Financial Crisis Just a Symptom of Detroit’s Woes

[Blackking]

Yeah the thing is these swaps protect against higher interest rates, its a hedge if you know what you're doing. So you have billions in pensions you can't fund and you issue the bonds (I.e. borrow money) to fund it. You want a locked in interest rate so if interest rates rise you won't be stuck paying millions more in interest rate expenses than you expected. So you enter into a swap which will have you paying a fixed rate on your bonds and the bank will pay you a floating rate based on the market. The federal reserve steps in and basically says we're lowering rates to practically zero to stimulate the economy (this is why rates are so low on things like mortgages now). So now you are stuck paying the fixed rate which is now higher than the floating rate you are receiving. And they ended up in a huge hole.

 

[Domingo Halliburton]

Really interesting. I figured they were for long terms. So what you're paying for is the "creation of the bonds", and insurance on them. In 2005 I don't recall what the interest rates were but they couldn't have been very high. They tried to take the cheap and what they thought was the safe way out and lost. At the same time I guess they didn't have a choice but to issue bonds since they were so in over their heads with their pension and the water department bonds. I can see why its necessary.

Yeah I said a couple years but they've been making money for more like 6-7 years with this swap.

For instance, Brooklyn wants to build a school, JP Morgan knows a bunch of investors who will buy the bonds even if brooklyns credit sucks. So you have to go through the wall street banks if you want the investors who will loan you the money like that. Obviously JP Morgan is going to have to get some fee for market making. And hell they'll probably bet on the bonds as well.


I'm not sure but maybe in 2005 the market was on a run up. Especially after the dot-com bust and 9/11. in 2007 the stock market was hitting all time highs with a real estate bubble. The interest rates were probably higher than now. And detroit probably had shytty credit making interest rates worse for them.

they were trying to protect against higher interest rates, they didnt plan on a systematic meltdown in 2007-8.