Detroit Files for Bankruptcy

As predicted here recently, the City of Detroit just became the largest municipality in US history to file for bankruptcy. Typically for the ways things are done around here, even the filing was filled with some shenanigans as Governor Snyder and Emergency Manager Orr filed the bankruptcy just before a judge was set to grant a temporary restraining order preventing such a filing. I think this is a sad day. But it is probably one that was necessary. My only interest now is in hoping that the retirees and their dependents, some of whom are very close to me, don't get the shaft in whatever comes out of this process. But being the pessimistic sort I think they probably will.

The city of Detroit filed the largest municipal bankruptcy case in U.S. history Thursday afternoon, culminating a decades-long slide that transformed the nation’s iconic industrial town into a model of urban decline crippled by population loss, a dwindling tax base and financial problems. The 16-page petition was filed in U.S. Bankruptcy Court in Detroit.

Gov. Rick Snyder’s office was making plans this afternoon to hold a 10 a.m. Friday morning news conference at the Maccabees Building, 5057 Woodward in Midtown, according to his office. It’s the same location where the governor declared a financial emergency for Detroit on March 1.  Snyder authorized Emergency Manager Kevyn Orr to file bankruptcy under a law the Legislature passed in December that replaced the previous emergency manager law voted repealed last November.

The bankruptcy filing came minutes before Ingham County Circuit Judge Rosemarie Aquilina was set to hold an emergency hearing Thursday afternoon on a request for a temporary restraining order blocking Snyder from authorizing a bankruptcy filing. “It was my intention to grant you your request completely,” Aquilina told lawyers for Detroit’s pension boards.

The judge did grant temporary restraining orders against Snyder and Orr taking further action in the bankruptcy proceedings. Ronald King, an attorney representing the police/fire and general retirement pension systems, said he may file a motion Friday in the case seeking to require Orr, an officer of the state, to withdraw the bankruptcy filing. After the hearing, King expressed frustration with the governor’s office after filing a motion for a temporary restraining order at 3:37 p.m. and giving Snyder’s attorney extra time to get to the downtown Lansing courthouse. The bankruptcy case was filed at 4:06 p.m. and Aquilina convened the emergency hearing at 4:11 p.m.

The Chapter 9 filing could take years, experts say, despite hopes by the governor and Orr that the case can be wrapped up in a year. A bankruptcy judge could trump the state constitution by slashing retiree pensions, ripping up contracts and paying creditors roughly a dime on the dollar for unsecured claims worth $11.45 billion. During a month of negotiations, Orr has reached a settlement with only two creditors: Bank of America Corp. and UBS AG. They have agreed to accept 75 cents on the dollar for approximately $340 million in swaps liabilities, according to a source familiar with the deal.

The bankruptcy plan was expected to closely follow Orr’s restructuring proposal that was unveiled to creditors on June 14 — a proposal that drew criticism from some creditors who said the cuts were too deep and did not include the sale of city assets, including Belle Isle and a Detroit Institute of Arts collection worth billions. He proposed paying most of the money owed to secured creditors while pension funds, unions and unsecured bondholders would receive, in some cases, 10 cents on the dollar.

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As I wrote previously there is no good reason that anyone with a working brain would accept 10% of what they're owed when someone else is getting 75% of what they're owed. You'd have to be extra special stupid to go for that deal. And how convenient is it that two of the more criminal banks that could be said to exist were going to get most of what they claim they were owed. It feels good to be a bank, no?  From a purely public interest standpoint there could be an interesting legal battle to determine if federal bankruptcy law can ignore the Michigan constitution which has generally been understood to prevent the alteration of public pensions. As we know in most cases the federal rules reign supreme. But there are still a few areas where the states can tell the feds to back up and go away. But of course it's not the state which is filing bankruptcy but the city. So yes this will all be "interesting". But that aside there are some good people who are gonna get hurt. Some of them I know. So this is not a good thing. 

Detroit has been on a downward spiral financially for years. This day has been probably inevitable since at least the late nineties. That was the time then to make the changes required to avoid this. The city needed to get rid of useless assets, collect taxes that were owed, cut taxes where possible to stop driving off businesses and citizens, deal with an intransigent and occasionally corrupt bureaucracy, take steps to get the crime under control, start an aggressive program to demolish abandoned homes, be unapologetic about requiring that Detroiters get work on projects inside the city (made more difficult by state rules against affirmative action), and do everything possible to bring in more revenue while cutting costs. Unlike the federal government cities can't create Keynesian stimulus on their own. They have to pay back their creditors. But for a variety of reasons, some good but mostly bad much of these things did not happen and here we are. Ironically some of the people that were cheerful about Detroit bankruptcy because they enjoyed seeing bad things happen to Detroit are suddenly somewhat worried about what a Detroit bankruptcy could mean to other (ie. THEIR) municipal or state borrowing costs. So stay tuned sports fans! This is going to be messy.

Thoughts?