Were Detroit’s rate swaps unfair?

Jan. 27 (Bloomberg) — The judge overseeing Detroit’s bankruptcy has rejected a $165 million settlement between the city and the banks that provided the city with interest-rate swaps. This startling development raises fundamental issues about the fairness of the original deals and the quality of the advice Detroit received before, during and after the transactions.

Although bankers typically aren’t responsible for ensuring that their clients get the best deal possible (they usually have no presumed fiduciary duty), securities laws and regulations require that bankers deal with clients fairly. And while fairness must be evaluated on a case-by-case basis, to paraphrase former Supreme Court Justice Potter Stewart’s quip about pornography, we know how to recognize it when we see it.