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Detroit Eligible To File Chapter 9; Pension Haircuts Allowed Bankruptcy Judge Rules
Update, and it's official:
- JUDGE: DETROIT ELIGIBLE FOR IMMEDIATE BANKRUPTCY PROTECTION
- DETROIT TO REMAIN UNDER BANKRUPTCY COURT PROTECTION, JUDGE SAYS
As somewhat expected - though hoped against by many Detroit union workers - Judge Steven Rhodes appears to have confirmed Detroit is eligible for bankruptcy protection (after pointing out that the city's accounting was accurate and it is indeed insolvent) making this the largest ever muni bankruptcy.
- JUDGE RHODES SAYS HE WILL ALLOW PENSION CUTS IN DETROIT'S BANKRUPTCY
- DETROIT JUDGE: NOTHING SEPARATES PENSIONS FROM OTHER DEBT
The city will now begin working toward its next major move - the submission of a plan to re-adjust its more than $18 billion in debt - including significant haircuts for pension funds (possibly 16c on the dollar recovery) and bondholders. With Detroit as precedent, we can only imagine the torrent of other cities in trouble that will be willing to fold.
He did provide an "out" though:
- RHODES WARNS THE CITY THAT JUST BECAUSE PENSION RIGHTS CAN BE IMPAIRED, DOESN'T MEAN HE WILL APPROVE A PLAN WITH STEEP CUTS
Via Bloomberg,
Before the bankruptcy, Orr proposed canceling $3.5 billion in future pension obligations and at least $1.4 billion in unsecured bonds. The debts would be replaced with a $2 billion note paying 1.5 percent interest.
But, of course:
Detroit must ask “what is necessary to invest to attract business?” Spiotto said in a phone interview. “If you don’t solve the systemic problem, you are just going to repeat it.”
Summary from Reuters:
Detroit is eligible for the biggest municipal bankruptcy in U.S. history because the city is broke and without Chapter 9 bankruptcy would continue on the path that has led it to insolvency, a federal judge ruled on Tuesday.
The judge also ruled that while the city did not negotiate in "good faith" with creditors, there were too many of them to make such negotiations practical.
Appeals are expected, but the ruling by U.S. Judge Steven Rhodes sets the stage for Detroit to file a plan of financial readjustment by March 1. The city's attorneys said they were not sure if the filing would occur before the end of the year.
The ruling came 25 days after the end of an eligibility trial during which Detroit's labor unions, retirees and pension funds argued against the city's July 18 bankruptcy filing.
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Trust me, the gov't will find some way to kick this can down the road--they aren't ready to let it all fail, YET!
Oh, it's close. The can has become too heavy to kick anymore.
Unless Obama increases the defict and bails out the states.
Bingo on the bailout.
Nonsense, he won't bail out the states. He's got his buddies at the 'morgue and goldy sacks to worry about... they promised him to whisk him out of the country on their gulfstream G650's over to Luxembourg and/or the Cayman's to pick up some multi-year vacation money.
Wait a second....
Are you suggesting that if you let the private sector die and allow your corner of the world to devolve into a crime-ridden shithole, you might not get your government-guaranteed pension?
That's Bullshit!
What????? My $10k/month pension is now only $1600 per month?
No. It's $160 a month. It's about what you actually paid in.
Yes, before taxes.
Finally. Functional capitalism...at least until bama prints some freshy's for the union folk.
If you want your pension you can keep it.
Or at least 16% of it.
JPM will manage what's left of it like EBT cards.
They should have put caps on public pension amounts long ago. The tricks used to boost pension amounts the last 3 years working were criminal.
I always Said 48,000 cap was fair. No matter how important you think you were. But must say I'm liking 16¢ even better. Can't imagine What ZERO public pension will feel like.
So they pay into a pension all their lives and now won't get back what they paid in for?
This isn't a game where you get your life reset so you can play again
I think you are leaving out the other 95% of the story.
Well, they probably will get what they paid in, what was it? something like 2-3% of salary? It's the idea that everyone gets a $50-100K (or more) per year pension for 30 years that mathematically wasn't going to happen.
I'm curious what the rate of return will end up being for state worker contributed funds... I'm guessing not that bad, all things considered, even @ $.16/1.00.
Does the saying "I'll gladly pay you tomorrow for a hamburger today" ring true?
If its too good to be true, chances are good it isn't.
Tuesday!! It's pay you on Tuesday for a hamburger today (ergo. C U Next Tuesday). ;)
that's total horsemeat .... yeah really it is ... /snark
you don't say racer. but every one of those pieces of garbage haven't had a shred of sympathy for the average taxpayer while they sit on their side of a bulletproof glass partition, smiling sweetly and saying, 'that will be 8000 dollars' for some imaginary infraction. i didn't see a single cop, teacher or fireman object as private citizens got their businesses, jobs and pensions destroyed. what makes them so special? cause obama keeps telling you they are special?
