7 ms·

Detroit files for Chapter 9 bankruptcy amid staggering debts

112 points by Irishsteve 13y ago

eeky 13y ago
The deindustrialization and depopulation really hurt Detroit. But what also strikes me is the rapid change in racial demographics. In 1940, Detroit had a 90% white population and was the highest standard of living city in America. During the course of WWII, 350,000 blacks moved into Detroit. In 1943, the Detroit Race Riot caused by tensions between whites and blacks resulted in 43 dead, 433 wounded. In 1967 it happened again, this time 43 dead, 1189 injured, over 7,200 arrests, and more than 2,000 buildings destroyed. President Lyndon B. Johnson sent in the Army to quell it. In 2010, the demographics are 10% white and 82% black, and Detroit is a bankrupt wasteland. Deindustrialization happened in other cities such as Pittsburgh - but they've recovered by transitioning into technology/medicine industries and the like. Pittsburgh has not seen a demographic shift like Detroit. http://en.wikipedia.org/wiki/Demographic_history_of_Detroit http://en.wikipedia.org/wiki/Demographic_history_of_Detroit http://en.wikipedia.org/wiki/Detroit_Race_Riot_%281943%29 http://en.wikipedia.org/wiki/Detroit_Race_Riot_%281943%29 http://en.wikipedia.org/wiki/1967_Detroit_riot http://en.wikipedia.org/wiki/1967_Detroit_riot
- ryusage 13y ago
  There's a 43 year gap between those stats. You've got the beginnings of a hypothesis, but I think you need a lot more data if you want to support it at all.
  - kingkawn 13y ago
    What is the hypothesis; black people killed Detroit?
    - mikestew 13y ago
      Or it could be that an 82% black population indicates $SOMETHING, rather than "black people killed Detroit". When Gary, IN started to fall apart with the steel mills closing, my theory was that the only people left were the ones too poor to get out. Could be the same with Detroit. Or not, I don't know. But the demographics remain, and a drive down Woodward Avenue will confirm the numbers.
      - kingkawn 13y ago
        What does it mean though? Your hypothesis should be something more than there sure are a lot of black people there and then let people's imaginations fill in what that means based on biases and broad generalizations. An observation is not a hypothesis.
djKianoosh 13y ago
Same site had an article about this in December 2011: http://www.freep.com/article/20111222/NEWS01/112220519/Detroit-s-debt-crisis-even-worse-than-thought-state-s-review-reveals http://www.freep.com/article/20111222/NEWS01/112220519/Detro...
rayiner 13y ago
I think this bankruptcy is an exciting thing for Detroit. The purpose of bankruptcy is a reboot and if anyone needs a reboot it's Detroit. Of course, Detroit isn't the only city going through or considering bankruptcy. Unlike most people, I view the nationwide phenomenon of municipal bankruptcies positively. Years of unsustainable policies have left the big cities of the U.S. in a financial state where they can no longer effectively provide services. In 2013, 40%+ of Detroit's revenues went to bond payments, pension benefits, and health benefits to retirees. This is money taken away from providing services to current residents of the city. Bankruptcy will mean bond money will no longer be so easily forthcoming, but that's a good thing. Cities will be forced to grow within their means, and that pressure will force more prudent fiscal policy going forward.
- Shivetya 13y ago
  It will be interesting to see how pension liabilities and current pension guarantees are handled. This is a very large scale problem not just in Detroit but across America, where the retirement guarantees given to retiring politicians and government workers is very costly. If they force the bond holders to eat it all then the market for municipal bonds will be hurt badly. The irresponsible largess in the current government pension system needs to come to an end.
  - rayiner 13y ago
    Pensioners will take some of the hit. Cities are too dependent on bond financing to want to totally cut ties with the municipal bond market.
    - bilbo0s 13y ago
      I think, in the case of Detroit, they will both be taking pretty painful hits. Snyder is serious about this. The bankruptcy administrator is likely to be unsympathetic. And very little help is likely to come from DC. Couple all of that with Chapter 9 providing all creditors with FAR fewer rights, and I think the writing is pretty much on the wall. The only thing the creditors can try at this point is to get a judge to rule that Detroit is not eligible for bankruptcy. Slim chance there... but we've all seen stranger things happen.
denzil_correa 13y ago
Apparently, one of the major reasons for bankruptcy has been population loss. Detroit has lost 250,000 people in the last decade. What has particularly happened in Detroit that has led to migration of population?
- HarryHirsch 13y ago
  The 1967 Detroit riot happened.
  - denzil_correa 13y ago
    How is that related to population migration between 2000-10?
    - jbooth 13y ago
