Council says no to Orr
By T. Kelly
The Michigan Citizen
DETROIT—With a rare unanimous vote, city council Oct. 21 rejected Emergency Manager Kevyn Orr’s plan to borrow $350 million from Barclays Capital Investment Bank, Executive Order No.17.
Council has seven days to present an alternative, which means nothing unless their alternative plan is approved by Gov. Rick Snyder’s appointed Financial Review Board.
For many, the Barclay’s deal is a deal that needs killing. “Jones Day has apparently just floated the most corrupt, shameless, self-serving, hustle of an IPO for their own insider-traded Detroit Turnaround operation,” wrote attorney Thomas Stephens, a member of Detroiters Resisting Emergency Management in an email.
Brandon Jessup, Michigan Forward, said the deal “will allow Wall Street banks an opportunity to leave Detroit seniors, retirees and working families saddled with bad debt.” Jessup notes that “since 2008, Detroit has sent nearly $800 million in unnecessary payments to Wall Street banks, including a $550 million payout just last year.”
“Executive Order No. 17 puts big banks in front of our seniors and city retirees, costing them up to 90 percent of their income to secure hundreds of millions in Wall Street predatory lending,” Jessup wrote in an issue brief.
The Emergency Manager’s plan is to borrow $350 million short term from Barclays. The loan would have to be repaid in less than three years. Bill Nowling, Orr’s spokesperson, explained in an email that within that time “the city will be out of bankruptcy and able to pay in full.”
From the proceeds, $250 million will pay Bank of America and UBS termination fees on interest rate swaps. The swaps come from a $1.44 billion loan made in 2005 to bring the city current on its obligations to the pension fund.
The city has already paid over $250 million to these banks on the swaps at the rate of 6.3 percent interest where the actual interest on the bonds was only 0.5 to 1.0 percent, according to Moratorium Now.
Nowling said the deal would free up casino revenue, about $120 million a year, and provide cash for improving services.
Attorney Jerry Goldberg of Moratorium Now says under Orr’s plan the banks holding the swap notes will get 75 cents on the dollar. In an Alabama case, banks got the reverse, 25 cents on the dollar.
He also says dealing with the interest swaps is the wrong way for Orr to go. Instead of paying off the interest rate swaps, Orr should instead challenge the swaps as “potentially fraudulent instruments within the bankruptcy and argue that the swaps should be liquidated.”
Goldberg says Orr’s relationship to Jones Day is problematic. Jones Day is the law firm where Orr was a partner until he resigned to take the EM position. It is the firm Orr hired to manage the bankruptcy. It explains why Orr is seeking to “award them this sweetheart deal” rather than prosecute. Bank of American and UBS are clients of Jones Day.
In addition, Goldberg says, both Bank of America and UBS are the subject of numerous criminal investigations. Officials from both banks have been convicted and indicted for conduct in the municipal bond market. The banks are also two of the most notorious subprime lenders, he says. Their practices contributed to over 100,000 foreclosures in a five-year period in Detroit — part of the reason the city’s tax base has diminished.
Not only are the terms of Orr’s plan bad, but the outcomes could be disastrous Goldberg notes.
The new $350 million loan is secured by a first lien of the city’s casino tax dollars, a second lien on income tax revenues and a lien on all other city property worth more than $10 million. If the city defaults, everything is up for grabs, and it will be Jones Day’s determination which assets to sell and to whom.
“In other words, the Detroit Water and Sewerage Department, as well as anything else they can get their hands on,” Stephens said. Additionally, Barclays will move to the head of the bankruptcy line, with a “senior secured super-priority Chapter 9 debtor financing.”
An article about Orr’s deal published in the Oct. 23 issue of Reuter’s, entitled “Detroit’s embedded time bomb” questions why Orr is trying to do this intricate financial deal now.
Councilwoman JoAnn Watson called the deal a “grand heist.”
To read Orr’s plan, see: www.detroitmi.gov/Portals/0/docs/EM/Order%2017.pdf. For Michigan Forward’s Issue Brief, see www.michiganforward.org. See also, www.Moratorium-Mi.org