News / Brèves Back to previous selection / Retour à la sélection précédente Will Detroit pay pensions or Derivatives? Glass-Steagall would have made the choice 28 July 2013 (LPAC) — The 250-year-old "arsenal" city of Detroit was brought into extreme impoverishment by the collapse of the auto/machine-tool industry in size and wage levels, and the national refusal to reverse that collapse, under the Bush and Obama presidencies. Lyndon LaRouche first put forward the policy to revive that industrial base in November 2004; Bush and Felix Rohatyn blocked it; Obama fixed the wage collapse in stone in the 2009 auto bankruptcy/bailout. But now the most immediate choice in Detroit involves the impact of the repeal of the Glass-Steagall Act in 1998. That choice is as follows: The city emergency manager, bankruptcy lawyer Kevyn Orr, has made an agreement to pay three banks — UBS, Bank of America, and SBS — approximately $225 million by Nov. 1. This amount equals 15% of Detroit’s total annual all-source revenues estimated at $1.49 billion this year, and Orr agreed to do it while defaulting on pension bonds. This $225 million is not a debt; rather it represents 75% of the "current negative value" (to Detroit) of swaps agreements with those banks on $1.4 billion in 2005 city borrowing. That is, it is a payoff on a LIBOR-rigged derivatives bet that Detroit was conned into making in 2005 by those banks, after borrowing from them. And if the payment is delayed beyond Nov. 1 to a second payment deadline of Mar. 1, 2014, under Orr’s agreement it will be 85% of the "current negative value" of the bet, or likely $250 million. Orr agreed to this derivatives payoff two days before declaring bankruptcy against pensions, retiree health funds, and other general creditors, giving it first priority outside the bankruptcy court. Will Congress and the White House allow this to happen, directly sacrificing pensions and health benefits for derivatives bets? Detroit already, in 2008, as reported in Saturday AM Briefing, had its Water and Sewerage Department pay $536 million to the same banks to settle a rigged derivatives bet. And it paid an average of $107 million a year since 2006 out of casino revenues on the same derivatives bet on the same $1.4 billion borrowing. When combined with the city’s loan "fees" totalling over $200 million since 2005, it is clear that non-principal, non-interest payments to banks have robbed Detroit of approximately one full year of revenue out of its last 10, through 2012. But this new bet payoff will directly start the drastic reduction of retiree health and pension benefits, in 2014. Had Glass-Steagall remained in effect, banks would not have been allowed to manufacture these derivatives products. Hedge funds and investment banks would have done so — but the international evidence makes clear that few cities and states would have been trapped into such "swaps" products had they not been sold them by the same banks which were buying and/or syndicating the municipalities’ bond offerings. [pbg]