Beatdown of COD Pensioners Commences

[Hermod]

While it would be nice to just sock it all to the banks, the fact is...

That very few of the bonds are held by the "eeeeeeevullllllllllll banks". Most of the bonds are held in other pension fund portfolios, insurance company reserves for claims, retirement annuities for individuals, and by investors as a part of the fixed income portion of their holdings. The banks just process the bonds and act as trustees.

[noise]

Well what other option do you suggest? You can't squeeze blood out of a turnip.

Nothing that's in any way appealing, I assure you. Nothing I'd even be comfortable posting here.

Of course, I don't have the answers. I don't live in the city or the state. I just like to stand by my word and think the world would be a better place if we all did.

[noise]

Your point would have tons of merit if two things weren't true:
1) Lots of institutions and governments fail to make good on promises, specifically including debt. When deferring any form of payment by anyone occurs, there is always the risk that circumstances will change and prevent repayment. I am not saying that it is honorable or right, but there is no alternative. The amount of a tax hike or further reduction in services [[i.e. the police) would cause even more people to leave and snuff out downtown's revival. Even if the city decided it wanted to pay all that it owes everyone, I truly don't think it could. If we liquidated every single piece of property the city owns, it would not equal $18B. We need to avoid a Detroit "Treaty of Versailles". You know the treaty that forced post WW1 Germany to pay reparations it could not afford?

2) I remember as a child 30+ years ago that Detroit was losing population. All economic indicators have been steeply pointing downward for at least 3-4 decades. City workers and their unions were aware of that. Detroit's pending bankruptcy is only even slightly surprising in the sense that it took this long. I feel bad for people who will- and they will- lose a good chunk of their retirement money. But they knew it, or were willfully blind to it. I had conversations in econ class at MSU about the consequences of Detroit's downward spiral. Among the consequences? Inability to pay pensions. That was about 1994. Detroit's inability to meet its obligations is not a surprise.

So your two points of contention are as follows:

1) Others break promises, so we should, too.

2) You were smarter than everyone in 1994.

[belleislerunner]

If I was in charge, I would propose

1) All Detroit living pension holders would get 80% of their pensions

2) All Michigan living pension holders would get 60% of their pensions

3) All out of state pension holders would get 25% of their pensions.

No point in the current overtaxed populace supporting out of state leeches.

[noise]

If I was in charge, I would propose

1) All Detroit living pension holders would get 80% of their pensions

2) All Michigan living pension holders would get 60% of their pensions

3) All out of state pension holders would get 25% of their pensions.

No point in the current overtaxed populace supporting out of state leeches.

Really? Leeches? Did they agree to never leave the city or state when they accepted the terms of their employment?

[Hypestyles]

So when are all the scheduled testimonies expected to be over? When is a final decision speculated to take place?

[corktownyuppie]

2) You were smarter than everyone in 1994.

I can't speak for Mikey, and in 1994 I was only 16. But I remember as early as 2003 having conversations with a handful of friends who were in finance talking about the stark likelihood of a bankruptcy.

But it wasn't just because of the financial conditions at that time. In fact, the financial conditions in 2004 weren't great but they were probably sustainable, as long the city residents were willing to put up with piss-poor service levels in every area of municipal operations.

No, the nail in the coffin was the population loss trends over 2 decades, followed by a subsequent acceleration between 2000 and 2003.

So, I side with Mikey in that a bankruptcy filing was not surprising. What was surprising is that it took this long.

[corktownyuppie]

So when are all the scheduled testimonies expected to be over? When is a final decision speculated to take place?

That's not exactly how this works. There are essentially two outcomes I can forsee:

[[1) There's an out-of-court settlement where either pensioners agree that their pensions are limited to whatever is already in the pension fund + some amount that they agree on...or the state agrees to fund some or all of any shortage that might occur if the pension fund is insolvent...or the city agrees on some finite number which they will pay into the fund while being absolved of any responsibility about whether or not the pension fund is solvent. Or some combination of the 3.

