|Photo Credit - Yahoo News|
Protesters in December outside of Detroit's U.S. Bankruptcy
Court demanding the City sue Banks UBS AG and Bank of
America on 2005 Deal Swap Deal terms.
As first revealed by January 23 report in the Michigan Citizen, ex-mayor Kilpatrick in 2005 and former City Chief Investment Officer Sean Werdlow and city banks established illegal structure per Michigan's Municipal Finance Law Act 34, resulting in Detroit owning $1.4 billion in debt to Corporate Financial Institutions of UBS AG and Bank of America.
The debt resulted in Michigan Governor Rick Snyder mandating Detroit's Elected Officials last year accept appointed Emergency Manager Kevyn Orr in March 2013 controlling all of the City's finance and municipal affairs, under controversial state law P.A. 436 of 2012.
The lawsuit, filed in U.S. Bankruptcy Court seeks to void the terms of four “service corporations” and associated trusts former City C.I.O. Werdlow and Mayor Kilpatrick created to enter the questionable debt swap deal.
Unbeknownst to City Council Officials in 2005, Detroit secured interest rates between 3.5-6.5% on the deal by purchasing “swaps” from UBS AG and Bank of America sticking the city with a $50-million-a-year bill.
Emergency Manager Kevyn Orr initially refused considering suing banks on terms set with the "deal swap". In July Orr was ready to accept negotiating a deal with UBS AG and Bank of America settling the questionable liability for $.75 on each dollar owed. He recently changed his position on the matter with the E.M. granting the financial institutions a deadline for a possible settlement offer by 5pm January 31.
“This deal was bad for the city from its onset, despite reassurances it would adequately resolve the city’s pension issues,” Orr said to the Detroit Free Press. “We have tried, without success, to negotiate a resolution to this dispute and to allow the city and its taxpayers to move forward and unwind these illegal transactions.”Orr, a former Bankruptcy Attorney for Washington, D.C. Law Firm Jones Day, offered a separate financial institution Barclays Bank, another agreement in June set on borrowing a $350 million dollar loan. The City would use $230 million of the loan to pay off two clients of Jones Day: UBS AG and Bank of America.
Attorney Jerry Goldberg representing retiree David Sole in court opposed Orr's second plan at during bankruptcy court hearing January 13, questioning terms of the Barclay's deal before U.S. Federal Court Judge Steven Rhodes chamber.
“Instead of going after these banks for their predatory lending practices which caused Detroit’s financial crisis by foreclosing on 100,000 homes and then putting the city in bankruptcy through interest rate swaps, which continued the banks’ fraudulent lending practices against the city itself — Orr is asking Judge Rhodes to approve a termination fee of an additional $165 million payment to these banks, funded by a loan by Barclays Bank at up to 8.5 percent interest with $4.2 million in ‘breakage fees,’” said Attorney Jerry Goldberg in the Michigan Citizen report.
“If this deal is approved, the people of Detroit will be paying 20 percent of city income tax revenues, $48 million a year, to these banks for the next four years, at the expense of city pensions, jobs and services.”Attorney for City Creditor Ambac Insurance Attorney Carol English agreed with Goldberg assessment of Emergency Manager Kevyn Orr securing a $350 million dollar loan with Barclays Bank.
English cited how ill-prepared Orr and his appointed negotiator and lead financial adviser, Kenneth Buckfire were before attempts to secure the loan with Barclay's failing to secure an independent financial actuality projection of where interest rates are going in 2014. In court, English presented a graph of interest rate projections showing the city may actually end up paying 78 cents on the dollar in Orr's June offer to Barclays Bank.
U.S. Federal Bankruptcy Judge Steven Rhodes raised questions on legalities of the 2005 "debt swap" after Attorney English cited a probable violation Michigan's Municipal Finance Law - P.A. 34 of 2001 - when former Mayor Kilpatrick and Werdlow agreed with UBS AG and Bank of America terms.
"Attorney Caroline English, representing creditor Ambac Insurance and other attorneys opposing the Barclays deal argued in the point the community has insisted on: The swaps are void; they were illegal agreements and the city has no obligation to repay the banks," the Michigan Citizen article cites.The swaps are illegal because the city did not follow provisions in P.A. 34 against entering into the 2005 deal, and city used casino revenues as collateral for the swaps in violation of the state gaming law, English argued in court Jan. 13.
The city created a corporation to appear as the borrower, because the city could not legally borrow any more money.
“It is inescapable the city is indebted under the swap obligations. The service corporations were used unlawfully to evade the Municipal Finance Requirement… The service corporations have no revenue," English said.Under the deal, Detroit Casino Revenue would be used as collateral to secure the agreement in direct violation of P.A. 34 of 2001 prohibiting such actions.
If Detroit is successful against in pending lawsuits against UBS AG and Bank of America, the financial institutions could be found liable to pay the City up to $50 million fees over determined number of years, plus associated interest and court costs.
“This deal should have the swap parties paying the city about $50 million a year,” English said in Judge Rhodes court January 23.
Join Amazon Prime - Watch Over 40,000 Movies