Wall Street pockets millions in fees as Detroit hurtles toward bankruptcy

A series of debt deals conducted by the Detroit municipal government have allowed it to continue operating at a significant budget deficit, yet these transactions have cost the city millions of dollars in fees to some of the nation's biggest banks. According to a report by Bloomberg News published on March 13, several Wall Street firms have raked in nearly $500 million since 2005 for conducting some of these activities.

Some of the services rendered by JPMorgan Chase & Co., UBS AG and Bank of America Merrill Lynch included general bond issuances, underwriting jobs and credit default swaps. A large derivatives package conducted over the years by a team of Wall Street-affiliated advisors cost the city $350 million alone. 

Critics of these actions, speaking with the source in series of interviews, allege that the banks also had the opportunity between 2005 and 2008 to entice lower-income folks into buying mortgages that were clearly unaffordable. This led to wide-scale foreclosures which have caused  nearly a quarter of the homes in Detroit to remain empty and, in many cases, uninhabitable.

"The banks promise to get you the money and say you can pay later," Greg Bowens, a Detroit-based financial advocate, told Bloomberg. "They get their fees off the top, and you trust that they're doing what's in your taxpayers' best interest."

To help deal with the economic mess, state officials are debating whether to appoint an emergency advisor with sweeping powers to enact reforms. However, some in Detroit fear that these efforts will focus more on managing the enormous debt load than taking steps to revitalize the city.

As we've said previously, municipal economic collapses can pose unique challenges for the United States. Investors with exposure to municipal debt may want to review their portfolios and consider forms of wealth preservation to ensure that their professional and personal finances are not at risk.