US Economy

Judge rejects Detroit’s deal to exit swap contracts

Mary Williams Walsh
Graffiti is painted on the walls of the abandoned Packard Automotive Plant December 13, 2013 in Detroit, Michigan.
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A federal bankruptcy judge ruled on Thursday that Detroit could not proceed with a plan to extricate itself from some costly long-term financial contracts by paying $165 million to two big banks.

Judge Steven Rhodes said in his decision that Detroit had hurt itself financially in the past by going forward with hasty and imprudent decisions and that the practice "must stop."

Bankruptcy judge rejects Detroit's interest-rate swap deal

At the same time, Judge Rhodes said that Detroit could go ahead with a special $120 million loan from another bank, Barclays, which Detroit has said it urgently needs to provide municipal services in bankruptcy.

Detroit had asked the court to approve a bigger loan from Barclays, for $285 million, but it had planned to use the first $165 million to pay Bank of America and UBS to end the financial contracts, known as interest-rate swaps.

Officials have said that without the special loan from Barclays, Detroit would soon run out of cash and not be able to pay its workers. But because Detroit is already in default on some of its bonds, it could not take on new debt without pledging collateral, and the only money it could pledge was tied up in the interest-rate swaps.

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Creditors have argued that the interest-rate swaps, which were set up in 2005 as part of a $1.4 billion borrowing that Detroit undertook to shore up its pension system, have never been valid or enforceable and should simply be voided.

—By Mary Chapman, The New York Times.