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Banks bet on US cities dying. - 12/22/2010 2:18:55 PM

hertz

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quote:

Americans bailed out the giant banks. So how do the too big to fails re-pay the American taxpayers?By betting that American states and cities will fail.As the Wall Street Journal notes:
As U.S. cities and towns wrestle with financial problems, investors are finding a new way to profit on their misery: by buying derivatives that essentially bet municipalities will default.These so-called credit default swaps are basically insurance contracts that have long been available to protect holders of corporate bonds against default. They became available a few years ago for municipal debt, allowing investors to short sell—or bet against—countless cities, towns and bridges, and more than a dozen states, including California, Michigan and New York.
The derivatives are still thinly traded, but their existence has the potential to make investors skittish
http://seekingalpha.com/article/201633-bailed-out-banks-betting-against-u-s-cities-and-states

quote:

$2tn debt crisis threatens to bring down 100 US cities Overdrawn American cities could face financial collapse in 2011, defaulting on hundreds of billions of dollars of borrowings and derailing the US economic recovery. Nor are European cities safe – Florence, Barcelona, Madrid, Venice: all are in trouble
http://www.guardian.co.uk/business/2010/dec/20/debt-crisis-threatens-us-cities

I was reading a story the other day about Detroit. The plan, apparently, is to abandon much of the city because it can no longer be maintained. This would mean encouraging people to concentrate in areas that will form what is essentially a new hub city amongst the decaying remnants of the larger old city. The talk is of a mass movement of people from the 'dead' parts of the city to the parts that still have a bit going for them. Sounds a bit like an amputation - cut out the dead tissue so the rest will be safer...

But then I saw these two stories. It sounds like scary stuff. But is it true, any of it? Are 100 US cities heading for oblivion? Is this the financial crisis Part 2?

Post #: 1

RE: Banks bet on US cities dying. - 12/22/2010 2:26:51 PM

ThatDamnedPanda

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It's definitely true, and it's not just the cities - it's many states, as well. And yes, it has every indication that it will be Meltdown Part II.

People need to get it through their heads. The collapse of 2008 was not a one-time event, it was the first wave of the tsunami. The world is broke. The entire world simply does not have enough money to pay its obligations. Get used to it, because the future isn't going to be anything like the past.

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RE: Banks bet on US cities dying. - 12/22/2010 2:30:11 PM

hertz

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It's tragic, really it is. Look at these...

http://www.kevinbauman.com/100abandonedhouses/

(in reply to ThatDamnedPanda)

Post #: 3

RE: Banks bet on US cities dying. - 12/22/2010 2:32:43 PM

hertz

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Here's one of the shrinkage stories...

http://www.telegraph.co.uk...US-cities-may-have-to-be-bulldozed-in-order-to-survive.html

(in reply to hertz)

Post #: 4

RE: Banks bet on US cities dying. - 12/22/2010 3:07:29 PM

MrRodgers

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Of course US cities are dying. Good 'ole US corporate/capitalist values...fuck 'em.

American cities have been on a death march for 40 years as it was then and over the next few years...the entire fortune 1000 completely left. Then their support businesses left. Then the people had to leave. (Det. 5 million to 900,000)

Starve em out, they'll leave. All that is left in the cities is schools, govt. (in debt) and poor people. The jobs are still leaving as fast as they can, demand is disappearing altogether and large parts of Detroit (my home town) are ghostly.

(in reply to hertz)

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RE: Banks bet on US cities dying. - 12/22/2010 3:24:45 PM

Charles6682

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Sigh,I hope this dosen't happen to Rochester NY.The place where Kodak and Xerox started.Only time will tell.

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RE: Banks bet on US cities dying. - 12/22/2010 4:57:53 PM

DarkSteven

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Um, the death of towns isn't new.

When the railroads were built, they fed life into the towns along the path, and many of the others withered and died. Same with the freeways. Colorado is chock full of ghost towns that died when India decided not to use silver for their currency in 1895.

The part that is new is the bubbles that kept them up. As a taxpayer, I resent like hell my tax money being used to prop up towns that have their death upon them.

And it's not the cities that are the intended beneficiaries of getting propped up. It's the banks that own real estate.

< Message edited by DarkSteven -- 12/22/2010 4:58:16 PM >

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RE: Banks bet on US cities dying. - 12/23/2010 5:59:17 AM

DomKen

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While I feel for the plight of Detroit the simple fact is that Detroit's problems are largely self inflicted (primarily a reliance on a single industry).

Chicago used to be in much the same sitaution. However things have changed greatly. We have revitalized our downtown and surrounding neighborhoods and people have moved back into the city ( The city's population actually went up from 1990 to 2000 ).

As to holding credit default swaps on municipal and state bonds, it is wrong to look at it as investors betting that the bonds will default but more correctly as the bond holders insuring themselves against default. Which is entirely reasonable considering the size of the investments.

