Detroit and the Law

August 9th, 2013
in Op Ed

by Frederick J. Sheehan, Aucontrarian

The City of Detroit, Michigan's petition for "bankruptcy protection and the adjustment of debts under chapter 9 of the United States Bankruptcy Code" (case number 13-53846 United States Bankruptcy Court for the Eastern District of Michigan, Southern Division), offers plenty of opportunity.  Among the potential windfalls are to those who buy contracts at a discount, the clarity of bondholder claims, and the clarity of retiree benefit claims.

For claimants, it is now a roll of the dice. When a municipality enters bankruptcy, the court can exert enormous control over mayors, city councils, and legislative bodies.

Follow up:

The judge is a wildcard. In this case, the nitwit-end-of-the-spectrum has already revealed itself. Ingham County Circuit Judge Rosemary Aquilina ruled - if that's what this is called - that Michigan Governor Rick Snyder should read "certain sections of the [state] constitution and [reconsider] his actions." According to the Detroit News, Her Honor hectored the Michigan attorney general:

"It's cheating, sir, and it's cheating good people who work."

Presumably, she is addressing city workers' negotiated benefits, which is not a reason to banish the bankruptcy petition, but, if she believes what she claims, for the court to rule. This "unconstitutional" prerogative is bunk, stated by the public-union representatives and some untutored legal scholars.

On the other end of the spectrum, public unions are "unconstitutional," and should have been dismantled as such 80 years ago.  Public workers already had Civil Service protection, which was specifically authored for the protection of state and municipal workers against the turmoil of party politics and Tammany Hall job favors. If the Civil Service protection was inadequate, the lawful response was to strengthen the hand of the Civil Service.   Politicians, of course, would be the last to favor such resolve.

School children are taught the three branches of government balance and adjourn interests in a republic. The judicial branch has let us down (as have the others).  It has reinterpreted the Constitution to avoid unpopular decisions.

The judicial branch is in decline.  Its capricious disposition has sown doubts among the people.  What is this "secret FISA court," authorizing the National Security Agency's petitions to spy on every American because each might be a foreign menace?

Ingham County Circuit Judge Rosemary Aquilina claimed a second reason Governor Snyder should be required to deny Detroit's bankruptcy petition:

"It's also not honoring the [United States] president, who took [Detroit's auto companies] out of bankruptcy."

Aquilina is a reason The Onion must create ever more improbable inventions of the absurd to stay in business. (If Aquilina has a say, recall what happened to bondholders in the General Motors and Chrysler bankruptcies.)

City of Detroit, 1933

The following is quoted from "The Coming Collapse of the Municipal Bond Market":

February 1933 - City of Detroit defaulted on interest payments. The 1933-1934 Detroit budget dedicated 50% of estimated tax revenue to interest payments. Tax delinquencies rose from 36% in 1932-1933 to 80% in 1933-1934. Detroit issued scrip (rather than money) to pay city employees. Scrip was refused by local stores. (Many other cities issued scrip for wages in the Depression.) Detroit was able to negotiate much lower interest payments and longer debt maturities with bondholders. It was able to do so because bondholders knew Detroit was out of money with no ability to borrow.

Please note the parties compromised and did not rely on a court decision. It was approved by bondholders because they knew Detroit had no means to pay its bills, other than a reduction of interest payments. (After the negotiation succeeded, City of Detroit bonds rose $25.)

May 1933 - Yields on some issues became meaningless. All City of Miami bonds (yields ranged from 4-¾% to 5-½%, maturities from 1935 to 1955) were quoted at $26. It was nearly impossible to get price quotes for a wide range of municipal bonds. Arkansas and Detroit were in default.

Some other developments during the 1930s, trends which may or may not be mirrored as more cities go to court:

By 1933 - Across the U.S., every form of municipal expenditure had been cut since 1930 with the exception of relief payments. Welfare had risen from $100 million in 1929 to almost $500 million. Grants-in-aid from federal government to municipalities rose from $500 million in 1933 to $1.6 billion in 1934.

1933 - General sales taxes were introduced on a significant scale in Illinois, Michigan, New York and North Carolina. (Ability to raise taxes at this time was concentrated in the states rather than cities.)

April 1933 - House of Representatives bill that would have given the courts the power to delay municipal debt payments up to 10 years. This cleared the House Judiciary Committee. Municipal bond prices fell. Bill was defeated on a House vote.

May 1934 - Municipal Bankruptcy Bill became law. Set a formula under which insolvent municipalities could refinance themselves - at the expense of current creditors - in "[f]ederal courts under their constitutional powers to deal with bankrupts." In May 1936, the U.S. Supreme Court ruled the Municipal Bankruptcy Bill was unconstitutional.


Some differences between then and now: Municipal workers' benefits were insignificant; the sense today there is always more money to solve a problem; the arbitrary dismissal in courts of legal contracts.


Other Items Too Ridiculous to be True (But Are)

AT A HEARING OF THE HOUSE JUDICIARY COMMITTEE ON TUESDAY, JULY 16, 2013, The NSA (National Security Agency) came under attack. Rep. Bob Goodlatte (R-Va.), Chairman of the committee, said he was surprised that the programs had been kept secret for so long.

REPRESENTATIVE BOB GOODLATTE: "Do you think a program of this magnitude gathering information involving a large number of people involved with telephone companies could be indefinitely kept secret from the American people?"


— Washington Post, July 17, 2013


Federal Reserve Chairman Ben S. Bernanke or his successor may be asked a similar question.

For those old enough to remember, does the current atmosphere remind you of the early days of the Watergate hubbub? That is, the odd sensation of keeping one eye on TV hearings (during the daytime, an oddity) not knowing if the legal to-and-fro would develop, but with a sense this was an important, historic moment.

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