Category Archives: Big Govt

Detroit Looks to Pay Less to Bondholders

What a mess. I’m sure George Bush is mostly to blame. Is anyone surprised that most liberal newspapers do not put too much time into this story. Might be inconvenient…


DETROIT—The city of Detroit told some debtholders on Friday they will have to accept pennies on the dollar or risk getting drawn into the largest U.S. municipal bankruptcy ever.

What’s News: Detroit defaults on some unsecured bond debt and asks creditors to accept ten cents on the dollar to avoid bankruptcy filing. Elan formally puts itself up for sale. BMI sues Pandora over fees. Joanne Po reports. Photo: Getty

Kevyn Orr, the bankruptcy lawyer hired by Michigan Gov. Rick Snyder to lead the restructuring of Detroit’s troubled finances, told representatives of the city’s creditors that the city plans to stop making payments on some of its debts, starting with a $39.7 million payment that was due Friday, and won’t make payments in the foreseeable future on at least $2 billion in unsecured municipal debt as part of a move to save cash.

The total bill for the city’s long-term liabilities is nearly $20 billion, and the city is now insolvent, according to Mr. Orr. His decision to suspend debt payments could serve as a trigger for Chapter 9 bankruptcy filing in a matter of months, and the plan for the city of about 700,000 that he unveiled on Friday could serve as a road map under bankruptcy.

Over the next 30 days, Mr. Orr plans to negotiate with dozens of bondholders, insurers, unions and pension funds. If enough of those groups balk at the plan, they could help force a Chapter 9 bankruptcy. It is still possible—but increasingly unlikely, say people familiar with the matter—that a negotiated settlement can be reached outside of bankruptcy court.

At most risk is the $11 billion in unsecured debt. That includes almost $6 billion primarily in health benefits for retired city workers; more than $3 billion for retirees’ pensions; and about $530 million in general-obligation bonds. Retirees are set to get less than 10% of what is owed them under the plan.

Other debt is considered secured, including about $5.3 billion in bonds backed by revenue from the city’s water and sewerage department. City employees and vendors would continue to be paid.

Mr. Orr’s proposal also calls for using the savings from the cuts to invest $1.25 billion in public safety and blight removal to revive a city beset by a dwindling tax base, entrenched crime and population loss.

Mr. Orr also is reviewing the sale of the city’s assets but has made no final decision. His examination of the worth of the city’s Detroit Institute of Arts created a furor in the city, but it was still unclear what the museum’s fate will be.

Tamara Lowin, director of research at Belle Haven Investments, whose firm owns some of the city’s debt insured by Assured Guaranty, said she was surprised at Mr. Orr’s treatment of some “unlimited tax general-obligation bonds” as unsecured debt. She said these types of bonds are viewed as one of the safest investments in the municipal-bond market, because by law, there is a dedicated stream of tax revenues attached to them, with the pledge that the local government must raise revenues as much as necessary to repay the debt.

Matt Fabian, managing director of research firm Municipal Market Advisors, said the borrowing costs of other local governments in Michigan could rise as a result of the treatment of these bonds as unsecured. About 80% of Detroit’s $8 billion in water and sewer, pension and general obligation debt is insured, according to the firm’s research.

State and local officials have long worried about the spillover effects of a Detroit bankruptcy. But Republican Gov. Rick Snyder, who has the final say on any filing, has recently softened his opposition, saying it could be a viable option with appropriate planning.

“The plan Kevyn discussed with creditors today requires shared sacrifice among all involved, but most importantly focuses on a restructuring designed to return Detroit to solid financial footing, ensure the delivery of essential services for residents and solidify the city’s viability well into the future,” Gov. Snyder said in a statement.

On Friday, Mr. Orr said again that he would prefer not to file for bankruptcy, but added that it remained a workable option for the city.

