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Finance - Investments Sub-forum: Non-Actuarial Personal Finance/Investing

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  #91  
Old 07-24-2013, 11:21 AM
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http://www.rawstory.com/rs/2013/07/2...on-challenges/

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DETROIT (Reuters) – Labor unions trying to stop Detroit from cutting pensions filed a new challenge to the city in bankruptcy court as the federal judge overseeing the case said he would hear arguments on Wednesday.

U.S. Bankruptcy Court Judge Steven Rhodes agreed on Monday to a request by Detroit Emergency Manager Kevyn Orr to fast track a hearing on whether other courts can hear lawsuits against Detroit, while it seeks federal bankruptcy court protection.

.....
To remain in bankruptcy court, Detroit must prove that it is insolvent and that it made a good faith effort to negotiate with its creditors, including its employee pension funds, over the city’s more than $18 billion of debt, which includes $5.7 billion in unfunded liabilities for healthcare and other retiree benefits and a $3.5 billion pension liability.

.....
AFSCME leaders on Monday said that Orr had rebuffed efforts by unions to discuss the issues.

“Not once, did (Orr’s) representatives sit down and seek to negotiate a solution with our union,” Steven Kreisberg, national director for collective bargaining for AFSCME, told a news conference.

“Our members and our retirees were never given the opportunity to address the serious issues of the type of cutback that the emergency manager is seeking,” he said.

Orr has not specified how much pensions or retiree health care will have to be cut, although his June 14 proposal to creditors called for “significant cuts in accrued, vested pension amounts for both active and currently retired persons.”

Orr spokesman Bill Nowling said the unions were never promised negotiations. “We will meet with the unions if they ever put a counterproposal on the table.”

Under Michigan’s emergency manager law the city was not obligated to negotiate in collective bargaining with the unions, Nowling said. “It’s a mischaracterization to say they were promised negotiations.”

Pensioners could attempt to appeal to the federal district court any order by Judge Rhodes enforcing the stay of litigation against Detroit. But, because such an order would not be considered a final judgment under bankruptcy laws, the federal court could refuse to hear the appeal, Gold said.

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  #92  
Old 07-24-2013, 11:24 AM
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European bank exposure to Detroit

http://online.wsj.com/article/SB1000...814520624.html

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The situation demonstrates the ways in which European banks are still paying the price for flawed decisions made in the run-up to the global financial crisis. The trouble dates back to 2005, when Detroit was trying to find a way to replenish its depleted pension funds for municipal workers and its police and fire departments. The city turned to a giant Swiss bank, UBS AG, UBSN.VX +0.17% for help.

UBS, leading a group of banks from around the world, sold more than $1.4 billion of bonds, known as "certificates of participation," for Detroit. Big chunks of that deal, and another the next year, went to European banks that, in the heady precrisis days, were venturing far from home to find assets that offered lucrative interest rates and appeared to be relatively low-risk.

But last week Detroit filed for bankruptcy protection, squeezed in part by the ill-fated bond deal and related transactions. The city's creditors include not just UBS but also nationalized banks in Germany and Belgium. They hold debt that once was worth hundreds of millions of dollars but today is worth a fraction of that, likely adding to huge losses that the banks and taxpayers in those countries already have suffered.
....
Thanks to the financial crisis and its fallout, UBS has already endured about $50 billion in losses and a Swiss government bailout, and is in the midst of dismantling a big part of its investment bank.

Now it faces even more losses. Following heated negotiations with Detroit's emergency manager in recent months, UBS and another lender, Bank of America Corp.'s BAC -0.60% investment-banking unit, agreed to accept less than what they are owed under a hedging transaction that accompanied the bond deal and that had become a heavy weight around Detroit's neck.

....
UBS and its peers earned $46.4 million in fees on the deal, according to Detroit's annual financial report. Over the anticipated 20-year life of the certificates of participation, Detroit was expected to be on the hook for total interest payments of $827 million, according to a 2005 bond prospectus.

To make sure that bill didn't rise if interest rates spiked, UBS and other banks entered into a hedging arrangement with Detroit to cover a large chunk of the debt. Under the "swaps" deal, the banks would pay Detroit if interest rates rose. If rates fell, Detroit would owe the banks money.

.....
All told, European banks bought a total of about $1 billion of the Detroit bonds, according to industry officials familiar with the transactions.

By 2009, however, a downgrade of Detroit's credit rating forced the city to pledge new collateral under the swaps deal. Detroit pledged the revenue it expected to receive from three casinos in the city—roughly $180 million a year. That meant if the city failed to make a scheduled swaps payment, the banks could block that crucial flow of money to the city's government.

Making matters worse, plunging interest rates forced the city to pay as much as $13 million a quarter to UBS and Bank of America under the swaps contracts. By last month, the bill for the city to get out of the hedging deal amounted to nearly $297 million, according to a recent court filing. The banks agreed July 15 to accept as little as 75% of that in a compromise with Detroit's emergency manager.