[[2) This goes all the way through bankruptcy court, and the judge approves whatever across-the-board settlement that the EM [[on the city's behalf) proposes to clear all the debts. The problem with this is that the court case may take 2 years, then it will likely be appealed all the way to the Supreme Court. So there's a lot of incentive for everyone to get steered into #1.

Either way, this thing is far from over, and if the parties are smart, they take the out-of-court mediation seriously and try to find a deal.

[noise]

I can't speak for Mikey, and in 1994 I was only 16. But I remember as early as 2003 having conversations with a handful of friends who were in finance talking about the stark likelihood of a bankruptcy.

But it wasn't just because of the financial conditions at that time. In fact, the financial conditions in 2004 weren't great but they were probably sustainable, as long the city residents were willing to put up with piss-poor service levels in every area of municipal operations.

No, the nail in the coffin was the population loss trends over 2 decades, followed by a subsequent acceleration between 2000 and 2003.

So, I side with Mikey in that a bankruptcy filing was not surprising. What was surprising is that it took this long.

I agree. I don't think most city workers expected to lose their pensions, though.

[Gistok]

Really? Leeches? Did they agree to never leave the city or state when they accepted the terms of their employment?

Noise.... he makes JoAnn Watson sound like a Mensa candidate...

[steve from virginia]

Keep your eye on the little birdie ...

From Financial Times Alphaville Blog:

Is DIP financing the best option for Detroit?

Guest writer: Bond Girl

Last Monday, the Detroit City Council unanimously rejected a $350m debtor-in-possession [[DIP) financing that would have been arranged and purchased by Barclays. Detroit’s state-appointed emergency manager, Kevyn Orr, has aggressively championed the deal as a means of releasing the city’s casino revenues, which are a stable and recurring resource that could be applied to eliminating blight and improving city services.


In 2009, Detroit pledged the casino revenues as collateral on its outstanding interest rate swap agreements, which at the time were subject to termination due to the city’s deteriorating credit. The swaps had been executed in 2005 as a means of hedging certificates of participation that were issued to shore up the city’s pension funds.

One of the many bizarre twists in Detroit’s bankruptcy filing is that the pension certificates were positioned as unsecured obligations while their hedges were positioned as secured obligations. Proceeds from the DIP financing, structured as two separate loans, would provide $230m to settle the out-of-the-money swaps at roughly 75 cents on the dollar [[this loan is called the Swap Termination Note) and $120m for service improvements [[the Quality of Life Note)

The city council’s rejection of the DIP resolution was largely dismissed as a symbolic gesture intended to send a message to the bankruptcy judge. Under the state’s emergency management law, the council has seven days to offer an alternative plan to the emergency financial assistance board. The council has not yet produced an alternative plan. According to the Bond Buyer, the emergency financial assistance board has 30 days to consider the proposals that have been submitted and determine “the one that best serves the interest of the public in that local government.” Whatever proposal survives the process must also be approved by the bankruptcy court.

The city council’s concerns about the DIP loan are hardly misplaced. The terms are extraordinarily rich. The city risks a penalty interest rate and acceleration in the event of default, and the term sheet details dozens of events of default. The structure appears to assume Detroit will have affordable market access at a later date, which most market participants would agree is optimistic. Finally, the city could perhaps obtain a more favorable outcome by challenging the secured status of the swaps in bankruptcy court.

Contrary to what Orr and some in the local media suggest, there is nothing inevitable about Detroit obtaining DIP financing – a point demonstrated by the fact that the use of DIP financing has until now only been a species of corporate lending and is unprecedented in Chapter 9. More responsible alternatives do exist. Unfortunately, the ideal arrangement involves the inconvenience of leadership at the state level.

* Bond Girl has long been one of FT Alphaville’s favourite commentators on all things munis. She worked in public finance for ten years, will soon be a state government official, and tweets as @munilass.

Debtor in possession financing is not a good deal for the city because the terms of the loan are harsh and there is no margin for error.

Orr's suggestion that the returns are for, "eliminating blight and improving city services" is false, it is to provide some short term cash to keep the city government open.

