A bond insurer yesterday struck a blow against Detroit’s proposal to exit bankruptcy, arguing in a new lawsuit that Detroit’s approach would illegally discriminate against the city’s third-biggest group of creditors — the investors who provided $1.4 billion for its workers’ pensions nearly a decade ago, the New York Times reported today. Those investors bought “certificates of participation,” which were the first securities Detroit defaulted on as it prepared to file for bankruptcy last summer. The city now contends that the 2005 borrowing was a “sham transaction” and is proposing to give the investors who bought into it one of the lowest recovery rates in its bankruptcy. The insurer, the Financial Guaranty Insurance Company, said in its lawsuit that Detroit “seeks to turn a crooked eye to history.” It said that the city had benefited greatly from the transaction but was now pretending to be “the innocent victim of fraud perpetrated on a grand scale.”
