Skip to comments.Detroit Files Chapter 9 Bankruptcy; Pension Promises vs. Bondholders in Spotlight
Posted on 07/20/2013 6:03:37 AM PDT by Kaslin
In an inevitable, anticlimactic decision today, Detroit files for bankruptcy.
Detroit became the largest US city to ever file for bankruptcy on Thursday, seeking protection from its creditors as it restructures more than $18bn in debt.
Richard Snyder, Michigan’s Republican governor, said in a letter included in the filing.
“Detroit simply cannot raise enough revenue to meet its current obligations and that is a situation that is only projected to get worse absent a bankruptcy filing.
Kevyn Orr, who Mr Snyder appointed in March to serve as Detroit’s emergency manager, has stirred controversy by putting the claims of holders of general obligation bonds – which are backed by taxes – on the same footing as those of pension funds and retirees.
Holders of the general obligation bonds argue that they should be paid before other unsecured claimants. Pension funds maintain that their rights are constitutionally protected and should have priority.
“To treat holders of general obligation bonds backed by the full faith and credit of a sovereign entity as unsecured and impaired has implications for the municipal market,” said Peter Hayes, head of municipal bonds at BlackRock, which owns $25m of Detroit’s debt.
Mr Orr said the city’s total debt was at least $18bn and could be as much as $20bn – $11bn of which is unsecured. The remaining $9bn that is secured will probably be paid back at 100 cents on the dollar.
Welcome to Chapter 9, Detroit
FT Alphaville says Welcome to Chapter 9, Detroit
Beyond the list of derelict buildings and brownfield sites owned by the city — you’ll want to read the approval letter by Michigan Governor Rick Snyder, in Exhibit A.
Here is a link to Detroit's Bankruptcy Filing
Amusing Flashback of the Day
The amusing flashback of the day with a hat tip to ZeroHedge goes to a CBS news headline from October 13, 2012 Obama: I "refused to let Detroit go bankrupt".
“We are one nation. We are one people. We will rise and we will fall together. Anyone who doesn’t believe it should come here to Detroit. It’s like the commercial says: This is a city that’s been to heck and back. And while there are still a lot of challenges here, I see a city that’s coming back.”—President Obama, Sept. 5, 2011
Government Motors II
I cannot imagine anyone being stupid enough to purchase a Detroit municipal bond at any time in the last 10 years.
Detroit muni bonds are not just junk bonds, they are sewer bonds. Just flush them down the toilet.
Tell that to the holders of GM bonds (mostly retirees )
Obama stole my money
Chicago bondholders take note. No matter what it says on that piece of paper you are last in line for the scraps.
Unionized retirees vs. investors? Obama in the White House? No doubt who is going to win.
omg! is that an actual 3rd world slum pictured right outside Detroit?
I thought I read yesterday (Friday) that a Judge ORDERED them to withdraw the bankruptcy petition because it “dishonors the president” and because she thinks Obama will bail them out anyway
And the other democrat controlled city (Chicago) is on the check off list.
City by city and them state by state.
I didn’t read it, but Fox News reported it yesterday
Bond holders will be screwed...that’s the trend.
What these political hacks dont seem to realize is that people who buy bonds expect to be paid back. They also dont seem to realize that these investors are not stupid.
Investors that are burned once are unlikely to be burned twice. Investors are also the type of people that will learn from others mistakes. If you burn a group of investors other investors will learn of it and will not invest in your bonds in the future.
Here is a little known secret municipalities as a rule borrow a lot of money using the munny bond market. Water treatment and waste water treatment plants cant be built without selling bonds.
If Detroit bond holders are burned every city in the country will have to pay much higher interest rates to induce investors to buy their bonds because investors will now consider these bonds as far more risky than they had previously. This means every municipal project will be much more expensive than it would otherwise have been. All to protect Detroit employee pensions. Fed bailout or not the rest of the country will pay for Detroits mismanagement.
“Bond holders will be screwed...thats the trend.”
