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detroit bankruptcy unions vs wall street


It’s ironic that in the same 48 hour period that Ford and General Motors announced multi-billion dollar profits over the previous three months and their stock prices are the highest they’ve been since the economic collapse, the city of Detroit officially requested bankruptcy protection. With tens of billions of local taxpayer dollars at stake, the city’s two main financial stake-holders – investors and unions – are set to battle it out.

Bailout or no bailout

Wall Street investors and unions alike would love nothing more than to see a government bailout of Detroit. Smaller cities in California have gone bankrupt recently and they didn’t receive a bailout. But supporters are likely to remind President Obama that the $18 billion of debt Detroit faces is less than the $20 billion dollar auto bailout. Turning their backs on the city may show the White House and Congress in the light of only caring about multi-national corporations and not the people. That would no doubt infuriate many since it’s the American people’s money being used to bailout the corporations instead of the American people.

In Detroit’s case, half of their $18.2 billion in debts is owed to government employees, retirees and their unions. The other half is owed to bond holders, investors, companies that provide city services, and even victims of police brutality. The first step in the process however is getting a bankruptcy judge to accept the bankruptcy. And both the investors and unions would like to see that application rejected so they could go on squeezing the taxpayers for every single penny owed, plus interest, fees, fines and all those other little banking charges that the American people have come to loathe.

Perhaps the biggest reason there probably won’t be a bailout is because almost everyone familiar with municipal bonds has just been shocked into admitting that Detroit is little different than every other large city or small town in America. Many fear the motor city is just the first domino of many more to fall. And there’s no way the American people can bail out the whole of the American people.

In Detroit, the average debt owed by every resident is $27,000 and that doesn’t even include their share of the county debt, state debt, national debt or even their own personal debt. The ugly truth is, the situation is the same for most Americans. Do you have the $250,000 you owe people right now? Could you cough it up if JP Morgan, China or the government employee unions demanded payment? And that’s for every man, woman and child.

But that hasn’t stopped organized labor from using its influence with the Democratic Party to ask for a federal bailout. In an announcement in Washington DC yesterday by the AFL-CIO, the union is calling on President Obama, the US Congress and the state of Michigan to match funds and bail out Detroit.

As detailed by the New York Times, the union called on Congress and the President for help. “There is no question there’s a crisis in Detroit, but impoverishing the city’s public service workers and further decimating public services is not the solution,” Lee Saunders, the president of the American Federation of State, County and Municipal Employees, and chairman of the A.F.L.-C.I.O. Political Committee said, “The whole country is watching how this crisis gets resolved. As the nation emerges from the worst of the Great Recession, it is time for Congress and the White House to make it clear they will not turn their backs on our urban centers.”

Legal battle

If Detroit is allowed to proceed with its bankruptcy, it will be up to the courts and judges to decide who gets paid back and at what percentage. Federal courts, as confirmed by at least two Supreme Court decisions, insist that the federal government has little authority over a municipal bankruptcy due to the Tenth Amendment’s protection of states rights. But federal authorities could take control to oversee and sign-off on any restructuring or deals with unions or bond holders.

Unions would like to see the bankruptcy handled at the state level where it’s assumed that Michigan has strong laws protecting government employee pensions, contracts and financial obligations. Courts in other states have repeatedly said that any cutting of already-agreed to employee pay, pensions and medical benefits is un-Constitutional to one degree or another depending on each state’s Constitution.

A popular topic on financial channels since the bankruptcy announcement, most analysts agree it’s simply too soon to predict what will happen in Detroit’s case. Many believe that ‘preferred’ bond holders will be paid back at 100%, while holders of ‘general bonds’ will only receive a fraction of what they’re owed.

Local businesses owed money by the city may also be out what they’re owed or they may be awarded a percentage of the balance due. Union employees, as has been the case in other municipal and corporate restructurings, may see a civil war within their own ranks. Retirees and current employees could be paid in full for the rest of their lives, while new hires would see their pay and benefits slashed down to poverty level.

Again, it will most likely come down to judges and bankruptcy courts to decide the fate of Detroit and its debts. And most experts estimate that process will take 12-18 months.

25 Facts about the Fall of Detriot

The website TheEconomicCollapseBlog.com produced an interesting list titled, ’25 Facts about the Fall of Detroit that will leave you shaking your Head’. We thought our readers might enjoy it as well:

1) At this point, the city of Detroit owes money to more than 100,000 creditors.

2) Detroit is facing $20 billion in debt and unfunded liabilities.  That breaks down to more than $25,000 per resident.

3) Back in 1960, the city of Detroit actually had the highest per-capita income in the entire nation.

4) In 1950, there were about 296,000 manufacturing jobs in Detroit.  Today, there are less than 27,000.

5) Between December 2000 and December 2010, 48 percent of the manufacturing jobs in the state of Michigan were lost.

6) There are lots of houses available for sale in Detroit right now for $500 or less.

7) At this point, there are approximately 78,000 abandoned homes in the city.

8) About one-third of Detroit’s 140 square miles is either vacant or derelict.

9) An astounding 47 percent of the residents of the city of Detroit are functionally illiterate.

10) Less than half of the residents of Detroit over the age of 16 are working at this point.

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11) If you can believe it, 60 percent of all children in the city of Detroit are living in poverty.

12) Detroit was once the fourth-largest city in the United States, but over the past 60 years the population of Detroit has fallen by 63 percent.

13) The city of Detroit is now very heavily dependent on the tax revenue it pulls in from the casinos in the city.  Right now, Detroit is bringing in about 11 million dollars a month in tax revenue from the casinos.

14) There are 70 “Superfund” hazardous waste sites in Detroit.

15) 40 percent of the street lights do not work.

16) Only about a third of the ambulances are running.

17) Some ambulances in the city of Detroit have been used for so long that they have more than 250,000 miles on them.

18) Two-thirds of the parks in the city of Detroit have been permanently closed down since 2008.

19) The size of the police force in Detroit has been cut by about 40 percent over the past decade.

20) When you call the police in Detroit, it takes them an average of 58 minutes to respond.

21) Due to budget cutbacks, most police stations in Detroit are now closed to the public for 16 hours a day.

22) The violent crime rate in Detroit is five times higher than the national average.

23) The murder rate in Detroit is 11 times higher than it is in New York City.

24) Today, police solve less than 10 percent of the crimes that are committed in Detroit.

25) Crime has gotten so bad in Detroit that even the police are telling people to “enter Detroit at your own risk“.

A final warning

It’s appropriate that we quote The Economic Collapse Blog considering this is exactly what they’ve been accurately predicting for some time now. In fact, consider these final words of warning from the website:

‘Detroit is only just the beginning.  When the next major financial crisis strikes, we are going to see a wave of municipal bankruptcies unlike anything we have ever seen before. And of course the biggest debt problem of all in this country is the U.S. government.  We are going to pay a great price for piling up nearly 17 trillion dollars of debt and over 200 trillion dollars of unfunded liabilities.

All over the nation, our economic infrastructure is being gutted, debt levels are exploding and poverty is spreading.  We are consuming far more wealth than we are producing, and our share of global GDP has been declining dramatically. We have been living way above our means for so long that we think it is “normal”, but an extremely painful “adjustment” is coming and most Americans are not going to know how to handle it.

So don’t laugh at Detroit.  The economic pain that Detroit is experiencing will be coming to your area of the country soon enough.’


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