Unelected Emergency Manager Set To Break Detroit’s Pension Promises

[badtoworse]

14. I've seen the Bloomberg article before and it confirms my point

Last edited Thu Jun 20, 2013, 02:56 PM - Edit history (1)

The article gives a distorted picture of what swaps are designed to do. It states "The largest part is $350 million owed for derivatives meant to lower borrowing costs on variable-rate debt". That is simply not true. An interest rate swap is designed to reduce variable interest rate risk, not cost. You pay a premium for that, i.e a higher total rate, but it's fixed and doesn't change no matter what happens to variable rates. That is elementary and if Detroit's financial managers did not understand that, they either weren't qualified to do their jobs or they were idiots.

The article is also disingenuous because it only focuses on the swap payment Detroit has to make because the spread between the fixed rate and the variable rate has widened. It fails to mention that the payments that Detroit makes under its variable debt have shrunk such that their total cost of debt service remains constant (which is what they wanted when they executed the swap).

As for the fees charged by banks to arrange Detroit's bond offerings, this the banks' business. Would you expect them to do it for free? Presumably, Detroit shopped around and UBS gave them the best deal.

The real problem here is that Detroit kept borrowing to repay maturing debt and cover current expenses when their revenues were insufficient. Only a bunch of morons wouldn't recognize that you can't do that indefinitely and that this day would eventually come.