      It's a somewhat racist simplification of things. The 67 riots were a big part of what provoked 'white flight' from detroit to the burbs. Of course, detroit was already losing population before that and the trend didn't speed up overall until much later, when the car companies started struggling. As always, it's more about economics than it is about race. http://en.wikipedia.org/wiki/Demographic_history_of_Detroit http://en.wikipedia.org/wiki/Demographic_history_of_Detroit
      - mgkimsal 13y ago
        "The 67 riots were a big part of what provoked 'white flight' from detroit to the burbs." Coleman Young did his best to keep it going a decade later.
      - tptacek 13y ago
        The only thing racist about attributing Detroit's decline to "white flight" is the name "white flight", since black families were also very much a part of white flight.
        13y ago
jstalin 13y ago
I'm surprised it took this long. The whole situation has been extremely political and this should have been done long ago. Perhaps now Detroit (the city itself) will physically shrink to accommodate its ability to actually service residents.
znowi 13y ago
Reminds me of this little clip :) http://www.youtube.com/watch?v=oZzgAjjuqZM http://www.youtube.com/watch?v=oZzgAjjuqZM
georgemcbay 13y ago
Looks like it might be time for OCP to demolish Old Detroit and replace it with Delta City.
- negativity 13y ago
  I'D BUY THAT FOR A DOLLAR!
jpdoctor 13y ago
What I don't see in the comments yet: This is interesting not only for Detroit, but for the precedent it sets. There are 10 or 15 municipalities that will study how to screw the retirees & bondholders as thoroughly as Detroit plans to and then go down that path.
- JumpCrisscross 13y ago
  Note that much of Detroit's debt is insured by monoline insurers who viewed the probability of a majour U.S. city entering Chapter 9 in the way S&P and Moody's viewed a nationally correlated housing meltdown pre-2008. I have not yet seen how this bankruptcy will (a) affect the monolines' solvency, or, (b) change their behaviour around municipal credit wraps.
  - prostoalex 13y ago
    On (a) there ya go: http://www.bloomberg.com/news/2013-07-12/detroit-s-20-offer-jeopardizes-insurers-recovery-muni-credit.html http://www.bloomberg.com/news/2013-07-12/detroit-s-20-offer-...
    - JumpCrisscross 13y ago
      Interesting. Though the article, from 12 July 2013, quotes a 20% recovery rate on Detroit's GO bonds (it's somewhat humorous to see Detroit's "full faith and credit"-backed bonds referred to as unsecured by Bloomberg). I'm seeing the market buzzing around 75 to 80. Assuming a 75% recovery rate and 95% coverage, that means the monolines would be liable for about $475 million. I'm not sure (a) what fraction of the capital of U.S. monoline which insure municipal debt that is, or, (b) how that is distributed across variably capitalised muncipal monoline insurers.
- nostromo 13y ago
  I have a hard time feeling sorry for bondholders in these situations. There is always some risk in lending money. Perhaps they should try and find more creditworthy institutions next time. A lot of money in the US is being lent with the assumption that creditors will always be bailed out by the state or federal government; that mindset exasperates excessive borrowing and spending at the local level and encourages creditors to make risky loans. This is the textbook definition of a moral hazard.
aculver 13y ago
Does anyone have any insight into how this affects residents of the suburbs like Livonia, Farmington Hills, Dearborn, Ann Arbor, Royal Oak, etc.? I've been visiting "Detroit" since I was a kid, but in reality was always staying with people outside Detroit proper.
- zaius 13y ago
  Pretty sure they're all separately incorporated, so it wouldn't affect them directly. It will affect retires who moved out of Detroit into these cities and now rely on Detroit pensions.
outworlder 13y ago
Related to the other thread about San Francisco housing prices, in Detroit they should have hit rock bottom. Which would be good for cash-strapped startups trying to increase their runway. I know nothing about crime rates, transportation and other amenities which could make life difficult. Is it that bad?
- andrewguenther 13y ago
  It is worse than that bad.
- burkemw3 13y ago
  The cheap parts of Detroit are that bad. After a screening of BURN, an film following firefighters in Detroit, a firefighter commented 'A gallon of gas is much cheaper than a movie ticket.' There are blocks of houses where 0, 1, or 2 houses are occupied. Downtown Detroit is safer and has better services, but it costs more than the rock bottom prices. There are people targeting start ups for Detroit though: http://detroitventurepartners.com/ http://detroitventurepartners.com/
- jlgreco 13y ago
  If it is anything like Flint, it is really bad.
- astine 13y ago
  Yes, things are pretty bad: http://www.foxnews.com/us/2013/07/16/detroit-dire-but-private-groups-citizens-keep-motor-city-running/ http://www.foxnews.com/us/2013/07/16/detroit-dire-but-privat...
- prawn 13y ago
  Streetview drive around. It looked pretty bleak last time I gave this a shot.
inzax 13y ago
You should expect to see this more often than not. Cities in Florida are going through the same things, but just haven't defaulted yet. Expect it. Its going to be the norm. most of this is due to the archaic pension system.
deleted 13y ago
[deleted]

