Detroit EFM sought SEC probe of banks over interest rate swaps

[Zacha341]

Ok, where do we go from here?

[[Reuters) - 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, a unit of Bank of America, for interest rate swaps to hedge risk on some of the $1.4 billion of pension debt Detroit sold in 2005 and 2006.

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 about 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, sent the city and the banks back to the bargaining table after postponing a hearing about the earlier deal to terminate the swaps for $230 million, or 75 cents on the dollar.

...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 services."

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.

Read complete article here...

[Dan Wesson]

Nothing, all we can do is negotiate...


What the Banks did may be morally wrong but it was not illegal. They own the law making Branch of our Government and advise the Executive Branch.

Just checkout Jefferson County Alabama home of Birmingham. They went under because of the Sewer construction and bond swap they entered into with New York Banks. Bad scene for the residents who now have outrageous water and sewage fees.

[Zacha341]

Here's an older link from the Workers World I found looking into how all of this got started. I'm not endorsing the organization, but find it interesting that they tend to be less PC obedient in SOME areas applying equal bashing to the right AND the left. See reference to Granholm...

Detroit lost 25 percent of its population in the last decade, according to the 2010 U.S. Census. [[Detroit News, March 23) Detroit’s population declined from 951,270 in 2000 to 713,777 in 2010. Detroit, an 85 percent African-American city, experienced the greatest population loss of any U.S. city except New Orleans.

Not one of the many newspaper articles discussing this lost population puts the blame where it belongs — on the major banks, which have leveled neighborhoods throughout Detroit with mass foreclosures driven by racist, predatory lending....

....As early as March 2007, the Moratorium Now! Coalition to Stop Foreclosures, Evictions and Utility Shutoffs pointed out to Democratic Gov. Jennifer Granholm that she could declare a state of economic emergency under Michigan law and place a moratorium on foreclosures based on the 1930s Mortgage Moratorium Act, which was upheld by the Michigan and U.S. Supreme Courts. Granholm explicitly stated, “The banks wouldn’t like it.”

http://www.workers.org/2011/us/banks..._detroit_0407/

[Zacha341]

I've always said that sub-prime lending, casino gaming and crime had a devastating impact on Detroit. Couple that with the economy and other factors and we are here.

However, while the banks have culpability, there was a push, even at the federal level - only a few years back before the bubble - to INCREASE lending options [[sub-prime), to 'level' the playing field of home ownership.

I went to a workshop on 'creative finance' inspired home buying/ refi but declined to go that route as our income was not strong enough. I knew of the balloon payments and 'escrow' joys that took many people out of their homes...

I also knew Timeo Danaos et dona ferentes.... [[fear of folk bearing false gifts)

Just checkout Jefferson County Alabama home of Birmingham. They went under because of the Sewer construction and bond swap they entered into with New York Banks. Bad scene for the residents who now have outrageous water and sewage fees.

[renf]

Kevyn Orr's request to have the SEC investigate the banks that dealt with
Detroit's swap deal helps to explain why the banks, on December 23, accepted 43 percent of what they claimed they were owed. I assume that both Kevyn Orr and the banks were not sure about winning were there litigation about the swaps.

[Hermod]

Kevyn Orr's request to have the SEC investigate the banks that dealt with
Detroit's swap deal helps to explain why the banks, on December 23, accepted 43 percent of what they claimed they were owed. I assume that both Kevyn Orr and the banks were not sure about winning were there litigation about the swaps.

Litigation is always a crap shoot. Even if you are sure you are in the right, there are no guarantees once you get into court which is why it is often just a lever to promote a negotiated settlement. The threat of criminal investigations was such a lever to get the banks to settle.

[Lowell]

Kevyn Orr's request to have the SEC investigate the banks that dealt with
Detroit's swap deal helps to explain why the banks, on December 23, accepted 43 percent of what they claimed they were owed. I assume that both Kevyn Orr and the banks were not sure about winning were there litigation about the swaps.

The banks were also incentivized to avoid a PR disaster ala banksters kicking Detroit while it is down.

[Jimaz]

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
- Henry Ford