Diversification opportunity - Boeing

With a USD 100 bn in orders for this new plane, Governor Rick Snyder, Detroit, and Michigan should be pursuing this opportunity very hard. Glad (and a bit surprised) to see my Congressman on the ball for this one. Aerospace would be a great complement to our existing industry and help suppliers diversify from automotive cycles. Plus, Boeing was from Detroit, Michigan to begin with. To top it all, we are actually a right to work state at the moment. Amazing. Not sure if we can use the Dubai-Detroit sister city aspect on this one though, unfortuately.
Chances like this don't come around very often. Hopefully, local leaders will realize the opening and seize the opportunity.

Here is Free Press coverage of Congressman Bentivolio's pitch:
http://www.freep.com/article/20131121/BUSINESS06/311210098/boeing-kerry-bentivolio-relocate

Motivations and biases - Detroit art appraisal

Nolan Finley wrote in the News over the weekend that he's had some conversations with Detroit officials leading him to believe that the DIA will certainly be "monetized". The target number he was throwing around is $500 million to somehow be extracted from the DIA's assets. He mentioned that if the auctioneers value the collection at $3-4 billion, the DIA is probably safe, but the higher the valuation, the more likely the DIA will be raided.

I agree with the last statement, though this brings into question the objectivity of the auction houses in their assessments. Unless they have signed an agreement indicating that they would not participate in any auctions of DIA art, they would seem to have an inherent incentive/motivation to inflate the value of any art they appraise, as it would increase the chances that some art would be "monetized" and that they could earn a commission on such "monetization." Certainly, the auctioneers cannot be seen as independent/objective appraisers of art without such a clause. 

Detroit bankruptcy: We hope for better things. It will arise from the ashes.

Well, we've finally made it - bankruptcy. Detroit has essentially been bankrupt for years, but last week, EM Kevyn Orr finally made it official with Governor Snyder's blessing.

What caused it?

Too many factors to count, and well-known ones at that. Race riots. Declining tax base. White flight. Contracting auto industry. Urban sprawl. Corruption. Mismanagement. Regional antagonism. State turmoil and falling revenue sharing. Crime.

What does it mean?

Detroit stopped functioning properly years ago, so from that standpoint, bankruptcy changes nothing in the short term. However, now, we will have the chance to invest in improving services rather than servicing the debt.


On a positive note, the City will have some time to breathe, plan, consolidate, and re-invest. It is entering with a plan, which is also good. I was relatively pleased with Orr's preliminary plan, and if Detroit is able to emerge from Chapter 9 on that basis, it should result in a stronger City.

On a negative note, of course, Detroit's pensioners are at risk. This is very unfortunate, and I'm not sure what the best workaround would be. There are no good answers. Perhaps, to at least make sure each one of them gets one of Detroit's abandoned homes as a potential rental property or something. I'm less sympathetic to the bondholders. Those assets are often sound numerous times after initial issue, and if someone has bought them within the past 5-10 years, they probably bought the junk bonds at a steep discount anyways, factoring in a likely Detroit default. To say nothing of the fact that they probably insured their investment anyways.

Then there are the variables. Orr's initial plan does not include liquidation of Belle Isle or the DIA. However, in federal court, anything is possible. If Detroit has to sell its jewels to private hands in a fire sale, all of us lose, and Detroit would be a less desirable destination, and less likely to recover long term. At least, in Chapter 9, the City cannot be forced to sell anything. Perhaps there will be an opportunity for the State to step in as needed and "rescue" such jewels temporarily in exchange for a cash injection (see previous post).

It is a new day in Detroit. Things are not yet different, but for the first time in a long time, it seems like they can't get worse at City Hall, but only better. We hope for better things. It will arise from the ashes.

State solution to DIA threat?

In the past week or so, it has come out that Emergency Manager Kevyn Orr is looking at liquidating the (significant) city-owned elements of the DIA to help pay for some of Detroit's outstanding bills. Now, perhaps it is the right thing to consider as someone simply trying to balance the books. In any case, Mr. Orr perhaps believes he is fulfilling some kind of fiduciary duty. However, stripping the DIA would be a tremendous mistake and blow to Detroit's revitalization. We are trying to save the city, not accelerate its demise. The choice between preserving our culture vs. paying for retiree healthcare is a false one - we have to find a creative way to do both.