112 points by Irishsteve 13y ago

eeky 13y ago

The deindustrialization and depopulation really hurt Detroit. But what also strikes me is the rapid change in racial demographics. In 1940, Detroit had a 90% white population and was the highest standard of living city in America. During the course of WWII, 350,000 blacks moved into Detroit. In 1943, the Detroit Race Riot caused by tensions between whites and blacks resulted in 43 dead, 433 wounded. In 1967 it happened again, this time 43 dead, 1189 injured, over 7,200 arrests, and more than 2,000 buildings destroyed. President Lyndon B. Johnson sent in the Army to quell it. In 2010, the demographics are 10% white and 82% black, and Detroit is a bankrupt wasteland. Deindustrialization happened in other cities such as Pittsburgh - but they've recovered by transitioning into technology/medicine industries and the like. Pittsburgh has not seen a demographic shift like Detroit. http://en.wikipedia.org/wiki/Demographic_history_of_Detroit http://en.wikipedia.org/wiki/Demographic_history_of_Detroit http://en.wikipedia.org/wiki/Detroit_Race_Riot_%281943%29 http://en.wikipedia.org/wiki/Detroit_Race_Riot_%281943%29 http://en.wikipedia.org/wiki/1967_Detroit_riot http://en.wikipedia.org/wiki/1967_Detroit_riot

ryusage 13y ago
There's a 43 year gap between those stats. You've got the beginnings of a hypothesis, but I think you need a lot more data if you want to support it at all.
- kingkawn 13y ago
  What is the hypothesis; black people killed Detroit?
  - mikestew 13y ago
    Or it could be that an 82% black population indicates $SOMETHING, rather than "black people killed Detroit". When Gary, IN started to fall apart with the steel mills closing, my theory was that the only people left were the ones too poor to get out. Could be the same with Detroit. Or not, I don't know. But the demographics remain, and a drive down Woodward Avenue will confirm the numbers.
    - kingkawn 13y ago
      What does it mean though? Your hypothesis should be something more than there sure are a lot of black people there and then let people's imaginations fill in what that means based on biases and broad generalizations. An observation is not a hypothesis.

djKianoosh 13y ago

Same site had an article about this in December 2011: http://www.freep.com/article/20111222/NEWS01/112220519/Detroit-s-debt-crisis-even-worse-than-thought-state-s-review-reveals http://www.freep.com/article/20111222/NEWS01/112220519/Detro...

rayiner 13y ago

I think this bankruptcy is an exciting thing for Detroit. The purpose of bankruptcy is a reboot and if anyone needs a reboot it's Detroit. Of course, Detroit isn't the only city going through or considering bankruptcy. Unlike most people, I view the nationwide phenomenon of municipal bankruptcies positively. Years of unsustainable policies have left the big cities of the U.S. in a financial state where they can no longer effectively provide services. In 2013, 40%+ of Detroit's revenues went to bond payments, pension benefits, and health benefits to retirees. This is money taken away from providing services to current residents of the city. Bankruptcy will mean bond money will no longer be so easily forthcoming, but that's a good thing. Cities will be forced to grow within their means, and that pressure will force more prudent fiscal policy going forward.

Shivetya 13y ago
It will be interesting to see how pension liabilities and current pension guarantees are handled. This is a very large scale problem not just in Detroit but across America, where the retirement guarantees given to retiring politicians and government workers is very costly. If they force the bond holders to eat it all then the market for municipal bonds will be hurt badly. The irresponsible largess in the current government pension system needs to come to an end.
- rayiner 13y ago
  Pensioners will take some of the hit. Cities are too dependent on bond financing to want to totally cut ties with the municipal bond market.
  - bilbo0s 13y ago
    I think, in the case of Detroit, they will both be taking pretty painful hits. Snyder is serious about this. The bankruptcy administrator is likely to be unsympathetic. And very little help is likely to come from DC. Couple all of that with Chapter 9 providing all creditors with FAR fewer rights, and I think the writing is pretty much on the wall. The only thing the creditors can try at this point is to get a judge to rule that Detroit is not eligible for bankruptcy. Slim chance there... but we've all seen stranger things happen.

denzil_correa 13y ago

Apparently, one of the major reasons for bankruptcy has been population loss. Detroit has lost 250,000 people in the last decade. What has particularly happened in Detroit that has led to migration of population?

HarryHirsch 13y ago
The 1967 Detroit riot happened.
- denzil_correa 13y ago
  How is that related to population migration between 2000-10?
  - jbooth 13y ago
    It's a somewhat racist simplification of things. The 67 riots were a big part of what provoked 'white flight' from detroit to the burbs. Of course, detroit was already losing population before that and the trend didn't speed up overall until much later, when the car companies started struggling. As always, it's more about economics than it is about race. http://en.wikipedia.org/wiki/Demographic_history_of_Detroit http://en.wikipedia.org/wiki/Demographic_history_of_Detroit
    - mgkimsal 13y ago
      "The 67 riots were a big part of what provoked 'white flight' from detroit to the burbs." Coleman Young did his best to keep it going a decade later.
    - tptacek 13y ago
      The only thing racist about attributing Detroit's decline to "white flight" is the name "white flight", since black families were also very much a part of white flight.
      - 13y ago

jstalin 13y ago

I'm surprised it took this long. The whole situation has been extremely political and this should have been done long ago. Perhaps now Detroit (the city itself) will physically shrink to accommodate its ability to actually service residents.

znowi 13y ago

Reminds me of this little clip :) http://www.youtube.com/watch?v=oZzgAjjuqZM http://www.youtube.com/watch?v=oZzgAjjuqZM

georgemcbay 13y ago

Looks like it might be time for OCP to demolish Old Detroit and replace it with Delta City.

negativity 13y ago
I'D BUY THAT FOR A DOLLAR!

jpdoctor 13y ago

What I don't see in the comments yet: This is interesting not only for Detroit, but for the precedent it sets. There are 10 or 15 municipalities that will study how to screw the retirees & bondholders as thoroughly as Detroit plans to and then go down that path.

JumpCrisscross 13y ago
Note that much of Detroit's debt is insured by monoline insurers who viewed the probability of a majour U.S. city entering Chapter 9 in the way S&P and Moody's viewed a nationally correlated housing meltdown pre-2008. I have not yet seen how this bankruptcy will (a) affect the monolines' solvency, or, (b) change their behaviour around municipal credit wraps.
- prostoalex 13y ago
  On (a) there ya go: http://www.bloomberg.com/news/2013-07-12/detroit-s-20-offer-jeopardizes-insurers-recovery-muni-credit.html http://www.bloomberg.com/news/2013-07-12/detroit-s-20-offer-...
  - JumpCrisscross 13y ago
    Interesting. Though the article, from 12 July 2013, quotes a 20% recovery rate on Detroit's GO bonds (it's somewhat humorous to see Detroit's "full faith and credit"-backed bonds referred to as unsecured by Bloomberg). I'm seeing the market buzzing around 75 to 80. Assuming a 75% recovery rate and 95% coverage, that means the monolines would be liable for about $475 million. I'm not sure (a) what fraction of the capital of U.S. monoline which insure municipal debt that is, or, (b) how that is distributed across variably capitalised muncipal monoline insurers.
nostromo 13y ago
I have a hard time feeling sorry for bondholders in these situations. There is always some risk in lending money. Perhaps they should try and find more creditworthy institutions next time. A lot of money in the US is being lent with the assumption that creditors will always be bailed out by the state or federal government; that mindset exasperates excessive borrowing and spending at the local level and encourages creditors to make risky loans. This is the textbook definition of a moral hazard.

aculver 13y ago

Does anyone have any insight into how this affects residents of the suburbs like Livonia, Farmington Hills, Dearborn, Ann Arbor, Royal Oak, etc.? I've been visiting "Detroit" since I was a kid, but in reality was always staying with people outside Detroit proper.

zaius 13y ago
Pretty sure they're all separately incorporated, so it wouldn't affect them directly. It will affect retires who moved out of Detroit into these cities and now rely on Detroit pensions.

outworlder 13y ago

Related to the other thread about San Francisco housing prices, in Detroit they should have hit rock bottom. Which would be good for cash-strapped startups trying to increase their runway. I know nothing about crime rates, transportation and other amenities which could make life difficult. Is it that bad?

andrewguenther 13y ago
It is worse than that bad.
burkemw3 13y ago
The cheap parts of Detroit are that bad. After a screening of BURN, an film following firefighters in Detroit, a firefighter commented 'A gallon of gas is much cheaper than a movie ticket.' There are blocks of houses where 0, 1, or 2 houses are occupied. Downtown Detroit is safer and has better services, but it costs more than the rock bottom prices. There are people targeting start ups for Detroit though: http://detroitventurepartners.com/ http://detroitventurepartners.com/
jlgreco 13y ago
If it is anything like Flint, it is really bad.
astine 13y ago
Yes, things are pretty bad: http://www.foxnews.com/us/2013/07/16/detroit-dire-but-private-groups-citizens-keep-motor-city-running/ http://www.foxnews.com/us/2013/07/16/detroit-dire-but-privat...
prawn 13y ago
Streetview drive around. It looked pretty bleak last time I gave this a shot.

inzax 13y ago

You should expect to see this more often than not. Cities in Florida are going through the same things, but just haven't defaulted yet. Expect it. Its going to be the norm. most of this is due to the archaic pension system.

deleted 13y ago

[deleted]