)Detroit has had a tough decade. Former Mayor Kwame Kilpatrick was convicted Monday on corruption charges, and now the city is trying to avoid becoming the largest U.S. municipal bankruptcy. 

But Wall Street isn't shedding any tears, as it has found a way to profit from Motown's deep troubles. With the city seeking loans to cover pension shortfalls, debt payments and deficits since 2005, Wall Street companies have profited to the tune of $474 million in fees, according to Bloomberg.

That's nearly the city's entire 2012-13 budget for fire and police protection.

"We have no lights, no buses, poor streets, and now we're paying millions of dollars a year on our debt," David Sole, a retired municipal worker and part of an advocacy group that fights foreclosures and evictions, told the publication. "The banks said they need to be paid first. But there is no money."

The fees stem from about $3.7 billion in debt issued by Bank of America's (BAC) Merrill Lynch, JPMorgan Chase (JPM) and UBS (UBS), which have charged for underwriting expenses and for fees on wrong-way bets on swaps and bond-insurance premiums, according to Bloomberg. 

Detroit's downward spiral has been exacerbated by a massive population decline. The Census Bureau found the city had only slightly more than 700,000 residents at the end of the past decade, the lowest since 1910, according to The Wall Street Journal.

At the city's peak in the 1950s, when the U.S. auto industry was in its heyday, the population surged to about 2 million. 

But the banks have only worsened the problem, says Sole, who told Bloomberg that while some banks were collecting debt fees, they were also selling subprime mortgage loans that ended in foreclosures. That has wrecked the city's ability to generate tax revenue and has pushed down real estate values. 

The biggest chunk of Wall Street's fees is tied to swap contracts the city entered into with UBS and SBS Financial Products in an arrangement that was a bet on the direction of interest rates. When rates fell, the city incurred a liability of $439 million as of June 2012, which has since declined to $350 million. Representatives for UBS, JPMorgan and SBS declined to comment on the arrangements, Bloomberg says. 

Detroit's precarious situation will soon be in the hands of a financial manager. Michigan Governor Rick Snyder is expected to tap attorney Kevyn Orr, 54, for the role, according to USA Today

He'll have his hands full, with so many of the Motor City's houses, businesses and office buildings now standing as eerie remembrances of Detroit's better days. 

More on moneyNOW

Mar 15, 2013 9:03AM
It was the best of times in Detroit, before it was the worst of times.  Now they have so many unfunded liabilities on the books.  When Detroit was a boom town decades ago, its gov leaders sold out the people, giving ridiculous benefits to city employees, and not funding them.  And now their chickens are coming home to roost.  What's scary is that Detroit is actually on the front part of the wave - similar situations and pain will be felt in cities all over the country, who chose to make a bunch of promises they couldn't keep. 

Seriously, what reasonable person with a 5th grade education would ever be conned into believing that these benefit packages were sustainable?  If you ask a worker to contribute $100k over their working life into a pension plan that will pay them $80k per year when they retire at 55, the rest of the cash doesn't magically appear at some future date.  It has to be funded, and fully.  You can't count on 15% annual returns, you can't count on future tax revenues, you can't count on some windfall somewhere.  If you pay someone $25k per year and give them another $25k per year in benefits, you better be finding the $50k in funding now, or making plans based on ultra-conservative ROI calculations.

Detroit is only the beginning.  There are about 150 other decent-sized cities that are on the same track, not counting all the small municipalities.  Of course, half the state governments are in the same boat.  Then check out the US debt clock website - the federal gov has $123 TRILLION in unfunded liabilities, and growing.

