Detroit — In what the corporate media have called a “stunning blow” to Wall Street, two of the biggest capitalist banks have been barred from making a deal that would take an additional $165 million from the people of Detroit. The ruling by a federal bankruptcy judge also prevents a third bank from getting another $34 million for financing the deal.
It was headline news not just in Detroit but across the United States. The New York Times put the story on the front page, along with an accompanying photo of a demonstration with a hand-painted sign reading “Bank of America owes Detroit for destroying our neighborhoods!” Abayomi Azikiwe of the Moratorium NOW! Coalition to Stop Foreclosures, Evictions & Utility Shutoffs was quoted in the Times article.
U.S. Bankruptcy Court Judge Steven Rhodes ruled Jan. 16 that the city of Detroit, which is in Chapter 9 bankruptcy and under the control of an “emergency manager,” could not go forward with its loan deal with Barclays bank to pay off Bank of America and United Bank of Switzerland for what is called a “swap termination.”
Organizers with the Moratorium NOW! Coalition called Rhodes’ ruling “courageous” and a “big win for the people of Detroit.” The group has consistently opposed and organized a struggle against the emergency manager and the bankruptcy of Detroit, and demanded cancellation of the city’s debt to the banks.
The trial, which began Dec. 17 and ended Jan. 13, was attended by community activists, city retirees and residents, who were present when Rhodes delivered his decision. Some had participated in a protest outside the courthouse earlier that day, despite blowing snow and bitter temperatures, as well as in many previous demonstrations there.
Clapping erupted when people’s anti-foreclosure attorney Jerry Goldberg exited the courtroom after the decision. Goldberg, an activist and former auto worker, is one of the lawyers who opposed the deal.
What are swaps?
Interest rate swaps have locked Detroit and other cities across the country into loan deals where banks were paid interest rates up to 1,200 percent higher than the actual floating rate for the bonds to which they were linked. Such swaps were a huge boondoggle for the banks and a bust for the cities when interest rates went down to zero as a result of the federal bank bailout in 2008.
Goldberg explained swaps to Workers World: “Detroit is just one of many cities that were sucked into these complex financial transactions by the banks. The deal was set up where the city paid a fixed interest rate to the banks, while the banks paid the floating rate tied to the Libor.
“When interest rates went down beginning in 2008, because of the federal bank bailout, the city had to pay the banks the difference between the 6.23 percent fixed interest rate and the approximately 0.5 percent floating interest rate on the bonds. This amounted to $50 million per year, or $300 million between 2008 and 2013, in addition to the termination fee which the banks are now demanding.”
The original deal with the banks to terminate the swaps was made by Emergency Manager Kevyn Orr, who was appointed by the right-wing governor of Michigan to take over Detroit’s finances. Under the deal, the city would have had to pay Bank of America and UBS some $230 million, or 75 percent of the swap termination fee of $290 million. To pay this amount, Detroit would have had to take out a loan from Barclays, which would then charge the city up to 8.5 percent interest, plus millions in fees.
Judge: ‘just too much money’
Orr’s investment banker, Kenneth Buckfire, failed miserably to justify the deal in his testimony. On Dec. 18, after rigorous cross-examination of Buckfire by Goldberg and other attorneys, Judge Rhodes ordered the city and the banks to enter mediation and come up with a better deal for the city.
After the court-ordered mediation, attorneys for the emergency manager and the city, from the global law firm Jones Day, announced they would seek approval of a new agreement. The trial was reconvened on Jan. 3.
This new deal would have paid Bank of America and UBS $165 million, with an additional $34 million to Barclays in interest and fees. Under this agreement, the people of Detroit would see 20 percent of their city income tax revenues pledged to pay off the banks over the next four years.
Judge Rhodes in his ruling said it was “just too much money,” called it “another hasty deal” by the city, and denied the motion to approve the new deal. In doing so, Rhodes went against the recommendation of the judge he had appointed as mediator.
In his verbal opinion, Rhodes stated: “The city had entered into a series of bad deals to solve its financial problems. The law says that when the city filed this bankruptcy, that must stop. It also says that this court must be the one to stop it if necessary. It is necessary here.
“One hundred sixty-five million dollars is too high a price to pay for the city to put this issue behind it. It’s higher than the highest reasonable number. It’s just too much money.”
Rhodes held that there was at least a reasonable possibility that legal challenges to the swaps brought by a number of objectors and their attorneys would be successful, which could render the swaps void altogether. These objectors include the Detroit General Retirement System Board and the Detroit Retirees Association, as well as David Sole, founder of the Stop Theft of Our Pensions Committee and a Moratorium NOW! activist.
If such litigation against the banks were successful, it could mean that the banks would have to repay the city for $300 million already paid to UBS and Bank of America on the swap deals.
‘Cancel the debt!’
Rhodes’ decision “squashed this attempted giveaway to two banks which have played a major role in the destruction of the city’s neighborhoods with their racist, predatory lending and subprime mortgage schemes,” Goldberg, Sole’s attorney, told Workers World after the ruling.
“We made it real for the judge,” said Goldberg. “We showed the horrendous impact these banks have had and will continue to have on the people of the city. In a city that’s been devastated by the banks like Detroit has, how do you justify giving this kind of money to the banks? Even the judge couldn’t see it.”
Moratorium NOW! organizers are urging continued vigilance and struggle by the residents, workers and retirees of Detroit. “This victory was not just won in a courtroom,” Abayomi Azikiwe, a coalition leader, told Workers World. “It was the ongoing mobilization of Detroiters against the banks that played a pivotal role in getting the judge to deny this giveaway to the banks that destroyed our city.
“We demand cancellation of the city’s entire alleged debt to these racist banks, and reparations to Detroiters, along with a jobs program to rebuild our communities that these banks have destroyed by predatory lending and massive foreclosures.”