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Motor City Meltdown
Divide and Conquer in Detroit

Detroit may have the court’s approval to officially declare bankruptcy, but the city’s creditors—both pensioners and bondholders—have been challenging every step of that process.

Most of the opposition comes from the city’s bondholders, who are unquestionably getting a worse deal than pensioners: 20 cents on the dollar. The pensioners will see steep benefit cuts too, but not nearly as steep. The largest possible cut is 34 percent, and some may see losses as low as 4 percent.

But for many pensioners, even these modest cuts are too much. One group announced plans to protest the plan by “shutting down the city” (although this is more publicity stunt than serious threat).

Clearly, nobody is particularly pleased with the deal they might be getting, but as the Economist notes, Detroit may have divided the opposition enough to prevent a successful challenge from either direction:

The fact that some groups are doing far better than others sets the stage for some to approve the deal. This, in theory, allows the judge to impose the deal on other creditors—a “cram down”, as it is called. In fact, if either class of pensioners rejects the deal, even a cram down cannot force it through.

Bondholders are particularly furious that they are being offered so much less than pensioners. But no one seems to care much what happens to them. On the frozen streets of Detroit this week, it was the old folk citizens felt sorry for. But they also knew there was nothing else to be done.

At this point in the process, Detroit’s bankruptcy fight may consist mostly of public posturing and legal battles, but that doesn’t mean the important part is over. Who comes out on top could decide the future not only of this city, but all the other struggling cities around the country. Everyone is watching this battle closely and planning their next moves.

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  • Fat_Man

    How can they shut Detroit down? It is already a howling wilderness.

  • William Ockham

    It’s easy enough to be concerned about the grim fate of the pensioners. But aren’t almost all of Detroit’s municipal bonds held by other pensioners though their own pension funds, annuity companies, 401(K)s, IRA/s and just plain retirement savings accounts?

    • Andrew Allison

      Of course, but do you think that Detroit’s pensioners give a rat’s rear end about other pensioners?

  • Jim__L

    “The fact that some groups are doing far better than others sets the stage for some to approve the deal.”

    Wow. So much for fairness and equity. Now it’s just a matter of making sure your preferred side gets as much as it can.

    That’s not a good place to be, but it’s where Blue leads.

  • Herb

    Other cities hoping to borrow, not just those facing huge pension liabilities, are watching.

    As are those who would lend to them

    • free_agent

      Though cynically I’d say that what the larger situation needs is for buyers of municipal bonds to start to seriously fear the pension problems of the cities. Then the cities might be forced to address the problems now, before they get so much worse.

      • Herb

        I don’t disagree…munis from cities with unresolved defined benefit pensions should be viewed as junk even if not currently rated as junk bonds. Unfortunately due to rules governing large institutional investments (like pension funds, interestingly enough) they cannot treat them as junk and force the return to match the risk.

        However, my point was even cities without pension issues, either due to never having defined benefits pensions or having addressed the issue, will suffer when munis are force up rate wise if Detroit et al get to put bond holders to the back of the line (a la Chrysler).

  • free_agent

    You quote, “But no one seems to care much what happens to them.”

    It’s amusing but true… Even ideological capitalists are tending to shrug and say that lenders need to properly estimate the risks of bankruptcy. Only lefties really fret about people taking losses they should have been wise enough to predict, but of course lefties aren’t going to cry in this case.

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