Mike Shedlock

Corruption, fraud, and bankruptcy are often found together. Such is the case with Detroit. I have seen allegations and suggestions of fraud, but a recent article shows that fraud by Bank of America, city officials, or both is now a given, and likely provable in a court of law.

Does that change my view on what constitutes a "fair" settlement?

Before answering, let's take a look at the charges as presented in Democracy Watch: Swaps, COPs & Lingering Questions.

In 2005, the city of Detroit faced a monumental dilemma: It desperately needed to borrow more than $1.4 billion to help shore up its two pension systems, but doing so would far exceed the legal limit on the amount of debt it could amass.

The solution arrived at by the administration of then-Mayor Kwame Kilpatrick was to sidestep the law by turning to something called certificates of participation, or COPs, which are similar to municipal bonds. But instead of borrowing the money directly, Kilpatrick and his crew – following the advice of investment bankers who would reap massive profits from the deal – set up two nonprofit “service corporations,” which in turn created trusts that would sell the COPs to investors. Technically, it was these two nonprofits that were obligated to ensure repayment of the debt. The city then entered into a contract with the nonprofits – both of which were controlled entirely by city officials -- agreeing to pay them for services rendered. In other words, they were mere shells.

Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.