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Detroit’s Bankruptcy: The Story Behind the Filing

Long term lessons for other municipals a lasting lesson

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A Timeline: The Long Road to Bankruptcy

Perhaps something could have been done earlier – not to eliminate the damage but at least blunt it so that pensioners would recover 80 cents on the dollar instead of 10 cents. However, iconic mayor Coleman Young was driving white and middle class Detroiters out of town during his tenure in the 70s, and Mayor Kwame Kilpatrick, presiding during the relatively prosperous years 2002-2008 and who probably had the best chance to turn things around at the last minute, was too busy engaging in a pattern of corruption, bribery and fraud to lead the city to face the ugly truth.

This disastrous long-term history of mismanagement and absence of strategic planning is, according to New York Times columnist Paul Krugman,  attributable to bad luck. “For the most part the city was just an innocent victim of market forces,” Krugman writes – as if the city had gotten that way by losing a bar bet or something.

So what of the broader municipal market? Well, markets took it in stride when Stockton declared bankruptcy. But Detroit is different. Not only was Detroit nine times more populous than Stockton at Detroit’s peak, but it is still more than twice as populous – and defaulted on a lot more debt.

Further, Stockton is really a local California problem; Detroit is a marquee name in American industry. So since Detroit filed bankruptcy – and since the President told them to drop dead when they requested a federal bailout, we’ve seen a broad pullback in munis, and some outflows, but no panic selling.

Indeed, in the last two weeks, we’ve seen two healthy developments that are actually good for bondholders, in the long run:

  1. First, Detroit finally recognized the inevitable and filed for bankruptcy before things got even worse, and there would be even less to recover.
  2. Second, the Treasury Department’s refusal to fund a bailout for Detroit sent a positive message to cities like Chicago, New York, Philadelphia and other struggling municipalities nationwide: Get your act together, because you’re not getting bailed out either.

Secretary Lew’s refusal was a shot across the bow to free-spending states and cities – and a much-needed one.



Article printed from InvestorPlace Media,

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