Detroit thread. Post Kwame, Monica, and $1 houses here.

[Phillip V]

Foolish girl. That $20k could easily have been a down payment on a nice Detroit home.

[sbr]

SHe could have bought 20,000 houses.

[Savonarola]

From Daniel Howes in the Detroit News:

Lenders take it on the chin in Orr's plan


Emergency Manager Kevyn Orr's restructuring plan for Detroit is rattling a whole lot more people than city employees and the retirees who stand to lose city-paid health care and chunks of their pensions.

His move to label limited and unlimited general obligation debt as "unsecured," effectively declaring it no longer backed by the "full faith and credit" of the cash-strapped city, is roiling bondholders and threatening to alter the municipal bond market's assumption that cities will raise taxes to meet their financial obligations and avoid default.

Not now in Detroit, where taxing authority is already at its statutory limit. Not in a city that already can claim to be the highest taxed municipality in Michigan, notwithstanding a pathetic inability to collect much of the real estate and income taxes it is owed.

Orr's point: Lenders should have known better, and Detroit won't pay because it can't.

"If you lent money to an insolvent city that has been going insolvent as openly and notoriously as possible since 2000, and you don't have a security interest, then you are an unsecured creditor," he told The Bond Buyer in a recent interview. "This has been building for decades and decades. They understood the risk."

His contention may prove to be the linchpin of tough negotiation, protracted litigation or both. But his observation that Detroit has been "openly and notoriously" headed toward bankruptcy is spot on, supported by reams of news articles, independent studies, state-ordered financial reviews, public testimony of the city's longtime auditor general and towering financial mismanagement exceeded only by the city's deep political dysfunction.

A former mayor — the one whose administration engineered the interest-rate swap deal to fund pension payments and routinely failed to file annual financial reports with the state — is in federal prison, convicted on corruption charges. And a former member of City Council last month completed her own prison term.

Detroit has lost nearly a third of its population over the past decade, probably the most significant voluntary exodus from any city in the developed world. The calamitous trend cut tax revenue and gutted home values by creating more supply than demand; it undermined the city's ability to meet financial obligations it arguably should not have made.

None of this is a secret. No, Orr says lenders whose positions are not secured with specific revenue streams (such as the water department or casino taxes) are, by his definition, unsecured. They would share equally the pain of a restructuring that is increasingly likely to take place inside what would be the largest Chapter 9 bankruptcy in American history.

Who says Texas is the only place where everything is bigger? Four years ago, Detroit became home to the largest bankruptcies in American corporate history, courtesy of General Motors. and Chrysler. This year, it probably will produce the largest municipal bankruptcy ever — a dubious distinction that says a lot about the culture of Detroit and its auto industry.

Most of what it says isn't good. The coming Detroit reckoning would confront the bad habits of its past and would try to chart a humbling future. But its path to get there proposes to trample conventions of the municipal finance market, to pierce constitutional protections of vested pensions and to impoverish public employees who didn't make the rules or the deals.

Sound familiar? It should, because Detroit's singularly grim predicament isn't Detroit's alone. Cities and school districts across Michigan are under emergency management. Pension liabilities in states such as California and Illinois are massive, forcing politicians to confront the confluence of union power, pension promises and the cash that greases the political process.

Detroit is just getting there sooner, a municipal canary forced into the coalmine largely of its own making. Its predicament is the cost of one-party rule for 50 years; a political culture obsessed with power, control and self-dealing; a city budget whose priorities too often reflected the demands of employees and their union leaders, not the needs of taxpaying residents or the responsibility to adequately maintain public infrastructure.

And the financial community? Too many chose to ignore the unmistakable arc of the Detroit's decline so long as they could engineer one more deal, pocket more fees and bank on the assumption that the city would raise taxes yet again to honor its debts, that Michigan would backstop the commitments, or both.

Could the remedy for Detroit's undeniable profligacy have implications for Triple-A-rated Oakland County right next door? It could if proximity trumps performance and the common sense to recognize that the city's problems were mostly made in Detroit.

Orr's initial offer was about 10 cents on the dollar to bondholders.  His tough talk is, in part, an attempt to frighten them into accepting a deal like this rather than putting Detroit through a municipal bankruptcy.  He's also said that works from the Detroit Institute of Arts would not be protected if the city were to go to bankruptcy in order to get at least attention, maybe assistance from business and suburban civic leaders.

While I can't disagree with Orr's assessment of the situation, who would ever loan Detroit money again?  The bond holders lost their money and got blamed for doing so. 

[Admiral Yi]

The good people of Detroit are being sacrificed on a cross of austerity.

[Jacob]

Pretty shitty to see your vested pensions getting obliterated.

[CountDeMoney]

Pretty shitty to see your vested pensions getting obliterated.

Then they never should've been public employees and should've put it all into a 401k instead, where it would've been much safer.

[Admiral Yi]

 

Or they could have asked their union to bargain for a 401k instead of a defined benefit plan.

[CountDeMoney]

Go fuck yourself and your 401k.

[Barrister]

Or they could have asked their union to bargain for a 401k instead of a defined benefit plan.

But that would be stupid.

[DontSayBanana]

But that would be stupid.

I think that's kind of the point.

[MadImmortalMan]

Under the circumstances, perhaps it would not be.

[DGuller]

Or they could have asked their union to bargain for a 401k instead of a defined benefit plan.

That's like saying that they could've asked their union to bargain for decertification.

[MadImmortalMan]

Huh? Please invest our money in more diversified investments equals disband the union? They could have just put the pension fund into an S&P ETF you know. 

Can't buy off any of Kwame's cousins or former Supremes that way though.

[Admiral Yi]

But that would be stupid.

How so?  Detroit employees are going to get pennies on the dollar.  Once you get a 401k contribution, it's yours, no takes backs.  And there's no law of physics that says a defined benefit contribution has to be larger than a 401k contribution.

Guller: Your comment makes zero sense.  Zero Kelvin.  It's a black hole of sense.

[Savonarola]

Pretty shitty to see your vested pensions getting obliterated.

Most likely it's the pensioners that aren't going to accept Orr's terms.  They're the best funded to put together a challenge, and the Michigan constitution protects city pensions.  A lot of commentators think that the latter might not hold in bankruptcy, though.