Michigan Sets Detroit Review in Step Toward Takeover

Detroit’s finances will be given a preliminary review by state officials starting Dec. 6, Michigan Treasurer Andy Dillon said, in what may be the first step toward the appointment of an emergency manager.

The 18th-largest U.S. city may face $400 million in penalties if an emergency manager is put in charge, because of swap agreements made with two banks that helped Detroit borrow money in 2009, according to Ted Damutz, senior credit officer for Moody’s Investors Service in Chicago.

Dillon is aware of the potential penalty, Terry Stanton, spokesman for the state treasury department, said by e-mail. He said the financial review is only a first step in a process that may lead to state intervention.

Detroit faces a $44 million cash shortfall by June, on top of an accumulated $155 million deficit. Yesterday, Mayor Dave Bing and City Council members denounced the potential state action, saying the city will heal itself. Republican Governor Rick Snyder has said that while he doesn’t want to name an emergency manager, the city needs help.

“The goal of the mayor and governor is to avoid the appointment of an emergency manager,” Steve Serkaian, a Bing spokesman, said yesterday by telephone. So concern that the swaps penalties may kick in is “speculative,” he said.
UBS, Siebert

The penalties were included in a renegotiated financing agreement after the city’s credit rating was cut in 2009, Damutz said yesterday in a telephone interview. He said the city could try to renegotiate terms if an emergency manager takes over Detroit’s finances. A Moody’s report lists the banks as Zurich- based UBS AG (UBSN) and Siebert, Brandford, Shank & Co. in New York.

Karina Byrne, a UBS spokeswoman in New York, didn’t immediately respond to a message seeking comment on the swaps, left after normal business hours. A person answering a call to Siebert’s West Coast headquarters in Oakland, California, said no one was available to provide a comment on the deals.
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