Keep in mind at all times that Orr is the agent for the governor, not the citizens of Detroit. His job is to insulate the Governor's office and the [[bankrupt) State of Michigan from Detroit's distress. This DIP loan is part of the process ... as well as part of the problem.

[corktownyuppie]

Keep in mind at all times that Orr is the agent for the governor, not the citizens of Detroit. His job is to insulate the Governor's office and the [[bankrupt) State of Michigan from Detroit's distress. This DIP loan is part of the process ... as well as part of the problem.

I agree with everything Bond Girl wrote.

And yes, better terms for the city exist with increased involvement from the State. Let me translate this into layman's language.

"If the state were willing to use its AAA credit to issue the bonds and lend the $350MM to Detroit, this would be a much better deal for the city and cost far less interest for its residents."

But here's the problem. Even if that's what Snyder wanted to do, he doesn't have the authority to make that deal happen.

Here's the the other problem. If you convince the state legislature to help finance the bankruptcy, they're going to want even more operational control over how it's spent.

You think it's bad with an Emergency Manager? Imagine if the EM needed to have every spending decision go through the State Legislature? It would be as bad as City Council, just in the opposite direction.

The DIP financing is not a good deal for Detroit. It's just the best among lots and lots and lots of far worse alternatives.

[BankruptcyGuy]

I am unaware of any bond issuance since the creation of the planet that didn't have penalties in the event of default.

The holders of secured debt eat first in bankruptcy, even in front of pensioners. She writes that the city "perhaps could obtain a more favorable outcome." They could also obtain a worse outcome: paying the secured bondholders 100 cents on the dollar, or losing the cash flow stream.

So if the secured debt holders are paid at a discount, it's a net savings for Detroit. It is Monday morning quarterbacking, and nothing more, to say that there is some magical better deal out there.

[Hermod]

It is Monday morning quarterbacking, and nothing more, to say that there is some magical better deal out there.

On Halloween, the Great Pumpkin will rise up out of a pumpkin patch and bring the kiddies in Detroit enough cash to pay all their debts.

[steve from virginia]

@Bankruptcy,

No deal is better than this deal, this is swimming w/ crocodiles.

[Wesley Mouch]

If I was in charge, I would propose

1) All Detroit living pension holders would get 80% of their pensions

2) All Michigan living pension holders would get 60% of their pensions

3) All out of state pension holders would get 25% of their pensions.

No point in the current overtaxed populace supporting out of state leeches.

How mean of you to discriminate against people whose lives have taken them somewhere other than Detroit or Michigan. So someone who moves to Milwaukee to care for a sick relative gets 25%?

[BankruptcyGuy]

@Bankruptcy,

No deal is better than this deal, this is swimming w/ crocodiles.

I don't know what reptiles you're referencing, but they do have an existing deal. It's about 500 bp higher in rate, and has a swap breakage fee of several hundred million dollars. If you default on it, you lose 100% of the casino revenue cash flow.

The choice isn't this new deal or nothing; it's this new deal or the KK deal.

[steve from virginia]

What do you think is going to happen w/ the Barklays' deal?

This is a payday loan for a city.

By itself DIP is ... a non-sequitur.

[BankruptcyGuy]

The loan [[which isn't a DIP loan, as the term is used--it doesn't fund operating losses and get a priority interest in new collateral) will be approved. There is no alternative available, and doing nothing doesn't work [[as the City has recently discovered).

Think about how bad a deal for the City the current deal is: paying 500 bps over market rates, and pledging your only real source of income to cover it. That's real money, and real services that could be funded, through the cost savings of a new deal.

[steve from virginia]

If nothing is done, the state of Michigan has to continue to borrow in Detroit's place.

Lansing is just as responsible for this mess as Detroit, they can afford to continue to fund city operating costs and not push anything.

Why should the EM take anyone's assertions at face value, particularly the bankers?

Remember Keynes' famous remark: "if you owe a hundred pounds you have a problem, if you owe the bank a hundred million pounds the bank has a problem'. With the city owing some unknown number of billions, there are plenty of problems to go around.

