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Bankruptcy In The USSA: Detroit Bondholders About To Be GM'ed In Favor Of Pensioners
First, the Obama administration showed during the course of the GM and Chrysler bankruptcy proceedings, that when it comes to Most Preferred Voter classes, some unsecured creditors - namely labor unions, and the millions of votes they bring - are more equal than other unsecured creditors - namely bondholders, and the zero votes they bring. Five years later we are about to get a stark reminder that under the superpriority rule of a community organizer for whom "fairness" trumps contract law any day, it is now Detroit's turn to make a mockery of the recovery waterfall. As it turns out, bankrupt Detroit is proposing to favor pension funds at roughly double the rate of bondholders to resolve an estimated $18 billion in long-term obligations, according to a draft of a debt-cutting plan reviewed by The Wall Street Journal.
The breakdown to unsecured stakeholders would be as follows: 40% recovery for pension funds, 20% for unsecured bondholders - all this to the same pari class of unsecured creditors. Because just like in Europe when cashing out on CDS in insolvent nations is prohibited as it would suggest that the entire Eurozone experiment is one epic farce, regardless of how much "political capital" Goldman Sachs has invested in it, so in the US municipal creditors are realizing that in the worst case scenario, they will be layered first and foremost by all those whose votes are critical in keeping this crony administration in power.
According to the WSJ the plan calls for recovery to be divided among the unsecureds amounting to $4.2 billion, more than the originally planned $2 billion to settle claims which included about $11 billion in unsecured debt, including $6 billion in health and other benefits for retirees; $3.5 billion for retiree pensions; and about $530 million in general-obligation bonds.
There is a possibility that final "math" in the Plan of Reorg is changed before the final draft.
It was unclear from the plan reviewed by the Journal whether the city is using all of the same estimates for the money owed to unsecured creditors in its draft plan. A person familiar with the draft plan said the recovery rate for the pension funds could end lower than the balance sheet shows.
Details of the plan sent to creditors on Wednesday have been kept under wraps as the city and its debtholders continue to talk in closed-door mediation. The city sent its working draft to creditors in the hopes that the plan with a richer payout might spur some of them to settle with the city individually or, in the least, offer their own suggestions toward modifying the overall proposal, according to another person familiar with the matter.
The formal plan is expected to be filed in federal court in Detroit within two weeks, officials said. Creditors will vote on the plan, but the final decision rests with the court.
Still, the probability is that Kevyn Orr has finally gotten cold feet on playing hard ball with the unions. "The proposed plan provides the road map for all parties to resolve all outstanding issues and facilitate the city's efforts to achieve long-term financial health," Detroit Emergency Manager Kevyn Orr said in a statement Wednesday. Mr. Orr's spokesman declined Thursday to comment on the plan's details. Several creditors, who were opposed to the city's early plans to offer creditors, including bondholders and pension funds, less than 20 cents on the dollars owed to them, also declined to comment."
One can only imagine the amount of "Steve Rattnering" that must have gone on behind the scenes, and how much more is still set to happen, for such a skewed plan to pass the bankruptcy judge over creditor objections. Which it will once the president makes a phone call.
Then again, with contract law abrogated as was made very clear with this administration's first steps into the "Fairness Doctrine" back in 2009 and the bankruptcy of GM and Chrysler, nothing can, or should, surprise one any more.
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How low did QE push those Detroit bond yields?
Thanks Ben!
I don't mean to be a wet blanket, but I don't really see the glaring evil here. The simple fact is that the city does not have the money to meet all its obligations. What is the bankrutcy court supposed to do, stick it to the old folks? It's easy to demonize the pensioners as "the Unions," but in a certain respect these are just ordinary working people who will have very little recourse if their pensions are gutted. Kevyn Orr has probably also been made aware that this problem is much bigger than just Detroit, that he is setting a precedent for future bankruptcy proceedings in other insolvent cities, and that to establish at pattern of raking over the working stiffs is unacceptable. Then we really would be living in an age of Neronic horrors.
The bondholders will have to bite this bullet--there just isn't anyone else who can do it. Yes, that will spike the yields on munis but that should force city councils to start taking governance a lot more seriously.
Well, let's hope those pensioners are ready to pay considerable higher taxes and utility bills, because there is no young workforce to keep those essential services afloat.
If you get paid in dollars (and that includes a lot of "working stiffs"), you have been getting fucked over since 1913.
