Orr said Detroit asked the U.S. Securities and Exchange Commission
to investigate its deals with UBS AG and Merrill Lynch Capital
Services, a unit of Bank of America, for interest rate swaps to
hedge risk on some of the $1.4 billion of pension debt Detroit sold
in 2005 and 2006.
The city thought there were "serious questions" about whether it
owed the banks anything at all, Orr testified, and Detroit weighed
trying to invalidate the swaps. But officials decided chances of
prevailing in court were only "more or less 50/50," so it decided to
bargain with the banks instead.
Orr testified before U.S. Bankruptcy Judge Steven Rhodes at a
hearing about a Christmas Eve deal to end the swap agreements for
$165 million plus fees. That represents a 43 percent discount for
Detroit, steeper than one initially proposed.
Rhodes, who is overseeing Detroit's bankruptcy case, sent the city
and the banks back to the bargaining table after postponing a
hearing about the earlier deal to terminate the swaps for $230
million, or 75 cents on the dollar.
Bond insurers, Detroit's pension funds and other parties have
objected to the swap-termination plan. On Friday, Rhodes rejected
their motion to force the city to release documents related to the
legal options it considered to end the swaps. He was interrupted by
a heckler, who was escorted from the courtroom after briefly forcing
Rhodes to vacate the bench.
The city wrapped up its closing arguments on Friday. Objectors will
begin closing arguments Monday morning.
"We have clearly met our burden," said Corinne Ball, an attorney at
law firm Jones Day, representing Detroit. Ball called the deal the
city's best option to avoid lengthy and expensive litigation.
Orr did not say during testimony how the SEC replied to his request
for an investigation. Later, his spokesman Bill Nowling said in an
email Orr inquired about the issue in 2013, but the SEC said its
four-year window to examine the deals had expired.
Nowling said the SEC "also said it had previously looked at the
swaps deals and ... would not open a full investigation."
An SEC spokeswoman declined to comment. Spokespersons for UBS and
Bank of America also declined to comment.
Orr testified that Detroit decided to settle with the banks because
litigating the case risked having to pay the full amount or losing
casino tax revenue the city put up as collateral. The casino tax
accounts for about 20 percent of the city budget.
"Twenty percent of the city's budget could go away," Orr said. "If
that happened to the city, you could not cut enough services."
He said $165 million was the lowest termination fee the city could
negotiate. Orr said the city's initial proposal was for $145-$150
million, but the banks would not agree.
[to top of second column]
He said terminating the swaps was critical for Detroit's future.
"The city cannot plan unless it removes this potential risk from the
table so any plans it does make ... are credible and realistic," he
The city plans to use a $285 million loan from Barclays Plc to pay
to end the swaps. About $120 million from the loan will be used to
improve city services in Detroit, which has more than $18 billion in
Detroit initially secured a $350 million loan from Barclays, but the
terms were reduced when the city renegotiated its deal with UBS and
On Monday, the judges serving as mediators who helped negotiate the
deal recommended that Rhodes approve the agreement to end the
U.S. District Judge Gerald Rosen and U.S. Bankruptcy Judge Elizabeth
Perris wrote that the deal was fair to all parties, adding that
their advice "can best be captured and characterized by the
admonition, 'Do not allow the perfect to become the enemy of the
They wrote: "Although it is not a perfect settlement, the mediators
believe ... it represents a fair and equitable solution that is
advantageous to all concerned."
In a document filed late Thursday, a group of objectors said the
mediators' recommendation was inappropriate.
"Here, the recommendation appears to impinge on the confidentiality
of the mediation process," they wrote. "Further, the recommendation
makes observations regarding the benefits of the Forbearance
Agreement and urges the Bankruptcy Court to overrule all objections
to the Forbearance Agreement, a matter that is presently before the
court and must be decided based on the evidence properly admitted."
(Reporting by Joseph Lichterman in
Detroit, Karen Pierog in Chicago, Sarah N. Lynch in Washington and
Peter Rudegeair in New York; editing by David Gregorio and Meredith Mazzilli)
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