That $1 you HOPE for, just became 16¢ CHANGE
Deficits don't matter.
Paul Krugman is so proud.
According to him, the problem will be lack of debt. You see, if only Detroit had more debt, it would mean it would have spent a lot which means everything is OK when that happens. In Krugman's world, it's all about quantity, quality matters not.
This is how debt assets get destroyed and dollar supply is reduced. Now every portfolio holding Detroit debt assets has to re adjust their values and their follow on leverage used to purchase stocks, etc. This is how the party starts.
This event, which will spawn many ledger losses, is of the type & kind that requires the Fed, in a debt-dependent & driven economy, to print larger and larger batches of fiat, in order to plug the recurring holes in the fiscal fiat dam, and delay the flood that would show the emperor as naked.
Bond holders shouldn't get a better deal than pensioners......
If the inverse is also true...
Agree.
Exactly. Treat them the same. Since bondholders are going to get screwed, so do pensioners.
Unless you're a derivative creditor...
No they shouldn't but they will. America is already a banana republic and in another 10-15 years there will be 10-20% of the popuation that lives well (exluding retirees who will at least have SSI and Medicare in some form because the Feds won't be able to take that away in a democracy) and everyone else under 65 will largely be a$$fucked.
All my relatives are going to have to move back home from FLA and get jobs...
Cops and firemen ????
The firemen will have to get rid of one their homes. The one in the midwest/East coast or in Arizona? And they'll have to stop buying those $60,000 top-shelf german cars. Same with the retired cops.
I posted this yesterday but it gets sadder each time I read it. Of course no one made these types of rules.
http://www.wpri.com/target-12/tim-white/no-providence-mayor-upset-over-hiring-of-52-year-old-to-fire-department
Perhaps in this Escape From... Film, we will finally find out why they call him, "Snake".
.....blowing up my detroit
knocking out my broadway
heading for my L.A. .....
Ahahahahahahahahahahahaha.............:deep breath:.......................hahahahahahahahahah!
I have no pension
Welcome to the statist brainfracked reality were people "losing" their pensions paid by people who don't have a pension is a calamity.
What's a pension?
"Looks like it's raining....looks like it's raining!......OH NO TEARS ARE FALLING!"
KISS
This is just the beginning. Other cities are going to realize that bankruptcy will be the only way to get rid of these ridiculous pensions. Once that happens, the muni market is history. It could actually trigger the bond market collapse that everyone has been waiting for, since there will be a tidal wave of cities declaring bankruptcy to get out from under all the pensions. It will be like another Lehman moment.
It's funny, because I occasionally hear on the radio ads telling people to invest in muni bonds because they're "risk free" and "tax exempt". LOL. These are probably the same people telling everyone to buy houses and MBSes in 2005.
Pension cuts are not allowed by the Michigan constitution.... buuuuut the judge felt that treating them as regular contracts under Michigan law will do. Unlike bond holders who willingly purchased said bonds and therefore decided to take on this risk, pensioners had no reason to believe their pensions were at risk. So why not treat the two populations equally? That's how crony capitalism rolls.
actually they did. the unions loaned the city money in return for a future payout.
now they are debtholders too.
That's why the charade lasted as long as it did.
Chuck Ponzi would have been proud. But alas.....the grim reaper has arrived.
This is a federal case, so the state constitution is worth about as much as......(I'll let you fill in the blank).
Federal cases have to abide by state law all the time... depends on the situation. Even in bankruptcy cases, there are state exemptions to deal with...
I fail to see how this isn't a supremacy clause issue where federal law is ruler of the roost... now, the state would be prohibited from cutting its own pensions, but with a federal process like this, I don't see how a state could impose its constitution in the event of a conflict, unless it was to secede... The state constitution is still valid for all other issues, but for this one, it's superceded by federal law... Not saying this is the way it should be, just saying from a cursory observation point, this is the skinny.
In the end, what would you be hoping for where a state can't reneg on its pensions? That's like prohibiting divorce... no really, we ought to have people that hate each other forced to continue their relationship in perpetuity. If you look at bankruptcy as one of the fundamental safeguards to the entire legal system (the great sweeper), then it's easy to understand why this is happening...
Here is what happened. I am no lawyer, but I follow this case with interest as I feel it is a harbinger of things to come.
When BK was filed, the unions, etc. went running IMMEDIATELY to a STATE JUDGE to get a suspension of the BK since the constitution guarantees pensions and whatnot. Judge is a flaming liberal, and made a bunch of political and illogical statements in her ruling. Look her up.
