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.

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