(in reply to DarkSteven)

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RE: Banks bet on US cities dying. - 12/23/2010 7:43:17 AM

pahunkboy

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Yeah Ken- Chicago is a fine and dandy example if fiscal prudance! LOL... argh//

Not to worry about things getting bad. When they get very very bad- Fort Detrick will release a bio weapon on the population. There will also be a nuclear war.
Hundreds of millions will die. If 10 million in America live- the war is considered a success.

In short nothing can humanly be done to change this course of events.

...in many ways- the people that live thru it- wont- have gotten the better deal.

(in reply to DomKen)

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RE: Banks bet on US cities dying. - 12/23/2010 7:50:05 AM

mnottertail

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Thanks for the insightful panorama of the political landscape.

I will go down to the store and start stocking up on canned asparagus.

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RE: Banks bet on US cities dying. - 12/23/2010 8:07:50 AM

pahunkboy

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;-0~ STOMP

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RE: Banks bet on US cities dying. - 12/25/2010 10:28:19 AM

MrRodgers

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quote:

ORIGINAL: DomKen

While I feel for the plight of Detroit the simple fact is that Detroit's problems are largely self inflicted (primarily a reliance on a single industry).

Chicago used to be in much the same sitaution. However things have changed greatly. We have revitalized our downtown and surrounding neighborhoods and people have moved back into the city ( The city's population actually went up from 1990 to 2000 ).

As to holding credit default swaps on municipal and state bonds, it is wrong to look at it as investors betting that the bonds will default but more correctly as the bond holders insuring themselves against default. Which is entirely reasonable considering the size of the investments.

Except Detroit was too busy kissing Coleman Young's ass while his corruption did nothing for the city.

This was as opposed to another single industry town like Pittsburgh. It has very successfully and completely evolved from steel and has been for 20-30 years in the top 3-5 cities in which to live in the country.

Trust me kinkroids, almost every single bullshit capitalist remedy was NOT adopted and instead govt. used what one might proudly suggest as 'progressive' policies to turn that city around. Anybody venture a guess as to how Pittsburgh did this at least within one very important part of its economy ?

Oh and BTW, any banks that bet on Pittsburgh failing...lost.

< Message edited by MrRodgers -- 12/25/2010 10:33:17 AM >

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RE: Banks bet on US cities dying. - 12/25/2010 11:00:48 AM

pahunkboy

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Pittsburgh is a NWO city. As is Austin TX.

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RE: Banks bet on US cities dying. - 12/26/2010 2:41:27 AM

hertz

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quote:

NWO city

?

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Post #: 14

RE: Banks bet on US cities dying. - 12/26/2010 8:49:34 AM

pahunkboy

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NWO = New World Order

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RE: Banks bet on US cities dying. - 12/27/2010 5:21:58 AM

Termyn8or

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FR

I had to give this a bit of thought. The perception seems to be for some that this is amoral or something. I don't see it that way. Banks must make money, they didn't get the bailout to lose money. What some of them do when it comes to mortgages is atrocious, but whether it's a bank or an investment firm which is similar, they have one stated goal. To make money with money. They have people to whom to answer.

Certainly it is a sign of the times - bad times. Where is the civic pride in those who, for example, bet against their city's football team ? Technically bookies do it all the time and make money. If your team sucks, why give your money to the bookie ?

Of course there is the question of where the people go. Just where do they go ? The population hasn't decreased in the country, and if people leave cities, what do they do, live out in the woods or under bridges ?

Many cities are in trouble. Chicago is fortunate due to their geographical location. The transportation industry is good for them. This in turn supports more commerce in the area. The trick is that they are pulling in money from somewhere else rather than pushing the same pile around ad infinitum.

There's a story of a town in which things were bad. Some guy comes and pays a deposit or something for a room at the hotel on approval. The hotelier pays a debt with the money, and the person he paid paid someone else and so forth, and in the end someone paid the hotel a past due bill, which put the money right back where it started. Then the money was refunded to the perspective customer and the net result was that bunch of debts got paid even though no money had been made.

Something like that cannot go on forever. Or can it ?

If a town or some certain geographical area is completely self sufficient, there is no need for trade with the rest of the world, but those places are far and few between. I don't mean to hijack, but this subject begs the question - where did the people go ? The 4.1 million from Detroit, they just up and moved to other cities ? Well that would require expansion which costs money. If you take the US economy as a whole, it must cause a deficit somewhere. Most likely in the abandoned cities I would think.

So what we are looking at is technically the renaissance of ghost towns in the US. Without municipal bonds and such, it just would've happened sooner I think. And now that the inevitable has been forestalled as usual, the crash will be worse. The American way.

T

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RE: Banks bet on US cities dying. - 12/27/2010 5:27:59 AM

CerVeza

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Yup, Detroit was in decay in the early 50s. They all share a few things in common. They have large government employee unions. They have high taxes. Huge regulations. And, they are ruled by one party. What they are trying to do with Detroit is tear down long abandoned houses and buildings, now used by druggies, and concentrate the population to make it easier to service. And in place of the torn down buildings, urban agriculture. I grew up in the area and from the time I was about 14 all I could think about was moving out. Going away to college. I did... I came to Arizona. Watch Detroit 1 8 7 if you can... it's filmed right there on location. A trip down memory lane, most of it not so good.