As Detroit inches towards bankruptcy, the world-class art collection at the Detroit Institute of Arts could be sold off to pay creditors. Is it the right move? Can it be averted? Douglas Bernstein, Plunkett Cooney managing partner, joins the News Hub. Photo: Getty Images.

Mr. Orr’s proposal calls for unsecured bondholders carrying about $2.5 billion in debt to take the largest “haircut,” receiving less than 10 cents on the dollar.

Secured creditors would fare best, but new bonds would be issued to cover the debt and could include changes to the terms.

Mr. Orr’s team is also in negotiations with surrounding suburban counties to lease its city-owned regional water system to them in exchange for new revenue for Detroit.

Mr. Orr’s plan seeks to supplement the slashed retiree health-care benefits by enrolling retirees under the Affordable Care Act or through Medicare. He plans to meet with unions directly on Thursday to discuss his proposed changes.

Union leaders expressed disappointment with the plan, saying workers and retirees were taking too big a hit. Ed McNeil, assistant to American Federation of State, County and Municipal Employees Council 25 president, representing the city’s largest union for municipal workers, said bondholders needed to take a larger cut since workers had already been hurt by cuts to wages and furlough days. Daniel McNamara, president of the Detroit Fire Fighters Association, said it would be difficult to get all of the 48 unions to agree to such concessions.

One of the goals of the plan is to try to improve city services, which remain subpar despite one of the state’s highest levels of taxation. Mr. Orr’s team called the city’s current path a “death spiral” because of the increasing percentage of the city’s budget in coming years that will be devoted to paying retiree benefits.

During Mr. Orr’s presentation on Friday, his cellphone started ringing and some people in the room began to murmur, wondering why he was allowed to have his phone on and they were not.

“Those rules don’t apply to me,” Mr. Orr joked, according to people who attended the meeting and his spokesman.

Write to Matthew Dolan at, Kelly Nolan at and Emily Glazer at

A version of this article appeared June 15, 2013, on page A1 in the U.S. edition of The Wall Street Journal, with the headline: Pennies or Bankruptcy, Detroit Tells Creditors.

Detroit Looks to Pay Less to Bondholders –


USDA’s Raisin Brand

If the government confiscates your property without compensation, that’s a violation of the Constitution’s Takings Clause. If it confiscates your property as part of a longstanding government program, that’s business as usual at the Department of Agriculture. Or at least it was until Monday, when a unanimous Supreme Court ruled that raisin farmers can challenge federal regulations in court before they are forced to pay fines for noncompliance.

In Horne v. USDA, the question involved a Great Depression program to prop up the price of raisins by forcing raisin sellers to hand over a share of their crop at a discount to the federal government. Through annual marketing orders, the Raisin Administrative Committee controls the U.S. raisin supply.

When raisin farmers Marvin and Laura Horne tried to avoid the confiscation by cutting out the middleman sellers, the USDA came after them with hundreds of thousands of dollars in fines. The Hornes appealed on grounds that taking the raisins at below-market rates was an unconstitutional seizure of their property.

A federal district court upheld the government’s right to take the raisins, saying the Hornes were merely paying a “toll” for marketing their raisins and that the government doesn’t “force plaintiffs to grow raisins or to market the raisins.”  [But the Govt can make you buy health insurance?…] A panel of the Ninth Circuit Court of Appeals agreed.

But when the case was appealed to the Ninth Circuit en banc, the government switched its argument at the 11th hour, claiming that the Hornes had to first pay their fines and only then appeal the case in the Court of Federal Claims. The effect would have been to let the government bully businesses to comply with the regulations to avoid the potential fines or years of litigation.

In his opinion for the Court, Justice Clarence Thomas wrote that the Ninth Circuit could decide the takings claim directly. He added that it makes no sense to “force a party to pay an assessed fine in one proceeding and then turn around and sue for recovery of that same money in another proceeding.”

The Hornes must still fight the takings case on the merits back in the Ninth Circuit, but at least they can’t be subjected to this form of double jeopardy.

