A while back I dissected the debt of Detroit, the classic America 2.0 case. By this, I mean a gigantic government presence, working with manufacturing and unions to push off obligations into the future with no clear plan of really what to do. In the end, of course, it all came crumbling down and yesterday we got a slight glimpse into just how bad it can get.
To review, here is the diagram I had to make after reading several sources on the subject, to help wrap my head around the calamity that was the city of Detroit’s books:
This looks crude, and it is, but it really helped me get my brain around the nightmare.
From everything I have been reading, Kevyn Orr is getting ready to propose that the general obligation and pensions get settled out at .25 on the dollar. That sounds a bit expensive to me, and as Lex Green said to me in an email certainly isn’t “fire sale” prices yet, but that is what the consensus seems to be saying.
In an odd bit of news, many private foundations have been trying to gather enough money to offset an auction of Detroit’s art collection, estimated by some to be worth up to a billion dollars. If I were Orr, that would have been the first thing I would have done is liquidate that stuff, but I am quite a bit less sensitive than I would need to be to ever consider a career being a politician.
All of this is subject to the whims of the BK judge, but if I were a retired Detroit fireman, I would certainly begin tightening the belt stat, if that wasn’t done already.
This may affect municipal investments, but honestly I imagine any fallout from it is already baked into the pie.
Is Chicago next? We shall soon see.
From a political standpoint, the Republilcans should make the Democrats own this just like they should own Zerocare ™ and the nightmare in Illinois/Chicago that is coming down the tracks. How easy can it get for a Republican? All they have to say is “look at that” and they should get easily elected in any of a number of districts in 2014.
(Disclosure – I have many different municipal investment vehicles in my portfolio).
Cross posted at LITGM.