Today’s dispatch should be read particularly in light of the March 2013 e-mail message pasted at the end below, when the names Kevyn Orr, Jones Day and Detroit, and the words emergency manager and restructuring counsel, first started getting used together in adjacent sentences, but somehow our local corporate media couldn’t see any significant ethical or equitable issues involved in that…
LINK TO THE AUDIO OF THE DECISION, WHICH EVERYBODY SHOULD LISTEN TO!!!
(THIS STORY HAS MYSTERIOUSLY DISAPPEARED FROM THE FREE PRESS’ ON LINE FRONT PAGE, BUT IT’S STILL AVAILABLE UNDER ‘MORE ON DETROIT BANKRUPTCY’) Hmmm…
“Calling the original debt deal legally dubious, Rhodes said the city “likely” could challenge it successfully in court and pay substantially less. It was the second time Rhodes rejected a proposed settlement with [JONES DAY CLIENTS] UBS and Bank of America Merrill Lynch. The first was for about $230 million. “The court … will not participate in or permit the city to perpetuate the very kind of hasty and imprudent financial decision-making that led to the” original deal, Rhodes said Thursday from the bench.
“The ruling was a stunning blow to UBS and Bank of America Merrill Lynch and a big win for the city’s residents, retirees and other financial creditors who want more money left to pay for city services and also to help pensioners and other creditors. In his sharply worded ruling, Rhodes said the city must stop making poor financial decisions and stressed that it’s his judicial responsibility to ensure the city emerges from Chapter 9 bankruptcy as a financially sustainable municipality.
“The settlement’s demise was a loss for Orr, who testified in favor of the deal during a trial in Rhodes’ court, and a loss for bankruptcy law firm Jones Day, which pursued the settlement aggressively. Rhodes said the settlement was “just too high a price.”
“It is higher than the highest reasonable number,” he said. “If it were close, the court would approve it. But it’s not close. The court looked for every way it could to approve this settlement. It could not find a way. It’s just too much money.” By rejecting the swaps deal, Rhodes also rejected the recommendation of Detroit bankruptcy mediator and U.S. District Chief Judge Gerald Rosen, who personally endorsed the settlement. “It’s a real slap at Judge Rosen,” Wayne State University law professor Laura Beth Bartell said. “He stood up and said, ‘This is it. I want you to approve it.’ ”
“The judge recognizes the city is in crisis and is not giving more money to banks that have already made a lot of money on this deal,” said Jerry Goldberg of the Moratorium Now Coalition of protesters fighting to protect pensions. Rhodes said Detroit has convincing arguments that its 2009 decision to pledge its casino taxes as collateral on the transaction was illegal under the Michigan Gaming Act, which limits how the money can be used. He also said the city has a strong argument that the swaps were invalid altogether. The Free Press reported in September that the swaps deal might have been illegal.” [BUT NEVERTHELESS OPINED THAT JONES DAY’S GIVEAWAY TO THEIR BANKSTER CRONIES WAS APPROPRIATE!]
(THE NEWS AT LEAST HAS THE INTEGRITY TO LEAVE THE STORY ON THE FRONT PAGE):
“Rhodes halted a trial last month over Orr’s original plan to pay the two banks $230 million after questioning whether the settlement of 75 cents on the dollar was unfair to other creditors. UBS and Bank of America agreed to a lower payout during Christmas Eve negotiations. Opponents of big banks trumpeted the judge’s ruling Thursday on social media sites, calling the rejection a setback for Wall Street. Outside federal court, protesters marched in the snow and chanted “Hands off our pensions!” Retired city worker David Sole, who had fought the settlement, said Thursday he didn’t expect Rhodes’ ruling. “It just shows … the banks are crooks and shouldn’t be paid,” Sole said. “This was way too much money to give the banks.”
THE ALWAYS-INFORMATIVE MARY WILLIAMS WALSH IN NY TIMES DEALBOOK:
Mr. Orr testified that he had in fact considered suing the two banks to get out of the swaps, and even had his staff draw up a complaint. But in the end, he decided that such a lawsuit had just a 50-50 chance of success and that it would take too long at a time when Detroit urgently needed the casino revenue to secure a fresh loan.
