Monday, July 22, 2013


I thought that it might have been Portugal that went into the tank over the weekend but nope, it was Detroit and painful as it is I guess we have to talk about it.  Firstly, we must all agree with Little Paulie for a change; Detroit is not the same as Greece.  I kid you not,  he actually wrote that but Paulie might be having a bit of the vapors lately as recent reports have the U.K. economy picking up a bit which in the World of Little Paulie can't possibly happen as it has ignored his advice for the past 18 months.  I can't wait to see his next piece on the subject.  But back to Detroit.

Detroit has filed for bankruptcy under chapter 9 of the Bankruptcy Code, that reserved for cities and municipalities.  A Federal Judge has been appointed to oversee the proceedings who, by virtue of the law, is the closest thing to God that one could encounter on this earth. Where this is going to go is anybody's guess, but the fact that it has occurred is a tragedy of huge proportions.  Fifty years ago, Detroit was the most prosperous city in the United States: how the mighty have fallen and how it is no one's fault and yet everyone is at fault.  Detroit has been for 60 years, a city under single party rule; incompetent and corrupt at worst and completely at the call of organized Labor.  It has been a one party, labor union and at the same time, a "one" company town the latter of the two which, while competent in their stated mission, were totally devoid of foresight and seemingly incapable of judging risk.  Labor, determined to squeeze the last drop out of every contract, was unable to understand that blood cannot come from the stone of management that never recognized their own competitive vulnerability or to take advantage of--at least as a bargaining tool--what the Japanese and the Germans recognized early on: one needed had to manufacture motor cars only in the state of Michigan.  It is the greatest piece of industrial stupidity in this nation's history and coupled with the lack of governance, this conclusion was inevitable.

Unfortunately, Detroit became the template for too many cities in the U.S. and we are now faced with a good many smaller Detroits but some larger ones as well (see: Chicago, Il.).  The immediate reaction has been to call for a Federal bail-out and with a nod to Little Paulie for perhaps getting it wrong again,  if one looks at the municipalities as Greece and Washington as--pick a name--the IMF, the ECB, Euroland North, and Barry as Angela, maybe things aren't so different Over Here as they are Over There.  The southern tier got one bail out, but the next one is very much in doubt.  Over Here, the first one may well be a non-starter because having witnessed the knock-on effect in Euroland, I suspect politicians of both stripes in D.C. are going to be loath to start the ball rolling for Detroit.

Which means, I suspect, if you are a creditor of this unfortunate city you may be looking at a serious hair-cut as the Euros like to say, showing their great command of the American idiom..not knowing that it is barely used any more.  Which means, I would think, that the Muni and for that matter the entire tax free bond sector might want to rethink their willingness to take on risk which has been remarkably unaffected up until recently.  Which seems to me that the horses' asses at Moody's and alike might wonder why they still carry Chicago as investment grade, but of course I've been wrong about this for the past two years.  Then again, as I have previously quoted:  "If 'tis now, 'tis not to come.  If 'tis not to come, 'tis now.  If it be not now, yet it will come."  Hamlet was nuts to be sure but he was a pretty smart guy.

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