Detroit's Bankdruptcy:  A Stunning Disconnect

by John M. Curtis
(310) 204-8700

Copyright July 18, 2013
All Rights Reserved.                                      

             When President Barack Obama bailed out General Motors and Chrysler March 30, 2009, there were high hopes that one day Detroit would regain some of its lost luster.  Once the envy of the world, the Big Three, GM, Ford and Chrysler, watched their fortunes plummet in 2008, dropping to only 53% of the domestic car market, tossing thousands of U.S. autoworkers and related industries into unemployment.  With a population peaking in the 1950s at 1.8 million, Detroit shrank to 700,000 by 2008, driving residents to brighter pastures in less blighted parts of the country.  Strapped now with around $18 billion of debt, the City of Detroit filed for Chapter 9 bankruptcy July 17, hoping to restructure, especially pension obligations for retired city employees.  With the auto industry’s renaissance in full swing, watching Detroit hits the Obama administration with a big black eye.

             Whatever Detroit’s fiscal mess, the Obama administration should not turn its back on the symbolic hub of what’s left of U.S. manufacturing.  Faced with a ton of criticism of his 2009 bailout of GM and Chrysler, President Barack Obama needs to pressure Congress—and GM and Chrysler—to help resolve Detroit’s financial crisis, without going BK.  Detroit’s slide into oblivion paralleled the decline of the U.S. auto industry in the 70s, 80s and 90s, before the industry reinvented itself after the 2009 bailout.  Now thriving, generating some of the biggest profits in the industry’s history, the Big Three must give back to Detroit.  As the population declined to 700,000, the tax base shrank, putting Detroit into the red.  One check from Warren Buffet or Bill Gates would solve Detroit’s depleted bank account.  While it’s easy to point fingers, the White House should help Detroit with a fix.

             Whatever creditors bang on Detroit’s doors, they could be easily be managed with a government and private-sector partnership.  Given the improving economy driving more car sales and given the U.S. auto industry’s rebirth, it’s only a matter of time before Detroit’s industrial base recovers.  Since half the population was driven to Jefferson County now at 700,000, it’s a matter of time before suburban residents would consider relocating back to the city.  As the auto industry continues to thrive, the city will automatically attract a new generation of residents seeking more convenience and affordability in the downtown area.  With a little help from the auto industry, Detroit could begin the kind of urban renaissance that would attract back former residents and younger workers seeking affordable housing in the inner city.  Letting Detroit go bankrupt was the worst possible fix.

             However many billions are owed by Detroit’s creditors, a bridge loan could easily accommodate current debts that forced the city into desperate measures.  GM showed the way to restructure bad debt, whittling down $46 billion to $8 billion, racking up $17.2 billion in profits.  Just like other parts of the country emerging from recession, GM, Ford and Chrysler’s success have added more jobs to Detroit—and the country at large—paving the way to a major gentrification.  Instead of letting Detroit declare bankruptcy, hurting retired city workers, it’s time for the auto industry to share in the bounty of their new prosperity.  When the local entity becomes wholly dependent on one industry, it’s up to the local, state and federal government to partner with private sector to help resolve budget shortfalls.  Detroit must tighten its belt, restructure operations and follow the lead of GM, Ford and Chrysler.

             Seeking bankruptcy protection was the wrong approach to lead Detroit out of its current fiscal mess.  Bankruptcy expert Kevin Orr gave the city bad advice.  Working with the Commerce Department and the Big Three, the government could have guaranteed enough loans to the city to avoid bankruptcy and, most importantly, the public disgrace.  Detroit’s bankruptcy is the worst possible public relations nightmare to foreign and domestic bondholders.  Foreign investors can only quake in their boots watching the manufacturing hub of the U.S. go under.  White House officials know full-well the damage done to U.S. prestige at home and abroad.  “Were the comeback state in Michigan, but to be a great state we need . . .Detroit on the path to being a great city again,” said Republican Michigan Gov. Rick Snyder, offering no suggestions as to how to fix the problem.

             While $18 billion in debt seems like a big chunk of change, it’s a drop in the bucket compared to obscene profits made by the Big Three, precisely because they’ve restructured and the economy has rebounded.  Detroit doesn’t need bankruptcy:  It needs a public-private partnership to help it work through its debt.  Working with the Big Three and federal government, Detroit should be able to withdraw its bankruptcy filing, obtain the loans needed to pay creditors and begin a sensible reorganization plan that streamlines its $380 million budget.  U.S. Commerce Secretary Penny Pritzker should sit down with Gov. Synder, bankruptcy expert Kevin Orr and leaders with GM, Ford and Chrysler to find an acceptable alternative plan.  If the economic recovery continues and auto industry thrives, it won’t take too long for Detroit to restructure, repay its debt and meet obligations to all its creditors.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.