The fed judge told the state judge to basically go to hell, this is above your paygrade. About a day or so after the state judge made her ruling.
There you go. When state law collides with fed law, there is no discussion as you know. But it should be noted that as far as I know, fed BK codes only cover muni BK and below, not entire states. I am thinking about IL. They make Detroit look solvent.
Sounds to me like the federal court got it right... what is the ominous repercussion of the ruling? As if this hasn't happened before on numerous occasions...
I commented below, but states can practically accomplish the same thing through repudiation or, perhaps more likely, deciding how to appropriate state funds... In short, the state can simply defund pension obligations in favor of other expenses. There won't be a discharge of the debt (unless they can make settlement agreements), but effectively it will be the same thing. Whether the state legislators can accomplish this given the voting blocks state employees command is anyone's guess, but from a mathematical standpoint, it seems pretty inevitable that default will occur, regardless of whether a city, county, or state.
Michigan constitutional mandates hold until the city or whatever declares bankruptcy. Then, federal bankruptcy laws supercede any state mandates. Under federal law, pension cuts are allowed. So, those state mandates don't mean dick.
Well, this is a start. But just the start. Years in the making of insane policies that could never be funded will take years to break up. But maybe, just maybe a beginning to the end.
And this is different from the federal government how?
Federal Government has access to nuclear weapons and a printing press
LOL @ 16 cents on the dollar. I'll believe it when I see it paid out. IMO if you don't already have the check in hand, you ain't getting paid at all.
Let's face the facts. The reason Detroit is in Chapter 9 is because the majority of it's population can't even read a book with that many chapters in it.
They can if it's got big print and lots of pictures.
The losses are tax deductable right? Whew, got that going for them....
Illinois has a 100 billion shortfall. Can't wait to see the teacher's union protest over nothing once they file.
There's no money left!! How difficult is that to understand?
And Illinois is voting today I think on a pension reform.....cutting costs I think.....cutting pension payouts
I think IL is going to be different in that there is no fed BK code for state BK, only muni (or so I have read). Perhaps a BK lawyer can chime in.....
I believe that you are correct, however as sovereigns the states can simply repudiate debt... while the debt may not be eliminated through a formal bankruptcy process, the state is still free to distribute its revenues as it sees fit... In other words, the debt/obligation remains on the books until paid, which might be a while. As far as precedent, Arkansas defaulted in 1933, although I think bond holders got paid in full.
What about Chicago cop and fire pensions? I heard they are in bad shape.
Muni not state
Next Olympics = Detroit of course
Ever see vultures fly around and around in a circle up in the sky?
Oh the buzzards in the sky get so dizzy they can't fly just from sniffin' that good ol' mountain dew
"The judge also ruled that while the city did not negotiate in "good faith" with creditors, there were too many of them to make such negotiations practical."
Kewl, so if I can rack up enough creditors, I don't have to negotiate with them in good faith. Any of you folks want to loan me some money?
It's time to reload the popcorn and cotton candy. This circus is just getting started...
Yup, I wonder if Tyler realizes the primary value of his site is the comment threads -- filled with financial/economics analysis gold and comedy gold both.
Greatly depends on the article and I would have agreed with you say 4-5 years ago.
Activate the FSA terror cells!
And its a Democratic run city since 1963 if Im correct.
The average Detroit pension is $19K per year.
plus free healthcare for life.
yeah but 4 bedroom homes in long established neighborhoods are only a buck, all they need is a roof, plumbing, wriing, windows and some wall material to cover the framing and 14 40 cu. yd dumpster trips to haul out the stuff in the yard.
"Detroit must ask “what is necessary to invest to attract business?” Spiotto said in a phone interview."
A neutron bomb?
What a joke. The taxes, unions, attitude of the people. They all have Obama people/FSA mentalities. Give me give me give me - I rob you and knock you out. Bulldoze the place and make it farm land if it is not contaminated.
Arm the defenseless Detroit pensioners and drive them to the courthouse
This is a bellwether... thee jig is up and the dominoes are about to fall.
Let me guess, you were educated in Detroit?
Speaking of "jigs," we know who ran Detroit in the ground, now don't we?!? Same as they are doing anywhere they infest in large numbers!
This will be hilarious.
If any funds do become available they will be stolen.
Expect political infighting for the "land grab" by opportunists.
Detroit will sink deeper into the abyss.
And be dotted with mosques.
Where is crazy old Uncle Joe "This is a big effin deal" Biden when you need him?
just pensions?
phew, good thing muni bonds are still safe.
LOL
Detroit is what happens when liberal dreams meet reality.
There will be many other Detroits.
