Cities find the fine print is costing millions

[The Northerner]

Detroit Mayor Dave Bing is struggling to save his city from fiscal calamity. Unemployment is at a record 28 percent and rising, while home prices have plunged 39 percent since 2007. The 66-year-old Bing, a former NBA all-star with the Detroit Pistons who took office 10 months ago, faces a $300 million budget deficit — and few ways to make up the difference.

Against that bleak backdrop, Wall Street is squeezing one of America's weakest cities for every penny it can. A few years ago, Detroit struck a derivatives deal with UBS and other banks that allowed it to save more than $2 million a year in interest on $800 million worth of bonds. But the fine print carried a potentially devastating condition. If the city's credit rating dropped, the banks could opt out of the deal and demand a sizable breakup fee. That's precisely what happened in January: After years of fiscal trouble, Detroit saw its credit rating slashed to junk. Suddenly the sputtering Motor City was on the hook for a $400 million tab.

During late-night strategy sessions, Joseph L. Harris, Detroit's then-chief financial officer, scoured the budget for spare dollars, going so far as to cut expenditures on water and electricity. "I figured the wouldn't turn out our lights," says Harris. But there wasn't enough cash, and in June the city set up a payment plan with the banks.

Now Detroit must use the revenues from its three casinos — MGM Grand Detroit, Greektown Casino, and MotorCity Casino — to cover a $4.2 million monthly payment to the banks before a single cent can go to schools, transportation, and other critical services. "The economic crisis has forced us to move quickly and redefine what services a city can and should provide," says Bing. "While we face a tough road ahead, I believe we're on the right path." UBS declined to comment.

Detroit isn't suffering alone. Across the nation, local governments and related public entities, already reeling from the recession, face another fiscal crisis: billions of dollars in fees owed to UBS, Goldman Sachs and other financial giants on investment deals gone wrong.

Read more: http://www.msnbc.msn.com/id/34067419/ns/business-businessweekcom/

[LisaM]

1. Words don't even begin to describe how I feel about this

I just hope that these usorious, rapacious bastards get what they deserve.

[northzax]

2. And yet, I bet Detroit was perfectly happy

When the deal was going their way? Detroit is broke and has nothing to lose, just default already.

[LisaM]

6. Those terms need to be re-negotiated

The banks ought to be ashamed. I don't think those terms should be legal to begin with, but for cripe's sake, renegotiate.

[annabanana]

3. The Swiss have been showing an ugly side lately, haven't they?

First this, now the minarets thing...

[madrchsod]

4. the banks own the house and the senate

until there is a radical change in financial regulations we are headed for a great depression.

[Hawkowl]

5. Hope and Change

The first African American president's present to the first African American majority major city.

[LisaM]

7. Oh, he wouldn't even accept Michigan's primary votes

It was obvious at that point that he really didn't care about Michigan.

[phantom power]

8. He should invite OCP to move in and build Delta City!