Definitely the bondholders will be left high and dry although some of the big Wall Street banks may find a way to negotiate quiet deals to cover their losses. The little guy will definitely be exploited and lose it all.
The key issue is how to deal with the pension funds. Detroit simply doesn’t have the tax base to cover its pension obligations. It will either have to default on the pensions, have the future pension obligations reduced, or find a way to move the burden to the state or federal government.
Shifting the pension liability directly to the state or federal taxpayers will be extremely unpopular so the politicians will have to look for a way to accomplish it without appearing to bail out Detroit. I see this happening with the Pension Benefit Guaranty Corporation. This is a government insurance fund for private industry pensions. It is funded by fees levied on private companies, not from the general revenue.
Even though the fund insures private pensions, it is the perfect vehicle to bail out Detroit. First, the chief community organizer and media will cast the preservation of the Detroit pensions as a racial issue. Anyone who opposes it wants black government workers who earned their pensions to starve. Once they have framed the issue they spring a plan to save the pensions without a taxpayer bailout. Move the pension obligation to the Pension Benefit Guaranty Corporation. Increase the levy on wealthy private companies to cover the obligation. After all the capitalists are rich and it is only “fair” to the poor government retirees in Detroit. We are only asking them to pay a little bit more to make sure these people don’t starve. Why would anyone oppose this simple solution unless they were racist?
Once the precedent is set, watch the floodgates open as bankrupt cities demand equal treatment and the progressives push the cost of bailing out public pensions on business. it is a perfect execution of the Cloward-Piven strategy to bring down the US economic system. No doubt McCain and Graham will be part of the gang of whatever supporting this destruction of the private sector.
Lets see if union and non-union pensioers are treated equally.
There will be a trustee and a plan that will determine creditor classes. Orr will probably be replaced.
Gee- I seem to remember that Obama treated SECURED BOND HOLDERS in the Gm travesty of a ‘bankruptcy’ with total disdain & they got stiffed.
So did the vendors on accounts payable.
Only the unions won with the ‘bankruptcy’ Obama engineered for GM.
There wasn’t one single part of the GM ‘bankruptcy’ that followed any accounting rules I ever learned.
Obama is getting back what he handed out to others, IMO.
“I see this happening with the Pension Benefit Guaranty Corporation.”
It would be interesting to see if the city kept up with their insurance payments, if the city is responsible for that debt.
How long until 401K fund managers at Fidelity, Wells, Vanguard, etc... will be ordered by this administration to step up buying municipal bonds to “solve this problem”?
That judge is possibly being ignored-—http://www.zerohedge.com/news/2013-07-20/ponzi-scheme-expert-oversee-detroit-bankruptcy
omg! is that an actual 3rd world slum pictured right outside Detroit?
It's altogether too possible that it might be!
Whenever Detroit falls off another cliff I feel compelled to repeat this excellent article originally posted in 2009.
Posted: July 6, 2009
Detroit: The Triumph of Progressive Public Policy
By Jarrett Skorup
Imagine a city where all the major economic planks of the statist or progressive platform have been enacted:
A living wage ordinance, far above the federal minimum wage, for all public employees and private contractors.
A school system that spends significantly more per pupil than the national average.
A powerful school employee union that militantly defends the exceptional pay, benefits and job security it has won for its members.
A powerful government employee union that does the same for its members.
A tax system that aggressively redistributes income from businesses and the wealthy to the poor and to government bureaucracies.
Would this be a shining city on a hill, exciting the admiration of all? We dont have to guess, because there is such a city right here in our state: Detroit
Detroit has been dubbed the most liberal city in America and each of these progressive policies is alive and well there. How have they worked out?
In 1950, Detroit was the wealthiest city in America on a per capita income basis. Today, the Census Bureau reports that it is the nations 2nd poorest major city, just edging out Cleveland.
Could it be pure coincidence that the decline occurred over the same period in which union power, the city government bureaucracy, taxes and business regulations all multiplied? While correlation is not causation, it is striking that the decline in per capita income is exactly what classical economists predict would occur when wage controls are imposed and taxes are increased.
