Detroit going bankrupt

[obgyn65]

Just heard that Detroit is going bankrupt. I have some munis from Michigan. Not sure what's going to happen to muni bond holders.

[Gumby]

Are they issued by the City of Detroit or by the State of Michigan? If the State issued them, the Detroit bankruptcy is irrelevant. If they are issued by Detroit itself, then this article may help shed some light (or raise more questions).

http://www.nytimes.com/2011/12/24/bu...anted=all&_r=0

[imoldernu]

from the NYT article:

Quote:

In recent weeks, as Detroit officials have proposed paying off small fractions of what the city owes, they have indicated they intend to treat investors holding general obligation bonds as equal, in essence, to city workers — a notion that conflicts with the conventions of the market, where general obligation bonds have been seen as among the safest investments.

[ERhoosier]

Sad indeed. But having grown up in metro Detroit, I cannot honestly say I'm at all surprised. The seeds of greed & corruption sown over decades have apparently now born their sour fruit

[JOHNNIE36]

I think we are seeing a trend(?) in financial problems for many cities. I see where Harrisburg, PA is auctioning off city treasures and artifacts in order to pay off their obligations. Wasn't it some large city in CA (maybe Oakland) that is having their problems? And, I believe, the root cause of their problems are the pension plans. Believe I heard Detroit is $700M in debt just to the city employees pension plan. How did they get in that position?

[utrecht]

Because corrupt politicians borrow money from the pension fund and / or take a pension holiday and don't make the proper contributions. That's kind of like knowing that you need to save $20,000 per year to retire at 60 and then wondering why you cant retire at 60 after you borrowed from your 401k and didnt pay it back and / or decided not to make contributions a couple years because you decided to buy a new car instead.

[omni550]

Quote:

Originally Posted by JOHNNIE36 Believe I heard Detroit is $700M in debt just to the city employees pension plan. How did they get in that position?

Here's a quick timeline of how Detroit got to where they are today Detroit bankruptcy: How did it get to this point? | Money - Home

omni

[bUU]

Among all the transgressions and such, there is also the structural reasons why Detroit is bankrupt: In the old days, cities and towns that grew up on the profits from an industry became ghost towns when the profits dried up. If you removed the cost of actual violations of the law (as opposed to just differences of opinion about what is right or wrong), I wonder whether Detroit would really be in any better shape than it is now - I suspect not. Short of forcing Americans to buy American cars, and forcing American automakers to stay in Detroit, this situation was inevitable. The only difference now is that there is big (outside) money invested in the future of the city, instead of "just" the lives and work of its residents, as was the case in those old ghost towns.

[obgyn65]

Hello Gumby - please see the quote below. I have munis from Michigan (not City of Detroit per se), and not sure what's going to happen to them.

Investors, do you own Detroit municipal bonds? 4 things to know | MLive.com
"Just because bonds have the word "Detroit" in them, they may not be tied up in a potential bankruptcy. Likewise, there are bonds that don't mention Detroit in the title that could still be part of the city's debt.
For example, Detroit Public Schools is a separate entity from the city, so its bonds shouldn't be part of the bankruptcy. But there's a chance bonds issued by Wayne County could have a tie to Detroit, since cities sometimes use counties to issue debt to take advantage of a better credit rating, said Becky Gersonde, investment adviser representative with Heber Fuger Wendin Inc. in Bloomfield Hills. The firm's clients hold Michigan municipal bonds, but Gersonde said she does not believe any of the clients own Detroit debt."

Quote:

Originally Posted by Gumby Are they issued by the City of Detroit or by the State of Michigan? If the State issued them, the Detroit bankruptcy is irrelevant.

[Gumby]

Then your holdings are probably unaffected. If you want to be certain, you could ask the indenture trustee for the bonds at issue. The MSRB website linked in the article might help you find out who the trustee is for your bonds, or you could ask your broker for help.

[MichaelB]

Quote:

Originally Posted by obgyn65 Hello Gumby - please see the quote below. I have munis from Michigan (not City of Detroit per se), and not sure what's going to happen to them.

Oby, they will most likely be redeemed once they reach maturity. Despite the headlines, most bonds are paid. If you have doubts you can check the market price for your bonds to see if they have declined.

[Gumby]

Quote:

Originally Posted by MichaelB Oby, they will most likely be redeemed once they reach maturity. Despite the headlines, most bonds are paid. If you have doubts you can check the market price for your bonds to see if they have declined.

The market price at any point in time reflects a rough consensus among market participants as to likelihood of recovery in full, as well as a view about future interest rates. The consensus may be an informed consensus or little more than a guess.

General obligation bonds are not technically secured by anything other than the taxing authority of the issuer. That is, they don't have a lien on specific property. As you know they have always been considered to be very safe, but it is an open question as to whether they can be considered unsecured debt that is pari passu with pension claims and other unsecured claims. To my knowledge, this situation is sui generis in the annals of municipal bankruptcy.

In any event, if Detroit was not the issuer, the bonds are unaffected by the reorganization, although the market price of debt issued by other Michigan political entities may drop if bond buyers see this event as casting a pall over all Michigan issuers. It is an interesting case to be sure.

[obgyn65]

I just checked and the price did go down. I will keep you informed.

Quote:

Originally Posted by MichaelB Oby, they will most likely be redeemed once they reach maturity. Despite the headlines, most bonds are paid. If you have doubts you can check the market price for your bonds to see if they have declined.