Detroit

Court rules against giveaway to banks in Detroit

2 February 2014 by Kris Hamel


Credit: Sam Beebe (Creative Commons BY)

Detroit, Jan. 16 — With a decision community activists called “a major victory for the people of Detroit,” U.S. Bankruptcy Court Judge Steven Rhodes ruled today that the City of Detroit could not go forward with its loan deal with Barclays Bank that would have cost the city millions more in order to pay off Bank of America and United Bank of Switzerland for what is called a “swap termination.”

Clapping erupted in the stuffy “halls of justice” as people’s anti-foreclosure attorney Jerry Goldberg, one of the lawyers who had opposed the deal, exited the courtroom this afternoon after the ruling.

Rhodes is the federal judge in the City of Detroit’s Chapter 9 bankruptcy case, the largest municipal bankruptcy in U.S. history. The deal would have paid UBS and Bank of America $165 million in swap termination fees, plus millions more in breakage fees and interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. .

Swaps locked Detroit and other cities across the country into deals where banks were paid interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
up to 1,200 percent higher than the actual floating interest rate for the bonds to which they were linked. It was a boondoggle for the banks and a bust for the cities when interest rates went down to zero as a result of the federal bank bailout in 2008.

Community activists, city retirees and residents were in attendance in the courtroom. Some had been demonstrating outside in blowing snow and bitter temperatures prior to the 2 p.m. ruling.

Activists with the Moratorium NOW! Coalition to Stop Foreclosures, Evictions & Utility Shutoffs are calling Rhodes’ ruling “a courageous decision” and a “major victory for the people of Detroit.” The group has consistently opposed and organized a struggle against the emergency manager and city bankruptcy, and demanded a cancellation of the city’s debt to the banks.

Closing arguments were made Jan. 13 in the interest rate swap termination trial that had begun on Dec. 17. Rhodes halted the three-day trial on Dec. 18 following inadequate testimony on the stand by Detroit Emergency Manager Kevyn Orr’s banker, Kenneth Buckfire. Rhodes ordered the parties to enter mediation to come up with a better deal for the city.

Under the original deal Orr had made with the banks, the city would have had to pay Bank of America and UBS some $230 million, or 75 percent of the swap termination fee of $290 million at the time. This amount would have to be financed by a loan from Barclays, which would then charge the city up to 8.5 percent interest, plus millions in fees.

After the court-ordered mediation on Jan. 3, attorneys for the emergency manager and city, from the global law firm Jones Day, announced they would seek approval of a new agreement. This new deal would pay Bank of America and UBS $165 million, based on an 8.5 percent loan from Barclays with an additional $34 million in interest and fees. Under this agreement, the people of Detroit would see 20 percent of their city income tax revenues for the next four years pledged to pay off the banks.

‘Just too much money’

Rhodes said it was just “too much money,” called it “another hasty deal” by the City and denied the motion to approve this deal. In doing so, Rhodes went against the recommendation of the judge he had appointed as mediator.

In his verbal opinion, Rhodes stated: “The city had entered into a series of bad deals to solve its financial problems. The law says that when the city filed this bankruptcy, that must stop. It also says that this court must be the one to stop it if necessary. It is necessary here.

“One hundred sixty-five million dollars is too high a price to pay for the city to put this issue behind it. It’s higher than the highest reasonable number. It’s just too much money.”

Rhodes held that there was at least a reasonable possibility that legal challenges to the swaps brought by a number of objectors and their attorneys would be successful and could render the swaps void. These objectors include the Detroit General Retirement System Board, the Detroit Retirees Association, as well as David Sole, founder of the Stop Theft of Our Pensions Committee and Moratorium NOW! activist. If such litigation were successful, it could mean that the banks would have to repay the city for the $300 million already paid to UBS and Bank of America on the swap deals.

Rhodes’ decision “squashed this attempted giveaway to two banks which have played a major role in the destruction of the city’s neighborhoods with their racist, predatory lending and subprime mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
schemes,” Goldberg, Sole’s attorney, told Workers World after the ruling.

“We made it real for the judge,” said Goldberg. “We showed the horrendous impact these banks have had and will continue to have on the people of the city. In a city that’s been devastated by the banks like Detroit has, how do you justify giving this kind of money to the banks? Even the judge couldn’t see it.”

Moratorium NOW! organizers are urging continued vigilance and struggle by the residents, workers and retirees of Detroit. “This victory was not just won in a courtroom,” Abayomi Azikiwe, a coalition leader, told Workers World. “It was the ongoing mobilization of Detroiters against the banks that played a pivotal role in getting the judge to deny this giveaway to the banks that destroyed our city.

“We demand cancellation of the city’s entire alleged debt to these racist banks, and reparations to Detroiters, along with a jobs program to rebuild our communities that these banks have destroyed.”




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