The political establishment and the media have relentlessly promoted the myth that the crisis in Detroit and in cities across the US is a product of overgenerous spending on social services and benefits, with public employee pension liabilities cited as the main culprit.
In reality, the driving force behind the Detroit bankruptcy has been a predatory interest rate swap foisted on the city by Wall Street bankers, which was signed by former Mayor Kwame Kilpatrick in 2005.
Scores of states, municipalities, school districts and various other public entities entered into similar swap contracts over the past decade. These deals have enabled the world’s most powerful banking houses to systematically plunder public budgets across the nation, creating the conditions for the rising wave of municipal bankruptcies.
The interest rate swap deals amount to complex bets on the direction of future interest rates. In the mid-2000s state and local governments entered into these bets in an environment of rising interest rates, seeking desperately to offset their growing financial costs.
During testimony last week, Orr testified that he considered the interest rate swaps to be illegal, and claimed that he even approached the Securities and Exchange Commission (SEC) about a possible prosecution of Bank of America-Merrill Lynch and Swiss bank UBS. (See: “Emergency manager acknowledges bank deals pushed on Detroit were likely illegal”)