Detroit Agency Paid Up to Terminate Rate Swaps

JPMorgan Chase & Co. stood to gain more than just its share of $7.8 million in fees by helping Detroit’s water and sewer agency issue new debt after the city staved off insolvency.

The department’s $659.8 million June bond sale let it pay more than $300 million to banks, including JPMorgan, to end interest-rate swaps while raising its borrowing cost. The utility, with 1,978 employees, plans to fire four of every five workers, while debt service has climbed to more than 40 percent of revenue, internal documents show.

As cash-strapped cities from San Bernardino, California, to Harrisburg, Pennsylvania, grapple with insolvency, the Detroit example shows that Wall Street banks never lose. That’s especially true when it comes to arranging transactions to escape distressed debt and swaps initially sold by the lenders. Along with the fees, the deal helped banks such as UBS AG, once an underwriter of the debt, recover payments to terminate swaps.

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