Detroit Doesn't Just Have A Debt Problem, It Has A Borrowing Addiction

If you've watched basic cable anytime in the last decade you've probably seen Montel Williams hawking payday loans. No more bounced checks, the psychic-believing former talk show host promises in one commercial. What your old pal Montel doesn't say, what can only be found in the proverbial fine print on his employer's website, is the long-term cost of short-term borrowing, "the typical representative APR range is somewhere between 261% and 1304% for a 14 day loan."

Which brings us to Detroit, where mayors and city councils have been floating the city's budget with the municipal equivalent of payday loans. According to Bloomberg, Detroit has borrowed so much money that Wall Street lenders collected nearly a half-billion in fees from America's poorest city.

The debt sales cost Detroit $474 million, including underwriting expenses, bond-insurance premiums and fees for wrong-way bets on swaps, according to data compiled by Bloomberg. That almost equals the city’s 2013 budget for police and fire protection.
The largest part is $350 million owed for derivatives meant to lower borrowing costs on variable-rate debt.
As Bloomberg further explained, the actual value of those derivatives is questionable based experiences of other communities.
Forget streetlights, all that borrowed money and the city was unable to even process the medical evidence that could have stopped serial rapists.
Whether the emergency manager to be appointed this afternoon by Gov. Rick Snyder can do much to trim the accrued costs of Detroit's past borrowing is kind of the $474 Million Question. Frankly, given that Lansing has had to approve Detroit's debt-heavy budgets all these years, it's fair to wonder the "business-friendly" Snyder's Administration's EM will be motivated to knock down the vigorish charged by bond brokers.
It's also fair to wonder if Detroit's elected officials, whose fate is of great concern to anti-EM activists, were really representing Detroit taxpayers and residents or if they've just been Wall Street's useful idiots because this mess is the personification of self-inflicted.
Read more:  Bloomberg

Email Signup
Send us your email address and we’ll send you the best of Detroit!