ARBORWEALTH: Motor City bankruptcy blues: City insolvent

Published: Thursday, August 8, 2013 at 03:15 PM.

EDITOR’S NOTE: This is part one in a series of columns.“Little GTO, you’re really lookin’ fine; three deuces and a four-speed … and a 389 …” — “Little GTO” by Ronnie and the Daytonas.

The city that once created the famed River Rouge auto plant, that produced powerful labor unions and mighty muscle cars, and that boasted great factories symbolizing America ’s production prowess, is insolvent.

Detroit occupies a special niche in our collective national consciousness. Detroit was Diana Ross and Marvin Gaye and Bob Seger. And what Baby Boomer doesn’t recall Super Sports and Cobras and GTOs. Now, like a hulking, rusting roller coaster, Detroit slumps in bankruptcy, the largest American city ever to declare itself officially broke.  

Detroit was a workingman’s town. It offered opportunities for entrepreneurs and provided laborers with livable hourly wages.  Detroit was Henry Ford doubling worker pay to $5 a day in 1914; it was Jimmy Hoffa empowering the Teamsters and Walter Reuther bargaining for the UAW; it was Lee Iacocca designing a Mustang that sold like hotcakes. 

Now, according to The Economist, “more than a third of residents live below the poverty level. Nearly half of all streetlights don’t work … the schools, also under emergency state control, are abysmal … crime has gotten out of control. The response time for 911 calls is nearly an hour.”

Negotiations and court rulings will determine which debts take precedence. Bondholders may or may not see further returns on their investments and retired city workers fear for their pensions. As Gail Marks Jarvis writes in the Chicago Tribune, “As if rising interest rates weren’t upsetting enough to individuals losing money in municipal bond funds, Detroit’s bankruptcy has now intensified the sense of insecurity over munis.” 

Very few muni bonds default, and they represent one of the few remaining tax breaks available to investors. But the value of Detroit ’s general obligation bonds, a type of bond thought to be the most secure of all muni bond investments, is now shaky at best.

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