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Judge approves Detroit's $85 million swaps settlement

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A complex financial deal to shore up the city's bleeding pension system got the courts approval on April 11.

According to the Detroit Metro Times, U.S. Bankruptcy Judge Steven Rhodes had rejected two previous offers involving Bank of America and UBS, a Switzerland based bank with ties Jones Day, the law firm where Kevyn Orr, Detroit's Emergency Manager, previously worked.

The ruling by the courts ends a pension debt saga that dates back to 2005, when the city got into a hedge bet known as "interest rate swap" that ended in the city's pension debt skyrocketing.

The interest rate swap is essentially a bet as to which direction interest rates would move. For example, if the interest rate increased, the city would reap the benefits of increased revenue. If the interest rates went down, the city would be indebted to the banks.

When the economy took a downturn in 2008-09, interest rates took a nosedive, and the city suddenly found itself facing $50 million in annual payments to the banks. The banks were alleging that the city owed over $270 million in interest payments.

Under the settlement, the city will be obligated to re-pay the banks $85 million and interest payments and will forgive over $185 million in back payments.

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