Let them eat Bumpy Cake
This past week, Detroit Emergency Manager Kevyn Orr announced that he was sponsoring a bus tour for Detroit’s creditors who are in town to have discussions regarding the state of the city’s crushing debt. The idea is that they would spend a few hours traveling around the most impoverished parts of Detroit so that they could get a real sense of just how bad things have gotten in this once proud city. Orr presumably thought this would help them to come to grips with the fact that the city isn’t reneging on its debt obligations lightly. It’s doing so because the situation is desperate.
Two days ago, however, the creditors blew Orr off completely and declined to participate, forcing Orr to cancel the bus tour.
Orr’s spokesperson put it this way:
“Unfortunately, the office of the emergency manager will not be sponsoring a city tour for creditors Wednesday,” Orr spokesman Bill Nowling said in a statement. “The city’s creditors informed our office that they would like to spend more time conducting due diligence research into the city’s financial state while they are in Detroit. It became apparent Tuesday that postponing the tour was necessary.”
In a Detroit News piece, Nowling is more blunt:
“The creditors are pulling out — they don’t want their pictures taken,” Nowling said.
Although Orr’s office says they are hoping to reschedule the tour, it’s obviously not going to happen. You can just about guarantee that, as soon as the folks back at the corporate office heard about the tour, they pulled the plug immediately. These creditors, mainly bankers who do not live in Detroit, have no interest in the visuals of wealthy mostly-white, mostly-men in front of the desperation that Orr wanted them to see. More importantly, they didn’t want to answer any questions about why they continued to pour millions upon millions of dollars into Detroit even as its downward spiral into financial crisis was obvious to everyone. Like a crack dealer selling drugs to users he knows will be dead in a year, they kept handing money to the city because they knew that debt was safe. If the city collapsed, they would be the first ones paid and they would be paid in full with everyone else left to fight over the remaining crumbs. It is, in fact, written into the Emergency Manager law itself:
Section 11(1)(b) – The financial and operating plan shall provide for … The payment in full of the scheduled debt service requirements on all bonds, notes, and municipal securities of the local government, contract obligations in anticipation of which bonds, notes, and municipal securities are issued, and all other uncontested legal obligations.
In their minds (and on their spreadsheets), it was a sure bet. So they kept handing the city as much rope as it needed to get to the place they are today.
Those on the right will tell you Detroit’s crisis is entirely the fault of Democrats and their liberal policies. Anti-liberal Detroit News columnist Henry Payne says, “the liberal dream helped bear the Detroit nightmare”. It’s a glib and ultimately inaccurate and unhelpful generalization that ignores the fact that our manufacturing base has imploded. As reported in a recent piece at The Bridge magazine, 105 of the 170 built in Michigan since 1979 have closed. With the Motor City’s role as the epicenter of the automotive industry, this “disinvestment” has had a profound and deeply damaging impact on our state’s largest city. It’s akin to blaming the collapse of the housing bubble on the people who took out home loans they couldn’t pay from predatory banks who handed out mortgages like candy because they were hugely profitable even if the homes went into foreclosure.
But our out-of-town creditors don’t want to hear about that or witness the devastation that it has caused. They just want their money and have no interest in the human toll the crisis has caused and continues to cause. The optics of being seen with their business suits and attache cases in the midst of the catastrophe they played a role in helping along is simply too much for them to tolerate.
There are many who believe that Kevyn Orr is simply going through the motions of trying to get Detroit’s creditors on board with sharing the pain that is required to get Detroit back on its feet with the end game being a municipal bankruptcy, something I have long advocated. If that’s the case, I cheer him on. We need to know who is on board with helping and who is standing on the sidelines with their hand out for the cash they are owed, unwilling to be involved in solving the problem.
Orr’s decision is rocking the municipal bond world. He has taken what have long been considered “safe” investments and made them as susceptible to the whims of our economy as our pensioners and any other group who has a financial agreement with the city. This, they say, will make it harder and harder for cities to borrow money cheaply in the future. Perhaps this is true.
Perhaps it will have another impact, however, and that is to put banks and lenders in a position where they are true partners, helping to ensure that investments are made intelligently, viewed as a true investment in the future of the city rather than as a way to harvest money from local communities in which they often have no presence. If that happens, the higher cost of credit may be worth it.
It’s worth noting, by the way, that, as Kenneth Buckfire, the guy in charge of Detroit’s financial restructuring points out, these creditors so upset they’ve lost their “most favored lender status” would lose it if Detroit goes through bankruptcy, too.
The argument is, which one of the creditors is special. Market convention for 60 years is, some of them are special — general obligation bondholders are special. But if you look at (the bonds) in the paradigm of a bankruptcy filing, they are not.
In the meantime, a Chapter 9 municipal bankruptcy, as I have written about before, is a way of bringing Detroit back from the precipice in a way that preserves democracy. It prevents the looting of public assets, keeps locally-elected officials involved in the process, and puts a non-political referee in charge of the process. If that is Kevyn Orr’s end game, I’m all for it.
It’s a shame that Detroit’s creditors aren’t willing to be part of the solution.
[Photo credit: Anne Savage, special to Eclectablog]