CNN has a misleading editorial on the Detroit bankruptcy. Jeremiah’s bullshit alarm went off when Kevyn Orr, pictured here, was described as “unelected.” That’s a cheap shot. Bankruptcy managers are, of necessity, appointed. So are federal judges.
The author, Ross Eisenberry, suggests that bankruptcy is Mr. Orr’s scheme to cheat Detroit’s pensioners and put Wall Street bankers at the head of the payments queue. He forgets that Chapter 9 is called “protection” for a reason.
Bankruptcy allows the city to restructure its obligations in an orderly manner, rather than face lawsuits from multiple creditors. As Natalie Cohen puts it, bankruptcy gives the city breathing room.
It was only a matter of time before one creditor filed a suit that would force the city to protect itself.
If you want a grownup analysis of who gets what in bankruptcy, read Ms. Cohen. It’s a little more complicated than “screw pensioners, pay bankers.” The city needs protection from all of its creditors, and all of them are going to take losses – even the bankers.
It is heartbreaking to see Detroit’s retirees deprived of their pensions. They were robbed, and the authorities should track down the culprits. Indeed, the FBI has already indicted a few of them. That’s better justice than the easy answers proposed by Mr. Eisenberry.
Hundreds of millions of dollars of plan assets were [diverted] to the annuity savings accounts of active employees outside of the defined-benefit pension plan.
The thieves turn out to be city trustees who robbed the pension fund. Note that many were elected officials, unlike the “unelected” Kevyn Orr. They’re the ones who brought in the Wall Street sharks, took bribes, and went on junkets to Hawaii.
Still, stiffing the bankers sounds like a good idea. Why not do that, and make the pensioners whole? The practical answer is that Detroit will need continued borrowing to stay afloat, and that gets harder with each default. Rates for municipal bonds are already on the rise.
The moral answer is that there are pensioners on the other side, too – not some Wall Street bogeyman. Municipal bonds are “widow and orphan” investments, because they’re tax exempt and (were) considered safe. It’s a tough situation with no easy answers, and Kevyn Orr deserves a lot of credit.
The Eisenberry editorial is misleading and inflammatory. He has even got racial and class war stuff in there. We were so dismayed that we looked into this Economic Policy Institute that employs him. Turns out, it’s an advocacy group for the unions. See here.
The unions have a right to their opinion, and we would expect them to be advocating this line. Dressing it up as an “editorial,” though, is dishonest. At least one union, the AFL-CIO, is a party to the bankruptcy. Eisenberry isn’t even a real economist. He’s a lawyer.