For the benefit of those who are not financial professionals:

"Swaps" are one type of a contract that is called generally a "derivative" contract. There are many, many types, all of which are irrelevant other than the most popular--the interest rate swap.

An interest rate swap is a contract between two parties where one assumes an obligation to pay a payment based on a floating rate, and the other has an obligation to pay a fixed rate. The simplest version, and the one into which Detroit entered was a contract that, for Detroit, converted their obligation to pay a floating rate of interest into the obligation to pay a fixed rate of interest. This was a separate contract related to a bond issuance. The simplest way to describe this is to put a simple example together.

*Detroit issues bonds, and they are called the "issuer."
*Bondholders pay money to a trustee, who pays the money to Detroit [[the bonds in question were used to fund pension obligations, if I recall correctly, but money is fungible, so it could have been for anything).
*Those bondholders desire a payment based on a floating rate, so that they don't have to take the risk of large rate movements.
*Detroit then had three options:

1. Pay the floating rate of interest, and run the risk that rates go up, which would increase their interest costs.
2. Enter into a swap contract [[which I'll describe below).
3. Don't borrow the money.

They chose #2.

For a swap to work, a dealer [[bank) must locate a counterparty [[the other side of the contract) that has the same need, but in reverse. There are some circumstances where the dealer has two clients with the exact opposite needs, but that is rare. Generally, the dealer will put together different pieces to get the same result.

In these contracts, however, the dealers would ordinarily run the risk that one side [[either Detroit or the other side of the opposite transaction) stops paying on their debt. That can radically increase the risk to the dealer [[AIG, anyone?!?), so they will demand collateral. In this case, the dealers demanded the only thing the City could pledge: its stream of payments from the casino taxes.

The rules are then pretty clear. Detroit now has three options:

1. It can make the payments on the debt as scheduled.
2. It can "break the swap." [[described below)
3. It can forfeit the collateral.

The cost to break the swap is the difference between interest rates at the time the contract was made to the time the contract is broken. If rates go up, the swap is valuable to the party paying the fixed rate, because they'll be paying a below market interest rate.

But rates didn't go up, they went down. Way down. HISTORICALLY way down. As low as they could possibly go. In that case, the cost to break the swap became very, very high for the City.

When the City defaulted, the dealers attempted to seize the collateral. I haven't seen the exact documents, but when you are talking in the hundreds of millions of dollars, those documents are crafted with care and precision, including, I think, a letter from the State Gaming Commission indicating that the collateral could be pledged.

The only other option is to negotiate something with the dealer or counterparty. In this case, a settlement of 75 cents on the dollar seems reasonable to me for a secured debt [[although I haven't seen the exact documents or dollar amounts).

Even in bankruptcy court, secured creditors eat first. There are probably some arguments against the creditors, which is why it is 75 and not 100 cents.

My biggest disappointment is that either no one is trying to explain this to City Council or no one can.

KK made a bad deal--a horrible bet. But I don't see a way legally to simply get out of the arrangement without losing the casino revenue. Getting out of the swap actually lowers the debt service on the existing bonds, which allows the City to borrow some more money for operating costs without increasing their payment.

Happy to answer more questions you may have.