First move should be to dump all current and former employees on Obamacare and let federal tax dollars pay for healthcare as much as possible.
What happened to all the money raised during ‘Detroit’s Starving Artists Painting Auction Venue’? How much money was generated to pay back their debt obligations?
Only $105M from a guy who died from A**S?
http://www.latimes.com/entertainment/arts/culture/la-et-cm-detroit-institute-of-art-20131127,0,2117613.story
Ah, Detroit. I lived there in the mid 80's for three years that felt like 30. At the time then I think the Michigan State Police had to mandate that all rookies did 2 years posted there as part of becoming a state cop anywhere in the state. My wifes grandmother owned a beauty shop in Dearborn for fifty years. She is dead and gone now and would turn over in her grave if she saw that city now. The people of middle eastern persuasion burned her beauty shop to the ground after she refused to sell to them three times and numerous acts of vandalism occured. All the shops are in Arabic there now. Our nation is broken. It remains to be seen what groups will form to govern on local levels only. I think there are big changes in the wind. If it truly hits the fan your police and fire protection will be truly what they already are, a 44 magnum and a fire extinguisher. At least you will be more aware what your tax dollars really meant then. I am 58 and can't identify the country I grew up in any more. I had the displeasure of spending the holiday weekend in the Baltimore and DC area of the country. It is booming down there. One brother in laws buddy just bought a 60 foot Hatteras boat. I am not a boat guy but I think those get to be 30K a foot in that class size. Anyway,,,, I love the Redwings and wish them well. The rest of Detroit???? It was good to get out in 87 and I wish you all the best. Long 44's and fire extinguishers.
I visited Detroit in the early 80's for about a week and the police department had 4 cops in each police car back then. Got stuck in Detroit after missing a flight in 2010 ... just got some dinner and slept at the hotel until I could get out of there the next morning.
I don't recognize the country anymore either and the political system seems to be a freak show with dead bodies sprinkled around the periphery while they do their circus act to entertain their constituencies.
When politicians and unions promise something for nothing, you get Detroit.... When white middle class workers are run off, you get Detroit.... The power to tax, regulate, and control is the power to destroy.
"doesn't mean he will approve of a plan with steep cuts" Detroit ain't goin' nowhere. Some "industrialist" will bail it out, and in return get a couple unused rail lines from the .gov warehouse.
As goes Detroit, so go Illinois and California. If those two go, the lights go out everywhere.
What happens to unfunded pension liabilities if the stock market corrects 30%? Or when rates go up and you get an ugly mark-to-market on the fixed income side?
If the Fed tapers, what's left of the economy goes down fast, rates shoot up as portfolios dump long maturities. Not long after that, the US defaults (again).
My city is in debt for 1 billion and I think we're insane. We're around 800k pop. Detroit should just close down.
Obama would make a good mayer of detroit. Even the Dearborn muslms would like him. Unions would like him. The rainbow minorities would like him. Sadly the working class that used to live there have been sucked dry and left so no one can pick up Obamas endless bills for empty promises.
how many ira's in Michigan have assets fully able to be ordered to buy the new and freshly created Public Pension Savings guaranty Bonds enacted to meet this crisis in paying for the retirment of Deeeeetroit's public workers?
Where there's a will, there's a way.
Never let a crisis go to waste.
Um,,, Detroit should just close down? Detroit was once the crown jewel of manufacturing. It has, for all intents and purposes been closed down. The smoke will be rising there before too long. From the ashes who knows what will come of it but I think the firemen and cops will quit working once they realize the pension fiasco is a pipe dream. Then it really will be a 44 magnum and a fire extinguisher. And to whoever down arrowed me for the above, why don't you buy some property in Dearborn and live there awhile.
2009, in meeting with head of house finance comm for state of Maryland..the state was on the brink of BK, taxes were well below the lowest estimates ...fast forward to today, some entity covered the budget gap, no bk ..thank you santa, aka ben the bernak...any audit of the FED's books and washington .gov would show how they bailed out the states, CA NY they covered the bills. detroit got a fuck you.
All of this has happened before. All of this will happen again.
http://armstrongeconomics.com/2013/11/25/unfunded-pensions-are-our-doom/
So this means that pensioners will see their pensions cut by 84% or cut by 16%?
84%
Thanks. Feck! 84% cut!!!?
That is going to mean severe hardship for loads of people and a hefty dose of reality for public sector workers who currently have pensions that they have not paid for.
They are going to know how many private secgor workers now feel. If this gets replicated across the US it will have huge consequences.
until there are lamp posts across the country with the charred remains of corrupt pols smoldering dangling from them..... NOTHING WILL CHANGE... CORRUPTION PAYS AND PAYS WELL... low risk high reward... go for it