Mar 15, 2013 10:08AM
Detroit:   A population of the welfare walking dead.  Bridge cards, ADC, Obama phones and rent paid for by the government.  Where the most confusing day of the year is Father's day.  A long ago great city (50's) that has hit rock bottom more times than I can count.  Most of the burbs are turning into the new ghettos as the low life move out and turn them into new little Detroit's.  Very sad.
Mar 15, 2013 9:13AM
Why was the city entering swap contracts in the first place???????????????????
Mar 15, 2013 11:36AM
Maybe we voted for the wrong man to run our country, what do you think?
Mar 15, 2013 9:39AM
How do you pay for infrastructure designed for 2 million people, when you have a population of seven hundred thousand? 
Mar 15, 2013 11:58AM
if the banks own the foreclosed homes why aren't they paying the property taxes?
Mar 15, 2013 9:30AM
Detroit, its a great city, to be from.  Everyone that is smart enough has left.  No jobs, high crime.  The place I grew up is a disaster, but I still love her.  I hope one day she makes a comeback. 
Mar 15, 2013 12:13PM
Detroit is a great example of tax and spend democrat policy. Sooner or later you run out of other people's money to hand out to lazy dumbazzes.
Mar 15, 2013 12:35PM
Detroit is a prime example of what not to do.  Unions, bankers, corrupt politicians, all consumed with greed and grabbing for themselves at the cost of the society as a whole.  Now the whole thing is in a hole, or more like a pit.
Mar 15, 2013 12:54PM

There's a light at the end of the tunnel...but unfortunately it's coming right at us. What is happening in Detroit is just the beginning.

Here's how I think things are going to play out in the next 2 years....Inflation on consumer goods and other items are already ramping up because the Fed has been printing money like a drunken sailor. This is going to cause interest rates to start climbing steadily upward....we're already seeing Mortgage rates starting to climb..  This is going to cause the Federal Reserve to tighten sooner then they wanted to try to put the inflation fire out that has actually been simmering for awhile. Once this happens...the Bond market is going to have a selloff and the dollar will start to tank. This will make servicing our National Debt almost unservicable....Can anyone come up with what it will cost us just to service a $17 Trillion dollar debt at 6%? This Country is already unable to meet it's monthly obligations.

People better get ready....because there's a train wreck a coming!

Mar 15, 2013 9:02AM
No Worries.  Can't wait to see the new farm land and corn growing....   Coleman, you clearly didn't think about the future when you threatened to turn off the suburbs water.  Oh well, it is what it is....
Mar 15, 2013 1:05PM
My heart bleeds for Detroit and the worthless money grabbing animals that call it home. Have the generational welfare garbage go out and get a damn job and watch how fast it clears up.
Mar 15, 2013 11:47AM
Typical media propaganda.  Things go well the government is credited and if things go poorly blame the banks.
Mar 15, 2013 12:49PM

The Army Core of Engineers would be happy to come in to Detroit and practice with their heavy equipment, say 5,000 bulldozers and excavators !

Mar 15, 2013 10:46AM

Having not been in Detroit for a few years...It is very sad, that it can fall into decay in just a matter of a dozen or so years...

Passed through the area, when making trip to Canada and Niagra, just a few years back.

Downtown seemed busy?

Thought they were revitalizing then?

3-4 Casinos....New Ball Stadium for their Tigers....New Stadium for the Lions, think they came back from Pontiac,Mi...Where they had the Silver Dome ?? Other Top notch Sporting teams such as the Detroit RedWings and the Detroit Pistons and a NASCAR track( MIS) within a hour or so from the City.

And Detroit Metro, an Airport I would fly through going somewhere else...

What the Hell happened to Detroit...?? Was the Auto Industry,the only thing that held it together ??

This reminds me of Many other Metro areas, that are in trouble also..

Mar 15, 2013 1:30PM
What is wrong with black run cities? Seems to be a DNA problem, caused by long-time free-loading, maybe?
Mar 15, 2013 1:31PM
leftards this is  not  walll streets  fault....  once   again   and   always  the  kook  left  lays  blame  where  it  doesn't  belong.
Mar 15, 2013 11:49AM
soooo banks through the politicians robbed the people and destroyed once great city, the american reality, politicians and bankers working together for the good of........
Mar 15, 2013 12:34PM
And you continue to blame undocumented workers for your economic troubles, it being that your enemies names are usually very well known and documented.
Mar 15, 2013 12:50PM
there is plenty of blame to go around. this is also why no city should hock itself to any particular industry. although the city will never suffer the same fate, look at everything that san antonio gave to a t & t. but once there was a ceo change the company was gone to dallas.
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