Bond insurer says Detroit knew better when it agreed to $1.4-billion debt deal in 2005

By Matt Helms and Brent Snavely, Detroit Free Press
McClatchy-Tribune Information Services

March 18--One of the major bond insurers that backed a controversial debt Detroit took on during the Kilpatrick administration asked the federal judge overseeing Detroit's bankruptcy Monday to allow it to intervene in the city's legal bid to wipe out the debt.

In January, Detroit sued in bankruptcy court against two quasi-legal subsidiaries called service corporations and two trusts created by the city and its two pension funds to handle a complex deal brokered in 2005 and 2006.

That arrangement slashed Detroit's unfunded pension liabilities but later backfired and was called one of the bigger factors pushing the city into bankruptcy.

Financial Guaranty Insurance Co., or FGIC, seeks to intervene in the lawsuit, which is part of Detroit's bankruptcy case.

The firm was not named as a defendant in the city's lawsuit filed in January in which Detroit sought to undo the results of what it called a sham legal structure that saddled the city with $1.4 billion in debt in "pension obligation certificates of participation."

FGIC accused the city of seeking to "turn a crooked eye to history, revising the facts of the pension funding transactions and claiming that the city was the innocent victim of fraud perpetrated on a grand scale."

Instead, FGIC argues, Detroit officials knew exactly what they were getting into: Facing enormous pension underfunding they couldn't keep putting off despite difficulty accessing conventional sources of borrowing, Detroit created a complex financial deal that ultimately backfired.

"The city's opportunism and revisionist history have broad repercussions, not the least of which being the impact on the funded status of the city's retirement systems, which will be subject to claims of unjust enrichment and the like" if the original deal is voided, FGIC argued in court filings Monday. "This, in turn, raises significant questions about the city's future, including the feasibility of the city's existing, proposed Chapter 9 plan. The issues are complicated and there is much at stake."

FGIC would be on the hook for about $1.1 billion of $1.4 billion and the insurer Syncora about $329 million.

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Under former Mayor Kwame Kilpatrick, Detroit sold the pension obligation certificates of participation to boost funding at the city's General Retirement System and Police and Fire Retirement System to nearly 100%. The city also bought so-called swaps, or derivatives, to permanently lock in steady interest rates around 6% on the arrangement. But three years later, as the national economy tanked, interest rates plummeted, souring the deal.

Detroit has been trying to negotiate an end to the swaps agreement with Bank of America Merrill Lynch and UBS, and now awaits U.S. Bankruptcy Judge Steven Rhodes' ruling on its latest offer.

After Rhodes twice rejected previous settlement offers as too generous to the banks, Detroit, Bank of America and UBS proposed settling the matter for $85 million, down significantly from the initial offer of about $230 million.

Contact Matt Helms: 313-222-1450 or [email protected]. Follow him on Twitter:


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