Some of the best analysis I've seen to date regarding the EM negotiations

[corktownyuppie]

Download it and read it. Very interesting commentary coming from the perspective of a fiduciary/advisor for bondholders. [[*Disclaimer, I work for a firm that works with Blackrock both co-operatively and competitively.) I don't agree with everything they are saying, but it's definitely very enlightening to see what analysts are saying from the perspective of the bondholder [[Detroit bonds and otherwise.)

Of note is the idea we don't hear much about regarding the shockwaves that will be sent through entire municipal bond market given a bankruptcy filing or a pre-bankruptcy settlement.

Of course, it argues that the state should step in and pay the bills otherwise the individual municipalities in the state [[and possibly nationwide) will take on increase in borrowing costs.

I've always thought that Lansing should provide more financial stability for social services in the city...HOWEVER...I also believe that they should be control the money and spend it as they see fit.

Blackrock is arguing that the State is going to pay the price for a Detroit bankruptcy either way...either through higher borrowing costs [[which is probably more politically viable) or via direct bailout and state takeover of not just budgets but individual city operations [[which is politically laughable). Blackrock begs the state re-consider this stance, implying that a bailout that they control will be far, far better than the bailout that will be determined solely by the marketplace and increased borrowing costs.

Of course, Blackrock is saying this not just because of their clients' exposure to unsecured debt. More likely it's because of the chilling levels of temporary illiquidity and volatility of both the secured debt in Detroit, and possibly the entire municipal market nationwide.

[[Translation, your $10,000 bond will still get paid off in full at maturity in 2023, but today's market value just dropped from $12,000 down to $4,000).

===========

I'm actually very excited by all this....reality is reality. The city will continue to shed population if it doesn't improve its service RIGHT NOW. What's good is that this is no longer a point of contention. My take is that city residents are going to get a HUGE uptick in service levels over the next 3-5 years.

But the question is who will pay the costs? Bondholders? Suburbanites? Employees? Retirees? Bond Insurers? All of the above??

I DON'T CARE. I LOVE IT!

[Novine]

Sorry yuppie but you're delusional if you think there's going to be some huge improvement in city services. With what money? On the bond front, Detroit and the state are already taking a hit from Orr's actions. DWSD bonds were downgraded to junk status even though those are backed by the payments by customers. Orr is on a path to burn down the municipal bond market statewide.

[corktownyuppie]

Sorry yuppie but you're delusional if you think there's going to be some huge improvement in city services. With what money? On the bond front, Detroit and the state are already taking a hit from Orr's actions. DWSD bonds were downgraded to junk status even though those are backed by the payments by customers. Orr is on a path to burn down the municipal bond market statewide.

Orr is proposing to use that money that would've been used to pay down debt instead be used for increased services to existing and future residents.

[corktownyuppie]

Considering that debt payments consist of 30-40% of our revenue...that's a pretty seismic shift.

[mwilbert]

To continue with the D-word, Blackrock is delusional if it thinks Michigan is going to make sure that there are continuous payments on Detroit GO debt. Central Falls RI is not a reasonable analog either politically or economically. I think they are also wrong to say that this is primarily a Michigan issue--if GO debt isn't given preferred status [[and legally it is clearly unsecured; there isn't any real justification for it to be given preference) then that is going to have an effect across the municipal market.

I hope that the end result of this is more cash available for city services, but I think we will have to wait and see how things shake out.

[Honky Tonk]

Sorry yuppie but you're delusional if you think there's going to be some huge improvement in city services. With what money? On the bond front, Detroit and the state are already taking a hit from Orr's actions. DWSD bonds were downgraded to junk status even though those are backed by the payments by customers. Orr is on a path to burn down the municipal bond market statewide.

Detroit's Bonds were reduced to junk status long before Orr showed up.

[Novine]

"Orr is proposing to use that money that would've been used to pay down debt instead be used for increased services to existing and future residents."

You still believe in this fairytale? First, Orr isn' waiving all of the bond payments. Even if Orr's plan survives litigation, and I doubt it will, the city would still be making bond payments. Second, as has been discussed in depth here before, the city can't provide the level of services necessary with what it spends today. If it's been financing that funding with borrowing, it's not as if Orr's plan results in "new" money. It will simply be the same level of spending or less in a system that is completely dysfunctional.

[Novine]

"Detroit's Bonds were reduced to junk status long before Orr showed up."

Wrong. The Water and Sewer bonds were just downgraded to junk status.

http://www.freep.com/article/2013070...-ratings-Water

[Honky Tonk]

"Detroit's Bonds were reduced to junk status long before Orr showed up."

Wrong. The Water and Sewer bonds were just downgraded to junk status.

http://www.freep.com/article/2013070...-ratings-Water

I was referring to this article.

http://www.freep.com/article/2012112...estors-Service

[sumas]

never was good with money or investments. Guess I am like the city but not corrupt.

[corktownyuppie]

Ah, yes. The stage of the negotiation where everyone points fingers and calls each other delusional. This is a sign that we're getting somewhere. Unfortunately, this part may also take a few years to get through.

At the end of the day, my belief is that all parties need Detroit to survive and grow in order to get the most of what they want. Sure, they can cite laws and contracts in the negotiation process. But when push comes to shove, the situation only gets worse for creditors the more the city fails...it only gets better for creditors the more the city can get its act together.

Of course, I'm not omniscient in this and may very well prove to be wrong. The only we'll find out is to play it out. I'm just saying that the fact everyone is standing obstinately at the table with their arms crossed is actually a good sign...

...it means that everyone has finally come to the table.

[coracle]

"Of course, it argues that the state should step in and pay the bills otherwise the individual municipalities in the state [[and possibly nationwide) will take on increase in borrowing costs."
No way Jose! That's bs.This would result in an ever increasing never ending commitment and produce a population increase that wouldn't add to the tax base. Investors will be far more selective what cities they buy Bonds from in future, and there will be more money available for municipalities that offer safe Investments. The time to offer to give State funds is when a city shows how it can get by without them and there has been reliable Money Management demonstrated over the years.
I wouldn't want to see my State Tax money shoveled down the same hole the Bondholder's money is disappearing into.

[Huggybear]

Absolutely this is going to change the face of municipal bond sales and insurance. Everybody's borrowing costs are going to go up.

Muni bonds were traditionally sold to investors on the premise that they were tax free and that municipalities could simply raise taxes to pay off the bonds. The second premise has long assumed - incorrectly - that there would be in the future political will or the practical ability to raise taxes. The second premise is belied by the existence of bond insurance and differentiated credit ratings among governments.

And in a sense, maybe it is time to revisit local governments' dependence on bonding. That whole thing seems to be to avoid raising taxes to pay for projects in real time or to avoid gradually accumulating money to do projects. In today's political climate, which in every level of government seems to be simply avoiding any tax increases, budgets are constrained, and debt service crowds out more direct spending on core services. That definitely happened in Detroit.

HB

[Wesley Mouch]

Sorry yuppie but you're delusional if you think there's going to be some huge improvement in city services. With what money? On the bond front, Detroit and the state are already taking a hit from Orr's actions. DWSD bonds were downgraded to junk status even though those are backed by the payments by customers. Orr is on a path to burn down the municipal bond market statewide.

You meant Detroit is on a path to burn down the muni bond market, didn't you?

Blame the drunk for the traffic accident, not the surgeon.

[Honky Tonk]

Absolutely this is going to change the face of municipal bond sales and insurance. Everybody's borrowing costs are going to go up.

Muni bonds were traditionally sold to investors on the premise that they were tax free and that municipalities could simply raise taxes to pay off the bonds. The second premise has long assumed - incorrectly - that there would be in the future political will or the practical ability to raise taxes. The second premise is belied by the existence of bond insurance and differentiated credit ratings among governments.

And in a sense, maybe it is time to revisit local governments' dependence on bonding. That whole thing seems to be to avoid raising taxes to pay for projects in real time or to avoid gradually accumulating money to do projects. In today's political climate, which in every level of government seems to be simply avoiding any tax increases, budgets are constrained, and debt service crowds out more direct spending on core services. That definitely happened in Detroit.

HB

Of course you have to avoid tax increases. Both Detroit AND the State of MI are hanging on by a thread. Actual tax payers in the City have been doing without for a long time and hanging on to the promise that it's going to get better, same with the State. A tax increase in either will push the people on the fence over.

[douglasm]

Huggybear is absolutely right that muni bond sales [[and other municipal financial options) would be hurt by a default UNLESS there is a revenue stream to pay for it.

A coupe of years ago we came too close to having a Public Facility District project go into default carrying the city of Wenatchee [[pop. about 50K) with it. The speculation was that had it gone under, it would have cost any muni project in Wasington about 2%, and if it had taken the city with it, 3%.

The key here is having a revenue stream. In my little town, we put in a complete sewer system and treatment plant to the tune of $11m. Granted we got 68% grant funding [[thank you American Recovery Act....we were "shovel ready"), but the only way to guarentee the funding sources for the other 31% was to show that we would set sewer rates at a point that would assure they got repaid, in this case 225 ERU's at $67.50 per.

[Novine]

"You meant Detroit is on a path to burn down the muni bond market, didn't you?"

Orr is the one who has stopped paying the bills, not the city.

[Wesley Mouch]

"You meant Detroit is on a path to burn down the muni bond market, didn't you?"

Orr is the one who has stopped paying the bills, not the city.

We descend into debating number of angels dancing on the head of a pin.

Sure, Orr stopped paying the bills -- but only because there was no more money to both pay the bonds and pay for basic services.

[Packman41]

"You meant Detroit is on a path to burn down the muni bond market, didn't you?"

Orr is the one who has stopped paying the bills, not the city.

Look, someone had to stop the madness and Orr was appointed as the EM. There is not enough revenue for the CofD to pay all its bills.

Had Orr continued to pay unsecured creditors, then he would not have enough revenue to pay for city services. At least for now there will not be payless paydays.

And Blackrock’s analysis is somewhat self-serving. These are the guys that sell muni bonds to their customers – the actual bondholders, such as your parents and grandparents. They write in their analysis that they were NOT surprised when they were selling bonds that Detroit was in trouble. Blackrock states that the problems of Detroit are “unprecedented” and a “…long time in the making.” They go onto list a long line of facts citing Detroit’s social and economic issues.

But knowing all along how bad the economic conditions were in Detroit they now claim surprise when the “full faith and credit” pledge of the CofD is broken. Well, maybe they should have done some real due diligence a long time ago. Their analysis has a touch of CYA to it.

Blackrock also states that Orr’s plan relies too much on the insurers that guaranteed the unsecured CofD bonds. Well, isn’t that what insurance is for? So the insurers took the premiums and thought they would never have to pay out? Maybe the insurers will underwrite their risks more closely next time.

Now Blackrock is trying to use some leverage [[fear-mongering) and imply that muni-bond financing costs could increase for the all citizens of Michigan if they do not stop what is happening in Detroit. Let me tell you that costs of borrowing will increase anyway – with or without the aid of the citizens of Michigan. Many municipalities across the country have over-borrowed and are in trouble.

We all know Detroit’s finances are in the toilet. But, let’s put things in perspective and do some math. Detroit’s outstanding debt ranges between $15 and $20 BILLION – so let’s call it $17.5 BILLION for now. With a population of 701,475 people that means Detroit has a per capita debt load of $24,947. Meanwhile, the USA has outstanding debt of $17.5 TRILLION shared by a population of 316,300,000. That is a per capita debt load of $55,327 – more than DOUBLE the per capita debt load of Detroit.

Do you see now why Blackrock is worried about the muni-bond market? Detroit could just be among the first dominos to fall. Blackrock and the insurers might not be able to stop the contagion.

[nain rouge]

Meanwhile, the USA has outstanding debt of $17.5 TRILLION shared by a population of 316,300,000. That is a per capita debt load of $55,327 – more than DOUBLE the per capita debt load of Detroit.

Now stop it. Everyone knows Detroiters are ignorant and vote for crooks. but not us. So are you really going to tell me that Joe in Livonia or Sally in Rochester Hills are supporting an even bigger mess in Washington? Nonsense. We're fiscally responsible. It's those Detroiters that need to get it together.

I know, I know... you're about ask, "Well, what about Allan Park? Hamtramck?" Well, there's a simple answers. It's all the Detroiters that moved to those cities and voted for crooks that are responsible for the messes in those suburbs. In fact, I can't think of many problems I can't blame on Detroit.

[Hermod]

Now stop it. Everyone knows Detroiters are ignorant and vote for crooks. but not us. So are you really going to tell me that Joe in Livonia or Sally in Rochester Hills are supporting an even bigger mess in Washington? Nonsense. We're fiscally responsible. It's those Detroiters that need to get it together.

One big difference. The feds own the printing press and can legally create money. That is why China can't afford to demand payment on US Treasuries. If they do, the US can just crank out a few trillion dollar bills and pay off the bonds. They are denominated in "dollars", not in gold. Of course that mean virulent inflation. The mayor, clownsil, and EM in Detroit cannot legally print money.

[313WX]

One big difference. The feds own the printing press and can legally create money. That is why China can't afford to demand payment on US Treasuries. If they do, the US can just crank out a few trillion dollar bills and pay off the bonds. They are denominated in "dollars", not in gold. Of course that mean virulent inflation. The mayor, clownsil, and EM in Detroit cannot legally print money.

Even if Detroit could print its own money, no person in their right mind would invest in Detroit's treasuries. If Detroit were a country, it would be equivalent to a 3rd world nation.

[corktownyuppie]

I'm gonna stay out of the debate about city debt vs. federal debt. But in the spirit of elevating the debate to more informed positions, I'd like to add that looking at debt on a per capita basis -- while not technically wrong -- is a very superficial and fairly unusable point of data.

Debt numbers are more useful when placed in comparison to other numbers.

For example...is $300,000 per capita a lot of debt?

...what if per capita income is $1,000,000?
...what if per capita income is $40,000?
...what if there is $600,000 in collateral backing the debt?
...what if there is $30,000 in collateral backing the debt?
...what if per capita income is growing by 10% per year? Does that change things?
...what if per capita income is shrinking by 10% per year?
...what if the collateral is growing in value by 10% per year?
...what if the collateral is shrinking in value by 10% per year?
...how quickly are we paying the debt off?
...what percentage of our monthly revenue is required to pay our debt?

Debt vs. income
Debt vs. collateral
Growth rate of income vs. Growth rate of Debt
Growth rate of collateral vs. Growth rate of Debt

These things are all crucial to understand in order to really get your arms around the issue of debt.

For example, US Debt to GDP Ratios are btwn 80-100% and rising. But Japan Debt to GDP Ratios are 220% and rising. Greece was at something absurd like 400% and rising. Germany is somewhere around 60%

I'll leave it to scholars to decide whether or not US debt ratios are approaching a point of no return. But I can tell you this:

If income is shrinking, collateral is shrinking, debt is growing, and rates are rising...you're going to hit a wall. Detroit has hit that wall, and none of the creditors are going to get paid unless income and collateral grow. Yes, there is a conflict of interest of who's going to lose how much in the process. But at the end of the day, everyone stands to gain from Detroit's finances stabilizing, which can only happen when population stops dropping, and the economy starts growing.

[compn]

Of note is the idea we don't hear much about regarding the shockwaves that will be sent through entire municipal bond market given a bankruptcy filing or a pre-bankruptcy settlement.

Of course, it argues that the state should step in and pay the bills otherwise the individual municipalities in the state [[and possibly nationwide) will take on increase in borrowing costs.

should we be encouraging municipalities to borrow money like detroit?

maybe the increase in borrowing costs will keep down wasteful spending.
detroit didnt get itself into this hole by itself.
banks were more than happy to sign any check they could for detroit.

but like what we saw happen with the tarp bailout and the wallstreet bailout. banks wont get any repercussions and the taxpayer will pay it in the end.

[corktownyuppie]

should we be encouraging municipalities to borrow money like detroit?

maybe the increase in borrowing costs will keep down wasteful spending.
detroit didnt get itself into this hole by itself.
banks were more than happy to sign any check they could for detroit.

but like what we saw happen with the tarp bailout and the wallstreet bailout. banks wont get any repercussions and the taxpayer will pay it in the end.

Hey, I'm not siding with the analysts on that point. I, for one, wouldn't philosphically mind if Detroit rips the muni market apart, because I think that municipal financing standards are totally ridiculous. But the only result would be that all the money would flood toward the highest credit entities [[Oakland County could see its rates actually go down) while the middle and lower end of the market see rates skyrocket. In the meantime, munis would go through a liquidity crisis that would [[temporarily) see prices drop 30% for a few months to a year.

All of these things would make my personal life difficult. Plus, I'm not sure if the result we want is for the richest counties to get the lowest rates while everyone else suffers.

Not sure if there's an optimal answer here.