A version of this article appeared June 11, 2013, on page A16 in the U.S. edition of The Wall Street Journal, with the headline: The Government’s Raisin Brand.

Review & Outlook: The Government’s Raisin Brand –


Mum’s the Word About SEC Defeats

“A more open and transparent Government…”
More than three months ago, the Supreme Court unanimously dismissed Securities and Exchange Commission penalty claims against investment adviser Marc Gabelli because the SEC 5304.OK -1.84%took too long to file its case. But you wouldn’t know that if you monitored the case on the SEC website. You’d find the regulator’s initial fraud allegations against Mr. Gabelli but no official acknowledgment that the Supreme Court has significantly gutted the case.

The same is true for many other cases the SEC loses or abandons in court. For instance, two executives of Knight Securities KCG -0.82%took the SEC to trial in 2008 and defeated charges of fraudulent trading, yet the agency’s website reflects only the initial allegations of wrongdoing. In another case, a federal judge in New York twice dismissed the bulk of the SEC’s 2004 book-cooking charges against a former accountant at Lucent Technologies (and the SEC voluntarily abandoned the remaining claim against her in late 2010). But the SEC website—while keeping the allegations online—doesn’t mention the dismissal.

Like other federal agencies, the SEC has long been good at publicizing its initial accusations of wrongdoing—which is fair enough—but not so good at letting the public know when those accusations turn out to be unfounded or an overreach. With new leadership at its helm, the SEC should set an example by preventing lapses that can inadvertently result in airbrushed versions of law-enforcement history.

When the SEC files enforcement charges, it summarizes the case in a “litigation release” posted to its website, usually linking to a more detailed complaint filed in court. In prominent cases, the regulator also issues a news release adding statements from senior officials to amplify the broader message of the case. If and when the SEC ultimately wins, it usually issues another release touting the victory, sometimes with a link to the relevant court decision.

And if the SEC loses? Sometimes it publicly announces the defeat, but too often mum’s the word. The original charges and news releases remain on the SEC website forever, with no update to prevent misperceptions and damaged reputations.

These oversights were less problematic in the pre-Internet era. Back then, SEC news releases largely disappeared into file cabinets after a one-day press cycle. Except for the most prominent cases, media coverage was typically short-lived and soon relegated to expensive subscription databases and the dusty microfilm rooms of public libraries.

But today’s SEC publicity is permanent and widely dispersed. The regulator’s accusations can persist indefinitely among the top search-engine results for the names of those accused.

This presents an issue of fairness and transparency for a venerable agency where I proudly served from 1994 to 2004. And the solution is simple.

The SEC could easily post a litigation release whenever it loses a case or suffers a major setback in court. Or the agency could insert a brief update on the pages of its website that had previously touted the case, letting the public know what later happened. The SEC already does this after some losses—and appears to be getting better at it—but the practice remains inconsistent at best. And there’s no obvious explanation for the disparate approach from one case to the next.

Ironically, the SEC might benefit from enhanced public awareness of its setbacks in court. Some critics appear to think SEC cases are all slam dunks, and they are quick to accuse the regulator of spinelessness when it settles without draconian sanctions or a public confession of wrongdoing. Increased publicity about SEC trial losses could help manage public expectations and serve as a reality check by illustrating the agency’s vulnerability when it pushes too far.

The SEC ought not be burdened with posting interim updates every time something happens in each of its many cases. Nor should the agency erase history altogether by taking down every vestige of its original allegations simply because it lost a case. But when major litigation developments occur, and when a case is finally over, the SEC should routinely announce the result—good or bad.

Mr. Ryan, a former assistant director of the SEC’s division of enforcement, is a partner with the law firm King & Spalding LLP.

A version of this article appeared June 3, 2013, on page A15 in the U.S. edition of The Wall Street Journal, with the headline: Mum’s the Word About SEC Defeats.

Russell G. Ryan: Mum's the Word About SEC Defeats –