DETROIT BANKRUPTCY: “IT’S NOT TINSEL TOWN; IT’S NOT CHI-TOWN…” HMM….

12/3/13

U.S. Bankruptcy Court Judge Steven Rhodes ruled today that Detroit could indeed file for protection under Chapter 9 of the bankruptcy code.    Since I advised bankruptcy for the state of Illinois in yesterday’s post (SOLVING ILLINOIS’ PENSION MALADY:  WHY, ONE CAN ALWAYS COUNT ON THE WORD OF OUR LEGISLATURE!, 12/2/13), it probably behooves me to make a few comments on the Detroit situation, even though the decision was immediately appealed and may, though probably won’t, be overturned.

First, while the lawyers will have to sort this out, and doubtless arguments will be made to the contrary, it looks like all unsecured creditors, be they bondholders, employee pension funds, contractors, or anybody else, have the same priority in bankruptcy.   Regardless of the law, however, it would seem that some sort of special accommodation has to be made for employee pension claims.   Since the pensioners have no access to social security, their pensions are their only means of livelihood; to deprive them of their pensions would be to throw them out in the street.  We can’t do that.  Judge Rhodes knows that. Everyone knows that.

So while Judge Rhodes said that the court could cut future pension payments, he is not saying, as some people would have you believe, that the courts should, or even could, eliminate those payments.  Some, perhaps all, pensioners will see their payments cut; one suspects none will see them eliminated.  Some clever formula will have to be derived under which the most highly paid pensioners take some cuts, perhaps some big cuts, but those at the bottom take few, if any, cuts.   Even under the plan working its way through the Illinois legislature as I write this, a plan that was, of course, formulated away from the bankruptcy court, the people at the bottom of the pension ladder will be taken care of, as they should be.

Second, an argument is being made, and doubtless will be continued, that any substantial hair cut for bondholders will send a chill throughout the municipal bond market, that all municipal bond issuers will pay higher rates if Detroit bondholders are made to suffer.

I don’t know whether such damage will be done to the muni bond markets if the supposedly big boys who hold Detroit bonds are made to feel some pain.  But I do know whether such damage should be done…of course it shouldn’t!   If a potential investor cannot distinguish between the credit of Detroit and, say, Dallas, s/he has no business owning municipal bonds, plain and simple.  Having to suffer for buying bonds of a lousy credit is part of the normal workings of the market place.  Those who take such risks cannot cry innocence when their big, risky bets don’t work out.   You pays your money, you takes your chances…Capitalism without failure is like Christianity without hell…or any other trite expressions come immediately to mind.   Bondholders took the risk and thought they would be paid to do so.  They were wrong.   They should feel the pain.  That’s capitalism.  And that’s life.

Third, Judge Rhodes determined that Detroit was insolvent before its bankruptcy filing in the summer; that was the major reason that he allowed the bankruptcy to proceed.  By those standards, it looks like neither Illinois nor Chicago is an obvious candidate for bankruptcy because one could argue that neither is insolvent.   Or maybe not.   Contractors who do business with the state are waiting a long, long time to be paid.  Both state and city pension plans are severely underfunded.   And both the city and the state are effectively borrowing to pay operating expenses.  One could conceivably make the argument that both Chicago and Illinois are insolvent, but it would be a stretch.   It will only be a matter of time, however, before the practical, if not legal, bankruptcy of both becomes obvious.  By then, of course, the hole will be much deeper and the pain more intense, but what do the politicians care?

I prescribed bankruptcy for Illinois yesterday.  Last week (“OKLAHOMA VS. ILLINOIS”:  COMMENTS FROM SOMEONE WHO KNOWS SOMETHING ABOUT ILLINOIS POLITICS), I made the case that, contrary to the self-assured but fact denying chest thumpers in these parts, Chicago is Detroit in many ways.   Don’t think that I’m the only one thinking about Chicago and Illinois in the context of bankruptcy and Detroit.   Investors, taxpayers, state officials (in their more candid, perhaps very private, moments), and people who make decisions regarding where to locate businesses do not think a municipal bankruptcy in the Land of Lincoln is such a laughable proposition.

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 

“OKLAHOMA VS. ILLINOIS”: COMMENTS FROM SOMEONE WHO KNOWS SOMETHING ABOUT ILLINOIS POLITICS

11/26/13

A good friend forwarded a message to me that seems to be making its way around the internet.  The message, entitled “Illinois vs. Oklahoma,” by a Harlan Twible blames the Democrats for Illinois’ financial problems and draws an unfavorable comparison to Oklahoma, but the author’s comments on the latter center around illegal immigration rather than finances.

The piece contained one of my favorite quotes, which the author quoted but did not attribute to its source, which reportedly was Henry Ford…

"Any man who thinks he can be happy and prosperous by letting the Government take care of him; better take a closer look at the American Indian."

Yes, Ford was both an industrial genius and a political kook.   But this is one of those instances when his political/social views were absolutely correct, if it is indeed his quote.   Including this quote was not the only area in which Mr. Twible made convincing points.  Nonetheless, those points need refinement.

I was asked by my buddy to comment on the author’s observations on Illinois’ political/financial situation.   I thought my readers might be interested in my observations.  I limited those comments to Illinois; I didn’t touch the author’s views on Oklahoma’s approach to illegal immigration:

Illinois is a mess; for all intents and purposes it is bankrupt, and if we followed the same GAAP conventions for pensions that corporations do, that would be even more obvious.  Chicago's situation is at least as perilous.  Our situation is yet another case of pols buying people's votes with other people's money; ironically, often with the people's own money, which is what Tocqueville warned us about nearly 200 years ago now.