While the judge allowed the city to borrow $120 million, it was unclear on Thursday whether Barclays was still willing to make the loan without resolution of the swaps issue or what the terms of a smaller loan would be. Judge Rhodes also placed conditions on the borrowing, saying that the money could be used only for purposes approved by the Michigan Gaming and Revenue Control Act and that the city must file notice with the court when it wanted to use it, giving creditors 14 days to object.
In delivering his ruling orally on Thursday, Judge Rhodes said he had reviewed the arguments Detroit would have made had it pursued a lawsuit, and thought they had merit. He said $165 million was “higher than the highest reasonable number.”
“If it were close, the court would approve it,” he said. “But it’s not close.”
The ruling was seen as a vindication for Detroit’s residents and its other main creditors, which stood to take a back seat to the new Barclays loan. They were arguing that the swap contracts appeared to have been illegal to begin with and should be voided rather than paid by the bankrupt city. Some even called for Detroit to claw back the millions of dollars it has already paid the two banks on the swaps.
“It’s a recovery for the people of Detroit,” said Abayomi Azikiwe of the Moratorium Now Coalition, who was outside the courtroom when Judge Rhodes made his ruling. “It’s a major win that could have national implications as other cities undergo bankruptcy.”
In a statement, Mr. Orr said: “We are reviewing today’s decision and we are thankful the court has approved our ability to pursue quality-of-life financing for the benefit of the city’s 700,000 residents. As recommended, we will continue to work toward a resolution of the pension swaps.”
Interest-rate swaps have been widely used in municipal borrowing, and other cities and counties have learned to their dismay that the long-running contracts are almost impossible to get out of without paying the total market value. Even in bankruptcy, the law gives swap traders the ability to be paid in full. Congress exempted such contracts from the bankruptcy rules that normally keep creditors from hounding bankrupt debtors.
The so-called safe harbor for derivatives like swaps contracts has raised eyebrows in Chapter 11 corporate bankruptcies, but until now it had not surfaced in a Chapter 9 municipal bankruptcy.
Days before filing its bankruptcy petition, Detroit said Bank of America and UBS had given it a break, so that it would have to pay only about $250 million to cancel the contracts. In the months since then, the amount dwindled to about $220 million. But other creditors, facing bigger relative losses, complained that the two banks were still getting way too much. They argued, among other things, that the interest-rate swaps were invalid from the beginning because the use of casino taxes for financial hedges is not allowed under state law.
With complaints about the swap payment mounting last December, Judge Rhodes sent the parties back to renegotiate their deal with the help of another federal judge, Gerald E. Rosen, the chief justice for the Eastern District of Michigan. Judge Rosen is the lead mediator of the Detroit bankruptcy, trying to negotiate settlements among Detroit’s more than 100,000 creditors to keep the huge bankruptcy from being mired in endless lawsuits.
It was Judge Rosen who persuaded Bank of America and UBS to agree to the $165 million figure just before Christmas. Creditors were by then so perturbed about the situation that they filed a complaint against him for misconduct when he announced the deal and said he would recommend that Judge Rhodes approve it.
And, like I told u so 10 months ago…
—– Forwarded Message —–
From: Thomas Stephens <firstname.lastname@example.org>
Cc: PMA Group <email@example.com>
Sent: Friday, March 15, 2013 6:59 PM
Subject: Jones Day’s new Contract with Detroit; Detroit’s new Government Jones Day Partner Kevyn Orr
Dear Gus Burns:
Congratulations on MLive.com posting by far the most interesting and potentially significant aspect of the story of Jones Day restructuring partner Kevyn Orr being named Emergency Manager of Detroit, which happened virtually simultaneously with his now-ex-employer Jones Day also becoming new restructuring counsel for the City he will govern starting March 25.
