Oh, Snap. Orr says, "How about I give you dimes for dollars, and we can call it even?

[mwilbert]

BK court CAN NOT force the city to do things they don't want to do.

This is true, but I don't think it means what you think it means. Your employer can't force you to show up at work if you don't want to, but if you don't, he can fire you.

The bankruptcy court cannot force an asset sale, but if the judge doesn't think you are presenting an acceptable plan he can throw you out of bankruptcy, at which point you and your assets are no longer protected from the creditors you may have defaulted on, and some other court may well let them start grabbing assets. So if the bankruptcy judge believes that it would be appropriate to sell some of your assets as part of an equitable settlement, your alternatives may not include holding on to those assets.

The problem in Detroit is that while a judge probably isn't going to think it is reasonable to sell Belle Isle, I don't have any particular idea whether one might think it was reasonable to sell some paintings. Certainly I hope not. It is also possible that the Legislature could shield the assets from actions in state courts.

[coracle]

The creditors are going to lose either way.

Bt some of them, foolishly, may think they can get a couple Van Goghs in a BK court proceeding and only take a modest haircut versus having to take pennies on the dollar.

This might be the nucleus of an idea to have your cake and eat it. If large Investors like Banks would accept payment in objects of Art and then loan them back to the DIA as philanthrophists they could still carry the assets on their bottom line and might even get a tax write-off for their action which would be more than 10c on their dollar as well as earn goodwill.

[Hermod]

I am wondering about the DWSD "revenue bonds" which are backed by the DWSD revenues rather than the "full faith and credit" [[har-de-har-har) of the city. The market doesn't seem to be in doubt about the repayment of those bonds as they are selling at a substantial premium to their face value [[because of the interest rate).

[corktownyuppie]

I am wondering about the DWSD "revenue bonds" which are backed by the DWSD revenues rather than the "full faith and credit" [[har-de-har-har) of the city. The market doesn't seem to be in doubt about the repayment of those bonds as they are selling at a substantial premium to their face value [[because of the interest rate).

It's complicated.

Technically, DWSD is backing those bonds with their revenue, which is basically like a money-printing machine. If not in its volume, certainly in its reliability. In other words, as long as DWSD can run like an independent entity, then those bonds are safe. It seems that the market is pricing them this way, as well.

Howeva...

DWSD is also owned by the City of Detroit. Just like the City of Detroit owns the Detroit Zoo, tons of artwork, the Windsor Tunnel, etc. Creditors may try to make an argument that as owners of the DWSD, the city has an obligation to use the revenue from the DWSD to pay off the creditors.

Of course, the problem with that argument is that not even the City of Detroit is allowed to use the revenue from the DWSD to make payroll, let alone outside creditors.

I do think that -- in the end -- DWSD will be sheltered from creditors. But, there will likely be a legal battle to get there, and who knows what it will take. It's safe...in the end. But if it were really, really safe, there wouldn't have to be a beginning, let alone an end.

[corktownyuppie]

I read it twice, didn't find "Oh Snap" anywhere.

Ah, I see. Headline was not clear enough. Should read:

"Orr Says, "How About I Give You Dimes For Dollars, And We Can Call It Even?", "Oh Snap," comments Corktownyuppie

[jtf1972]

Every time I have seen a situation similar [[although admittedly not as large) it never seems to deter the creditors from loaning money. They just alter the terms to their favor even more.

Here they will write off any losses and loan, loan again. It's what they do.

It's like a rapist. A rapist doesn't stop raping just because he rapes the wrong person and gets a disease. He goes to the doctor and then goes back to raping. He'd even rape the same person again.

Let's hope that when all is said and done Detroit actually learns a lesson about how to operate fiscally.

My big fear is that Orr will do his job and do a damn good one, leaving the city stable. Then the same old people who have been running the same old game for the last century get their hands back in the cash drawer and get to start with a clean slate. If the city is forced to liquidate assets, then we may be left with a city in good financial standing, no assets such as the DIA, and a corrupt group passing out credit cards to their friends and family all over again. Rinse, repeat.

[Wesley Mouch]

Let's hope that when all is said and done Detroit actually learns a lesson about how to operate fiscally.

My big fear is that Orr will do his job and do a damn good one, leaving the city stable. Then the same old people who have been running the same old game for the last century get their hands back in the cash drawer and get to start with a clean slate. If the city is forced to liquidate assets, then we may be left with a city in good financial standing, no assets such as the DIA, and a corrupt group passing out credit cards to their friends and family all over again. Rinse, repeat.

The voters of the City of Detroit will get the opportunity through their votes to decide if this will work. The EM is like the emergency room. But you still have to stop smoking, drinking, and driving fast down sidewalks if you don't want to return.

[Cincinnati_Kid]

How will this affect the pensioners? Ultimately, a big part of the debt is legacy costs. Supposedly, pensions are protected, but at some point they will be put on the table. Will they be asked to take cuts in benefits? It's probably going to come down to that.

