Friday July 19 2013
TAMUSA accounting student Joe Dupuy requests a comment on the Detroit bankruptcy. He noted I have mentioned this in class.
Here is a good WSJ explanation of what is going on.
Detroit joins Jefferson County AL, Stockton, CA, and San Beniamino, CA in BK court. Chapter nine was created for cities after the New York City debacle of 1976. President Gerald Ford never actually told NYC to drop dead. But as this article illustrates, a dose of reality may be coming for similar cities.
Here is what is really happening.
ON my investing blog I have termed this The New Civil War. The maps of the North South conflict, the Red versus Blue states for Republican and Democrat, and the Right to Work Map, are all the same. Union contracts have broken cities and states now just as they broke New York in 1976. Amazingly Michigan has now passed a ;right to work law. A right to work law was allowed by the Taft Hartley Act of the late 1940s. All the southern states have one, a worker does not have to join a union to obtain employment. For years Detroit politicians simply re cycled union paychecks into compulsory union dues which were funneled to Democrat politicians. Today that former 1950s city of 1.5 million has about 650,000 residents.
Other large US Cities face similar fates, Los Angeles, Chicago, and even Houston have huge unfunded liabilities. The state ofIllinois another basket case, handing out tax favors to keep companies from leaving the state. Now that Detroit has legitimized Chapter Nine, oh and don't forget the capital of Pennsylvania, Harrisburg, more cities will be following this route. Today Chicago Public Schools lay off 2,110 teachers and staff.
In bankruptcy all agreements can be re negotiated, including union agreements. Who will win, the creditors, the employees and retirees, or the citizens, or will all lose something?
I have maintained that Meredith Whitney needed to broaden her definition of default. I suspect that everyone involved with share in the default, not just the bond holders.
I have also maintained that the US is playing out 1973-74 alll over again. In the 1970s it was New York City in trouble, now we have multiple cities and entire states in trouble.