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Tuesday, 27 August 2013 10:11

Lawyers, Hedge Funds and Consultants to Profit as Detroit Bankruptcy Costs May Top $250 Million

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MARK KARLIN, EDITOR OF BUZZFLASH AT TRUTHOUT

detroit8 28In the rush to privatize America, nothing may symbolize the destruction of the notion of democracy and the public commons -- up until now -- as much as the takeover of Detroit by an "emergency manager," Kevyn Orr, appointed by Tea Party Michigan Governor Rick Snyder.

Detroit had long ago been abandoned by the auto companies that once made it among the most vibrant and economically energized cities in the United States.  It's been declining in population at the same time predatory lenders are foreclosing on what remains of the depleted housing stock, that which hasn't fallen into rubble.

So it's a bit shocking to read on Michigan Live (mlive.com):

The [Detroit] News reported this week Ernst & Young is the highest-paid consultant, pulling in $6.6 million to analyze the city's cash flow. Emergency Manager Kevyn Orr's former law firm, Jones Day, has been paid $1 million, though the firm is already writing off billable expenses it won't collect from the city.

How high could the bill go? An expert quoted by the News estimated the total bill for bankruptcy-related fees will be far higher. Expenses could “easily” top $250 million, Jim McTevia of McTevia & Associates, a turnaround firm in Bingham Farms, told the News.

Here's the kicker: the judge overseeing the bankruptcy appointed a $600 an hour attorney, Robert M. Fishman, to "monitor" the city's bankruptcy fees.

In the background of this takeover of a duly-elected municipal government by the state, one of the key issues behind the seizure of the city government is the issue of pensions owed to Detroit public workers.  In a recent Truthout article, "Pinching Pensions to Keep Wall Street Fat and Happy," Dean Baker spoke to the canard of the war on pensions that we are seeing waged by the Koch brothers crowd across America:

These workers could be forgiven for laboring under the illusion that they would see the pensions for which they worked. These obligations were actually guaranteed under the state's constitution....

Contracts with Wall Street types always seem to draw more respect than contracts with workers. Folks may recall that when AIG was bankrupt and effectively a ward of the government, we were told by the Obama administration (where Emanuel was then chief of staff), that it had to pay out $165 million in bonuses to its senior staff. Many of the AIG employees, who had taken the company into bankruptcy, pocketed hundreds of thousands of dollars from these bonuses.

By contrast, the pensions for Detroit's retirees average just over $18,000 a year. That means many AIG executives got a larger bonus from their bankrupt company in 2009 than Detroit workers will collect over their whole retirement.

With the Detroit bankruptcy, it is time for the Wall Street crowd to feast on the carcass, including the pensions that are necessary for the survival of Detroit public workers who literally earned their retirement funds.

Meanwhile, the citizens of Michigan be damned as Wall Street, according to Bloomberg News, is now considering cities and school districts in the entire state a credit risk primarily due to the handling of the Detroit bankruptcy:

Investors’ insistence on a yield 14 times higher than the AAA benchmark on $92 million of Detroit school notes is the latest example of municipal-bond market contempt for Michigan after the city’s record bankruptcy....

Snyder said after Detroit’s bankruptcy that he expected bond buyers would be “sophisticated investors” and separate the city’s situation from other municipalities, such as the independent school district. Orr said in an interview last month that it would be a “reduction to the absurd” to think other cities should be punished as a result of Detroit seeking court protection.

The yield penalty on the school notes, which investors including Gary Pollack at Deutsche Bank AG’s private-wealth unit said is among the biggest in years, shows Snyder and Orr were wrong.

Last week, the finance authority sold revenue bonds for Ypsilanti Community Schools, about a half-hour drive from Detroit, with 10-year debt yielding 4.29 percent, data compiled by Bloomberg show. That’s about 1.33 percentage points more than benchmark munis. Similarly rated revenue bonds averaged an interest rate just 0.59 percentage point more than AAA debt.

The Ypsilanti sale came after three other issuers in the state -- Genesee County, Battle Creek and Saginaw County -- postponed offerings because proposed interest rates were too high.

So Tea Party Governor Snyder, who began taking over cities by fiat beginning with Benton Harbor awhile back, is causing hardship around the state with his effort to, in essence, privatize democracy -- and sell off public assets in a bankruptcy fire sale -- in primarily minority-dominated cities.

If you want to know the bottom line of the contempt and indifference toward the citizens of Detroit, one just needs to read an August headline in the Detroit Free Press, "Hedge funds seeking to capitalize on Detroit's bankruptcy."

Look over the skies of Detroit and you can see the vultures circling.

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(Photo: Patricia Drury)