MotorCity Crashes, another domino down?

[lektrode]

damn i hate to be a doomer - what with all the 'good news' coming out of the beltway, just yesterday -
course, then then theres's this...
(and we'll just hold our noses at the stuff coming out of the lamestream media....)

but detroit just went belly-up:

• Updated July 18, 2013, 4:58 p.m. ET

Detroit Files for Chapter 9 Bankruptcy


and the liquidation begins?

Emergency Manager Orr Seeks to Liquidate Assets to Satisfy Creditors

• By
• MATTHEW DOLAN

The city of Detroit filed for federal bankruptcy protection on Thursday afternoon, making the automobile capital and onetime music powerhouse the country's largest-ever municipal bankruptcy case.
More

Read the filing.


The Chapter 9 case filed in U.S. District Court for the Eastern District of Michigan came after Kevyn Orr, the emergency manager, failed to reach agreements with enough of the bondholders, pension funds and other creditors to restructure Detroit's debt outside of court. The final decision rested with Republican Gov. Rick Snyder, who had appointed Mr. Orr as Detroit's overseer in March.
Previously

• Decision Day Approaches for Detroit
• Detroit Emergency Manager Orr Slogs Through Tough Job
• Detroit in Struggle Over Revenue
• Emergency Manager Orders Probe of Pension Funds
• Pennies or Bankruptcy, Detroit Tells Creditors

It was expected that the city would report long-term liabilities close to $20 billion. The city's assets were less clear, but Mr. Orr had called the city functionally insolvent and recently missed a payment to the city's pension system of nearly $40 million.
The financial outlook has never been bleaker for the Motor City, which has shrunk from its peak of nearly two million people in 1950 to 700,000 today.
Hurt by a flight of residents and businesses to the suburbs, cuts in state aid and a crash in real-estate values, Detroit borrowed to meet operating costs as well as long-term liabilities such as pensions and health care for retired city workers.
Detroit's Glory Days

View Slideshow



Associated Press Henry Ford and Edsel Ford celebrated with photos on the production line as their 20,000,000th automobile rolled out of the factory on April 15, 1931.





As a result, Detroit has spent on average $100 million more than it took in every year since 2008.
Most at risk under the bankruptcy case is the city's $11 billion in unsecured debt. That includes almost $6 billion in health and other benefits for retirees; more than $3 billion for retiree pensions; and about $530 million in general-obligation bonds.
A plan Mr. Orr disclosed last month calls for paying off the majority of what secured creditors such as certain bondholders are owed while offering pennies on the dollar to unsecured bondholders, unions and pension funds.
The strategy is likely to prompt heated debates before a bankruptcy judge as each group argues its case for why it deserves a bigger payout.
Municipal-worker retirees are set to get less than 10% of what they are owed under the plan.
Write to Matthew Dolan at matthew.dolan@wsj.com
A Long, Sad Decline

Detroit's population fell more than 26% from 2000 to 2012 and totals about 700,000—down from almost two million in 1950, according to the census.
An estimated 40,000 structures or land parcels sit vacant or empty.
The city spent $100 million more than it took in every year since 2008, on average—borrowing the rest.
Some 36% of Detroiters lived below the poverty level between 2007 and 2011, the census found.
In 2012, Detroit had the highest violent crime rate for a city with more than 200,000 residents, the FBI says.

[Mega]

Re: MotorCity Crashes, another domino down?

http://www.zerohedge.com/news/2013-0...etroits-bankru

[lektrode]

Re: MotorCity Crashes, another domino down?

http://www.zerohedge.com/news/2013-0...etroits-bankru


When 60 Years Of Lies Clash With Reality: Michigan Governor Snyder Authorizes Detroit's Bankruptcy

a VERY appropriate headline...

[charliebrown]

Re: MotorCity Crashes, another domino down?

A plan Mr. Orr disclosed last month calls for paying off the majority of what secured creditors such as certain bondholders are owed while offering pennies on the dollar to unsecured bondholders, unions and pension funds.
The strategy is likely to prompt heated debates before a bankruptcy judge as each group argues its case for why it deserves a bigger payout.
Municipal-worker retirees are set to get less than 10% of what they are owed under the plan.

What??? If I am a retireed grunt of the city of Detroit, and have a $50,000 a year pension, It is going to be cut to $5,000 a year????
Or does the pension fund have many diverse assets and only the portion in city bonds will get the 90% hair cut???

Is this a result of the population ponzi?? Without an ever increasing people base, the city goes kaboom. What great American city is next??? Cleveland?

[dcarrigg]

Re: MotorCity Crashes, another domino down?

What??? If I am a retireed grunt of the city of Detroit, and have a $50,000 a year pension, It is going to be cut to $5,000 a year????
Or does the pension fund have many diverse assets and only the portion in city bonds will get the 90% hair cut???

Is this a result of the population ponzi?? Without an ever increasing people base, the city goes kaboom. What great American city is next??? Cleveland?

Welcome to the financialized economy. It's a brave new world where you grow or die. It's a levered world, where an additional 1% added growth brings 10000% more capital, and 1% less is just as damaging. Steady margins and revenues day in and day out never really move the needle.

It's a world where Tesla has a quarter the market capitalization of GM and has an operating margin of -95%. Even the prospect of growth can make billionaires out of failed ideas. But begin to shrink for just one second and the ratings agencies and the automatic formula herd behind them foam at the mouth to send you the way of old yeller.

Everything is set up to discourage and dissuade stability and stasis. Everything must always be on the move. That which shrinks this quarter must be swiftly killed. The snake oil salesman on the corner who promises a quick cure and fast growth is handsomely rewarded. And the big decisions as to who should grow fat and who should be euthanized go to young 20 something boys in Manhattan who may not necessarily have the slightest clue about how any of these industries or towns actually work.

Brave New World indeed.

[GRG55]

Re: MotorCity Crashes, another domino down?

Welcome to the financialized economy. It's a brave new world where you grow or die. It's a levered world, where an additional 1% added growth brings 10000% more capital, and 1% less is just as damaging. Steady margins and revenues day in and day out never really move the needle.

It's a world where Tesla has a quarter the market capitalization of GM and has an operating margin of -95%. Even the prospect of growth can make billionaires out of failed ideas. But begin to shrink for just one second and the ratings agencies and the automatic formula herd behind them foam at the mouth to send you the way of old yeller.

Everything is set up to discourage and dissuade stability and stasis. Everything must always be on the move. That which shrinks this quarter must be swiftly killed. The snake oil salesman on the corner who promises a quick cure and fast growth is handsomely rewarded. And the big decisions as to who should grow fat and who should be euthanized go to young 20 something boys in Manhattan who may not necessarily have the slightest clue about how any of these industries or towns actually work.

Brave New World indeed.

Welcome to Planet ZIRP

Where the airplanes have no controls except for an on/off switch for the engines...

[lektrode]

Re: MotorCity Crashes, another domino down?

Welcome to Planet ZIRP

Where the airplanes have no controls except for an on/off switch for the engines...

and some of us, back _here_ in the 'wide end' are _still_ lookin fer some peanuts and drinks!

[jneal3]

Re: MotorCity Crashes, another domino down?

What??? If I am a retireed grunt of the city of Detroit, and have a $50,000 a year pension, It is going to be cut to $5,000 a year????
Or does the pension fund have many diverse assets and only the portion in city bonds will get the 90% hair cut???

The wording is confusing; the pension plans are in fact underfunded, but the 90% hair cut applies to the amount owed to the plan by the city, not the entire plan. Pensioners will probably see a 50% cut in their monthly payment, which is horrific enough, but not 90%. They will lose healthcare coverage though - Obamacare to the rescue?

[GRG55]

Re: MotorCity Crashes, another domino down?

The deleveraging continues and Detroit is just one more event in a very, very long process that started three decades ago.

Debt levels almost everywhere around the globe are still too high, higher than the income available to service them, even in an era of ZIRP referenced cost of debt.

In different jurisdictions around the world pretty well every tactic known to man has been applied to slow the pace of deleveraging to avoid another Great Depression:
1) Lower interest rates; 2) Reschedule debt; 3) Transfer debt from private balance sheets to the public balance sheet, which presumably has more capacity to service it; 4) Extend more credit to debtors to be used for immediate debt servicing so creditors don't take an immediate loss; 5) Impose fiscal "austerity" to try to cap any increase in the public debt; 6) Increase public sector revenues through "windfall" taxes or outright confiscation of assets by governments; 7) Depreciate the currency (reflation) to lower the real cost of the debt; 8) Debt forgiveness, whether voluntary or through involuntary defaults.

I'll make the proposition that the deleveraging that is going on now actually started 30 years ago when Volcker jacked interest rates. We came out of the inflationary 1970s with too much debt in the "advanced" economies...and that was reflected in record commodity prices (including oil and gold) and inflated property values. From the late 1960s and through most of the 1970s it paid to borrow as much as possible and buy the biggest home you could "afford" using the biggest mortgage you could take on. The magic of inflation did the rest. At that time the world was dominated by the economies of western Europe and North America (Japan was just emerging) and therefore that is where the debt problem was then concentrated.

What the municipal workers of Detroit are experiencing now started to be experienced by the retired workers in many industries during the Reagan (Revolution) and Thatcher years as the US and UK economies were restructured in the 1980s. The father of a friend of mine, an airline pilot who retired in the early 1980s at the top of his career as a B747 captain at the mandatory age of 60, three years later lost 60% of his pension overnight when the airline went bankrupt during the Reagan deregulation era.

In one form or another this de-leveraging has been going on ever since the Volcker Sledge Hammer. Debt in excess of the ability to service it is a continuing story. Twenty years of constant "restructuring" and downsizing in the commodity producing industries after the 1970s excesses, the Mexican "peso crisis" (Brady bonds to the rescue), the Ruble crisis (LTCM), the Asian crisis, Argentina's repeated debt defaults (it will probably hit the wall again with in the next 18 months), the 1992 Pound Sterling ERM crisis (which made Soros famous), Economic M.A.D. (© EJ) which is now unwinding in the form of yet another global Emerging Markets liquidity crisis as trade and capital flows inevitably reverse with a vengeance, all of it underlined by the Great Global Property Bubble, which has almost come full circle around the globe back to the west coast where it started (SoCal) as it busts across the Pacific arc of Sydney, Shanghai & Vancouver.

When 1 through 7 above aren't enough, number 8 becomes inevitable. From all reports there's a whole raft of local governments in China with financial statements that are indistinguishable from Detroit...

[jk]

Re: MotorCity Crashes, another domino down?

volcker moved the needle to make REAL interest rates quite high, thus promoting deleveraging in the early '80s. [but recall that inflation actually had already done a lot of the deleveraging work by the time volcker applied the sledge hammer.] in recent years, however, with negative real rates, there has not been a rate-based motivation to deleverage.

[GRG55]

Re: MotorCity Crashes, another domino down?

volcker moved the needle to make REAL interest rates quite high, thus promoting deleveraging in the early '80s. [but recall that inflation actually had already done a lot of the deleveraging work by the time volcker applied the sledge hammer.] in recent years, however, with negative real rates, there has not been a rate-based motivation to deleverage.

Indeed. Instead the corporate sector in North America and Europe has been levering up their balance sheets in what they see as a highly overvalued fixed income market as they get ready to ride out the next global downturn/recession and things get more difficult...which may now be underway given China and EM data coming out. Last week I read an article about the significant increase in hybrid capital product issue from the corporate sector. I don't really understand who in their right mind bought Apple's debt, but it's difficult to argue that Apple and so many others aren't doing exactly the right thing as a company. And let's not forget how quickly the bonds from that bastion of EM credit quality, Rwanda, were snapped up. Reminds me of Argentina in the 1990s.

But rates were driven negative to deliberately slow the pace of deleveraging...first after the tech bubble burst, and then after the financial crisis. Unfortunately growth rates have underperformed almost everywhere compared to the rosy projections of Central Bankers and politicians, so aggregate debt servicing capacity is still not adequate in many jurisdictions. In some cases the time was sufficient to heal damaged balance sheets and credit markets, and in some cases, like Detroit, time ran out. Now the Fed and BoE have fired the starting gun on what will ultimately progress to be a lengthy but unavoidable deleveraging of Central Bank balance sheets, as interest rates for companies and households begin to rise.

[jk]

Re: MotorCity Crashes, another domino down?

Indeed. Instead the corporate sector in North America and Europe has been levering up their balance sheets in what they see as a highly overvalued fixed income market as they get ready to ride out the next global downturn/recession and things get more difficult...which may now be underway given China and EM data coming out. Last week I read an article about the significant increase in hybrid capital product issue from the corporate sector. I don't really understand who in their right mind bought Apple's debt, but it's difficult to argue that Apple and so many others aren't doing exactly the right thing as a company. And let's not forget how quickly the bonds from that bastion of EM credit quality, Rwanda, were snapped up. Reminds me of Argentina in the 1990s.

But rates were driven negative to deliberately slow the pace of deleveraging...first after the tech bubble burst, and then after the financial crisis. Unfortunately growth rates have underperformed almost everywhere compared to the rosy projections of Central Bankers and politicians, so aggregate debt servicing capacity is still not adequate in many jurisdictions. In some cases the time was sufficient to heal damaged balance sheets and credit markets, and in some cases, like Detroit, time ran out. Now the Fed and BoE have fired the starting gun on what will ultimately progress to be a lengthy but unavoidable deleveraging of Central Bank balance sheets, as interest rates for companies and households begin to rise.

i question whether cb's deleveraging is indeed unavoidable. if they just stop expanding their balance sheets that will constitute [i believe] intolerable tightening. they will certainly never sell their [sometimes impaired -i.e.mbs] assets, although they could allow them to mature and neglect to roll them over. i predict that going they will always choose to roll them over, until after we have some kind of currency crisis. i don't think the economy can withstand any tightening in any form.

[GRG55]

Re: MotorCity Crashes, another domino down?

i question whether cb's deleveraging is indeed unavoidable. if they just stop expanding their balance sheets that will constitute [i believe] intolerable tightening. they will certainly never sell their [sometimes impaired -i.e.mbs] assets, although they could allow them to mature and neglect to roll them over. i predict that going they will always choose to roll them over, until after we have some kind of currency crisis. i don't think the economy can withstand any tightening in any form.

The Fed has to get ready for the next credit crisis...without creating it. A serious challenge indeed.

The Fed intends to reverse course on QE. I think its clear the Fed is starting to articulate that pending policy change and would seem to be conditioning the market - which foolishly expected "QE Forever". If it repeats the threat enough times, in soothing words of course, perhaps the Fed thinks the market reaction will be more muted in the actual event when it finally initiates the deadly deed of tapering?

The danger is the extraordinary valuation levels to which the fixed income markets have been driven...EJ wrote about the distortions in the pricing of USTs in his latest work, but the really frightening part of the fixed income market is how overpriced low quality credit has become by any rational or historical measure. EJ expects "the re-pricing [of bonds] will be sudden and violent".

I suppose the question is: If (when?) that happens will the Fed chicken out and revert, or is it going to force a credit market reset in the belief that US banks and businesses have had enough time to strengthen their balance sheets to weather that storm?

I don't think for a moment that the Fed can can reverse policy without disrupting the credit markets. But I don't think we can be at all certain they won't try.

btw: I don't think the Fed's timing is at all an accident or coincidental. 1. QE is demonstrably less effective as time passes. 2. The Fed has bought the fiscal authorities time to get together a coherent policy and economic restructuring framework, and look what has happened - no action but the deficit declined anyway. 3. We are in a low-inflation, perhaps disinflationary, phase globally now that China is slowing measurably, EM economies are under considerable stress and Europe continues to contract all of which is a headwind for rising US bond yields...if it happens, a decline in oil prices will cement the disinflationary trend. The US economy continues to grow, albeit slowly (inflation? what inflation?), and the 2013 version of "That Giant Sucking Sound" is coming from Fortress America as capital flows inward supporting the US$ (to the complete disbelief of the doomers). This might be the best chance the Fed thinks it will ever get to end QE, and set themselves up to eventually start to unwind that massive balance sheet.

[jk]

Re: MotorCity Crashes, another domino down?

what you call the fed's best chance to exit qe sounds like a recipe for the dreaded deflation. in fact it sounds like a scenario that requires increased stimulus in some form, and the fiscal authorities are paralyzed.

[GRG55]

Re: MotorCity Crashes, another domino down?

what you call the fed's best chance to exit qe sounds like a recipe for the dreaded deflation. in fact it sounds like a scenario that requires increased stimulus in some form, and the fiscal authorities are paralyzed.

Well Bernanke did say that the Fed were short of achieving both sufficient employment and sufficient inflation. "Guiding markets" to the rescue???