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Press release/statement

Demos Hails Judge Rhodes’ Order to Renegotiate Detroit’s Swaps Deal Settlement with Big Banks

NEW YORK — Yesterday, U.S. Bankruptcy Judge Steven Rhodes grilled Jones Day lawyers representing the city of Detroit and the city’s Emergency Manager Kevyn Orr over a settlement reached outside of the bankruptcy process between the city and Bank of America and UBS to pay the termination fees of a complex financial deal that the City took on in 2005. Judge Rhodes ordered the city and the banks to renegotiate their settlement which would have paid the banks 75 cents on the dollar. Despite a unanimous city council vote against it, the Emergency Manager is currently pushing the city to enter into another financial deal with Barclays to pay off the swaps termination fees. 

Demos Senior Fellow and former Goldman Sachs investment banker Wallace C. Turbeville, published The Detroit Bankruptcy in November, which took a critical look at the bankruptcy filing produced by the Emergency Manager. Turbeville, who was scheduled to testify yesterday as an expert witness in the case, examined the 2005 swaps deal and raised questions that were echoed by Judge Rhodes:  

“The law recognizes special duties that sophisticated financial institutions owe to special entities like cities in providing complex financial products,” Turbeville wrote in The Detroit Bankruptcy. “These swap deals were particularly ill-suited for a city like Detroit, which had been hovering on the edge of a credit rating downgrade for years…A strong case can be made that the banks that sold these swaps may have breached their ethical, and possibly legal, obligations to the city in executing these deals.”

“Judge Rhodes deserves praise for challenging the banks, something neither the city under its emergency manager nor the state has shown any interest in doing,” Turbeville said. “Rhodes was right when he said ‘every transaction that the city has entered into in connection with these swaps has been with a gun to its head.’ The people of Detroit deserve answers to the legal questions around the original swaps deal before any settlement is reached.” 

Turbeville will be following the bankruptcy trial closely as it develops and is available for comment.