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‘Safe Harbor’ In Bankruptcy Is Upended In Detroit Case

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http://dealbook.nytimes.com/2013/12/23/safe-harbor-in-bankruptcy-is-upended-in-detroit-case/?ref=business&_r=0

As Detroit struggles to come up with money to improve services for its residents, two large banks are poised to receive hundreds of millions of dollars to cancel a deal that helped push the city into bankruptcy in the first place.

The two banks, UBS and Bank of America, were the only creditors that managed to reach a settlement with Detroit before the city declared bankruptcy last July. They agreed to let Detroit out of financial contracts called interest-rate swaps for 75 percent of what the city owed, or about $230 million. They also agreed to give up some casino tax proceeds that Detroit had pledged to them as collateral for the swaps.

The 75 cents on the dollar is a far better deal than the city’s other creditors will probably get. And because of an unusual provision in the federal bankruptcy code, these two banks actually have a legal right to 100 cents on the dollar. The provision gives traders in swaps, options and other derivatives a so-called safe harbor, exempting them from the usual stay that blocks creditors’ efforts to collect debts.

...

But in the tangle that is Detroit’s finances, the swaps deal is only one part of the equation. The city is seeking to borrow $350 million from another bank, Barclays Capital, to finance its operations in bankruptcy, and it needs to resolve the swaps deal before it can get the loan. Without the loan, lawyers for the city say, it soon might not be able to meet its payroll.

But any time a debtor tries to borrow in bankruptcy, it stirs opposition, since the new loan will worsen the insolvency. The Barclays deal also gives it priority over all the existing creditors. And the bulk of the $350 million loan will go to pay UBS and Bank of America to terminate the swap contracts. Since those two banks would no longer need Detroit’s casino revenue as a backstop, the city could then use that money as collateral for the new Barclays loan.

The rest of the proceeds from the loan, $120 million, would go to the streetlights, the police, the razing of dilapidated properties and other city services that the residents of Detroit sorely need.

Utter fecking genius! So the bankers once more get paid out and then loan the same bankrupts even more money!

And the citizens of Detroit will be paying the money back how?

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This makes me wonder.. is there any reason the current Detriot public instututions are the only ones that can provide services?

What if the citizens voted to let Detroit go bankrupt, disband it completely and relaunch a new set of public services with a clean balance sheet?

Wall St pull this sort or trick all the time. What if the people turned the tables?

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What if the citizens voted to let Detroit go bankrupt, disband it completely and relaunch a new set of public services with a clean balance sheet?

Presumably the banks would get all the public buildings, etc.

Besides which, the public sector workers would never agree, and they're the ones who've been voting themselves fatter and fatter pensions and benefits for decades.

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This makes me wonder.. is there any reason the current Detriot public instututions are the only ones that can provide services?

What if the citizens voted to let Detroit go bankrupt, disband it completely and relaunch a new set of public services with a clean balance sheet?

Wall St pull this sort or trick all the time. What if the people turned the tables?

Legally they could agree to jointly fund new services but I can't see how they could avoid still having to pay for the old ones too.

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