Detroit declares bankruptcy, with $18 billion in debts

Detroit on Thursday became the largest American city to declare bankruptcy, officially succumbing to job losses in the auto industry, decades of population flight, and the collapse of revenue to cover everything from policing to street lighting. "Let me be blunt: Detroit's broke," Michigan Gov. Rick Snyder said as he recited a litany of ills that helped steer the decision and that made Detroit — once a gleaming example of American industry — into an urban wreck with debts of $18 billion. The announcement came four months after Snyder named Washington bankruptcy expert Kevyn Orr — who represented Chrysler during its successful restructuring — as Detroit's emergency financial manager to try to heave Detroit out of its fiscal morass.

The bailout will be framed in the context of race. Anyone who opposes it will be called a racist. After all, it is a disproportionately black city.

Pensions are the key to the bailout. Instead of reducing the obscene union pensions, the federal government will assume them for 100 cents on the dollar. After all, it isn’t fair for these hard working government employees to take the kind of hit those of us in the private sector have been taking for decades. Politicians can frame this as a humanitarian gesture and not a direct bailout of the city.

The second dimension will be huge infrastructure projects, funded by the federal government. These will be packaged as investments in people and jobs. Of course they will really be payoffs to the unions and corrupt politicians. None of the unskilled chronically unemployed in Detroit will benefit from these jobs.

With the federal government bankrolling pensions and infrastructure, and the debt service eliminated in bankruptcy court, the city’s operating budget can probably be brought in line with tax revenue for a few years. This will allow Obama and Congress to claim they didn’t bail out the city’s operating budget and the city is making it on its own. After a few years the city will start borrowing again to add to the bureaucracy, pay higher benefits to union public workers, and repair the “new” buildings that have been vandalized by the citizens. The slide to bankruptcy will begin again.

Clearly the bondholders will lose 100% in bankruptcy. But as we know, Wall Street today doesn’t take kindly to losses. The question therefore is, how will Congress bail out the holders of Detroit’s debt and keep it secret from the public? Sounds like a job for a Congressional staffer. Bury a payoff to the banks in a 2000 page bill such as the coming amnesty bill. The press will never report it and both parties will be complicit.

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