Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Detroit Bankruptcy Could Shake Muni Bonds to the Core

Interest-Rates / US Bonds Aug 02, 2013 - 02:33 PM GMT

By: Money_Morning

Interest-Rates

Shah Gilani writes: Detroit went bankrupt, but so what?

Its own decades-long gross political mismanagement, corruption and incompetence pushed the city over the cliff into bankruptcy.

Why should we care?


It could change the way investors look at muni bonds. And not for the better.

The largest Chapter 9 filing in U.S. history will reverberate well beyond this once- bustling city and its creditors.

What's most threatening to muni bond investors, and in fact all investors, is whether the city's general obligation bonds are secured or unsecured issues.

General obligation bonds, backed by a city's ability to levy taxes to pay interest and principal, are thought to be the safest of all munis.

Detroit is putting this to the test.

Without the ability to levy taxes on account of a dwindling population, and raise revenues sufficient to backstop its general obligation bonds, Detroit raises the crucial question that could affect muni bond investors around the country:

Are general obligation bonds unsecured and what are investors' rights?

The Supreme Court may be hearing this issue. And muni bond investing may be shaken to its core.

Detroit's Chapter 9 bankruptcy filing is what could hammer muni bond markets, because it gives the city the ability to possibly purge what everybody thought were its secured muni bond obligations.

And this could set a terrible precedent for investors everywhere as cities, counties and municipalities in financial straits around the country consider this form of bankruptcy.

Detroit's Sneaky Move

Everyone is mad at Kevyn Orr, the "emergency manager" of Detroit appointed earlier this year under a revamped state law designed to "alleviate the financial problems of Michigan's municipalities and school districts."

Creditors claim they were negotiating in good faith with the emergency manager instead of suing and pursuing their collateral rights when Orr blindsided them with the bankruptcy filing.

Detroit's ability to file for bankruptcy under Chapter 9 has been challenged in Michigan state court by the city's pension funds, bondholders, and other creditors who claim that in spite of the city being more than $18 billion in debt, it is not insolvent.

Last Wednesday U.S. Bankruptcy Judge Steven Rhodes, the federal judge overseeing Detroit's Chapter 9 filing from his Chicago bench, halted all lawsuits related to the city's bankruptcy filing, handing Detroit an early victory and clearing the way for it to proceed with its bankruptcy filing.

Detroit's pension plans alone have unfunded claims amounting to $9.2 billion, which breaks down into $5.7 billion of unfunded retiree health insurance obligations and $3.5 billion in unfunded pension payment obligations. While the pension fund plan managers speak for the plans, the city's 23,500 retirees have no formal legal representation.

Is Filing Chapter 9 A New Fad?

The Chapter 9 filing differs from a Chapter 11 bankruptcy filing for a corporation, which allows outside parties to make counter-proposals, or from a Chapter 7 filing that would require a liquidation of the city's assets.

Also, the Chapter 9 filing makes the city less vulnerable to any other parties controlling its much- needed restructuring.

"In a Chapter 9, which means the city holds more cards than they do in a private sector filing, the judge can't impose a plan on the city and no one else decides what they can do," said Michael Sweet, a noted authority on financial restructuring and bankruptcy.

What actually happens under Chapter 9 is:

  • The city gets an automatic stay against commencing or continuing collection efforts and foreclosures by creditors, but it doesn't prohibit payment of certain obligations if the city can and wants to make payments.
  • It's business as usual for Detroit. Section 904 of the Code prohibits the bankruptcy court from interfering in the political or government powers of the city or from use and enjoyment of income- producing properties.
  • Section 109(c) of the Code imposes eligibility on entities filing for relief under Chapter 9. Court hearings on a filing entity's eligibility are at the heart of the actions brought against the city's Chapter 9 filing in state court. There is no easy or quick answer to the eligibility question.

California's San Bernardino County, which filed for Chapter 9 protection, took almost a year to be declared eligible. The eligibility status of Stockton, California is still being argued in court more than 16 months after it filed for Chapter 9 protection from its creditors.

Ultimately, the eligibility issue could make its way to the Supreme Court, which may have to decide on Chapter 9 issues if more cities, counties, or municipalities threaten to restructure under court protection.

That's why the bankruptcy of Detroit will change government financing methods, investor appetite for government bonds, and how other American cities, municipalities and counties face the music from the Great Recession and their borrowing binges.

For more on what Detroit's bankruptcy means for muni bond investments, read here.

Source :http://moneymorning.com/2013/08/02/this-could-shake-muni-bonds-to-the-core/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in