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Lesson from Detroit
It's Expensive Being Broke

It’s beginning to look like Detroit’s bankruptcy will come with a pretty hefty price tag. Despite being effectively broke, the city has already committed $28 million to fees for lawyers and consultants brought on to assist with the process, some of whom are earning nearly $200,000 per month. And this is only the beginning—the city filed for bankruptcy only a few months ago, and many expect the full proceedings to last more than a year, if not longer. Emergency Manager Kevyn Orr believes the final cost could run as high as $100 million. The WSJ reports:

“I’m sure that is so, but we’re talking about public money,” said U.S. Bankruptcy Judge Steven Rhodes, who on Monday approved a contract for the city to pay the investment bank, Lazard Ltd. LAZ +0.49% , to advise a committee representing the city’s 23,500 retired workers on financial and restructuring issues. A Lazard managing director said the fee is appropriate given the firm’s expertise in restructuring work.

Detroit’s restructuring bills since its July bankruptcy filing already exceed post-filing fees paid by Alabama’s Jefferson County, which has spent $25.7 million in the two years since filing for bankruptcy, according to local officials. That one of the poorest big cities in the U.S. is becoming lucrative business for some professionals is rubbing some Detroiters the wrong way.

Unsurprisingly, the expenditures have been controversial. Pensioners, in particular, are angry that the city has found money to pay expensive consultants and lawyers while simultaneously arguing that it doesn’t have the money to keep its promises to retirees. The city, on the other hand, argues that it needs to spend this much to navigate the process smoothly and ensure that it will emerge as healthy as possible. It’s not immediately obvious who’s right, but one lesson is clear: Bankruptcy is expensive. It may be an effective way for desperate cities to get out of unsustainable obligations, but it’s a painful process. Other struggling cities should take a lesson from Detroit and solve their problems through other means before heading to court.

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  • rheddles2

    The city is right. They need to hire Lazard to defend them against suits from the Unions after bankruptcy. The fact that you need money to declare BK is not unique to cities. It’s true for any entity.

  • Corlyss

    “$28 million on fees for lawyers”
    And everyone should know that the lawyers and the court get paid first out of the deceased’s estate. That is the correct model. Bankruptcy law treats the bankrupt as if it were a dead person and the remaining assets are treated like an estate available for distribution. The bankrupt entity becomes a DOP (no “e”) meaning Debtor in Possession and is prevented from disposing of its assets without court supervision. It’s not a fun place to be.

    • Andrew Allison

      Agreed, but shouldn’t the court be protecting the debtor rather than filling the stomachs of vultures? Is it really credible that Kevin Orr is incapable of doing his job without fleecing the Debtor?

      • Corlyss

        “Agreed, but shouldn’t the court be protecting the debtor rather than filling the stomachs of vultures?”
        Well, remember this process was set up to eliminate the even more unpleasant social consequences of debtors’ prison. It was established when people weren’t at all timid about levying some punishment on profligate, incautious grasshoppers. The services required to administer the estates of said grasshoppers are expensive and time-consuming in many cases. So you tell me, why should the attorneys who do the work and the court where the bankrupt has to be forced to deal with his profligacy and reckon with those who loaned him money in good faith bear the costs of the bankrupt’s offensive behavior?

        • Andrew Allison

          Corlyss, thank you for your typically thought-provoking response. Here’s mine: First, does it really make sense to apply laws which were designed to ameliorate practices which are no longer tolerated? Second, I’m not arguing that the laborers are not worthy of their hire, but that if Orr isn’t qualified to do his job, why does he have it?
          You promised you were done with the health insurance issue but since you’ve re-opened that can of worms [grin], it’s not about the people who elect not to obtain insurance, but about those who can’t obtain it either because of a pre-existing condition or the cost.

          • Corlyss

            1) What’s wrong with the bankruptcy statute that it should be jettisoned because lawyers and the court get paid first? No offense, but I think you’d need to know a LOT more about the operation of the bankruptcy court to make that kind of judgment about replacing it with something else. It’s a system that has served all very effectively when it is allowed to operate. It was not allowed to operate in the financial meltdown and the reasons it was not have yet to be plumbed.

            2) I am not thru with Obamacare. I was just not going to repeat myself any more in that thread. There’s still lots to talk about concerning Obamacare. I have not yet begun to complain . . .

            3) With regard to your statement that it is not about people who elect not to obtain insurance, but about people who have been denied because of preexisting conditions, I beg to differ. Avik Roy, who has spent years studying health care reform, stated last night that that is one of the palpable lies told by the administration to sell the program on an altruistic basis. It’s pure propaganda, Andrew. He stated that the number of people who were denied insurance by pre-existing conditions in the NATION is about 300,000. The rest of the 50 mil didn’t have insurance because they made a calculated decision that it was not in their financial interests to obtain it. That is a VERY different story than what has been sold to the voters. And needless to emphasize, there were many cheaper, less draconian solutions to THAT problem, but the statists would not have realized the bang they think they’re going to get from nationalizing health care. As a lie, it’s right up there with “if you like your insurance and your doctor, you can keep them.” But because people were poorly served by a media that refused to tell anything but the administration’s story, preferably in pathetic stories about Juana and Keyshawn and Jim and Traci who, thru no fault of their own, found themselves at the mercy of unfeeling medical systems, only professionals knew the truth.

  • free_agent

    A researcher noticed that the only class of goods/services that the average millionaire bought at the highest quality level (highest price) was financial advice. Given that the fees are likely to be less than 1% of the total amount of debt Detroit gets out from under, it seems like a very good investment.

  • Anthony

    Another view: it’s not expensive being broke depending on where you sit; for without a public and a system constituted in a certain way, it would be impossible for anyone (able and adept he might be) to acquire $28 million in fees in ways that have been allowed for.

  • Jared

    I am also tired of being broke. I made a video about it to lighten up the situation and make people laugh. Please watch!

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