Detroit Doesn't Just Have A Debt Problem, It Has A Borrowing Addiction
March 14th, 2013, 9:53 AM
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.