The Party is Over
By Raoul Ilargi Meijer
If your answer to
that question is affirmative, I suggest you take a good hard look at what's
coming out of Detroit these days. Why don't we just call it a bail-in model,
not unlike Cyprus, where the waters are tested for forcing parties who
historically thought they were safe from cuts, find they no longer are.
And if you think
Detroit is the only American city that has these kinds of problems, think
again. It's merely the first, count on it. It's not just an American issue
either, of course, and although retirements plans are set up in myriad
different ways, they have one thing in common: they are in essence pyramid
schemes, eat your heart out Charles Ponzi, and it's just a matter of time
before the walls start crumbling.
But it's not just
that. The game is stacked and fixed in favor of certain parties at the cost of
others. We can all grasp how, without even knowing any details, because we
should know how America, and the world at large, works these days. All games
are fixed.
If you still have
trouble understanding what is going on here, please do read Nicole Foss'Promises, Promises ... Detroit, Pensions, Bondholders And
Super-Priority Derivatives from early
September. Here's one quote from that article:
Promises that
cannot be kept will not be kept. It is as simple as that. To complicate
matters, however, the architecture of the financial system prioritizes
promises, in a perhaps counter-intuitive, and certainly self-serving, manner.
This will make the task of allocating extremely scarce resources to
stakeholders lower down the financial food chain very much more difficult. It
is time for a good look at the range of promises made, the competing needs of
the recipients, the leverage enjoyed by powerful players in shoring up their
own position, and the real world implications for municipalities far beyond
Detroit.
And here's another
one:
Both pensioners
and general obligation bond holders argue that they should have priority in
claiming from the city's inadequate assets in bankruptcy. However, a different
class of creditor has legally senior status. Holders of financial derivatives
enjoy super-priority in bankruptcy. Thanks to changes to bankruptcy law in
2005, they are not subject to the 'automatic stay' provision intended to
prevent a disorderly grab for collateral by competing creditors. As such, they
are able to press their claim immediately, prior to bankruptcy proceedings and
therefore before claims by competing creditors are considered. This may
potentially leave nothing for other creditors to divide during subsequent
proceedings.
The piece below is
from Fox of all sources, but in this case that doesn't make much difference: it
is abundantly clear what's going on. Still, it's curious to say the least that
this comes out only now there's a trial going on to determine whether or not
Detroit is indeed bankrupt, and is eligible to file for it.
It was the politicians,
and not longtime city workers like Olivia Gillon, who brought Detroit to the
brink of insolvency, but now Gillon can only watch as lawyers negotiating the
Motor City's bankruptcy bid place a new value on her hard-earned pension: 16
cents on the dollar.
The beleaguered
city, facing debt of as much as $20 billion and led by a state-appointed
manager, tried nearly a year ago to renegotiate with creditors. When those
talks broke down, the city filed for bankruptcy last July, but the filing was
ruled unconstitutional by a judge. A series of state and federal rulings
followed, culminating in a trial that began last week in which the city must
show it is eligible to enter bankruptcy. That's when the frightening magnitude
of the "haircut" being sought for some 21,000 retirees emerged.
"It’s wrong
on every possible level," Gillon, 68, told FoxNews.com. "I earned my
pension. I retired expecting it and I feel that I should have it."
The retirees
include police officers, firefighters and other municipal workers, but not
teachers, who are covered by a state-administered system. The affected workers
have been promised some $3.5 billion in pension payments and another $6 billion
in health care benefits, money most agree the city can't pay. But for a
retiree counting on a modest annual pension of, say $30,000, the proposed cut
would leave him or her with $4,800. Of all the once-proud city's creditors,
including banks, vendors and bondholders, retired workers are the least able to
take the hit, said Gillon.
"Some people
are going to be hit hard," Gillon told FoxNews.com. "I’ll have to
change the way I live."
Gillon is a member
of the Detroit Retired City Employees Association, which, together with the
Retired Detroit Police & Fire Fighters Association, represent about 70% of
the city’s approximately 21,000 retirees. Along with the Michigan chapter of
the American Federation of State, County & Municipal Employees, they are
fighting the bid byclaiming the city of Detroit has not proven it is
insolvent, has not negotiated in good faith with its creditors and the
bankruptcy filing violates the state constitution protecting
retirement benefits for public workers.
Bob Gordon, who
represents the two pension funds, argued in court last week that the
city can restructure without cutting pensions, which are protected by the state
in a manner that he said is "binding" and "impermeable." The
Michigan state constitution does contain a provision that bans any action that
threatens to cut the pension benefits of public employees, but several experts
have said the federal bankruptcy code would trump the state statute, especially
if the city can demonstrate it has no way of making an estimated 100,000
creditors whole.
The Michigan-based
Mackinac Center for Public Policy, which sounded a warning about Detroit's
fiscal problems more than a decade ago, said the old-style defined
benefits pensions that have long been a centerpiece of civil service leave
pensioners at the mercy of politicians.
"It’s just
another example of the flaws of a defined pension system," said Ted
O’Neil, a Mackinac analyst. "The problem with putting trust in government
to invest and save your money is that they don’t always make the best
choices."People who worked hard for their pension many end up being
scapegoats," he added.
Indeed, the
Mackinac 2000 study looks prophetic now: "If Detroit's future
expenditures were relatively stable, this financial snapshot still would be
cause for concern. But the city is looking at two new outlays of monstrous proportions:
funding the pension obligations of current and future city employees, which
could cost up to $3 billion, and fulfilling requirements under several federal
environmental acts, which will cost billions more," read the report.
The 16 cents on
the dollar estimate could be a message to unions, which previously refused to
negotiate cuts.
Reading this
reminded me of a very old song, I can't remember the name or artist, it goes
something like this:
"They're
coming to take it away, hi hi, ha ha."
No comments:
Post a Comment