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.
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.)
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?" Goodlatte asked.
GENERAL COUNSEL FOR
ODNI [OFFICE OF NATIONAL INTELIGENCE] ROBERT S. LITT: "Well, we
tried."
-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.
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 4-3/4% to 5-1/2%, 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.
LEONARD GARMENT, AN ADVISER TO PRESIDENT NIXON, DIED ON JULY 15, 2013. According to the Los Angeles Times, he was "born in Brooklyn in May 1924... the son of a Lithuanian father and Polish mother, both immigrants." Alan Greenspan was born in Manhattan in March 1926, the son of a Romanian father and a Hungarian mother, both immigrants.
During World War II, Garment played the saxophone and
Greenspan the bass clarinet in the Henry Jerome Orchestra. Middle Europe was
well represented. By the 1960s, Garment had risen to partnership at the Wall
Street law firm Nixon, Mudge, Rose, Guthrie, Alexander, and Mitchell. According
to Garment, Alan Greenspan happened to bump into the prospering and influential
attorney in 1967. The economist invited the lawyer to lunch at the Banker's
Club. Knowing the (mis)calculating economist has planned every opportunistic
step in his life, chances are Greenspan hid in a trashcan at the corner of Wall
and Broad, saw Garment approaching through his periscope, and offered him
front-row tickets to the World Series.
Garment mentioned his introduction of the future Federal
Reserve chairman to Presidential candidate Richard Nixon in his autobiography
(Crazy Rhythm). Greenspan's verbal meanderings were "pretty technical stuff"
and "Nepal Katmandu language." But Nixon loved it: "That's a very intelligent
man." Of Richard Nixon's misjudgments, this remains the most destructive to the
American people.
There are rumors Greenspan is writing another book, this one chastising us for always being wrong and explaining why he has always been right. As if we didn't know.
There are rumors Greenspan is writing another book, this one chastising us for always being wrong and explaining why he has always been right. As if we didn't know.
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