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Sunday, July 21, 2013

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.

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