Cities find the fine print is costing millions

[underpants]

Source: Business Week/MSN

Local governments fork over billions in fees on investments gone bad

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.

Wall Street promised big, with small print
The seeds of this looming disaster were sown during the credit boom, when Wall Street targeted cities big and small with risky financial products that promised to save them money or boost returns.

Investment bankers sold exotic derivatives designed to help municipalities cut borrowing costs. Banks and insurance companies constructed complicated tax deals that allowed public utilities, transit authorities, and other nonprofit organizations to extract cash immediately from their long-term assets. Private equity firms, pointing to stellar historical gains, persuaded big public pension funds to plow billions of dollars into high-cost investments at the peak of the market.

Many of the transactions shared a striking similarity: provisions that protected the banks from big losses and left the customers on the hook for huge payouts.



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

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"The banks stuffed customers with and then extorted money from the customers to get rid of them," says Christopher Whalen, managing director at research firm Institutional Risk Analytics.

The New Jersey Transportation Trust Fund Authority, for instance, must pay nearly $1 million a month at least until December 2011 to Goldman Sachs on derivatives deals tied to municipal debt—even though the state retired the debt last year.

[Yo_Mama_Been_Loggin]

1. Why would any city get involved in a derivatives deal?

They are some of the most risky investments around? An old adage is when something sounds too good to be true it usually is.

[DJ13]

2. Wall Street is nothing more than white collar pirates

Its time the government stepped in and double check some of these contracts to see if some were written fraudulently.

[mbperrin]

4. Certainly they are. Otherwise, they wouldn't literally print them in fine print.

And length in terms of words?

Whole Constitution just a few hundred words. Ten Commandments a few dozen.

Bank contracts? Miles of headache.

[Taverner]

3. Jesus F - like Detroit needs another suckerpunch...

[greengestalt]

5. Soverign Immunity

They should try that angle...


"This City of ------ declares itself immune of all liability. Furthermore ------- holdings owes us ------ in compensation....blah blah legalese"


With a footnote:

"And if the State or Federal government tries to force this illegal lein, we declare ourselves an independent sovereign nation..."


Now would be the best time to put in such wording. It'd be a bluff the government couldn't take. The soldiers are all near-postal shell-shocked and desperate to get out with maybe some of their benefits and in one piece. Ordering them to 'take over' a city or state over a petty financial squabble would risk a mass mutiny.

[Fire_Medic_Dave]

6. For 2 million a year. Idiots.