Specifically, price theory predicts that artificially high business costs caused by excessive regulation and above-market labor compensation rates imposed by so-called living wages will lead to an increase in unemployment. Detroits minimum wage is a whopping $7.40 an hour, more than $2 above the federal minimum wage when it was enacted; and pressure groups are pushing for more. Additionally, any company contracting with the city must pay its employees $8.23 an hour if they offer benefits or $10.28 an hour if they do not offer benefits.
Such high wage mandates are especially hard on individuals with a poor education and low skills. If struggling and heavily taxed businesses cannot pay such high wages, then they are more selective about the few workers they do hire or go out of business altogether. Those who have promulgated these polices may be well intentioned, but mainstream economists have warned for decades that such policies were very likely to bring about the abject poverty and unemployment that characterize Detroit today. The city has the highest unemployment rate among all large U.S. cities. (On a side note, Michigan is home to eight of the 20 cities overall with the highest unemployment and has the highest state unemployment in the country.)
A similar pattern has played out in public education. It is now conventional wisdom among the political class that higher pay for teachers and increased spending per student lead to improvements in teacher quality and student performance. Again, correlation is not causation, but Detroit Public Schools strongly suggests that this theory must be rejected. It has chronically underperformed state averages, yet reforms are vehemently opposed by the systems powerful school employee union.
At the same time that union, the Detroit Federation of Teachers, has won rich salary and benefits packages for its members. Median compensation for a DPS teacher is $76,000 and Detroit spends the third highest amount of money per student among 76 large cities nationwide. Statewide, Detroits spending per pupil is in the 91st percentile and DPS teachers are paid at the 96th percentile. For all that, by almost any measure Detroit schools have for decades failed their students: test scores, safety, drop out rates, etc. For example, Detroits public school students perform at the 3rd percentile in the state - that is, they are in the lowest 3 percent, and the district is in its second state takeover in a decade.
In the private sector such failure would result in mass firings for unsatisfactory performance. No doubt such a response would be condemned by the progressives who support the school employee unions that have made similar actions impossible in their institutions, and have opposed major transformation at every turn.
For example, in 2003 philanthropist Bob Thompson offered $200 million to build 15 charter public schools in the city in which he would guarantee a 90 percent graduation rate. In response, the DFT balked because charter schools are not unionized. The outcome was that the union jobs trumped better outcomes for children.
People vote with their feet, and all the above suggests why, over the past decade, DPS has lost about 10,000 students each year to charter, independent and suburban schools.
Of course it would be unfair to place all the blame for the citys decline on public employee unions. Detroit is home to the Big Three, whose contracts with their own powerful unions provided the model for those public employee arrangements. The UAW successfully extracted wages and benefits estimated at $71 per hour before the recent shake-ups began.
This is about $25 more per hour than the amount foreign-owned U.S. auto manufacturing plants pay their non-unionized American workers. Due to this disparity, Japanese car companies earn some $1,000 to $2,000 more on each car sold than their American counterparts. The outcome has been a relentless loss of market share that, among other things, has devastated the economic engine that once powered Motor City prosperity.
In addition to being a model of progressive economic, labor and education policy, Detroit is also a case study in welfare statism. Tom Bray, former editorial page editor for The Detroit News, has made the following observation:
Detroit, remember, was going to be the Model City of Lyndon Johnsons Great Society, the shining example of what the fairness of the welfare state can produce. Billions of dollars later, Detroit instead has become the model of everything that can go wrong when you hook people on the idea of something for nothing - a once-middle class city of nearly 2 million that is now a poverty-stricken city of less than 900,000.
Progressives will complain that this portrait oversimplifies the factors involved in a great citys decline. Perhaps it does, but with this question in mind: At what point does the weight of evidence and logic make it impossible to avoid concluding that in the case of Detroit, correlation is causation?
No wonder it had to file for bankruptcy
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