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'Safe Harbor' in Bankruptcy Upended in Detroit Case
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UBS and Bank of America reach a settlement with Detroit before the city declared bankruptcy. The settlement was for interest rate swap contracts signed by Detroit officials in 2005, and settles the contracts for 75 cents on the dollar or $230 million. There is safe harbor for traders and banks in interest rate swaps or derivative contracts, so that the usual stay that blocks creditors from collecting debts does not operate. This kind of treatment for derivative contracts makes no logical sense in the context say experts. The swap contracts of 2005 were signed at a time the city took out a $1.4 billion variable interest rate loan to put into its pension funds, with the swaps as a hedge against rising interest rates. In fact Detroit is seeking a $350 million loan from Barclays Capital and it needs to resolve the swap for that loan. From this loan UBS and Bank of America get their $230 million leaving $120 million for streetlights, police and city services badly needed today. Public interest considerations of this kind were not considered by Congress when it made the rule for safe harbors universal in derivative contracts to reduce systemic risk of one financial institution dragging others into a systemic crisis. The safe harbor make it harder for a judge to say this thing smells and make attempts to change it.
Swap contracts from 2005 intended to protect against rising rates costing Detroit $36 million a year in bankruptcy
04/03/2009
To get out of these swap contracts entered into with UBS and Bank of America in 2005- to protect against rising interest rates on a $1.4 billion variable interest loan for city's pension funds- Detroit already in bankruptcy has to come up with $230 million. Of a $350 million loan the city is negotiating with Barclays Capital in 2014, $230 million goes to UBS and Bank of America, leaving only $120 million for streetlights, police and basic services! Congress did not consider a public interest situation when giving banks a safe harbor on stay for collecting debts in bankruptcy, and there is not enough public education on this subject to get Congress to act, say experts.
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Interest rate swap contracts sold by banks to the city of Detroit in 2005 and the "kiko" derivative contracts sold by banks to exporters in S. Korea before the 2008 global financial crisis
04/03/2009
The huge losses suffered by Detroit and by exporters in S. Korea and how the issues raised were handled in the two places. What takes precedence fairness or contracts, how much of a contract has to be intelligible to the investor and the broader question of why banks needed to write such contracts or conduct business in this way which could hurt their reputation. An example is given by Floyd Norris of NYT where Bankers Trust reputation suffered badly in 1994 for selling such contracts to P&G.
Linked Articles
New York Times 04/03/2009
'Safe Harbor' in Bankruptcy Upended in Detroit Case
New York Times 12/23/2013
Detroit's road to recovery- Judge Rhodes' rejection of a plan to pay off banks (2)
12/23/2013
Linked Articles
'Safe Harbor' in Bankruptcy Upended in Detroit Case
New York Times 12/23/2013
Judge Disallows Plan by Detroit to Payoff Banks
New York Times 01/16/2014
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