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Contracts Are Sacred, Except for Workers' Pensions

February 24, 2014


By Joe Rothstein
Editor, EINNews.com

Sylvester Stallone introduces Rocky Balboa to us in the first Rocky movie as a part-time knuckle-breaking debt collector. Rocky chases down one prey who’s behind on his payments to a loan shark, then spares him broken bones, with the warning that he had better find the money to pay up, somehow, fast, or else. Rocky has a kind heart. His loan shark boss in the movie gives him hell for it.

Now, shift to another scene, not a movie, but reality, this one witnessed by investigative journalist Lou Debose. I’ll let Debose describe it as he does in the February 22 edition of his Washington Spectator newsletter:

“Exactly one week before Christmas, 18 lawyers huddled in front of a bankruptcy judge in a federal courtroom in downtown Detroit. All were white, one was a woman, most were from the Jones Day law firm. There was one African-American attorney sitting on the side of the bar reserved for counsel, principals, and the judge: Kevyn Orr, a Jones Day partner on leave while he serves as Detroit’s emergency manager.

"Appointed by Michigan’s Republican Governor Rick Snyder, Orr has vice-regal powers to reorganize the municipal government and distribute the city’s assets to its creditors.

“Detroit is a black city---83 percent black, according to the U.S. Census---which made this tableau all the more remarkable. A pack of white bankruptcy lawyers picking over the carcass of the nation’s largest majority-black city.

"The December 18 hearing focused on $230 million the city had agreed to pay Swiss investment bank UBS AG and Bank of America. It was payment due on an interest-rate swap deal that had gone south.”

Debose then goes on to translate in plain language what the Detroit bankruptcy really is all about.

It’s largely about a city that got sold a raw deal by the big banks back in 2005 and 2006. Detroit agreed to buy some complex financial instruments to manage its debts---loan guarantees embedded with the near certainty that Detroit couldn’t meet the terms. Sure enough, just a few years later, when those very same banks’ irresponsible gambling helped bring down the economy, Detroit’s credit rating was downgraded, triggering default.

And, like Rocky’s loan shark employer, they were all over the city to pay $250-$350 million to terminate the deal.

That’s what Lou Debose’s court room scene describes: high-paid bank lawyers swarming the judicial process to take the city’s assets, because the city defaulted on the legally questionable contracts those very same banks sold them.

The banks are basing their claim to Detroit’s assets on the “sanctity of contracts,” the same argument that let so many of those banks walk away from the 2008 financial meltdown with their own accounts virtually intact.

Detroit’s public employees, who had nothing to do with the financial meltdown of 2008, thought they also had legally-binding contracts for their pension accounts. Michigan’s constitution defines public pensions as a contractual obligation that cannot be impaired. Now the employees are being told their pensions are expendable, but the interest on loans banks made to the city isn’t.

The fact that long-time public employees in Detroit and elsewhere are having their knuckles broken by those who carry big sticks is one of the great injustices of the ongoing U.S. economic crisis.

So is the fact that the banks got bailed out but home owners didn’t. Millions of home mortgages have gone into default in recent years with scant help from either their lenders or the politicians. People who borrow money need to pay it back we’re told. “Sanctity of contracts,” you know. It would be a “moral hazard” if people thought they could take money and not meet their obligations.

Meanwhile, the loan sharks with fat bankrolls are out in force, picking up hundreds of thousands of those homes, renting them, and then packaging rent revenue into “financial instruments,” the same kind of shaky investments that brought down the economy in the first place.

Blackstone Group, the $250 billion equity behemoth, reported $1.5 billion in income just during the past three months playing that rent packaging game. In 2013 alone Blackstone bought 1,400 homes in depressed Atlanta. Maybe this year they will buy up thousands of vacant homes in Detroit for the cost of new paint jobs. But pity the renters who move into those homes if their rent checks arrive a few days late.

It doesn’t take a tough guy with brass knuckles to collect the overdues anymore. The politicians and the courts seem to have taken over that job.

(Joe Rothstein can be contacted at Joe@einnews.com)



Joe Rothstein is a political strategist and media producer who worked in more than 200 campaigns for political office and political causes. He also has served as editor of the Anchorage Daily News and as an adjunct professor at George Washington University's Graduate School of Political Management. He has a master's degree in journalism from UCLA. Mr. Rothstein is the author of award-winning political thrillers, The Latina President and the Conspiracy to Destroy Her, The Salvation Project, and The Moment of Menace. For more information, please visit his website at https://www.joerothstein.net/.