Bond insurer sues Detroit over bankruptcy exit plan

|By:, SA News Editor

Throwing a wrench into Detroit's plan to exit bankruptcy, bond insurer Financial Guaranty Insurance sues, saying the deal illegally discriminates against a major group of creditors - those who poured in $1.4B for worker pensions in 2005.

Those investors purchased "certificates of participation," which was the first paper Detroit defaulted on ahead of its bankruptcy. The city calls the 2005 deal a "sham transaction" and its exit plan would give those investors one of the lowest recovery rates. Financial Guaranty says Detroit "seeks to turn a crooked eye to history."

The suit is about more than a higher payout to those investors. It could lead to a fight to claw back that $1.4B from Detroit's pension system. Current and future retirees make up Detroit's largest and second-largest unsecured creditors.

Watching: MBI, AGO, AMBC, SYCRF.