[compn]

i thought the state was going to split detroit up into smaller cities?
thus eliminating a bunch of the base that detroit uses as leverage to borrow money.

also if the city is only 50 sq miles it wont need such a big bunch of con men stealing from it.

[313WX]

i thought the state was going to split detroit up into smaller cities?
thus eliminating a bunch of the base that detroit uses as leverage to borrow money.

also if the city is only 50 sq miles it wont need such a big bunch of con men stealing from it.

At this point, I'm all for that as well. But that would require changes to the Home Rule Cities Act and the Constitution.

[Packman41]

How will this affect the pensioners? Ultimately, a big part of the debt is legacy costs. Supposedly, pensions are protected, but at some point they will be put on the table. Will they be asked to take cuts in benefits? It's probably going to come down to that.

The pensions are out on the table just as everything else is. Both the General Retirement System [[GRS) and the Police and Fire Retirement System [[P&F) are creditors of the CoD as the funds have unpaid contribution IOUs from the CoD. So, one could ask where the funds stand in the creditor stack and if ALL creditors would be treated equally. If the bond creditors are asked to take, say 20 cents on the dollar, then there would be in a huge uproar if GRS and P&F were offered 30 cents. Fairness would dictate equal treatment to all.

As to “protection” of benefits; that is limited. There are two types of benefits: [[1) the cash payments and [[2) health insurance. While the cash is “protected” the health insurance part is NOT protected by the Michigan constitution. Health benefits comprise about $5.7 Billion of the legacy cost or about 1/3 of the total long-term debt. So, that is left WIDE open on the table and one could expect it would be the first to go.

Some posters have said that the lenders will shun Detroit after a restructuring or BK and others have said they will return. My prediction is that they will slowly return, but not with the CoD doing business as usual. The bond underwriters have seen here in Detroit as well as Stockton, CA, Harrisburg, PA, Central Falls, RI, etc., that far and away the largest issue are the legacy cost of pension funds. Therefore, as the bond underwriters [[and the bond buyers) learn this painful lesson you can expect that they will NEVER lend to another municipality that has a defined-benefit pension fund obligation. I expect to see the underwriters only doing business with borrowers that have 401K type pension plan like the vast majority of private business/industry.

[corktownyuppie]

Therefore, as the bond underwriters [[and the bond buyers) learn this painful lesson you can expect that they will NEVER lend to another municipality that has a defined-benefit pension fund obligation. I expect to see the underwriters only doing business with borrowers that have 401K type pension plan like the vast majority of private business/industry.

Yes, I disagree with the notion that the lenders will be back like drug dealers given another chance to sell to their addict. They may be back, but the rules are gonna change. I expect to see the following:

[[1) Real scrutiny on the ratings agencies about why they didn't catch this earlier.

[[2) "Our pension is fully funded" is meaningless. Real questions about the methodology of arriving at that conclusion will need to be raised.

============

On another note, I read somewhere that just like with the DIA art, one thing that Detroit owns is a lot of its land. Do you think bondholders will accept land as part of [[or in lieu of) part of the debts owed?

[Hermod]

On another note, I read somewhere that just like with the DIA art, one thing that Detroit owns is a lot of its land. Do you think bondholders will accept land as part of [[or in lieu of) part of the debts owed?

If the proposals to "decommission" whole parts of the city were carried out, I would think that large contiguous tracts of land might have some value particularly if the city agrees [[under duress) to "deannex" those portions.

[Wesley Mouch]

How much do the Detroit retiree pension plans have invested in Detroit bonds?

[Packman41]

From CTY:
“Yes, I disagree with the notion that the lenders will be back like drug dealers given another chance to sell to their addict. They may be back, but the rules are gonna change. I expect to see the following:

[[1) Real scrutiny on the ratings agencies about why they didn't catch this earlier.

[[2) "Our pension is fully funded" is meaningless. Real questions about the methodology of arriving at that conclusion will need to be raised.”

Wait, we are both on the same page here. When I said, “..the lenders will be back” I also said but not with “..Business-as-usual.” I meant with the way the CoD is operating now. And that includes everything you listed – including the rating agencies and pension funds. Currently, the SEC is reviewing many municipal/govt. bond offerings [[e.g. State of Illinois) for failing to fully report their financial condition in disclosure reports. So when a posters here blame the bond holders because they should have known better I call bullshit. When did the CoD ever have their books balanced and transparent for all to see?

Also from CTY:
“Do you think bondholders will accept land as part of [[or in lieu of) part of the debts owed?”

Ummmm… NO! The vacant land is worthless who wants to develop anything here without a subsidy? Gilbert got $200 million in subsidies to do his thing here. Magic Johnson was able to buy the State Fair Site for $1. Hantz has to jump through hoops for three years to learn the Council will not let him have an urban farm, but rather a slow-growing hardwood tree forest. And we call that development friendly?? So, no – the land is about worthless and has a high PITA factor to manage it while they try to sell it off. And then pay real estate taxes too?? Take a look at RACER Trust and you will know what I mean.

