The Olympics of Restructuring

The man who once saved New York City from bankruptcy explains why Detroit may go under

March 15, 2013
March 15, 2013

The US city of Detroit is in deep financial trouble. Years of fiscal mismanagement and a shrinking population have left it with $14 billion in debt and a $300-million deficit last year, the auto capital of the country is headed toward bankruptcy. Michigan Governor Rick Snyder just appointed Kevyn Orr, a Washington bankruptcy attorney, to be the city’s “emergency manager,” a role with the power to implement budget measures without the consent of local officials.

Orr led the 2010 restructuring of Chrysler, the US automaker based in Detroit, during the the American government’s rescue of the auto industry. But his current challenge is what he calls “the Olympics of restructuring.” It might very well be: If the city doesn’t get back on its feet soon, it will become the largest municipal default in US history.

Felix Rohatyn faced similar problems in 1975, when he chaired a commission that extricated New York City from its financial crisis, a similar $14 billion debt load and an astounding $2.2-billion operating deficit (pdf). Rohatyn and a deputy were referred to as the “Batman and Robin of New York.” The legendary Lazard banker talked to Quartz about his worries that the same tools he used might not be available in Detroit.

“We couldn’t do this today,” says Rohatyn. “The various stakeholders are no longer around the same table.”

He’s referring to three major breakthroughs that helped refinance the Big Apple. First, municipal unions, as well as conceding pay cuts, used their pension funds to invest in the city. Then big Wall Street banks, which owned a lot of New York municipal debt and therefore had strong incentives to cooperate on restructuring, agreed to defer loan repayment and underwrote new securities on the cheap. And despite President Gerald Ford’s famous message to New York, pressure from Congress—and even from foreign governments fearing a default—led to federal guarantees on the city’s debt.

“They thought this would lead to a global financial catastrophe, and actually we all agreed with them,” Rohatyn says. “That’s also partly why we had the support of the banks and well as of the unions, which financed us, eventually, from their pension fund, which was taking a big risk for them.”

The Motor City is in a different position. Today’s weaker unions aren’t able to make the kind of investments they did four decades ago. The financial sector is not entwined in Detroit’s problems, and the city’s debt is in the hands of a far greater number and much more diverse cast of investors, making consensus on restructuring much harder. It’s also not clear that today’s Congress, let alone foreign leaders, would be interested in bailing out America’s 18th-largest city. And on top of all that, Orr faces ongoing strife between the city’s Democratic council and the anti-union Republican governor who appointed him, not to mention citizens upset at losing control of their beleaguered city.

Still, Orr thinks Detroit can be saved—and that the job could be done in just 18 months, thanks in part to the threat of bankruptcy procedures, which are friendlier to municipalities than their creditors. “I don’t think we’re inevitably headed for bankruptcy, but people have got to be realistic, reasonable and focused on changing the architecture of the finances of the city so they can go into a sustainable model for the future,” Orr told the Detroit News in an interview.

And if a failure to find an agreement resulted in bankruptcy? “If [creditors] don’t [work with me] and we’ve got to go to Chapter 9, I’m not playing,” he said.

Like Orr, Rohatyn isn’t completely pessimistic.

“The stakes are big,” he says. “I think they’ve got very good people, and I think they caught this thing, hopefully, just in time.”

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