Judge: Detroit’s Debt Deal With Wall Street Is Too Generous

December 20, 2013 | | ThinkProgress |

The judge presiding over Detroit’s bankruptcy has told the city to renegotiate a deal that emergency manager Kevyn Orr has treated as central to his plans for the city, saying that the proposal was too generous to the financial companies involved.

The proposed deal involves about $300 million in “secured debt” owed to two bank subsidiaries: UBS AG and Bank of America Merrill Lynch Capital Services. Those banks are considered “secured creditors” because Detroit put up revenue from its casinos as collateral for the loan. The deal would have benefited Detroit by freeing up that casino money for use in the city’s ailing general fund.

But it would have given the banks nearly 80 cents on the dollar of what they are owed, compared to the 16 cents on the dollar Orr has offered to retirees. In bankruptcy proceedings, the question of which creditors will take the largest “haircuts” on the money they are owed is central. This week’s decision is only a temporary and partial setback to Orr’s plans, which include steep cuts to the modest pensions of 20,000 retired Detroit workers and the revocation of retiree health insurance coverage. But Rhodes’ actions suggest that he believes that the city should offer a better deal to the tens of thousands of people to whom it promised retirement security in exchange for service and stop being so generous to the financial companies involved.

That is as it should be, according to research by finance expert Wallace Turbeville, who argues that Wall Street is the primary culprit in Detroit’s descent into insolvency. The city’s long-running economic decline and shrinking tax base is the fundamental problem, but the spark that turned those core problems into outright insolvency was a series of complex financial deals struck by corrupt former Detroit mayor Kwame Kilpatrick and a couple of Wall Street banks. Those deals, known as swaps, rapidly went bad and blew up the city’s balance sheet.