DETROIT Jan 3 Detroit asked a U.S. regulator to
consider bringing charges against two banks for costly
interest-rate swaps that factored in the city's record-setting
municipal bankruptcy case, Detroit Emergency Manager Kevyn Orr
testified on Friday.
Orr said Detroit asked the U.S. Securities and Exchange
Commission to investigate its deals with UBS AG and
Merrill Lynch Capital Services for interest rate swaps to hedge
risk on some of the $1.4 billion of pension debt Detroit sold in
2005 and 2006.
Orr did not say whether the SEC responded to his request to
investigate UBS and Merrill Lynch Capital Services, a unit of
Bank of America Corp.
The city thought there were "serious questions" about
whether it owed the banks anything at all, Orr testified, and
Detroit weighed trying to invalidate the swaps. But officials
decided chances of prevailing in court were only "more or less
50/50," so it decided to bargain with the banks instead.
Orr testified before U.S. Bankruptcy Judge Steven Rhodes at a
hearing over a Christmas Eve deal to end the swap agreements for
$165 million plus fees. That represents a 43 percent discount
for Detroit, steeper than one initially proposed.
Rhodes, who is overseeing Detroit's bankruptcy case,
postponed a hearing about the earlier deal to terminate the
swaps for $230 million, or 75 cents on the dollar, and sent the
city and the banks back to the bargaining table.
Orr testified that Detroit decided to settle with the banks
because litigating the case risked having to pay the full amount
or losing casino tax revenue the city put up as collateral. The
casino tax accounts for about 20 percent of the city budget.
"Twenty percent of the city's budget could go away," Orr
said. "If that happened to the city, you could not cut enough
He said $165 million was the lowest termination fee the city
could negotiate. Orr said the city's initial proposal was for
$145-$150 million, but the banks would not agree.
He said terminating the swaps was critical for Detroit's
future. "The city cannot plan unless it removes this potential
risk from the table so any plans it does make ... are credible
and realistic," he testified.
Bond insurers, the city's pension funds and other parties
have objected to the swap-termination plan. On Friday, Rhodes
rejected their motion to force the city to release documents
disclosing its thinking about legal options it considered to end
the swaps. He was interrupted by a heckler, who was escorted
from the courtroom after briefly forcing Rhodes to vacate the
The city plans to use a $285 million loan from Barclays Plc
to pay to end the swaps. About $120 million from the loan will
be used to improve city services in Detroit, which has more than
$18 billion in debt.
Detroit initially secured a $350 million loan from Barclays,
but the terms were reduced when the city renegotiated its deal
with UBS and Merrill.
On Monday, the judges serving as mediators who helped
negotiate the deal recommended that Rhodes approve the agreement
to end the interest-rate swaps.
U.S. District Judge Gerald Rosen and U.S. Bankruptcy Judge
Elizabeth Perris wrote that the deal was fair to all parties,
adding that their advice "can best be captured and characterized
by the admonition, 'Do not allow the perfect to become the enemy
of the good.' "
They wrote: "Although it is not a perfect settlement, the
mediators believe ... it represents a fair and equitable
solution that is advantageous to all concerned."
In a document filed late Thursday, a group of objectors said
the mediators' recommendation was inappropriate.
"Here, the recommendation appears to impinge on the
confidentiality of the mediation process," they wrote. "Further,
the recommendation makes observations regarding the benefits of
the Forbearance Agreement and urges the Bankruptcy Court to
overrule all objections to the Forbearance Agreement, a matter
that is presently before the court and must be decided based on
the evidence properly admitted."