Meanwhile, some participants in Detroit's debt sale were at the center of Europe's banking problems.

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  #93  
Old 07-24-2013, 11:52 AM
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How many of these huge bond + swap deals with crazy high fees have the ibanks been peddling to municipalities over the last decade? I'm guessing they were sold as being "neutral" from a market risk perspective with the swap layer. Better question might be is there anyone working for the cities that understands the deals they are entering?
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  #94  
Old 07-24-2013, 11:57 AM
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This thread may also be relevant (to what donny5k is asking about)
http://www.actuarialoutpost.com/actu...d.php?t=177543
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  #95  
Old 07-24-2013, 12:08 PM
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Has Detroit over-inflated its pension liabilities?

Cate Long, MuniLand:
Quote:
Michigan Governor Rick Snyder and the Detroit City Council agreed to hire an outside actuary to review the two pension plans. Here is the story, according to Pensions and Investments:


The Detroit City Council hired actuarial consultant Milliman Inc., Seattle, late last year to prepare a report about ways to reduce pension and retiree benefit costs. A ‘very rough preliminary guesstimate’ by Milliman adjusted the actuarial assets of the plans to 32 percent from 87 percent for the General Retirement System and to 50 percent from 102 percent for the Fire and Police fund as of June 30, 2010, according to the Milliman report, which was obtained by P&I.

A “very rough preliminary guesstimate” is what Orr was using in his “good faith” negotiations and is now taking to bankruptcy court?


Milliman made its adjustments by accounting for market value of the funds, the discount rate, mortality assumptions and the amount of the pension obligation certificates.

Pension calculations can seem to be a form of voodoo. Moody’s applies a lower discount rate, like the Milliman report did, to pension liabilities, while the two other major raters do not. Pension liability methodologies are, in essence, just opinions. More from P&I (emphasis mine):


The calculation Milliman used is atypical, said David Driscoll, Boston-based principal, actuarial consultant and head of the public pension fund practice at Buck Consultants LLC, New York. “Absent an unusual circumstance, the issuer of POBs holds the liability, not the pension fund, which is merely the recipient of the proceeds of the bond sale,” Mr. Driscoll said.

Orr could help everyone understand his case by releasing the Milliman report for study by actuaries and others.
Question: Does the Milliman report reduce the pension plan assets on the theory that the POB proceeds (contributed to the plan a few years ago) are at risk of being awarded to Detroit city creditors?
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  #96  
Old 07-24-2013, 12:30 PM
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POB is the same as the "pension obligation certificates" referenced above? Is that just an IOU from the city? Seems reasonable to me you'd ignore that or at least haircut it in a bankruptcy scenario, no?
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  #97  
Old 07-24-2013, 12:36 PM
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Quote:
Originally Posted by Westley View Post
POB is the same as the "pension obligation certificates" referenced above? Is that just an IOU from the city? Seems reasonable to me you'd ignore that or at least haircut it in a bankruptcy scenario, no?
The city owes its creditors. The pension plan owes its members, not the city's creditors. I don't see how a court could or would find the pension plan liable to the city's creditors.

So the POBs (debt owed by Detroit to creditors) will likely be haircutted. It seems that Orr & Milliman may have double counted when they say that the proceeds from the POBs (contributed to the pension plan years ago) is also owed on the same debt.
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Last edited by Dan Moore; 07-24-2013 at 12:39 PM..
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  #98  
Old 07-24-2013, 12:43 PM
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Quote:
Originally Posted by Dan Moore View Post
The city owes its creditors. The pension plan owes its members, not the city's creditors. I don't see how a court could or would find the pension plan liable to the city's creditors.
I'm not a pension actuary, so you're probably just talking way past me. What you said doesn't sound like a response to me at all, so let me try again.

Is POB the same as "pension obligation certificates? (I'll assume yes)
Is that just an IOU from the city? (I'll assume yes - an IOU from the city to the pension plan)
Seems reasonable to me you'd ignore that or at least haircut it in a bankruptcy scenario, no? (is there a reason why, in a bankruptcy, an IOU from the city to the pension plan would get paid full value when an IOU from the city to a bank would not?)


I don't see how "a court could or would find the pension plan liable to the city's creditors" is relevant if we're talking about IOUs from the city that both the creditors and the pension plan have. If we're talking about assets in the pension plan leaving the pension plan to pay creditors, then your response would make sense, but that's not what the POBs are, right?
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  #99  
Old 07-24-2013, 12:45 PM
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Quote:
Originally Posted by Dan Moore View Post
So the POBs (debt owed by Detroit to creditors)
OK, sounds like I misunderstand what these are. These aren't IOUs put in the pension plan in lieu of contributions?
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  #100  
Old 07-24-2013, 12:51 PM
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I thought they called them "certificates of participation"
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