Archive for September, 2014

Detroit Trials and Tribulations

September 15, 2014

The Detroit Bankruptcy makes a complete mockery of the rule of law and threatens to set a precedent that will send a shiver through the municipal bond market in search of a spine to tingle.

What is so very sad, to date, is the lack of any real moral outrage on the part of investors.

Blatant violations of contracts and the complete repudiation of bond opinions have been greeted by silence or exceptionalism that sounds like the bleating of sheep before the shears.

It doesn’t matter if Detroit is the only City in America that would dare to steal money from investors on such a gigantic scale. What matters is the City of Detroit’s attempts to repudiate $18 bln. in debt service payments go without chastisement, rebuke, or revile.

The decisions, so far, by the Federal judge, the State of Michigan, and the government of Detroit are nothing less than outrageous. How dare the bankruptcy judge demand to know how much Syncora Guarantee would accept to go along with the Detroit bankruptcy plan? Judge Rhodes sounds like an auctioneer at a Mecum Auto show: Would you settle for 75 cents on the dollar…yes? I have 75 cents on the dollar. Do I hear 50? How about 50 cents, do I hear 50 cents on the dollar, now?

Clearly, Judge Rhodes must know any plan that does not provide the full payment on the Pension Obligation Bonds is destined to be overturned by a high court. And, when the higher court rules the pension fund must return the $1.5 bln. then the City of Detroit will go into bankruptcy, again.

The likelihood that Detroit will go into bankruptcy again is almost a certainty among many in the municipal analytical community.

During a conference call, a rating agency analyst quipped, “Detroit may be going into Chapter 18 — Chapter 9, twice.”

It is even more ludicrous when the City of Detroit and the Bankruptcy Judge argue that artwork is like schools, hospitals and essential public services.

New York City’s Art Capital Group offered a $3 bln. loan secured by Detroit Art Institute’s collection. But, the City of Detroit would rather have a $814 mln. loan from local area institutions. The corruption and self-dealing stinks to high heaven.

If Michigan is allowed to restructure Detroit’s debt without providing any measure of recovery, and the Federal bankruptcy court can subordinate the rights of bondholders to the needs of organized labor, then municipal bond market faces a long walk on a very short pier.