Compared to the fawning, completely uncritical ‘coverage’ of Orr’s appointment by most of Detroit’s corporate media, which didn’t even mention this extraordinary aspect, you at least got the story. I hope you look into it more deeply, along the lines outlined in this message.
One slight correction to one of the statements in your story: The restructuring contractor whose retention was the condition of Detroit receiving the bond money you referred to is not Jones Day. That was Conway Mackenzie, whose contract has been approved, and whose representative Chuck Moore made a presentation to the Financial Advisory Board (FAB) on Monday, March 11, where I was present.
Here’s what’s happened with the Jones Day contract so far:
At the very end of that same FAB meeting on Monday afternoon, restructuring contractor/investment bank Miller Buckfire’s representative, James Doak stated they would be adding another law firm. In response to a question from the FAB, he said there would be an RFP (Request for Proposals) and they would like to bring in another law firm. Jones Day was not mentioned by name in public at that FAB meeting.
Approximately three hours later, the Free Press reported that Dave Bing wants to hire Jones Day as Detroit’s restructuring counsel: (http://www.freep.com/article/20130311/NEWS01/130311080/Bing-names-Jones-Day-law-firm-counsel-Detroit-restructuring)
There has been neither an RFP nor a contract for Jones Day presented so far to Detroit City Council.
Several questions arise from this scenario:
1. Do you believe the denials by Snyder, Bing and Orr that his hiring as EFM had nothing to do with the City hiring his law firm (or now former law firm, if you like) as restructuring counsel? Does that even pass the ‘smell test?’ Why are they making this claim? Isn’t it obvious they all want both Orr and Jones Day involved?
Do you see any potential ethical or other concerns here? Consider the following:
2. Jones Day represents Bank of America, and Bank of America is one of the counter parties on the City of Detroit’s interest rate swaps that are presently under negotiation as part of the City’s restructuring of its debt.
3. Recently resigned Jones Day partner Kevyn Orr is now Detroit’s Emergency Financial Manager. This is supposed to be a short-term position. Where will he go after 18 months or 2 or 3 years or however long he stays in this position? Jones Day and many of their corporate and bank clients are certainly in a position to profit from some of his work as Detroit’s government (as further mentioned briefly below), and he and they would have every opportunity to continue their relationships after he leaves Detroit. The acceptance of his resignation as ethically cleansing Jones Day’s lucrative new contract with the City, when this is intended to be a short-term position for him, is questionable, to say the very least.
4. As the EFM/EM Kevyn Orr has all powers of the City of Detroit’s government. (It almost seems trivial to mention it – see below – but of course that would include approving the Jones Day contract after he starts on March 25.)
5. As restructuring counsel, Jones Day is therefore the lawyer for its now-former partner Kevin Orr, and Orr as Detroit’s government is the client of the firm where he was a partner just a few days ago (when the discussions that led to him being given this position took place). To call this situation unusual, where the niceties of the recent resignation notwithstanding, the same law firm is effectively serving as attorney, client, and local government, is an understatement. How is it that in the flood of media ‘coverage,’ only your blog post mentioned this?
6. This huge 2,400 lawyer corporate law firm therefore now effectively controls Detroit thru its own retainer as counsel and its recently resigned partner as EFM, with power to realign, restructure, redevelop, and dispose of 139 square miles of under utilized urban real estate and other assets on the busiest international border crossing in North America, in the middle of the world’s greatest fresh water resources. Actually therefore, the concerns go quite a bit beyond what lawyers usually talk about in terms of “ethics.”
7. Doesn’t this at least potentially make the criminal enterprise for which Kwame Kilpatrick and Bobby Ferguson were just convicted look like stealing schoolkids’ lunch money, compared to major organized crime?
I told you… This is very interesting… This is an absolutely incredible aspect of this story, and one of the most amazing things about it is how little attention it’s received so far in a massive amount of coverage. I hope you follow up by asking independent legal, ethics and constitutional experts about the above concerns. And congratulations again on breaking a potentially huge story that the mainstream corporate media for whatever reason has ignored so far.