Tags: swaps | Detroit | bankruptcy | bomb

Detroit Emergency Manager Calls Swaps 'Ticking Time Bomb'

Friday, 03 January 2014 12:21 PM

Bankers who sold Detroit interest rate swaps placed “a ticking time bomb” in their structure, the city’s emergency manager said in court as a trial resumed over a proposal for ending the swaps.

Although the city collected $40 million over eight months from the swaps deal, falling interest rates helped the banks behind the deals turn a profit, Orr testified today before U.S. Bankruptcy Judge Steven Rhodes in Detroit. Since 2009, the city has paid more than $200 million to the banks behind the swaps, according to public records.

The city has proposed paying UBS AG and Bank of America Corp. a $165 million termination fee to get out of the swaps contract.

Days before the city filed the biggest ever U.S. municipal bankruptcy in July, Orr negotiated an agreement to end the swaps at a discount. After that deal was attacked by creditors and questioned by Rhodes, the city negotiated the current proposed termination payment on Dec. 24, which is about $65 million lower than the original.

The swaps are tied to pension obligation bonds issued in 2005 and 2006. They were designed to protect against rising interest rates by requiring the banks to pay the city if rates rose above a certain level. When rates instead went down, the city was required to make monthly payments.

Orr testified that after he became emergency manager last year he had “plenty” of concern about whether the swaps were fraudulently put together. He asked the U.S. Securities and Exchange Commission if it would be willing to investigate the deal, he said.

Eventually, Orr testified, he decided to settle with the banks instead of suing them in order to avoid a risky trial and prevent any threat to casino taxes used to guarantee payment of the swaps.

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Bankers who sold Detroit interest rate swaps placed "a ticking time bomb" in their structure, the city's emergency manager said in court as a trial resumed over a proposal for ending the swaps.
swaps,Detroit,bankruptcy,bomb
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2014-21-03
Friday, 03 January 2014 12:21 PM
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