Judge Challenges Bankrupt Detroit's Secretive Deal With Banks

December 19, 2013 | | Huffington Post |

The federal judge overseeing Detroit's historic bankruptcy abruptly halted a trial Wednesday, ordering the city to renegotiate a proposed settlement with its creditors -- major banks owed hundreds of millions of dollars who are among the first in line to be repaid. The settlement would put to rest a swaps deal, a financial bet gone wrong, that's been blamed by some experts for helping drive the city into bankruptcy.

Following Judge Steven Rhodes' decision to officially declare Detroit bankrupt earlier this month, city attorneys and creditors met Wednesday in court, attempting to finalize an end to the swaps deal, along with a new $350 million loan from London's Barclays Bank, the Detroit Free Press reports. The loan money would be used to pay two more banks, UBS AG and Merrill Lynch (now part of Bank of America), $230 million total that the city owes after the swaps deal, which was originated by former Mayor Kwame Kilpatrick in 2005. The remaining $120 million would be used to improve services to residents. [...]

The city currently claims to have $18 billion in long-term structural debts that it cannot afford to pay.

But liberal think tank Demos said the swaps deals should be challenged, writing in a recent report, “the banks that sold these swaps may have breached their ethical, and possibly legal, obligations to the city in executing these deals.”

Read the full Demos report: The Detroit Bankruptcy