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As part of Detroit's historic Bankrupty dealings, the Michigan Governor's "financial czar" has put the pension plan of the City's workers, on the "bad debts" chopping block table. Even though, unlike most corporate pensions, "city workers, do not have the same federal safety net that protects pensions at corporations."  

For most municipal-worker pensioners -- their monthly pension payment IS their Social Security. So they kind of need it.


First the "Bad News" for Detroit Pensioners:  whoever was managing their pension plan, apparently made some very sketchy "bets" with their payroll deductions. Quite literally ...


Kevyn Orr reaches settlement with some creditors; details not released

by Matt Helms and Tresa Baldas, Detroit Free Press Staff Writers -- July 15, 2013

[...]
The filings do not name the creditors, but Orr’s office has been working for weeks to settle $340 million in unsecured debts involving UBS AG and Merrill Lynch Capital Services. Orr spokesman Bill Nowling said late Monday that the emergency manager would have no comment on the deal with those involved with hedge agreements, or swaps, “until the deal is signed in the next day or two.”

Orr’s lawsuit, filed this month in Wayne County Circuit Court, accused insurer Syncora Guarantee of illegally trying to stop payments of its annual $170 million in tax revenues, money Orr said the city desperately needs to maintain public services.

Syncora insured the swaps and some of $1.4 billion in what are called certificates of participation that the city issued to make up for underfunding in Detroit’s two public employee pension funds. The suit is related to a series of transactions the city initiated dating to 2005 to shore up the pension funds responsible for retirement benefits to about 20,000 people.

Orr’s office announced in June that it would stop making debt payments, including a $40-million payment due on pension certificates of participation that Syncora insured, Orr’s lawsuit said.
[...]


'Hedge agreements, credit interest rate swaps, certificates of participation' ... is this stuff legal, for "underwriting" retiree funds?  

Apparently.  What could possible go wrong ... with rock-solid investing strategies like that?  

Hedge funds never fail, Housing prices never go down, and American Cities never go bankrupt ... now do they?


Credit Default Swaps: The Next Crisis?

by Janet Morrissey, Time-Business -- Mar 17, 2008  [written before the Mortgage Crisis]

[...]
Indeed, commercial banks are among the most active in this [credit default swaps] market, with the top 25 banks holding more than $13 trillion in credit default swaps --where they acted as either the insured or insurer -- at the end of the third quarter of 2007, according to the Comptroller of the Currency, a federal banking regulator. JP Morgan Chase, Citibank, Bank of America and Wachovia were ranked among the top four most active, it said.

Credit default swaps were seen as easy money for banks when they were first launched more than a decade ago. Reason? The economy was booming and corporate defaults were few back then, making the swaps a low-risk way to collect premiums and earn extra cash. The swaps focused primarily on municipal bonds and corporate debt in the 1990s, not on structured finance securities. Investors flocked to the swaps in the belief that big corporations would seldom go bust in such flourishing economic times.

The CDS market then expanded into structured finance, such as CDOs, that contained pools of mortgages. It also exploded into the secondary market, where speculative investors, hedge funds and others would buy and sell CDS instruments from the sidelines without having any direct relationship with the underlying investment. "They're betting on whether the investments will succeed or fail," said Pincus. "It's like betting on a sports event. The game is being played and you're not playing in the game, but people all over the country are betting on the outcome."
[...]


And Banks never fail to pay up, when the risk they are "participating" in -- suddenly goes belly up.

Never happens, my friends ... except once or twice, in recent history.


Now for the "Good News" for Detroit Pensioners: whoever wrote your State's Constitution, apparently realized that municipal workers needed some very serious protection for their future well-being. Quite literally ...



Michigan AG to defend constitution, public pensions in Detroit's bankruptcy filing

by Matt Helms, Detroit Free Press Staff Writer -- July 27, 2013

[...]
[Michigan Attorney General Bill] Schuette said he will file on Monday in U.S. Bankruptcy Court in Detroit to intervene "on behalf of southeast Michigan pensioners who may be at risk of losing their hard-earned benefits in accordance with his responsibility as attorney general to defend the constitution of the State of Michigan."

"Michigan’s constitution, Article 9, section 24, is crystal clear in stating that pension obligations may not be 'diminished or impaired,' " Schuette said. "As attorney general, I will defend the rights of Michigan citizens and defend the Constitution of the State of Michigan."

Schuette said: "Detroit's $20 billion indebtedness is simply staggering. Equally staggering is the financial uncertainty of pension benefits relied upon by Michigan seniors living on fixed incomes and anticipating a safe and secure retirement after a lifetime of work. Retirees may face a potential financial crisis not of their own making, possibly a result of pension fund mismanagement."

The move would put him at legal odds with the administration of fellow Republican Gov. Rick Snyder, who hired Orr and has defended bankruptcy with steep cuts for unsecured creditors as the only way to restore Detroit to solvency.
[...]

SO, that's the R's are calling our "social contract" these days -- "unsecured credit" ???

How quaint.


Now for the "Bad News" for Municipal Retirees across the nation:  if whoever was managing your pension fund, thought that investing in "credit interest rate swaps" was a sure bet -- well they might soon find themselves, among some very poor company ... retirees included.

Even the Fed himself, "couldn't find the 'There', there" when it comes to Credit Default Swaps. Quite literally ...  

[Note: commentators are indicating that CDS are not involved with Detroit's pension problems -- but rather "Interest Rate Swaps" instead.]


Why Did the Fed Bailout AIG and Not Lehman Brothers?

by Ron Fields, newsflavor.com -- Sept 17, 2008

[...]
American International Group is one of the world’s largest insurance companies, insuring risks across a wide spectrum of activities, from property and casualty, to director and officer insurance, to one of the most arcane areas of insurance -- credit default swaps. Although “credit default swaps” does not sound like insurance, it is a type of insurance in which AIG played a large role. A credit default swap is a contract by which one party agrees for a certain payment to accept the risk that another party’s bonds will not default.
[...]

That is all a long-winded explanation of a type of insurance, but that does not explain why the Fed opted to bailout AIG and not Lehman Brothers. The reason for the bailout is that the entire credit default system is a large unknown to the Fed, and the Fed fears that if a large credit default player like AIG cannot make good on its swaps, then a lot of bonds will not in reality be insured, and the balance sheets of many large banks holding low-rated bonds will be severely impaired causing any number of large institutions (banks and otherwise) to suddenly become insolvent. The Fed feared that a credit default meltdown could meltdown the entire financial system and cost the Fed many multiples of $85 billion.

The credit default market is not organized on any exchange. Each arrangement is unique and structured privately. Often the counterparty risk assumed in a credit default swap is swapped again to another party or broken up and swapped out to multiple players, kind of like reinsurance. The only problem is that no one has a handle on exactly how much exposure exists in the credit default market. The risk is that as one follows the trail of swaps, the last man standing will not have the capital to honor the swap agreement, and that will put the swap holder and the swap maker both into default.
[...]


All these still dark markets backing our billions in "sweat equity," doesn't bode well for the future security of the nation's municipal solvency, if what is happening to Detroit is any kind of early-warning, wake-up call,

-- to the nation's financial regulators ... who are once again very fast asleep at the switch, as that train of "payments due" heads for the inevitable curves not far ahead ...

Sometimes, just waiting to see if we make the bend, is not always the best of "full steam ahead" strategies. Quite literally.  Ask those 20,000 retired Detroit city workers, what their future looks like now?



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