Of course, there is justified uproar about this possibility and threat to the DIA (and on one hand, it is encouraging to get more stakeholders interested and involved in finding good solutions for Detroit). The state legislature is reportedly considering a bill that would prevent the liquidation of DIA assets during a potential Detroit bankruptcy. It is a good signal, but I think it still leaves too much to chance (and the courts). The courts could overturn this law, or creditors could tie up the city/DIA for years in lawsuits.

Instead, I propose the State take possession/title of the DIA assets (and potentially, other City treasures we would like to protect for the public good like Belle Isle, etc.) in exchange for a capital infusion (there is no price tag and the number shouldn't really matter, but maybe $1, or $100 million, or $500 million, or $1 billion - the state has a bit of a surplus now, and if a capital injection could help fund a proper restructuring for the City that keeps it out of bankruptcy, so much the better). Critically, the deal should have an iron-clad clause whereby the City could redeem/reclaim the assets at some point in the future (e.g., in 10 years, or when the City meets some milestones) by repaying the State face value. Also, a clause promising to keep the assets in the city would help. This could help make such a deal palatable to City stakeholders (knowing they could reclaim the City "jewels" at some point; they could not do this if the "jewels" were liquidated in bankruptcy court) and hopefully, would accelerate a City-State agreement (unlike the dithering that cost Detroit the Belle Isle deal). If done early enough, I think this approach would properly shield the City assets from bankruptcy and the courts.

Benefits to City
>Cash infusion (and possible delay/prevention of bankruptcy)
>Protection of key assets for Detroit citizens
>Possible re-acquisition of key assets (buy-back option)

Benefits to State and other stakeholders
>Preservation of significant public assets
>Pathway to greater collaboration/investment in City
>Greater influence on key issues/assets in City

Math for Michigan: Efficiencies in airport transit

As a frequent business traveler, I often make trips to our airport, DTW. Sometimes, I drive. Sometimes, I take a cab. Sometimes, I am dropped off. The miles add up. If there was a shuttle or bus or train I could take instead, I probably would. Many Detroiters might say the same, and many are studying possible solutions (currently, Metro Cab's contractual monopoly does pose some challenges to transportation solutions, but not insurmountable ones).

Each year, DTW handles > 30 million passengers. Thereof, the airport originates ~17 million passengers. If an average travel party size is two people, that means each year, Michigan travelers are making ~8.5 million round trips to DTW.

If the average round trip is 50 miles, and the cost per mile is 55 cents (that is the rate I am reimbursed at, factoring in fuel, depreciation, insurance, etc.), then driving to and from the airport is costing Michiganians about $234 million per year, or $2.3 billion over a decade. The fuel alone (at 25 miles per gallon, and $4/gallon) results in $68 million in gas being burned by our citizens each year, or $680 million over a decade sent to Texas, Alberta, or Venezuela.

I'm not sure what an optimal network to connect Michiganians to the airport would look like, but in a 2006 study, SEMCOG estimated that transit from Ann Arbor to Detroit (passing through DTW) would cost $0.6-3.0 billion to setup and $25-110 million to operate annually (on the higher end for light rail, on the lower end for buses). If the new Regional Transit Authority can put together a network that serves even half of the local airport traffic (~4.2 million round trips), saving Michiganians collectively $1.15 billion over a decade, I'm pretty sure it would more than pay for itself over time (not even including reduced traffic, pollution, wasted time driving, ridership fees, etc.).

Anyone should be able to land in Detroit and just hop on a shuttle or bus or train to downtown Detroit, Ann Arbor, or other places without a hassle or expensive taxi or rental car, like they can just about any other major city in the world. Jobs, economic development, efficiencies, connectivity...connecting Metro Detroit to the airport with reliable public transportation is a no-brainer.

Detroit - "Olympics of Restructuring"

March 2013 has been a historic month for Detroit.

The Governor declared the City to be in a financial emergency, which of course, was news to no one. Earlier this week, his appointed Emergency Financial Manager, a Kevyn Orr who studied at UM before moving out of state, started on the job. Interestingly, one of his first comments was to note that Detroit is the "Olympics of Restructuring." No disagreement with that observation from this corner.

