Detroit to be in ‘perpetual debt’
Deposition reveals Orr’s ignorance of budget items; unwillingness to investigate possible fraud
By T. Kelly
The Michigan Citizen
DETROIT — Emergency Manager Kevyn Orr does not plan to investigate possible fraud, is unaware of a major revenue source for the city and will implement a plan that will put the city on a track to perpetual debt, according to Attorney Jerry Goldberg, Moratorium Now activist.
“The city is trying to do a forbearance deal,” Goldberg said in an interview. Moratorium Now is trying to stop Orr’s move to pay off mega banks USB and Bank of America. Goldberg says the proposed deal, 75 percent of what is owed, will be paid before pensioners and other debt.
Orr has proposed retirees and other unsecured creditors will get 10 percent of what is due them.
The city’s biggest loan obligation involves a plan brought to cities across the country in 2005 by Bank of America and Merrill Lynch, which has since been taken over by USB. Former Mayor Kwame Kilpatrick and the council unanimously approved a $1.44 billion pension swap deal that paid the city’s unfunded obligations to the pension fund. Those pension swap plans are now under investigation and being challenged nationally because they turned sour for cities when interest rates rose. Banks are earning huge profits — for example, Detroit is currently paying nine percent interest on the swap deals.
Goldberg deposed the emergency manager in preparation for his court challenge to Orr’s plan to pay off the swaps. Goldberg says the city will have to borrow more money to pay off the same banks that destroyed the city’s tax base with predatory lending practices that led to nearly a 100,000 foreclosures.
He says, under Orr’s plan, the city will end up borrowing $400 billion over the life of the loan. “The city will be left ten times worse off than before. It will begin a perpetual cycle of debt.”
During the deposition Goldberg asked Orr, “… based on the fact that there’s at least an indication of fraudulent activity by both Bank of America (BOA) and UBS within the municipal bond market, has there been any indication as to whether or not that was the case with regard to the ‘swaps’ associated with the POCs (Pension Obligation Certificates)?”
Orr replied, “Yeah, first, it’s not clear that there was fraud with respect to POCs … but have we calculated and analyzed the possibility that there may be issues surrounding potential concerns in connection with the swap agreement, the answer is yes.”
As of two years ago, there had been 10 guilty pleas by banking executives — including BOA and USB officials involved in municipal bond departments — as part of a “far-reaching” federal investigation of bid rigging following the 2008 collapse of the banking industry. The number is growing. The top executive of Bank of America’s municipal bond department was indicted in 2012; in July three executives of USB were jailed; and BOA and USB have paid hundreds of millions in fines and fees for bond rigging.
During the deposition, Goldberg asked Orr if he had approached the Securities and Exchange Commission to conduct any kind of investigation of the swaps — “in light of their extensive investigations of UBS and Bank of America?”
“Your question is, have I? I think I can answer that question. I think the answer is no,” Orr said under oath.
Orr admitted to Goldberg that he “would have had discussions with my counsel” about whether or not to pursue the fraud investigation.
Orr admitted that his counsel was Jones Day — also Pepper Hamilton and others — and that Jones Day had BOA as a client.
“How could Jones Day investigate one of its own clients for potential fraud?” Goldberg asked. Orr told Goldberg to ask Jones Day that question.
Goldberg reminded Orr that under section 16 of Public Act 436, the new EM law, the emergency manager is “mandated to refer potential suspicion of criminal investigation to the Attorney General if there’s any kind of criminal activity associated with the financial crisis in Detroit.”
Orr replied if there appeared to be a basis for making criminal referral of anything that fell under his purview he would do it. He added, “There are matters that are under investigation that may or may not implicate the subject matters you’re talking about. I’m going to defer to speak about them further.”
Perhaps those other matters are the potentially illegal pledge of casino revenues as collateral for the pension swaps. When serving a short term as mayor, Ken Cockrel Jr. made a deal pledging the casino revenue as collateral for the pension swap certificates. The Detroit Free Press reported the pledge of casino revenue as loan collateral may violate the Michigan Gaming Control and Revenue Act. If the casino money cannot be used as loan guarantee, the debt is unsecured and the banks will be treated like other unsecured creditors — due just ten cents on the dollar.
There is also a question of whether the city’s creation of two entities in order to borrow the money in 2005 may have been illegal. Local media has raised questions about the legality of how the debt swap was put together. The banks devised documents called certificates of participation as an alternative to issuing bonds. This permitted the debt-ridden city to get around limitations on debt imposed by state law. The city also created two separate entities to accept and disperse the borrowed funds to the retirement system. The legality of that is also under question.
Bankruptcy Judge Steven Rhodes postponed a hearing on Orr’s plan until November.
When asked for comment on Goldberg’s statements, Orr’s spokesperson Bill Nowling said in an email, “The emergency manager’s office does not comment on depositions outside of official court pleadings or hearings, nor does it verify or dispel allegations made by opposing counsel.”
Goldberg said during the deposition Orr also revealed he knew nothing about what the city owes Wayne County. If a property in the city falls into tax foreclosure, the county pays whatever the amount of past taxes is due to the city and then puts the foreclosed property up for auction. If the auction sale does not earn the full amount of past due taxes, the city must then repay the difference between the amount it received from the county and the actual amount for which the property was sold. Since market value of city property is low and taxes are high, in most cases there is a big difference between what the property is sold for and what was due in past taxes. The difference is charged back to the city and becomes a debt.
Currently, Goldberg says, the city owes $82 million to the county for those charge backs. “Orr had no idea of what I was talking about — the charge backs,” Goldberg says. “That’s an $82 million budget item.”
There is money to help the city make those payments, however, he says. Under the Obama stimulus plan, the state of Michigan received $500 million to deal with the housing crisis that triggered the banking crisis. “There is $200 million of that $500 million that is targeted to help property owners pay past due taxes,” Goldberg said. “MSHDA controls it.” Michigan State Housing Development Authority has spent only $25,000 of it, he said.
As reported here, Gov. Rick Snyder’s office directed $13,000 of the MSHDA to the financially struggling Education Achievement Authority (EAA) in January 2013. The EAA is a district created by Snyder taking DPS students, buildings and funds to teach “failing children.”