Friday, February 10, 2012

Commentary: Detroit faces worse fate than an EM | The Detroit News |

Commentary: Detroit faces worse fate than an EM | The Detroit News |

The article from February 10, 2012 by John E. Mogk, a law professor at Wayne State University, states, "... municipal bankruptcy under Chapter 9 of the Federal Bankruptcy Act, which could be more damaging to the city and the state and take much longer to complete.

Seeking bankruptcy relief would downgrade the city's credit rating, reduce its ability to borrow funds, and drive up the city's interest rates. The credit standing of other municipalities in Michigan and the state will also be affected. Bankruptcy requires substantial additional management responsibilities, leaving staffers less time to actually govern.
Perhaps the most damaging aspect of bankruptcy is that it will place a stigma on the city, causing new businesses to avoid locating in Detroit."

Fred Leeb: My own question is, how do we know that this conventional wisdom is true? The business world lived in fear of the bankruptcy stigma but this has changed over the last 35 years and bankruptcy is now virtually just another tool in the toolbox to enable lasting structural change. Are GM's borrowing rates higher or lower now than prior to their bankruptcy? In addition, I believe there have been a number of studies showing that publicly traded stocks rise after there is an announcement of a major cost reduction program. This is because the action is an indicator that the management has finally recognized the depth of the problem and is willing to do something constructive rather than just cover it up.

Everybody already knows that Detroit is in terrible financial shape. It will remain that way until people believe that the city's leadership is willing to bite the bullet and implement a realistic multiple-year turnaround plan. As far as the city's bond rating goes, the only reason it is able to sell bonds at all now is because they are backed by other entities such as the state. This has only enabled the problem to fester and get worse. If people knew that other entities would not stand behind the city's bonds, they probably could not be sold at all, even now, before a bankruptcy has been filed. The only people we are kidding about Detroit is ourselves.