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Detroit BK: So About Those Hinky Swaps…

Credit Default Swaps

Yes, those pesky things.

It appeared that Detroit was going to try to evade a judicial determination on the swaps themselves, along with everyone involved in crafting them.  Especially the banks.

Not so fast….

The judge in the Detroit bankruptcy case struck down a controversial proposed settlement in which the city would have paid two big banks $165 million.

Good.  And here’s why.  The two banks involved, Bank of scAmerica (BAC) and Ur Butt’s Sexy (UBS) had entered into a swap on “future casino revenue” in 2009.  The up-front cash was $300 million.  The forward cash flow was, well, a gamble.  The settlement deal was for roughly half of the original, or $165 million.

Now why would you take such a deal if you were a bank?  Well, it might be simply because the cash flow wasn’t going to materialize.  That might be a good reason to take a nearly-50% haircut.

But it might also be because there was a very real risk that your deal was going to be ruled fraudulent, and therefore you might get nothing.

The bad news is that the judge allowed the city to borrow from…. you guess it — future casino tax collections.

But here’s the thing — with the bankruptcy filing the banks are essentially unsecured creditors and therefore they might get about what the pensioners get (15 cents on the dollar) and that is if their original setup on this isn’t ruled a fraudulent scheme — in which case they may well get zippo.

Now if we can just get someone to look at the rest of the swaps out there…… you know, all the nice hinky deals like what sank Jefferson County in Alabama?  Yeah, those.

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