From Wesley Mouch:
“How much do the Detroit retiree pension plans have invested in Detroit bonds?”

If they had competent investment advice [[that is a BIG if), then they should NOT own ANY municipal bonds, Detroit or otherwise. One of the benefits of a muni bond is that for a taxpayer [[i.e. the bond holder) the interest income is tax free – you have to declare the income, but you are not taxed on this income. So muni bonds carry a somewhat lower interest rate than corporate bonds with a similar credit rating because of this tax free benefit.

As pension funds [[muni, govt, corporate, etc.) collect income from their various investments that cashflow is received TAX FREE. There is no need for a pension fund to buy a tax-free muni bond at a lower rate, because that tax free benefit automatically is part of any investment they buy into.

[Mark Smiles]

IMO, a bankruptcy run by the EM is the most dangerous though because they have little to no interest in looking out for the long term prospects of the city. They are not accountable to the people or re-election so they are more prone to "give away the farm" in a Chapter 9 proceeding.

LAMO. The PEOPLE you speak of, ARE the ones who "gave away the farm", when they elected the politicians who spent more than the city took in.

[noise]

Ah, I see. Headline was not clear enough. Should read:

"Orr Says, "How About I Give You Dimes For Dollars, And We Can Call It Even?", "Oh Snap," comments Corktownyuppie

You were fine. HT misread.

[Wesley Mouch]

From Wesley Mouch:
“How much do the Detroit retiree pension plans have invested in Detroit bonds?”

If they had competent investment advice [[that is a BIG if), then they should NOT own ANY municipal bonds, Detroit or otherwise. One of the benefits of a muni bond is that for a taxpayer [[i.e. the bond holder) the interest income is tax free – you have to declare the income, but you are not taxed on this income. ...snip...

As an owner of some shares in Fidelity Michigan Tax-Free High-Yield Bond Fund [[FMHTX) that should have been obvious to me. Clearly they SHOULD not be invested there -- which only makes the question more interesting. btw, FMHTX has returned 4.41% tax-free annually over the last 10 years. Current yield 3.51% tax-free. Low minimum investments. Fine place for some conservative investing at low risk. They do hold some Detroit bonds. [[$10k min. investment, but I got in on a $250/mo. investment years ago without the min.)

You too can be a evil bondholder!

[Packman41]

You too can be a evil bondholder!

Right!

That is what a lot of people do NOT get. The bonds are generally held by common folks – they are the ones that will be getting cents on the dollar. And these are the same folks that pay taxes that support the cities in the first place.

When posters decry that the banks or “banksters” should take the loss they really are uninformed. Investment Banks are different from commercial banks you see on every other block in town. IBs underwrite the bonds and then sell them off you mutual funds and individual investors. Once the bond issue is fully sold out then the IBs act as a trust officer [[representative) for the bond holders – they are merely middlemen at this point and have no skin in the game. It is the investor; you, your parents or your grandmother that will take the hit and definitely not any “bankster.”

[Wesley Mouch]

.... It is the investor; you, your parents or your grandmother that will take the hit and definitely not any “bankster.”

You mean these people calling bondholders bad names are really complaining about their parents?

[Cincinnati_Kid]

Packman41 seems to be on top of his game. Thx for the information.

[48205to24]

Looks like my discussions with friends will finally change.
Explaining to to city workers and retirees who moved out of the city that a shrinking current workforce and income base will eventually affect their retirement- was similar to talking to a stop sign.
Without workers and income taxes whose going to pay into the system????

Glad I am young enough to start over, cant count on a pension, probably wont have social security. Got a good 40 years or so to save up for the last 30 or 40 years of my life. Considering I dont trust fed, state or local governments, banks, companies, security advisers, etc...hopefully a few eggs in every basket works.

[Hermod]

I just saw the quarterly report of a muni bond mutual fund. City of Detroit general obligation bonds are trading at just around par. The market doesn't seem to think they will be worth dimes on the dollar.

[corktownyuppie]

I just saw the quarterly report of a muni bond mutual fund. City of Detroit general obligation bonds are trading at just around par. The market doesn't seem to think they will be worth dimes on the dollar.

When was the qtrly report published? I see AA+ bonds priced at par on a 4.75% coupon right now. I'm not a muni analyst, but Detroit GO bonds with their B rating can't be priced the same as AA+ bonds. Color me skeptical.

[Hermod]

When was the qtrly report published? I see AA+ bonds priced at par on a 4.75% coupon right now. I'm not a muni analyst, but Detroit GO bonds with their B rating can't be priced the same as AA+ bonds. Color me skeptical.

3/31/13 Oppenheimer Rochester Limited Term Mutual Fund

Detroiit MI General Obligation 5% 2018. The fund owns $2,000,000 face value with a market value on 3/31/13 of $2,001,480.

The largest discount on Detroit GO bonds is 5.375% 2017 which has a face value of $1,535,000 and a 3/31/13 value of $1,477,729.

They hold twenty-two different DWSD bonds all of which trade at significant premiums to their face value.