That's true, but it doesn't address the question of who's going to take the hit. Who do you want it to be, Laws?
They are ALL going to take the hit, you are asking that one particular group of creditors within the same class take DIFFERENT hits. Thats the problem, there should be no difference between the unsecured and the pensions, becuase they are equal under the law and the wrtten contracts.
What you're after is a change in how the GO-Bonds were written after the fact. That is lawlessness at it's government finest. And by the way,is nothing NEW and is why we are in the mess we are as a nation.
Would those Go-Bonds have sold if they were subordinated to Pensions?I'm guessing not at the interest rate they were sold at.
I'm not after anything--I have no dog in this fight. I understand that the bondholders and the pensioners are equally tranched. But if it were really just a simple matter of dividing the remaining revenues between them, then why go through the bankruptcy process in the first place? The court has the power to redefine the terms of those contracts after the fact, as you put it; that's what the whole thing is about. They obviously see a reason for awarding priority to the pension system. You believe that their reason is something nefarious, but I'm not so sure.
Furthermore, I understand that the bondholders have cause to complain. I'm not telling them to just shut up and take it. I'm saying that perhaps they are better able to absorb the cost than retired city workers. Once again I have to ask, how would you adjudicate this mess? Equal apportionment based on creditor stake?
The classical approuch would be :
Pay Goldman in full.
Pay JPM half
Give the rest to the lawyers, if there is any 'rest'.
That's why this is so outrageous, how dare they threaten the status quo!
You really need to read up on bankruptcy LAW (as opposed to its corrupt practice in Detroit and elsewhere)...
"They" are one and the same as many of those bond holders are also pension funds.
They wont be paying for any of those.. Off to Florida. NO state tax, sunshine and great fishing. Oh and they are now voting for conservatives.
Goosestepper.
Fuckin A right. Thanks for that bit of wisdom.
And goddess bless the unions.
If the bond buyers hadn 't been so foolish to buy muni bonds, the problem would never have gotten so big.
"If the bond buyers hasn't been so foolish...."
How exactly do you think Detroit would have paid for all this shit I the first place without selling bonds? The interest rates were way too low(wonder why that is) resulting in a misapplication of capital by all involved.
i think i smell class action
So let me get this straight, the pension, which is a part of someone's pay, is supposed to take a back seat to bonds, which are inherently risky as they are an investment? What sense does that make? According to the logic of this article, a firefighter is supposed to work a full schedule for a few decades, take a portion of their pay as a pension promise, and then lose that pay because some investor bought an interest bearing investment device? If bondholders don't like it, they can hold out for higher rates. Fucking over people who fulfilled their end of a contractual bargain that involved actual labor, is absurd. This is a low even for libertarians.
glad you did not sell WW2 or WW1 bonds
So an uninsured pension (ie. no Pension Benefit Guaranty Corporation (PBGC) insurance) gets priority over the secured debt holders? Is that you Barry?
You don't get it, the firefighter retiree IS the bond investor, the city invested its pensioners assets in municipal bonds, including its own.
When they default, they default on themselves
The firefighter had no input into where his pension was invested. It matters not, as it's not his purview. If you are offered X-Y and Z for doing a job, and you get told, "Sorry, we can't pay you the Z," then you are being defaulted on by the other party in the contract. Buying Detroit bonds was stupid and risky. Anyone investing public pensions in the muni is a crook, but that is another issue.
Aren't many of those bondholders in fact pension funds?
Yes, don't know why people are missing this.
makes those MyIRA bonds look great doesn't it?
/s
Unions are Corporations too.
TD....the penions loaned the money to the city because at the time they made the loans the city was insolvent without them.
The pensions loaned the money to pay themselves. And therefore became another bond holder.
The city could have had to pony up the cash to an arms length fund, and would have exploded its balance sheet. So it did what any respectable democrat city would do.
This was sort of like a self-ponzi.
They could have just as easily demanded money years ago.....but that would have detonated the city's balance sheet back then and why do that when we can kick the can?
Now the unions are going to be getting obamacare. They are going to be on the exchanges with their fellow democrats. The unions demanded obamacare.....remember?
Any government officials and systemic journalists, are playing very well their roles, by pointing the finger at bankers who do not care to provide loans from all this liquidity they receive to stimulate the real economy. Besides, Barack Obama did the same, when in the peak of the crisis, higher bank executives and golden boys, defiantly shared nearly 20 billions in bonuses from the bailout packages.