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RE: Banks bet on US cities dying. - 12/27/2010 6:49:05 AM

hertz

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Does anyone remember Goldman Sachs selling 'good' investments to their punters which they themselves bet would fail?

quote:

In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
http://www.mcclatchydc.com/2009/11/01/77791/how-goldman-secretly-bet-on-the.html

Now you could conclude that this was just about the bank reducing its own exposure to risk (a risk that its customers were apparently very exposed to), or one could, if you wanted to be a bit uncharitable, come to the conclusion that it was a scam of sorts, where the bank got rich selling dodgy and dangerous investments to its customers. Of course, we never found out how many of the other banks were doing this. But I'd be willing to bet that Goldman Sachs were not on their own.

Now come back to today. Why is the practice of betting that cities will fail a problem?

Well, here's what Huffington has to say:

quote:

Offered by banks like JP Morgan, Bank of America, and Citigroup, the so-called municipal credit default swaps can be used by investors to bet that insurance contracts protecting holders of municipal bonds will default.

Some states say the derivatives not only scare away potential buyers of municipal bonds by creating a perception of risk, but ultimately drive up states' borrowing costs. Others contend that the instruments are traded too thinly to affect municipal bond markets or a state's credit rating.
http://www.huffingtonpost.com/2010/04/27/banks-bet-against-us-citi_n_553891.html

Essentially, by making these bets, the banks make it more likely that the cities will fail because their insurance costs increase. And what do you think happens when a city fails? Yep, that's right - everyone in the city dies. Economic Darwinism 101 - only the most efficient survive. Of course not! What actually happens is that you will end up paying to bail them out, in pretty much the same way as you paid to bail out the banks that are now acting to sink the cities...

Some cities apparently have bought foreclosed properties which they then rent out to raise funds. They have done this using money borrowed from the banks. But the banks are betting against them, making it more likely they will fail. As they fail, what do you think happens to the value of the properties they are holding? And who do you think will be the beneficiaries if failure occurs? That's right - the banks win again. They lend the cities money to buy foreclosed properties at a low rate for an interest charge. If the city fails, they will want their money back. They'll do this by making a claim on the property holdings of the city, but that won't cover the debt, because the value of those holdings will plummet to a new low - without the city buying to prop up what is left of the market, the whole thing will collapse to a new low. So how will the bank get the shortfall? That's where you come in. You'll be bailing them out again...

I dunno. It all sounds a bit shit to me.

(in reply to CerVeza)

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RE: Banks bet on US cities dying. - 12/27/2010 7:35:11 AM

pahunkboy

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Why would a bank need to make money?

They print it from thin air.

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RE: Banks bet on US cities dying. - 12/27/2010 8:18:58 AM

MrRodgers

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quote:

ORIGINAL: CerVeza

Yup, Detroit was in decay in the early 50s. They all share a few things in common. They have large government employee unions. They have high taxes. Huge regulations. And, they are ruled by one party. What they are trying to do with Detroit is tear down long abandoned houses and buildings, now used by druggies, and concentrate the population to make it easier to service. And in place of the torn down buildings, urban agriculture. I grew up in the area and from the time I was about 14 all I could think about was moving out. Going away to college. I did... I came to Arizona. Watch Detroit 1 8 7 if you can... it's filmed right there on location. A trip down memory lane, most of it not so good.

Actually, Detroit was booming in the 50's & 60's through the 70's. They were building, adding population and adding schools namely Henry Ford HS. Post war demand for cars and trucks both sky rocketed. Auto manuf. was going full tilt and all of my friends were desperate to work for GM, Ford or Mopar in that order. A close family friend bought a new Chevy every year from 1953 to 61, 2 in 56. IBM was building, Continental Motors added R & D, Burroughs Tireman Plant added $3 million expansion. The muscle cars of the 60's were dominant and they couldn't build them fast enough production was at capacity.

As for the rest I still cannot believe people with a brain still want to harp on such ridiculous generalities about what causes economic problems. All of that about so-called hi taxes, govt. unions, regulations is just more capitalist propaganda and more unmitigated bullshit. All of those were comparable to other cities and it sure as hell wasn't driving anybody out of the city.

In fact, it was the first oil embargo (73) that hit hard because we had become hooked on horsepower, luxury (size) and...gas guzzlers. Then on the contrary to anything govt. did, the stupid, greedy, short-sighted capitalist/corporatist refused to change (watched the Japanese cars start to take their lumps and learn) actually raised their prices (particularly Chrysler) and sales fell further. Brilliant. With the second oil embargo (79) it was the death knell of the auto industry in Detroit as we all knew it and it ALL because of industry executive arrogance and stupidity.

If you wish to argue the point then refer specifically to those regulations, the tax regime and govt. employee union benefits that allegedly 'killed' Detroit.

< Message edited by MrRodgers -- 12/27/2010 8:27:05 AM >

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