July 4, 2014 at 1:00 am

Daniel Howes

Detroit needs deal with creditors, not victory

Here’s a question almost everyone can understand:

If a transaction blamed for tipping Detroit into the largest municipal bankruptcy in American history is illegal, as the city’s lawyers contend, do the pension funds that benefited from the deal have to repay the money?

Or, in a new twist on Detroit’s time-honored tradition of self-dealing, do the investors and their insurers — chiefly Syncora, Financial Guarantee Insurance Corp. and a string of European banks — get the court-ordered shaft for the $1.4 billion Kilpatrick-era transaction while the pension funds get to keep the money allegedly obtained illegally?

Fair questions, those, considering the increasingly aggressive posture the city’s bankruptcy team is taking toward the pension Certificates of Participation deal, its lenders, their insurers and Sean Werdlow, the former Detroit chief financial officer who bolted his city gig for a firm that profited from the deal.

Look, the path of Detroit’s long downward spiral is well marked by Wall Street enablers who helped the political class deceive themselves and their constituents with deals the city could not manage. Sharpies who collected fees, harvested high yields on dodgy debt, or both, now are whining in bankruptcy court that their bets have gone bad.

Where have they been? Detroit’s looming financial collapse, abetted by self-absorbed political leadership, was no secret. Nor is the fact that so-called public servants routinely exchange their government pay stubs for fatter ones and the chance to steer lucrative business to their latest private-sector employer.

Fine, subpoena documents surrounding Werdlow’s hiring by an affiliate of Siebert Brandford Shank & Co. LLC, the municipal investment banking firm with offices in Detroit that helped engineer the complex 2005 pension transaction. Ask why he was hired, who brokered it and what they hoped to achieve by his hiring (beyond raking in fees, that is, at the expense of a city that could not afford them or the transaction they facilitated).

Given the towering corruption and cynical oversight that passed for management during the Kilpatrick years, such suspicions are completely justified. Add the fact that the proceeds from the transaction were treated as service contracts, not debt, and funneled through specially created service corporations to circumvent Detroit’s debt limit.

Suspect? You make the call. But the prosecution of a point potentially unlikely to be litigated in the upcoming bankruptcy confirmation trial could risk visiting unintended consequences on the very institutions — the city’s two pension funds — the restructuring is designed to help.

The “grand bargain” uses the leverage of the Detroit Institute of Arts’ collection to inject the equivalent of $816 million in new money into the pension funds. Foundation contributions, state aid, gifts from DIA donors are all intended to bolster pensions, not beggar them.

“We still believe those transactions were problematic at best and could well be illegal,” Bill Nowling, spokesman for Emergency Manager Kevyn Orr, said in an interview Thursday. “We could force the question and win. Then it raises the question: Where does that $1.4 billion come from? We don’t have the money.”

Exactly. Nor do the pension funds, whose leaders have to wait at least one more week to learn whether the needed majorities of the city’s two pension funds will vote to approve the proposed Grand Bargain settlement. Defeat of just one class would scuttle the deal, throwing the restructuring into a sort of chaos federal mediators and Gov. Rick Snyder hoped to avoid.

The Kilpatrick-era pension deal, worthy of a public finance award at the time, is proving to be another of Hizzoner’s gifts that keeps on giving. It exposes the fee-hungry bankers who found a way to get Detroit its money; helped push the city into Chapter 9, and now complicates its path out; and potentially imperils the shored up finances of the city and its pension funds should Detroit’s lawyers win a Pyrrhic victory.

If it comes to that. A win for the city almost certainly would be accompanied by an order to repay money it doesn’t have even as it exposes a dubious municipal finance practice that U.S. Bankruptcy Judge Steven Rhodes, for one, says likely is illegal under Michigan municipal lending laws.

There are few winners (save lawyers) in bankruptcy, and there is no free money in American finance. If the city’s obvious pressure campaign doesn’t produce the negotiated settlement its lawyers seek, they could find their client with a victory it does not want — and that’s not much of one at all.

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Daniel Howes’ column runs Tuesdays, Thursdays and Fridays.