Los Argentina: LA's City Council Issues an Ultimatum to Wall Street. Default Ahead?

THE CITY-Capital markets howled when Detroit declared bankruptcy last year and stiffed creditors. So maybe Los Angeles's City Council is doing investors a favor by flagging the risk of a default and Wall Street shakedown. 

Earlier this month LA's city council unanimously approved a labor-backed measure demanding that Bank of New York Mellon and Dexia renegotiate or terminate interest-rate swaps tied to $151 million in sewer debt. The council stipulated that this be done at no cost to the city and that the banks "return the unfair profits and termination payments since 2008, estimated to have cost the City up to $65 million." Labor groups have accused banks of "gouging LA taxpayers" with "predatory" deals. 

If the banks refuse to pay up, the council has ordered the city attorney "to evaluate potential legal remedies." One of the first foreshocks of Detroit's bankruptcy was its demand to renegotiate an interest-rate swap in 2009. 

The irony, as LA administrator Miguel Santana points out, is that the swap deals are benefitting taxpayers. In 2006 the city refunded sewer bonds at a variable rate hedged by a swap contract tied to a fixed 3.34% rate. If interest rates rose, the banks would pay the city. If rates fell, the city would owe the banks.  (Read the rest here.) 

-cw

 

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CityWatch

Vol 12 Issue 70

Pub: Aug 29, 2014