By Nathan Bomey and Matt Helms, Detroit Free Press
DETROIT — Judge Steven Rhodes on Friday approved a settlement between Detroit and two global banks over a disastrous financial bet engineered by former Mayor Kwame Kilpatrick’s administration.
Rhodes — who had rejected two previous settlements as too generous for UBS and Bank of America — ruled that the city can pay $85 million to eliminate the pension debt interest-rate transaction known as “swaps.”
The judge said the deal sets the stage for a potential “cram down” — a bankruptcy restructuring plan approved over the objections of retirees and financial companies — and urged creditors to negotiate with the city in confidential mediation sessions.
“The message is that now is the time to negotiate,” Rhodes said.
Rhodes scolded Detroit bankruptcy parties for waging an “orchestrated public relations campaign,” saying that negotiating in public is “counterproductive.”
“This bankruptcy is not about who wins in the court of public opinion,” he said.
The judge put aside his misgivings that the original Kilpatrick swaps deal was “likely” illegal, saying the new settlement was acceptable to allow Detroit to escape a $288 million obligation. He said he “commends” Detroit and the banks for reaching an “entirely reasonable” deal.
Rhodes had rejected two previous settlements of $230 million and $165 million.
That means the judge saved the city more than $200 million in payments that otherwise would have gone to the banks. Now, Detroit can pay off the swaps gradually.
Rhodes endorsed Detroit emergency manager Kevyn Orr’s bid to exit bankruptcy by Oct. 15.
“The settlement agreement is quite likely to be the fastest, surest and least costly way for the city to achieve that goal,” Rhodes said. “The record supports that judgment.”
With the judge’s approval, the banks have agreed to vote in favor of Detroit’s bankruptcy restructuring plan, potentially giving the city an avenue to force other creditors to accept the deal.
The swaps were brokered by Kilpatrick’s administration in 2005 and 2006 to secure a steady interest rate of 6 percent on a $1.4 billion pension debt loan. The bet soured when U.S. interest rates plummeted, sticking the city with a $50 million-per-year bill.
In 2009, Detroit pledged its casino tax revenue as collateral on the swaps, jeopardizing the city’s most dependable source of cash.
Rhodes had questioned the legality of the collateral pledge because the Michigan Gaming Act limits the way casino taxes can be used.
Nonetheless, he ruled “it is beyond serious dispute” that the city can strike a settlement even if the lien might have been invalid.
Orr testified that the city was close to filing a lawsuit against the banks, but eventually reached a deal he considered acceptable to avoid a risky and costly legal battle.
Rhodes agreed that it would take too much time and money for the city to fight the banks.
But several major creditors — including the city’s retiree committee, several European banks and bond insurers Syncora and Financial Guaranty Insurance — objected to the settlement.
Photo: ifmuth via Flickr