The Detroit analogy is more on target than most people think.  We continually play a game of denial in Chicago.  We thump our chests and say, while giggling at those who make the Motown analogy, "Chicago isn't Detroit" and then go on to cite our more diversified economy while avoiding the obvious political analogy of reckless spending by pols who remain reassured by the assumption that we will always find a way to pay for their excesses...somewhere down the road.   And in the post-industrial age, the raison d' etres for places like Detroit and Chicago are similarly slim, so the diversified economy argument will weaken, and do so quickly.   Mayor Emanuel and his obsequiants in the media and in favored quarters of the “business community” seem to think that businesses are lining up to live here because they want to bask in the glow of the Mayor’s greatness.  Such is the through process of those who believe that government is everything.

Chicago is a great place.  Illinois is a great place.  I love them both.  But they are not as great as those of us who love them seem to think they are.   There are plenty of objectively nice(r) places to live and to do business in this country.   We are soon approaching a point at which people will not put up with the shenanigans of the pols just to be able to live here.

I'd take issue with just a couple things regarding Illinois in the Twible piece....

First, his chain of command in Illinois is wrong.  The real chain of command would have Mike Madigan at the top and Rahm Emanuel near the top.   The governor has nowhere near the power his office would indicate; this has been the case for a long time in Illinois.   In fact, the governor of this state, whomever he may be, only has power to the extent he can work with, and accommodate, the Democratic power base, which is located in Chicago and manifests itself in control of the legislature and the huge concentration of statewide votes in and around Chicago.  

This leads to my next point.   We have a strange breed of GOPer here in Illinois who, since s/he craves power above all else like all pols, plays a game of get-along, go-along.  (Come to think of it, perhaps our GOPers are not all that strange; most Republicans everywhere crave power above all else and hence continually play a game of get-along, go-along, but I digress.)  This has been the case since at least the '50s, when Governor Stratton played footsie with the first and real Mayor Daley.  So the Republicans in this state are far from blameless for our pension mess.  In fact, the mess had at least some  roots in the Thompson and Edgar administrations, who went along with juicy pension deals with the teachers and other public employee unions so that Messrs. Thompson and Edgar could bask in the glow of teachers' unions endorsements, or at least pats on the head.

But Twible’s major point is certainly correct; the Democratic establishment has controlled things in this state forever.  Mike Madigan has been Speaker of the House for the last thirty or so years, with a brief (I think four year) interregnum in the '90s.   Clearly, the Dems wear the jacket.  But to assume that things would get, or be, much better if the GOP took power is delusional and naive.  Even if they had the guts to attack this problem, rather than attempt to curry the favor of the public employees' unions in order to secure their newfound positions of power, we are probably too far gone to fix this mess.

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 

CASINO EXPANSION IN ILLNIOIS: WHAT’S THE POINT?

5/30/13

We’re nearing the end of the legislative session in Springfield.  Among the other things, including pension reform (See my 5/8/13  piece THE CULLERTON PENSION PLAN:  “THE (PUBLIC EMPLOYEE UNIONS) FAMILY DON’T EVEN HAVE THAT KIND OF MUSCLE ANY MORE”??? and my 5/2/13 post MIKE MADIGAN’S PENSION REFORM PLAN:  “THE BEST THAT (WE) CAN HOPE FOR IS TO DIE IN (OUR) SLEEP.”), gay marriage, concealed carry, and a McCormick Place Arena (DEPAUL AND THE McARENA:  WHERE’S THE RETURN ON DEPAUL’S INVESTMENT IN CLOUT?, 5/17/13 and AN ARENA FOR DEPAUL AND ELEVATING CHICAGO:  “FRAU BLUCHER, ELEVATE ME!”, 5/16/13) coming to a head will be a huge expansion of casino gambling in Illinois.

I have expressed my feelings about casino gambling on 5/2/13 in ILLINOIS GAMBLING EXPANSION:   “A LADY DOESN’T WANDER ALL OVER THE ROOM AND BLOW ON SOME OTHER GUY’S DICE.”, but, since this seems to be the issue which is garnering, and undeservedly so, the most attention, a summary of my feelings is probably apt.

Legalizing gambling doesn’t especially bother me, though I often wonder why it was such a bad thing when run by groups of enterprising young immigrants and first generation Americans during most of the last century but is suddenly so salubrious now that government is in charge and/or gets a big piece of the action.  But I remain opposed to this gambling expansion, including a Chicago casino, four more casinos peppering the state, and slot machines at the airports and race tracks.  Why?  

I don’t see any upside to this further expansion of gambling.   Giving politicians more money to spend doesn’t solve anyone’s fiscal problems, and this will certainly be the case in Illinois.  Already, with a $100 billion pension hole and state vendors waiting months, or longer, to get paid, our esteemed legislators are finding ways to spend the new casino money on “depressed communities,” “Latino development funds,” the state fairgrounds, and that  catch-all for pork and sleight of hand, “education.”   Give these guys more money, they’ll just spend it…and more.  And who knows what brobdingnagian spending projects these poltroons can come up with in a bill that will, of necessity, be voted on with only at most a day and a half for review and consideration?  The jog to financial ruin which Illinois is taking will become a sprint.

So what’s the point?  Even the most effectively regulated, cleanest gambling operation in the world would only exacerbate our fiscal problems, so why put up with the attendant social problems?

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics.