Detroit is bankrupt
The article says it’s the largest city in the US to ever file for bankruptcy, but New York came mighty close in 1975. I know, because I owned a very small NYC bond at the time, and I remember the crisis well:
Rohatyn and a deputy were referred to as the “Batman and Robin of New York.” The legendary Lazard banker talked to Quartz about his worries that the same tools he used might not be available in Detroit.
“We couldn’t do this today,” says Rohatyn. “The various stakeholders are no longer around the same table.”
He’s referring to three major breakthroughs that helped refinance the Big Apple. First, municipal unions, as well as conceding pay cuts, used their pension funds to invest in the city. Then big Wall Street banks, which owned a lot of New York municipal debt and therefore had strong incentives to cooperate on restructuring, agreed to defer loan repayment and underwrote new securities on the cheap. And despite President Gerald Ford’s famous message to New York, pressure from Congress””and even from foreign governments fearing a default””led to federal guarantees on the city’s debt…
The Motor City is in a different position. Today’s weaker unions aren’t able to make the kind of investments they did four decades ago. The financial sector is not entwined in Detroit’s problems, and the city’s debt is in the hands of a far greater number and much more diverse cast of investors, making consensus on restructuring much harder. It’s also not clear that today’s Congress, let alone foreign leaders, would be interested in bailing out America’s 18th-largest city. And on top of all that, Orr faces ongoing strife between the city’s Democratic council and the anti-union Republican governor who appointed him, not to mention citizens upset at losing control of their beleaguered city.
By the way, one of the things that arguably may have helped lead to NYC’s financial troubles back then was none other than ye olde Cloward-Piven strategy:
Cloward-Piven’s early promoters cited radical organizer Saul Alinsky as their inspiration. “Make the enemy live up to their (sic) own book of rules,” Alinsky wrote in his 1971 book Rules for Radicals. When pressed to honor every word of every law and statute, every Judeo-Christian moral tenet, and every implicit promise of the liberal social contract, human agencies inevitably fall short. The system’s failure to “live up” to its rule book can then be used to discredit it altogether, and to replace the capitalist “rule book” with a socialist one.
The authors noted that the number of Americans subsisting on welfare — about 8 million, at the time — probably represented less than half the number who were technically eligible for full benefits. They proposed a “massive drive to recruit the poor onto the welfare rolls.” Cloward and Piven calculated that persuading even a fraction of potential welfare recipients to demand their entitlements would bankrupt the system. The result, they predicted, would be “a profound financial and political crisis” that would unleash “powerful forces for major economic reform at the national level.”…
Cloward and Piven recruited a militant black organizer named George Wiley to lead their new movement. In the summer of 1967, Wiley founded the National Welfare Rights Organization (NWRO). His tactics closely followed the recommendations set out in Cloward and Piven’s article. His followers invaded welfare offices across the United States — often violently — bullying social workers and loudly demanding every penny to which the law “entitled” them. By 1969, NWRO claimed a dues-paying membership of 22,500 families, with 523 chapters across the nation.
Regarding Wiley’s tactics, The New York Times commented on September 27, 1970, “There have been sit-ins in legislative chambers, including a United States Senate committee hearing, mass demonstrations of several thousand welfare recipients, school boycotts, picket lines, mounted police, tear gas, arrests – and, on occasion, rock-throwing, smashed glass doors, overturned desks, scattered papers and ripped-out phones.”These methods proved effective. “The flooding succeeded beyond Wiley’s wildest dreams,” writes Sol Stern in the City Journal. “From 1965 to 1974, the number of single-parent households on welfare soared from 4.3 million to 10.8 million, despite mostly flush economic times. By the early 1970s, one person was on the welfare rolls in New York City for every two working in the city’s private economy.” As a direct result of its massive welfare spending, New York City was forced to declare bankruptcy in 1975. The entire state of New York nearly went down with it. The Cloward-Piven strategy had proved its effectiveness.
IMO the bond holders will be stiffed but Detroit’s public pensioners and the contractors, well connected no doubt, will be bailed out by DC. The FED is still buying $85 billion in T-notes and mortgage backed securities each month. So bailing out this sink hole will be viewed as small potatoes. I think its safe to predict Republicans will be blamed for its self-inflicted demise and it will be labeled racist not to save the city So they’ll cave and agree to float the city $20-30 billion in unsecured loans.
However, an ever increasing number of bankrupt counties, towns, cities, and then states will be standing in line with their hands out. This will not end well.
The parasites became to numerous and killed the host.
Things that can’t go on forever don’t.
Parker…
Your proposal is exactly what Detroit HAS been trying to pull off.
It didn’t fly.
Heads are exploding all over the motor city as a consequence.
(All money bills have to come out of the House.)
BTW, if the House caves on Detroit… then an OCEAN of Democrat strongholds will be lined up to get theirs.
Bankrupt municipality = Democrat voting bastion
The real deal maker: “Nice suburbs…. Real shame if something was to happen to them”. Danegeld disguised under stacks of wonk-talk.
Detroit may seem like a Cloward-Piven scheme, but I would suggest it is just the result of democrat fiscal policies. The democrats, if unrestrained, always turn to kleptocratic tribal government that fleeces the taxpayers and distributes the spoils to their favored cronies. (Tribesmen.) In a free country where the taxpayers can vote with their feet, Detroit is what will happen. The “Golden Goose” shrinks so much that the golden eggs can no longer pay the bills. (The shrinkage has begun in California.) This happens because the democrats know nothing about how to keep the “Golden Goose” healthy and flourishing. They think the “Golden Goose” will just keep producing because they want it to.
Detroit has been ruled by democrats since 1961. For more on that see this: http://frontpagemag.com/2013/arnold-ahlert/toxic-government-by-democrats-detroit-2/ The typical democrat fiscal policy held sway for lo these many years. And now they are reaping the rewards. Unfortunately, it is just such policies that the Obama administration is trying to implement on a national scale. If the democrats succeed on a national scale, the USA’s eventual fate will be the same as Detroit’s.
J.J.:
I wasn’t meaning to suggest that Detroit is a result of Cloward-Piven, except in the most general sense. I was giving historic background for what happened in NY.
There is a reason winos keep their bottle in a brown paper bag. They don’t want to know when the end is coming.
Thanks for making me chuckle Mr. Frank. The long term debt addiction that has kept the economy afloat is like drug addiction.
Blert,
The House will cave. And the line will grow long indeed over the next few years.
I have to disagree with everyone who blames this solely on Democrat government.
The past and present day Republicans are as much responsible for this ongoing BS as the democrats who ran the city into the ground. They might not spend the money themselves, but they keep the money flowing into the same hands and help insure that their biggest donors and cronies never lose.
The idea that bond investors should be bailed out is a real problem. Anybody who invests in municipal bonds and municipal bond funds can see Detroit has been listed as junk bond status and worse, for years, trending down-not up. They invest at their own “risk”, chasing the highest returns. The highest returns are for California, Illinois, Ny, etc. the most financially irresponsible and indebted places.
If the republicans were actually principled capitalists as a group, there would be no bailout, and far fewer investors willing to put their money at risk in the future. But they know they can have it both ways, and continue to dump money down rat holes like Detroit. Fund managers have bought and paid for the McCain’s and Boner’s of the world, as well as the democrats. I’m pretty sure I have read the majority of big fund managers are democrats themselves.
Bailing out investors and claiming its the right thing to do, for the sake of the people who have these bonds in their retirement funds, gives all the politicians cover. Brokers and fund managers know the more people invested in these crappy things makes it easier for the politicians to justify the bailout. Nowadays, Investing in municipal bonds and municipal bond funds almost seems like a perfect scam.
southpaw says, “Bailing out investors and claiming its the right thing to do, for the sake of the people who have these bonds in their retirement funds, gives all the politicians cover. Brokers and fund managers know the more people invested in these crappy things makes it easier for the politicians to justify the bailout. Nowadays, Investing in municipal bonds and municipal bond funds almost seems like a perfect scam.”
In the case of Detroit it will be the same as it was with GM, bond holders will be holding an empty bag. But, I agree that repubs on the whole have been as irresponsible as the dems. We liquidated the muni & state bond portion of our portfolio in 2006 and invested the money in commodity futures, the currency markets, and OZ bonds. So far so good, but paper is paper and there is no safe haven in a manipulated global ‘economy’.
There’s a segment in the movie, “Goodfellas,” where the restaurant owner asks Pauly to come in with him as a partner, and Pauly and his gang proceed to bleed the business dry.
Southpaw…
I WAS a broker, I sold similar bonds…
That crowd is NOT Republican.
Wall Street is mostly Democrat — GS at the top of the list.
Wall Street LOVES big government — and LOVES Democrat borrow and spend policies. The borrowing part is its business.
The typical Republican investor doesn’t stump up any money to buy these bonds, anyway.
They are popular with classic Democrat money groups: doctors, attorneys, etc.
Republican investors go for stocks — or leave the money in the bank to collect interest.
Munis only pencil out if you’re in a top tax bracket — like doctors and attorneys.
Your thesis is counter-factual, but a common one on the street.
Apple
Intel
Microsoft
Google
Goldman Sachs
General Electric
and many, many, others are massively Democrat.
Google is even a part of the 0bama administration — by way of his czars and gaming the vote. (see The Atlantic 2012)
Generally, big business is Democrat.
Republicans did NOT fund Detroit via the muni bond market.
Lastly, the political leanings of the brokerage houses ARE absolutely considered when the deals are struck. You’ll find the exact same line-ups year after year.
A Democrat run city will ONLY use a Democrat leaning broker — which will syndicate with other, like minded, brokers.
Cities come and cities go. A trip to Israel is instructive. The landscape is dotted with tels, i.e. buried towns built on top of garbage dumps that are 7,000 years old.
Detroit will be a tourist attraction in the distant future, just like the site of Cahokia is today.
blert, Thanks for the inside view of Wall Street. I read a lot of investment stuff and it’s obvious to me that most of that crowd are democrats. They love big government. They’re the ones who rake in the fees for doing these municipal bond offerings.
The only people who are owning Detroit munis these days are people who buy junk bonds. Not many widows and orphans in those stinkers.
This is what we lost: Detroit’s magnificent River Rouge plant in its heyday.
http://tinyurl.com/lt2eg9l
If you’ve never seen this marvel, which makes the Pyramids look like a sixth-grade classroom project, watch the clip.
And the Left has destroyed it. Utterly, and in a matter of decades, they’ve demolished the city that used to be the pride and jewel in America’s industrial crown.
Cloward and Piven are evil to the core, and I mean that literally. Nazis, both of them. And they flourished like the green bay tree. The bitch is still alive, but the bastard is dead.
Another magnificent achievement: the Willow Run plant, the largest building under one roof in the world, which was one of the main engines of the Arsenal of Democracy in World War II.
Remember that? Remember reading about it in school? I bet almost no “US person” under 30 has ever heard the expression.
The Willow Run plant assembled a bomber plane every 55 minutes. Said planes had over One Million Parts. You can see that one on Youtube also.
It sickens and enrages me, this relentless destruction by the Left of everything fine and splendid about MY COUNTRY, Goddammit.
I’ve read that the Wall Streeters gave 75% of their donations to Bozo in 2008. Big Biz + Big Guv = Big Power.
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Beverly, Willow Run and River Rouge are symbolic of the Golden Goose that democrat fiscal policies kill. Man’s hard work, ingenuity, and willingness to take risks laid waste by higher taxes, more regulation, and the belief that no matter how stupidly government acts, the marvels of man’s ingenuity and risk taking will continue to pay them extravagant taxes even while being loaded down with ever more burdensome regulation. It is to weep.
One thing I’ve never understood: Why did ( does?) Detroit turn out such crappy cars? When the Japanese were buying a USA market share during the 1970s -1980s, they did so not only with size and price but with incredible quality and quality control. This went on for years and years as Toyota, Honda, Nissan (Datsun initially) & company made steady gains. Detroit’s response? Freaking Pacers, Pintos, K cars, et. al. They were all just awful cars. I know that people tend to get emotional and defensive about this but as far as I know there is still no American car line that stand up to Japanese quality and value.
It’s almost like we were the victims of some nationwide scam pulled off by the Detroit auto industry. As long as they were able to keep out the Japs with their high quality and efficient products, we suckers didn’t know any better.
The older I get the more I see the truth of that old saw about American car makers being giant pension plan and benefits administrators that just so happen to make cars on the side (and crappy cars at that).
They had decades to correct their course in Detroit and chose not to do so. Too bad, but they certainly don’t deserved to be bailed out by anybody.
carl in atlanta:
My car, a 2010 Fusion, is the first American car I’ve ever bought. I bought it with 35,000 miles on it. Previously, I’d mostly had Volvos and Toyotas, except for a brief spin with a hand-me-down Plymouth Fury from my father during the late 70s, a behemoth of a car way too big for me and which I unloaded fairly quickly.
I’ve had the Fusion for about two and a half years. Knock wood, it’s been a great car, at least as good if not better than my Toyotas (1984 Camry first and then 1998 Corolla). As for the two Volvos (a 1965 and one from the early 70s), although I guess they were safe, they needed almost constant repair.
The Fusion is attractive, extremely comfortable, smooth driving, powerful, and gets good mileage.
Take a look.
Taken from Drudge: If Obama had a city, it would look like Detroit.
The problem with American cars in the past was not because of the American worker. Many Japanese brands are made or assembled in the U.S. If there have to be villains, management and unions would be first in line. With Japanese leadership and non union workers in the U.S., the quality of Honda, Toyota, and Nissan was instantly good.
Current American cars are quite good on quality. If there is a laggard on reliability, it seem German brands have suffered.
Obama already created a city. It was his Chicago.
Neo:
I agree that in the past 8 or 9 years Ford seems to have done a better job than GM and Chrysler re styling and quality control, and I have admired the styling of the newer Fusions. Still, assuming the price to be the same for a comparable Japanese (or even Korean) vehicle – – not likely– I’d choose the Japanese (or Korean). IMHO cars are just too expensive (and they depreciate too quickly) to be worth tthe gamble; bottom line is that I’m reluctant to place my trust ( ans hard earned $!) in any vehicle made in (or by) Detroit.
A vignette (for I too own and American car): Trying to get an inexpensive, safe car for our college age son 4 years ago, we bought him a 1996 Oldsmobile Cierra station wagon from a “little old man” who had apparently taken pretty good care of it. The price was right but I have to say I was shocked the first time I sat in it and noticed just how pitifully and haphazardly the controls buttons knobs, gauges, etc were laid out; everything looked like it was just stuck on as an afterthought ( Example: the “up and down buttons” for the power windows were installed crookedly/askew in the doors. At the freaking factory!). Needless to say, the purchase was a terrible mistake and we’ve had nothing but trouble with this car ( had to have the engine rebuilt last year). On the other hand, we bought our older son a 1995 honda civic over 9 years ago and have never had a bit of trouble with it.
I agree that European cars might be “good” cars ( they certainly handle very well and area lot of fun to drive), but they require an awful lot of expensive maintanance. I’ve had bad experiences with all three Volvos I’ve owned (though they are safe and have wonderfully comfy seats).
I figured I might PO someone who just loves their American car; too bad it was the hostess! Figures. No offense intended.
Report on that status of that Fusion sometime; Ford went up in my estimation when it didn’t accept the post-crash bailout — and I do like their pickup trucks — but I still see them as part of the Detroit rip-off industry. Like all of them, their past sins ( e.g. Pinto, Edsel and all Lincoln and Mercury products) have saddled them with a heavy burden of proof.
Trust once lost is very hard to regain.
UPDATE ON DETROIT:
This was news to me (a friend just sent me the link): http://www.detroitnews.com/article/20130719/METRO01/307190099/Ingham-County-judge-rules-Detroit-bankruptcy-withdrawn-Schuette-appeals
She goes on to rule that it’s the public sector union pension plans that cannot be touched.
What about federal preemption? [And where is it when you need it?]
carl in atlanta: “Why did ( does?) Detroit turn out such crappy cars? When the Japanese were buying a USA market share during the 1970s -1980s, they did so not only with size and price but with incredible quality and quality control.”
Hubris, carl. The U.S. automakers just couldn’t believe that people would buy those little gas sippers (the first Japanese cars were sub compacts) when they were offering “big iron.”
Even if they wanted to change, it was made more difficult because of all their obligations to the unions. Short-sighted management and the UAW were instrumental in keeping the American auto-industry non-competitive for all these many years. Toyota has now passed GM as the largest auto manufacturer in the world.
The Japanese treat business as the Art of War and Miyamoto Musashi’s philosophy combined.
They are extremely serious about success, strength, and getting it done.
Judge Rules That Detroit’s Bankruptcy Is Unconstitutional, Ruling That It “Dishonors” Obama
http://www.detroitnews.com/article/20130719/METRO01/307190099/Ingham-County-judge-rules-Detroit-bankruptcy-withdrawn-Schuette-appeals
J.J. formerly Jimmy J. Says:
July 19th, 2013 at 5:57 pm
“Even if they wanted to change, it was made more difficult because of all their obligations to the unions. Short-sighted management and the UAW were instrumental in keeping the American auto-industry non-competitive for all these many years. ”
Right. And Carl acknowledges it with a glancing blow, but probably doesn’t recognize the full extent to which inertia, government, social, and legal pressure brought the car companies to the point where they were as he notes, describable with some hyperbole as pension plans that produced cars as a sideline.
Did the car companies lack a management voice that would stand up to all the parties and tell it like it was, rather than go along in order to get along, minimize conflict, endure, and sometimes profit big time? Yeah, but the car companies were not proprietorships anymore, and not many men have the courage to tell the US Government in the person of Ed Markey or whomever, to go to hell to his face.
When it pays to hunker down in your niche and collect your payout in a couple of years, rather than fight what amounts to a sociopolitical fight, that is what most non-ideological people will naturally do.
They get, for instance their lawyers to complain that the Japanese are manipulating the yen and hope that someone in government cares. Most don’t. So they try to move on.
The wacky, liberal, judge will be reversed upon appeal.
In any event, Federal bankruptcy judges throw out contract provisions all the time.
The reason that Chapter Nine has been entered is because the money is not there, not because the Governor is mean spirited.
Her judgment consists of basically: this can’t be happening!
blert: “In any event, Federal bankruptcy judges throw out contract provisions all the time.”
As I learned all too well when my old employer went bankrupt. The unions all sued claiming the company was hiding assets etc. The lawyers and accountants went over the books, inventoried the assets, and toted it all up. The pension fund could not meet its promises. The money was given to the PBGC and their actuaries looked it over. They decided who got what part of the remaining assets. In other words, what each retiree’s haircut would be. My observation was that it was done in as fair a manner as possible. That didn’t make it any easier to take. IMO, if the company had filed three years earlier, instead of dragging the failure out and wasting resources, the pension fund would have been in much better shape and the haircuts would not have been as bad. IMO, financial reality is always better dealt with earlier than later.
The awful truth is that those pension contracts are just pieces of paper when the money isn’t there. No bankruptcy court in the country can make them whole. I feel for the Detroit retirees that are going to get their pensions cut, but maybe their plight will be a wakeup call for all Americans. Recognizing our financial problems and dealing with them in a straightforward manner is the only way out.
They need evil Republicans to blame cause otherwise…