Haste, not bias is what’s behind Detroit’s grand bargain

Detroit’s bankruptcy plan is finally underway and to no one’s surprise, much of the debate and controversy have concerned the inaptly named “grand bargain.”

As critics have pointed out, it’s not really a bargain or deal at all, but just a plan, for several foundations and state government, all of whom are otherwise uninvolved in the bankruptcy, to donate the equivalent of $816 million to Detroit under the condition that the holdings of the Detroit of Arts (DIA) be protected from sale, and the funds be devoted exclusively to minimize cuts to accrued pension benefits.

The holdout creditors Syncora and FGIC (“fidg-ick”) object on grounds of process and substance. They say the plan was borne out of a mediation process tainted by pro-retiree bias, and amounts to a “fraudulent transfer of assets.” Their unsecured claim for repayment is as strong as the pensioners. But because of the grand bargain, the gap between the two classes’ recovery rate could be over 100 percent [sic].

Politics, according to “these Huns on Wall Street,” explains why Detroit is illegally favoring Main Street over them. But there’s another explanation, namely the “fast track” nature of the bankruptcy. Detroit is cutting corners, legally, because it wants to end the bankruptcy as soon as possible.

Cities may can voluntarily decide to liquidate or monetize assets. And, outside of bankruptcy, a court could force them to raise taxes. No municipality can be compelled to sell off public assets to pay back creditors. That goes for inside and outside bankruptcy.

But Detroit itself put the art in play, initially. It is interesting to consider how things may have developed had Emergency Manager Kevyn Orr put his foot down from the start and asserted that Picasso was not up for discussion. Instead, shortly after being appointed but before filing for Ch. 9, Orr went to the DIA and told them they needed to somehow help Detroit with its fiscal struggles.

Still, that may have amounted to little had Judge Steven Rhodes not appointed Judge Gerald Rosen in August 2013 to direct a mediation process. Rosen, acting in a manner far more authoritative than one would expect from a “mediator,” then designed the grand bargain and became its advocate.

Momentum gathered, and after it came to light that Rosen’s plan would entail an injection of hundreds of millions of dollars, cash-strapped Detroit was all ears. The condition that Ford, Kresge et al. surely attached to the donation that the money had to go for pensions may actually have made the grand bargain even more enticing for the city.

Because, despite some initial tough talk by Orr about a coming pension Armageddon, it now seems evident that Detroit never wanted to pursue plan approval without the support of retirees. And it eventually got it. But were the grand bargain funds unrestricted and the city only able to use say $400 million as a pension cut buffer, or if the funds never were available in the first place, Detroit’s case to retirees would have been much harder to make. Winning the consent of the pension trustees and then retirees themselves created a sense of inevitability, which took tangible form in the settlements Detroit secured from several Wall Street creditors other than Syncora and FGIC.

Probably, a bankruptcy proceeding should not have a life of its own or sense of momentum. But this one did right from the start. The case was on a fast track, due partly to the city’s desire to wrap up before Orr’s 18 month term as Emergency Manager expired, but the pace was ultimately set by Judge Rhodes. The thought may have been that because this is the largest, most complicated Ch. 9 in history, it needs special discipline.

For evidence that fast track, not anti-Wall Street bias, was behind the city’s making the grand bargain central to its bankruptcy plan, recall the swaps negotiations. There, Detroit’s eagerness to settle created a pro-Wall Street bias. Judge Rhodes forced the city to scuttle an expedient deal because it was too generous to the banks.

In sum, the grand bargain may be legally questionable, but it and the bankruptcy plan as a whole are not agenda-driven, at least in terms of the city’s motivations. The larger issue is the hastiness. Detroit’s problems are deeper and much more complex than Stockton and San Bernardino, whose bankruptcies are proceeding at a comparatively leisurely pace. All these cities can’t be equally right about the best pace for a Ch. 9. Major doubts still exist about the basic competence of Detroit city government. Perhaps a more drawn-out bankruptcy could have left Orr time to attend to reforming operations before returning power to the elected pols. It surely would have resulted in a different plan of adjustment.

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