Emergency managers have a mixed track record, but it seems like Mr. Orr is off to a decent start. Mayor Bing is on board and seems heartened to finally have a "partner" to work with to get things done in the city. The City Council has been remarkably more accommodating than many might have expected. In his first week, Mr. Orr has also extended an olive branch of collaboration, which is encouraging. I hope the personal tax kerfuffle he endured this week also tempers his actions - Detroit has its crooks but it also has many well intentioned people...sometimes things just fall through the cracks. The EFM can cut just about anything or everything, but that doesn't mean the ax will be more effective than pruning shears in all cases. At the end of the day, you can only cut so much - growth and revenue are the most effective solutions to Detroit's problems.

Mr. Orr has a very difficult task ahead of him, and we can only wish him all the best. It is encouraging that the business community is continuing its investments and support despite the civic mess. Dan Gilbert's vision and investments (which I was fortunate enough to be able to tour this month) are quite remarkable and almost exactly what I would have recommended for downtown, and the private funding for new emergency vehicles is as heartening as it is necessary. That being said, I hope such largess doesn't come without too many strings attached (e.g., an implicit requirement that the new vehicles be dedicated to Downtown/Midtown would not be helpful).

Momentum vs. impending emergency financial manager or bankruptcy for Detroit

It seems like the momentum surrounding the City has never been better. The investment. The enthusiasm. The energy. The new Hudson-Webber "7.2 SQ MI" report shared by the Free Press shows the evidence of progress in Midtown and Downtown: http://www.freep.com/assets/freep/pdf/C4201048218.PDF (this is an incredibly fascinating report and highly recommended read for those monitoring developments in the D)

It also seems like the City itself has never been worse. With the release of the Detroit Financial Review Team's findings, our suspicions have been confirmed. The City needs an Emergency Financial Manager or to go through bankruptcy.

Some observations on their findings (http://www.freep.com/assets/freep/pdf/C4201112219.PDF):

• Detroit will be spending ~$700 m on retiree healthcare over the next five years...Vanguard bought the entire DMC for just $365 m in cash (plus assuming liabilities and promises of future investments)...couldn't Detroit have just bought a hospital for $100 m and offered its retirees free healthcare for much less than what it is paying per year right now?
• Since 2006, Detroit's Revenues have exceeded Expenditures (though both have been declining) for a Current Surplus each year...what is resulting in deficits in the general fund are huge negatives in "Other Financing Sources"...I wonder if this is debt/interest payments?

DPS went through the Emergency Financial Manager route with Robert Bobb. He did a lot of good things, but I'm not sure he solved the underlying problems, and I certainly wouldn't call DPS a success story just yet. Rather, it sometimes seems like DPS is just being wound down almost, and schools are continually being closed. I'm not looking forward to a similar story with Detroit. An EFM in Detroit can't just look to fix Detroit finances by downsizing and cutting and cutting. That is important, but if Detroit is to have a future and not dissolve, the EFM also needs to work with Detroiters and look to growth and new opportunities.

Bankruptcy worked for GM and Chrysler. Detroit is probably a more complicated situation, but I wonder if this would be a better solution than an EFM. Or, as I have proposed before, someone can just buy the outstanding bonds (that should be going for pennies on the dollar) and just retire them...

Athletic bridges – Pistons in the D and Red Wings in the 'burbs?

With the Ilitch family finally making its intentions about a new downtown hockey arena official, and with the NHL finally resolving its labor dispute, it seems like the Red Wings will remain in downtown Hockeytown for the foreseeable future, which is great. The new complex seems like it would be very impressive and promising, and would turn countless parcels that Mr. Ilitch currently holds into productive assets for the city on multiple levels.

On the other hand, with the Palace remaining a fine venue, it does not appear like the Pistons and their improving product will move downtown anytime soon, despite sagging crowd levels. Investing hundreds of millions of dollars into a brand new facility when the Palace remains in great shape does not make financial sense. While the City is a core market for the Pistons, I can't imagine marginal ticket sales from a move downtown would offset the investment required anytime soon. Perhaps Mr. Gores should invest in express buses to bring downtown fans to the Palace instead.

That being said, I think the new hockey facility represents an interesting opportunity for future Red Wings and Pistons collaboration. Why not have the Pistons pay ~10 games a year downtown at the new stadium, and have the Red Wings play a similar number of games at the Palace? Such an arrangement could help increase accessibility to each franchise and broaden the fan base. NHL and NBA franchises share arenas in other cities, and the IHL did use the Palace in the 1990s, so the concept is technically feasible. This way, at least until the Palace fully depreciates, the regions assets could be utilized in a creative way that builds new bridges and connections.