Quote Originally Posted by renf View Post
If federal law provides a safe haven for derivatives and swaps in Chapter 11 bankruptcy, why would the banks accept just 43% of what they are owed? What is their motivation? It is a good deal for the city. Can anyone explain what municipal debts have been given safe harbor by Congress?
Ok, some basics:

Secured debt, as noted, is treated differently than unsecured debt. These debts are secured by casino revenues.

The swaps are in default for non-payment, and that happened before bankruptcy, so it is what's called a pre-petition default. The City would have the option of either curing the default [[which it can't, not enough cash), working something out with the lender, or turning over the collateral.

Why would the banks accept less than 100%? Two reasons:

1. There is an argument, although I don't think it's really a good one, that the City of Detroit was acting without authority when it entered into that agreement. No one can predict with certainty how such a matter would be viewed by the judge.

Two side notes: 1a. This clearly demonstrates how much better City counsel is compared to those representing the unions and pensioners. Do you know what you do when you have an issue that has some risk? Use it as leverage in negotiations. What you don't do is demand that the issue be resolved immediately, lose on the issue, and then leave your clients completely without leverage. But I digress.

1b. Judge Rhodes threw the City residents a huge lifeline by sending everyone back to the drawing board. Huge savings for the City. Someone send him a gift basket.

2. Time value of money. Even with a default, it would take time for the swap counterparties to collect the money due. The best they could do is casino revenue, over time, after fighting in state and federal court for years. Money now is worth more than money [[possibly) later.

As to your last question, I don't know what you mean by "safe harbor." Do you mean which debts are given which priority? Did the NYT use those exact terms, or can you post a link to the article?