Back in the 1920s or 30s, when a reporter asked John Dillinger why he robbed banks, he replied: “Because that’s where the money is”.  Well, nowadays, it appears that the shoe is on the other foot.  Or, maybe some bankers have turned the tables. Remember as I have noted before, that friendly face at the local (Commercial or Investment) Bank, who you might have known since high school, is acting in the bank’s best interest–not necessarily yours.

Today, Federal Bankruptcy Judge Steven W. Ross, rejected the City Of Detroit’s request to borrow $265 Million from Barclay’s Bank in order to pay-off the $165 Million it owes Bank of America and UBS, and $120 Million to provide urgently needed municipal services in Bankruptcy. That article is linked from the NY Times, http://dealbook.nytimes.com/2014/01/16/judge-rejects-detroits-deal-to-exit-swap-contracts/?ref=business.

The $165 Million to repay B of A and UBS was to extricate itself from expensive financial contracts known as interest-rate swaps.  The swaps, which were entered into back in 2005, as part of a plan to shore-up its underfunded pension system, didn’t work-out.  Disgraced former Mayor Kwame Kilpatrick was in office at the time that the “hastily and imprudent” (according to Judge Rhodes) financial transactions were entered into.

Mr. Kilpatrick is currently serving 28 years in Federal Prison for, as the prosecutors claimed at his Trial, “…running the City of Detroit like a criminal enterprise”, as linked in The Oklahoman, http://newsok.com/authorities-move-former-detroit-mayor-to-oklahoma-city-federal-prison/article/3924111.  As I studied Detroit’s problems, I started to see a parallel to the 2011 Bankruptcy of Jefferson County (Birmingham), Alabama.

JPMorgan Chase arranged interest-rate swaps for Jefferson County, as noted in the linked article from Bloomberg, http://www.businessweek.com/printer/articles/522390?type=bloomberg, prior to The Great Recession.  In this case, JPM ended-up taking a huge loss that was involved with the “London Whale” fiasco, which ended-up with the Bank taking a $6.2 Billion total loss.  Oh, by the way, former County Commissioner and Birmingham Mayor Larry Langford is currently serving a prison term for bribery.

So, both Detroit and Jefferson County had financial troubles.  Politicians often don’t care about the long-term ramifications of their actions, since they will be out of office before the long-term “results” truly hit-the-fan.  See the similarities:  public officials enter into incomprehensible financial deals which they rarely understand; perhaps accept kick-backs; city/county goes bankrupt;  pensioners suffer; municipal services are greatly reduced and official sometimes goes to jail.  But, the banker keeps his/her job and receives bonus.  So, why trust the banker?

Matt Taibbi, an excellent writer for Rolling Stone, on financial matters, goes into a bit more detail on “The Continual Screwing of Jefferson County, Alabama”, http://www.rollingstone.com/politics/blogs/taibblog/the-continual-screwing-of-jefferson-county-alabama-20110531.  Mr. Taibbi’s column notes that it was clear to the Courts that Jefferson Country’s Officials were being fleeced.  Keep in mind also that the Bank accepts large fees from both parties to the Swap, or other financial derivative.  And, it looks like, in both Detroit and Jefferson Country.

So, once again, If it sounds too good to be true, it probably is. Bankers are generally not Fiduciaries. That means that they are acting in their Employers best interest–not yours. By the way, none of the articles mentioned bankers going to jail. HMMM…

NOTE:  Interest-rate swaps are basically agreements where one party exchanges higher fixed interest rates for lower, but variable rates.   There is also a “counter-party” who, in turn, takes the other side of the swap–accepting the higher fixed rates, while taking the bet that interest rates will rise.  Rates rose sharply on Jefferson County’s bonds once investors became concerned about some local governments’ ability to eventually repay their debt.  Swaps are but one form of financial derivatives.





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