Any government officials and systemic journalists, are playing very well their roles, by pointing the finger at bankers who do not care to provide loans from all this liquidity they receive to stimulate the real economy. Besides, Barack Obama did the same, when in the peak of the crisis, higher bank executives and golden boys, defiantly shared nearly 20 billions in bonuses from the bailout packages.
Who do you think those bondholders are? They are other pensioners. Get it? It is one person's retirement versus another's
Silver For The People
Or government sanctioned pensions vs. private annuitants? Transfer of wealth?
As I said above, wait 'till Detroit is substituted with California. Some key snow flakes are going to shift about then, causing a bond avalanche. Which in turn, set's the helicopters loose.
This is why I think the people who are bottom-fishing real estate in Detroit are doomed to lose money. Sure, you can buy in for peanuts, but all that does is just make you a source of property tax money and fee money for the locals, who elect the Kwames. Buying in is basically a bet that they are going to do something to improve the city's economy, good luck with that.
Hopefully the Pitbulls are still pool partying?
Union dues -> campaign cash -> votes -> high pay + sweet benefits packages -> more union dues -> more campaign cash -> votes -> higher pay packages + bigger pension and benefit promises -> more union dues -> more campaign cash -> votes -> higher pay packages + bigger pension and benefit promises -> more union dues -> more campaign cash -> votes -> higher pay packages + bigger pension and benefit promises -> more union dues -> more campaign cash -> votes -> higher pay packages + bigger pension and benefit promises -> more union dues -> more campaign cash -> votes -> higher pay packages + bigger pension and benefit promises -> more union dues
No one in this mess has clean hands.
The virtuous circle. Power to the people.
It's the only competition we have for the banker - mass media- politician nexus.
hmmm, imagine that, Obama all the way to the right...
do union bosses still whack politicians who do not play ball?
The cold feet come from the cement shoes they pour you, right before you disappear.
Play Ball!
Pensioners preferred over bond holders. That's a better decision than bond holders who invested of their own free will their money. This complaining is stupid and Zero Hedge is better than that. Is anyone being forced to invest in MyRA Bonds (not yet anyways)? They deserve to lose it the government down the road on this no risk investment. Don't worry about the pension fund, they have all kinds of other municipal bonds in them and will get a hair cut from this example.
The Chinese investors are gonna fix Detroit, just like they're fixing Africa
Of course bondholders get GM'd.
Because the scum bureaucrats who caused the problem must be publicly rewarded so all the other scum bureaucrats will not turn on their masters. Meantime, all the other bondholders paying attention will see this theft and punishment being handed out and will abdicate their money somewhere else. Good luck municipalities.
What kind of retard lends money to a city? Are people not aware that moving out of a city is easy? The taxes and crime go up, rich people can be gone in less than a few months. People had to know they would never get that money back.
I hear on the radio time to time companies pushing 'tax free' municipal bonds, so that means there are down to looking at retail suckers.
The irony is that many of the holders of these bonds are pension funds themselves. Robbing Peter to pay Paul.
Rule#1 - Kick the can.
Rule#2 -Kick the can again, and again.
Rule#3 -Point finger at the other guy, and run.
Here ya go, zero. Factory direct http://www.buycaliforniabonds.com/
the russian spelling "revolution" on the poster has something weird about it. If I recall correctly, I don't think their Cyrillic alphabet has a "j" in it. this might be another slavic languague corrupted by our anglo alphabet.
When does 'obamad' enter the lexicon? Obamad-to be financially devastated so that unions are financially enabled.
the unions voted for democrat liberals who stole everything that wasn't nailed down and most of what was.
the place votes 95% democrat.....year in and year out. No matter what. No matter how many scandals, indictments, whatver. The place is a mini-Chicago minus the hip downtown area.
Not that politics realy matter, particularly with the 2 main parties....but why on earth do they continually elect the same?
A wise man once said "you cannot cheat an honest man".
Detroit is proof. The people who elected the political thieves were not honest. They were not honest to their neighbors nor to themselves. They elected anyone who promised OPM, regardless of feasibility.
The ONLY cure for liberalism is REALITY. You cannot argue with liberals. You cannot reason with them. You cannot plead with them. You cannot do ANYTHING with them to get their attention. That's because they do not think. They FEEL. Hence the political gender disparity.
