Summary: What can investors learn from Detroit?Detroit was the worst of the worst. A city whose population had fallen almost 2/3rds over the last half century. A place where whole neighborhoods have been turned into urban prairie. It’s bankruptcy proceedings have been epic. What can we learn?Source: WikipediaFirst, do your homework. When Detroit filed for Chapter 9 protection, no one should have been surprised. The city’s decline has been evident for a long time. The last time Detroit’s population grew was in the 1940s. If people don’t live somewhere, they’re not going to pay the taxes necessary to support its debt.Second, one bankruptcy does not a meltdown make. In late 2010 there had been a lot of prophecies of doom for the muni market, punctuated by Meredith Whitney’s estimate of “hundreds of billions” of defaults over the next year on national TV. While her prediction may have been especially stupid, many other commentators had also called for a collapse. It didn’t happen. Muni bonds are generally safe, supported by stable tax and fee revenue. Even a basket-case like Detroit paid billions in obligations on schedule—until they ran out of money.But third, the past is not always prologue. Just because someone used to have money doesn’t mean they’ll have enough in the future. See number one above.Finally, never underestimate the power of politics. The two principal antagonists in the bankruptcy proceeding were pensioners and bondholders, overseen by Judge Stephen Rhodes. A preliminary reorganization plan was affirmed earlier this month. $7 billion in debt will be erased; pensions will be trimmed modestly; bondholders will receive 74 cents on the dollar. Before this, bondholder claims have always had priority. But financial seniority doesn’t secured the debt. The political power of the pensions held significant sway. They didn’t get everything, however. Even though those pensions were protected under Michigan law, when a city files for bankruptcy Federal law prevails.Detroit’s bankruptcy has been an exclamation point—a coda on the long ballad of the Financial Crisis that included the automakers’ retooling. It gives the City a fresh start. But can Detroit really turn around? That’s a different question. Douglas R. Tengdin, CFA Chief Investment Officer Phone: 603-224-1350 Leave a comment if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpdwww.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net
