LONDON, ENGLAND -- (Marketwired) -- 08/12/13 -- It once stood at the peak of American industry, but now Detroit is a shadow of its former self. The news of its bankruptcy in July shocked many worldwide, yet the causes of the city's demise have lingered in plain sight for decades. Jules Gray investigates Detroit's long and fascinating road to bankruptcy in a new World Finance special report.
The supposed reasons for Detroit's downfall are many: the city's population fell 63 percent since its peak in 1950, and a further 26 percent since the turn of the century; unemployment reached 27.8 percent in 2009, and settled at 16 percent earlier this year; and "all this occurred as the city's auto industry collapsed, decimating the manufacturing base that had sustained it for the last century," writes Gray.
However, the real reasons for Detroit's bankruptcy have been sorely neglected; Gray's investigation reveals an unsettling and altogether more complicated affair beneath the surface. While the corrupt politicians, a declining auto industry, social unrest, and a fleeing population all played a role, matters worsened crucially in 2009 when the city began trading interest rate futures. It is this that forms the basis of Detroit's decline.
Detroit's use of derivatives can be traced back to 2005, when shortfalls in funding were supplemented by vast sums of debt. However, when the city chose to take onboard interest rates swap positions as a means of hedging against failure, its plight worsened significantly.
World Finance's journalist investigates the implications of Detroit's gambled on these complex financial instruments and the ways in which financial risk-taking led to collapse. "Detroit got involved in trading interest rate futures, and once it was in it couldn't turn back," writes Gray.
The special report also includes a timeline looking at Detroit's history of using interest rate swaps, beginning in 1997 and ending on July 18.
To uncover the truth behind Detroit's dissolution, read Gray's article online at www.worldfinance.com - the place for those interested in the foremost financial issues of day.
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