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What The MSM Doesn’t Want You To Know About Detroit

The city was forced into bankruptcy before alternatives were explored.

The mainstream media, and even the financial media, have buried the real story concerning Detroit’s bankruptcy.  Or rather, they’ve buried the other real story, besides the fact that the city has been run by Democrats since 1962.  The real story is that Detroit was forced into bankruptcy before the many alternatives to this route were even considered – a route that may leave bondholders and pension guarantors unfairly holding the bag.

Whenever a person, corporation, or municipality has liabilities outstripping assets, and spends more than is taken in, bankruptcy may be necessary.  However, the traditional course of events is to make major changes in operations, and work with creditors, before filing for bankruptcy protection.  In other words, sell what stuff one can, restructure debt, and change management.

Bankruptcy

What’s so bad about bankruptcy?  It means that lenders who provided money to Detroit in the form of bonds, secured by the city’s assets (like the art museum), will not get back what they are owed.  They will be “crammed down”, or forced to take pennies on the dollar.  This is exactly what happened with the auto bailout, where secured creditors had to take 29 cents on the dollar while the UAW got increases in benefits.  When secured creditors are crammed down, they become less likely to lend in the future and when they do, they’ll charge more in interest.  That impacts the entire bond market, where you and I trade securities that invest in these same bonds.

It’s also patently unfair to companies that guarantee the city’s pensions.  The city pays these guarantors a fee akin to insurance, so that if the city can’t pay its retired employees, the guarantor takes on that burden.  Obviously, that’s a risk the guarantor is willing to take in exchange for the fee it receives – but it also expects that the city will do everything in its power to remain solvent.  As with lenders, it will result in costing cities even more to insure their pension funds, as guarantors get spooked that government will insert itself into the process and leave them holding the bag.

Sure, Republicans certainly don’t like the idea of the state bailing out Detroit. However, the rush to bankruptcy was hit with a harsh rebuke by the presiding judge, Rosemarie Aquilina, who said, “I have some very serious concerns because there was this rush to bankruptcy court that didn’t have to occur and shouldn’t have occurred.”  Instead, Gov. Snyder might have found some popular support in his suburban base if he’d also ask that base to help out.  He had precedent.  The suburbs voted for a modest property tax increase last year to help fund the art museum’s $23 million operating budget.

Alternatives

Here are the numbers:  the current deficit is $386 million, with expected negative cash flow of about $90 million.  As of late April, the city had $64 million of cash on hand and $226 million in current obligations.  The city has $17 billion in liabilities, including $600 million in unfunded pensions.

To solve the near-term problems, let’s start with the Big Kahuna – Detroit’s world-class art collection, which is actually the second largest collection owned by a municipality, whose value is estimated at around $1.1 billion.  It contains 65,000 works, and specializes in the works of the greatest American artists.  It ranks in the top six as far as U.S. art collections go.  Christie’s is evaluating it now, so we’ll see how close they come to the rumored value.

Some people moan and groan over selling off the collection.  Yes, it would be a terrible loss to the city, but the art will find loving collectors to take it off the city’s hands.  This is what is known as “sacrifice”, and if people don’t want the collection sold, they should’ve thought about that before putting fiscally irresponsible Democrats in charge of the city.  However, selling the collection is but one alternative.  There are plenty of big-money institutions that routinely lend money against works of art, and a $500 – $700 million loan collateralized by the collection would certainly be possible.  That alone would address the near-term cash flow issues.

Next, the city has tons of real estate (that includes the land the art museum sits on, by the way). The city owns 60,000 vacant parcels and 78,000 vacant structures.  Private enterprise could buy this land and revitalize those neighborhoods.  The city also owns parking garages and meters.  Those can be sold and operated by someone else, so Detroit might earn 1-1.5x annual revenues for those operations, plus their real estate value.

The Emergency Manager suggested the city sell its utility company.   Why not?  The province of Ontario has offered to buy the tunnel linking it to Detroit.  Why not?  And why is Detroit taking on $440 million in new debt to build a sports arena – when it can’t afford to service the debt it currently has, and people are fleeing the city like rates on a sinking ship?  Cancel that bond offering.

“Journalism” As Usual

Haven’t heard about all this?  What a shock.  By burying the leads, the media doesn’t have to admit to the city’s poor stewardship by corrupt Liberals – the same fiscally inept stewardship carried on by Liberals in cities and states across the country.  Furthermore, the Liberal media hates Wall Street, which is portrays as greedy, criminal, and undeserving of success.  So naturally, they want to see bondholders and guarantors screwed.  Profit is evil, after all.  If it upends money-grubbing investors, so much the better.

Even more disconcerting, however, is that many journalists are just plain lazy and/or uneducated in this area.  It’s much easier to follow the pack and report on the bankruptcy itself, instead of getting into hard numbers.

ABC News and the normally reliable Yahoo! Finance reporter Aaron Task ignore mentioning that Democrats were at the helm of Detroit all these years.  NBC News predictably failed to grill Snyder on alternatives to bankruptcy, as did CBS News.  One NY Times Op-Ed plays the race card to explain the crisis.

Even the financial media has fumbled the ball.  CNBC has not examined this angle at all, instead crowing over how those on pensions will get hurt – when they won’t.  TheStreet.com has reported on the bankruptcy’s impact of the muni bond market only.  One would think the financial media would really get in and crunch the numbers, and do an analysis on exactly how much money could be raised.

However, kudos are due to Tim Worstall at Forbes, who wrote, “What is it that we’re supposed to care about? A few pieces of canvas or real lives as they are actually lived?”  Mallika Rao at HuffPo, of all places, at least addressed the art collection, although she questioned its value.  Bloomberg gets it right, as does the Wall Street Journal.  Forbes correctly analyzes how public-private partnerships are more successful.  However, it took a citizen journalist over at BondBuyer.com to truly crunch the numbers on why bankruptcy was unnecessary.  Oh wait, he works at a firm that underwrites tax-exempt bonds.

In other words, a real expert whose voice is only being heard on a blog, instead of the major Sunday news shows.

 

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