Detroit emergency manager Kevyn Orr filed a case on behalf of the city to look into the complex transactions that provided funds for the city's pension system back in 2005, DealBook said. The lawsuit was blunt enough to claim that the investment banks involved had profited handsomely from the fundraising transactions.
Bank of America and UBS reportedly led the $1.4 billion fundraising via borrowings to improve its shaky pension system. Moreover, the Wall Street-led banks had inked interest-rate swaps with Detroit, or long-term financial contracts, in order to hedge the debt. DealBook said that although Detroit stopped making payments to the $1.4 billion loan, the city was still honoring the swaps contracts, and even extended an offer of hundreds of millions of dollars as payment just to end the contracts. The lawsuit was reportedly the city's means to end the means to siphon additional funds from the beleaguered state, arguing that the stipulation was illegal to begin with.
On the other hand, DealBook said the biggest concern of the banks, bond insurers and other corporate creditors of Detroit is that the city has drafted a plan to resolve its bankrupt state by asking its creditors to restructure the debts.
DealBook noted that municipal bondholders had not had any opportunity of incurring losses in principal amounts as forced by court. Should this happen, bankruptcy specialists said this would be a rare case, as municipal bonds only gets restructured via interest reduction or payment extensions.
On the other hand, DealBook explained that if the city of Detroit is basing their argument on bankruptcy law, the state might have intepreted the statute as a means to cut losses to a minimum by having all parties share the brunt of the losses.
Based on the yet-to-be-released draft, investors who have acquired the $1.4 billion of Detroit via certificates of participation or COPs, will lose a lot as the adjustment plan will only recognize just half of the debt amount. This means that COPs will only end up profiting $0.10 per debt dollar, DealBook said.