But reality sure can get their attention. Looks like it just did.
"Daddy, can I work for the city, or at least the state, when I grow up to be a Big Loki?...Pleeze Daddy...."
"No Little Loki. You need to keep practicing your singing so you can be waelthy and famous like Broke Back Jason Beebrr."
The real problem is that the Democratic-socalist who gained control of Detroit tried to Wage class-warfare. But the response to class-warfare is an economic scorched-earth retreat. Where the side being attacked retreats but burns everything behind them so that the advancing army starves. This is in a way what happened to Detroit and since New Yorks New Mayor wants to play the class-war game get ready for the same to happen to that city.
Why should the NYPD give a shit if the Mayor doesn't give a shit??
Fuck DiBlasio....he's a fucking POS NIGGER too.
"Never lost a dollar of principal to default in ~30 years of owning various munis."
You should read this article:
http://en.wikipedia.org/wiki/Opportunity_cost
As some ironic joke, the union pension is probably 90% Detroit bonds
"keeping this crony administration in power"
talk about an agenda.....when i read shit like this i just shake my head cause it's, the new boss is the same as the old boss and i'd bet that no matter who is in the white house this shit would still end the same.
This video is 4 years old, but I can assure you Detroit is worse now than then.
http://www.youtube.com/watch?v=1hhJ_49leBw
I was at the Autoshow in Detroit last weekend; every time we can't believe just how close it is just a short distance from the "good" part of town to utter poverty, despair and rampant crime. Eminem was no where to be found in his Chrysler 300, and as is reported the street lights don't work in large areas of the city.
My dad used to take me to watch the Tigers and Lions in the mid 60's, then after the '67 riots, whites moved out in droves. After Coleman Young came to power, he finished off Detroit with 20 years of corruption; the black fist you see downtown was more than a tribute to Joe Louis, it was a symbol. Those who grew up in and around Detroit during the Young years know what the symbol meant.
Soulman Young....whatta PIECE OF SHIT NIGGER (in every sense of the word).....hopefully roasting somewhere over an open pit of molten steel.
Painting Obama, the most right-of-center Dem ever, as a socialist is laughable but to be expected from ZH.
Of course it would only be more of that evil damned "socialism" to question why Detroit is still going forward with a $400 million new stadium - on the taxpayer's dime. Because that's capitalism right? Go give your heads a good shake.
Are you drunk?
Nobody could be so ignorant as to say Obama is the most right of center Democrat ever when he is the most leftist, communist, socialist person to ever live in the WH.
Oh no some vulture fund partners may not get new ferraris! Oh the humanity!
I have no probleme with them stiffing the bond holders; just as long as the place doesn't turn into Zaire's famous beach. Plus Dexia should have purchased the bonds like they did for California and Illionis; via the FED! Yes I know whats going on!
UNFUNDED pension obligations......asshat polititco's breaking contracts to working people..V....asshat politicos defaulting on brilliant "investors"....why are the asshats still at liberty ???? Fuck the "Bondholders"......
Contracts are dead in the USA. So are we the sheeple. Welcome to New World Order.
MYRAs for everyone. Let's share the financial repression.
Some lovely lawyers somewhere have convinced themselves that pension liabilities are an unsecured credit on par with bond debt. If you look at the bankruptcy code, unpaid pension liabilities are actually have priority over other debt - though only to the extent the pension (and direct compensation) was incurred in the prior 180 days.
To the extent that government has expressed a compelling interest in ensuring that pensions are properly administered - both directly in the bankruptcy code, and through the agency of the Pension Benefit Guarantee Corporation (PBGC), I think some judicial determination somewhere that the bond holders will get paid off at equal priority with the pension obligations is either a temporary delusion, or the first in-the-open oligarchic extra-legal power play.
As concerns bonds being held by pensions... absolutely correct. And entirely irrelevant. Pension fund managers are tasked with assuming a balance of risk assets to seek an appropriate return on the assets of the pension fund. As are all other investment managers. The risks they assume include risks of default on bonds - whether sovereign, municipal, or business. Pensions also take direct equity interests, and assume standard business risks.
Materialization of an investment risk (such as a bond default) is a far different type of risk than a breach of contract in deferred compensation from employer to employee (as in an employer failing to fulfill pension funding guarantees).