Judge signs off on Detroit’s $85 million swaps settlement

April 11, 2014
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(Source: Wikimedia Commons)

(Source: Wikimedia Commons)

The judge overseeing Detroit’s historic bankruptcy has signed off on an $85 million settlement involving two banks tied to a horrendously complex financial deal to shore up the city’s pension systems.

U.S. Bankruptcy Judge Steven Rhodes previously rejected two offers involving Bank of America and UBS, an international bank based in Switzerland with affiliates that are also represented by Jones Day, the law firm where Detroit Emergency Manager Kevyn Orr previously worked. Rhodes’ ruling today ends a costly 2005 pension-related debt involving a hedge bet known as “interest rate swaps” that went sour.

As Curt Guyette noted in this week’s Metro Times, essentially, interest rate swaps are a bet on the direction in which interest rates would move: If they increase, the city reaps the benefit; if they went down, the city would owe the banks. Thanks to the economic downturn in 2008-2009, interest rates plummeted, causing the city’s annual payments to spike to nearly $50 million. To date, the banks said they were owed $270 million. Under the settlement approved today, the city will save nearly $185 million, paying roughly 30 cents on the dollar.

Spun another way, as attorney Jerome Goldberg contended in court last week, the swaps deal itself, he says, should’ve been invalidated — costing the city nothing, rather than the $85 million it will pay now.

As Guyette reports, Goldberg said the city should’ve filed suit claiming just that. Rhodes had previously indicated the city would’ve likely prevailed in a challenge. Detroit News reporter Chad Livengood, at the courthouse this morning, tweeted that Rhodes mentioned Goldberg’s point — that if the city were to sue the banks and win, not only would it have to pay nothing, it could potentially recoup the $300 million it has already forked over since 2009.

Nonetheless, Rhodes said today, even though that outcome would be favorable for the city, the $85 million settlement was “reasonable.” As The Detroit News notes today, the settlement may give Detroit the ability to implement cuts in pensions and health insurance on retirees in what’s known as a “cram-down,” which, under bankruptcy law, would force creditors to accept payments.

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  • Jerry Mangona

    I’m fine with Goldberg’s objection saying that had we (the city) sued and won, we would have paid $0…and possibly even had our past payments refunded to us. But let’s not oversimplify it. That’s only if we had won.

    If we had sued and lost, not only would we have paid the $85 Million, we would’ve coughed up the entire $300 Million. Of course Goldberg thinks that this wouldn’t have happened. But Goldberg isn’t the one that gets to make that decision. In the same ruling, Rhodes remarks that there is a “very real risk of a court finding” in favor of the banks and that the swaps were protected.

    So was $85 Million a fair settlement? We’ll never really know, because we’ll never really know whether or not we would have won in court. Nor will we know how many years of litigation it would take and how many millions in attorney fees.

    I’m too ignorant of the merits of the case to comment any further. My only issue is that Goldberg is getting quoted left and right about how we paid $85 Million for nothing. I’m willing to bet there are a bunch of people on the other side saying that they walked away from $215 Million for nothing.

    Let’s just not pretend that, like a unicorn from on high to rescue us, if somehow if some magical genius came in to replace Orr, all of our pensioners would be saved.