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”.
Bloomberg says Detroit ‘Gut Kick’ Poses New Test for Long Suffering City
The move was inevitable, said Steven Rattner, a New York financier who headed President Barack Obama’s auto-industry task force in 2009 that put the predecessors of General Motors Co. and Chrysler Group LLC into bankruptcy reorganizations.
“This will be much messier than the auto companies,” he said. “This will go on for a long time.”
“You’re going to have much bigger haircuts for the workers and that’s going to mean much more pain than the workers for the auto companies were asked to bear,” Rattner said.
Michel Soucisse, manager of Mudgie’s Deli on Porter Street, shares her concern.
“I really fear that Detroit will be cut apart by its creditors and some of our assets will start to be sold off willy-nilly,” he said in an interview. “I really hope it means that we get to keep our assets and get help at the same time.”
10 Pages of Bankruptcy References on This Blog
I have 10 pages of Detroit Bankruptcy References on this blog. The earliest is in regards to GM and is from 2005.
Here are a few examples:
- LA Mayor Says “No Question You’ll See Some Cities Default”; Mayor Daley Says “I wouldn’t doubt it”; NY Mayor Goes After Public Pensions
- Detroit Loses $400 Million on $800 Million of Bonds; Detroit’s Easy Solution
- City of Houston is Bankrupt (So are California, Oregon, and Pension Plans in General)
Clearly this is not a surprise. Nor did the stock market treat it like a surprise.
What’s going to be a surprise (but not to Mish readers) is when Oakland, LA, Houston, Baltimore, and numerous other cities declare bankruptcy to escape untenable pension and health-care promises.
The Bright Side
Taxpayers should be fed up with ever-escalating property taxes, sales taxes, and fees to pay ridiculous retirement plans for unappreciative public union employees, especially police, fire, and teachers’ unions.
So, look on the bright side.
The Detroit bankruptcy is a good thing, and it will be even better when numerous other cities, bankrupted by public union greed, do exactly the same thing.
If you are desperate for yield and holding questionable municipal bonds, especially long-term municipal bonds, you may wish to reconsider.
Mike “Mish” Shedlock