A half-percentage point isn't good enough to put at 'risk' one of the few streams of revenue that flows from outside Detroit and dangle it like a pinata over the bankers.

Believe it or not, after $8+ trillions in bailouts since 2008 the bankers don't need the money. Because for sure, they will whine about not being paid enough and demand that Detroit workers surrender their pensions.

Right now, Orr is sock puppet for Michigan forgetting for a moment that he has a duty to the city.

https://www.google.com/search?q=barc...ient=firefox-a

Barclays = libor rigging, energy price fixing, money laundering, etc.

[Wesley Mouch]

If nothing is done, the state of Michigan has to continue to borrow in Detroit's place.

Lansing is just as responsible for this mess as Detroit, they can afford to continue to fund city operating costs and not push anything.

...snip...

Your hate of the bankers here blinds you to reality.

Sure, they could keep paying stupid money. And they might have to pay for some things like pensions to some degree. But they could also keep service levels in the sewer where they are.

I'm OK with heading farther towards collapse of Detroit finances. Let the house all collapse. But there will be a price to pay in crappy living conditions.

So are you OK with screwing bankers even if it screws the citizens too?

[Hermod]

I am wondering:

Could you make the legal argument that the trustees of the two pension funds have "diminished" them in violation of the state constitution by paying out the "thirteenth check" and by unwise and imprudent investments of the funds assets?

Could you reduce the amount of the monthly retirement checks to take into account the diminished value of the fund due to the payment of the thirteenth check?

Possibly some legal arguments here.

[Hermod]

So are you OK with screwing bankers even if it screws the citizens too?

Most of the bonds are not held by the banks. The screwing of the bondholders will be felt by retirees, pension funds, and insurance reserves. They are the ones who will get screwed. The banks are only collection agents for the ultimate bond holders [[TIA, I have some DWSD revenue bonds in my retirement portfolio).

[BankruptcyGuy]

I am wondering:

Could you make the legal argument that the trustees of the two pension funds have "diminished" them in violation of the state constitution by paying out the "thirteenth check" and by unwise and imprudent investments of the funds assets?

Could you reduce the amount of the monthly retirement checks to take into account the diminished value of the fund due to the payment of the thirteenth check?

Possibly some legal arguments here.

Yes, that is an argument that can and will be made. It likely already has been presented through the mediation that's already occurred.

[BankruptcyGuy]

If nothing is done, the state of Michigan has to continue to borrow in Detroit's place.

Lansing is just as responsible for this mess as Detroit, they can afford to continue to fund city operating costs and not push anything.

Why should the EM take anyone's assertions at face value, particularly the bankers?

Remember Keynes' famous remark: "if you owe a hundred pounds you have a problem, if you owe the bank a hundred million pounds the bank has a problem'. With the city owing some unknown number of billions, there are plenty of problems to go around.

A half-percentage point isn't good enough to put at 'risk' one of the few streams of revenue that flows from outside Detroit and dangle it like a pinata over the bankers.

Believe it or not, after $8+ trillions in bailouts since 2008 the bankers don't need the money. Because for sure, they will whine about not being paid enough and demand that Detroit workers surrender their pensions.

Right now, Orr is sock puppet for Michigan forgetting for a moment that he has a duty to the city.

https://www.google.com/search?q=barc...ient=firefox-a

Barclays = libor rigging, energy price fixing, money laundering, etc.

The State of Michigan's only arguable obligation is to accrued pension benefits. As I've indicated, if the state is forced to pay to support those benefits, it almost unquestionably will come in legislation that also takes over all pensions. And it will likely freeze those pensions, as is in Orr's proposal.

500 basis points [[sorry for the technical term) is equal to 5%. The rate is approximately 3 and 1/2 times as high as it would be without the swap.

If I read the numbers correctly, the unsecured bondholders would get 10 cents on the dollar on their interests. Even if they got 0, that wouldn't pay for much of the pension shortfall. Or are you suggesting that secured creditors should not get their security in the event of default?