Tuesday, August 14, 2012

Belle Isle: Sold!

Belle Isle Main Canal -- 1900-1920 (Library of Congress)

Governor Snyder's office announced a deal today to sell Belle Isle to Grand Rapids based property developer, Grand Luxury Estates. A spokesperson for the governor, Hal Itocis noted that under the current consent agreement an appointed financial management team in Detroit holds the authority to sell city assets to meet financial obligations. The consent agreement resulted from efforts between the city and state to forestall the Public Act 4 appointment of an emergency manager to run the city. Also, Itocis emphasized the city's current budget shortfall, and the grave implications of a municipal bankruptcy filing.

When asked about the rational for disposing of one of Detroit's prize assets without prior notice or bidding from other potential buyers, a member of the city's financial management team appointed by the governor, Neo Conservatorio, replied, "Belle Isle as it stands... or just sits there really... Belle Isle is nothing but a big vacant lot sitting out there in the river. There are very few improvements worth noting, and the only thing that makes it an 'Isle' is the fact that it's stranded out there. There's really nothing 'Belle' about it. Basically."

In addition to city operating expenses, the city's financial obligations include debt servicing on municipal bonds issued for capital improvements and "financial stabilization." The outstanding principal on these bonds amounts to $5.6 billion (about 3.3 times the annual $1.7 billion city budget). Interest payments and derivative expenses amount to about $132 million per year. Principal payments come to $88 million, for a total debt cost per year of $220.4 million, which makes debt-servicing the second largest item on the city budget.

"Bankruptcy is not an option," Conservatorio said, "It's not just the police, fire, trash collection and all that city stuff we're talking about here."

Conservatorio explained that bankruptcy would mean default on principal and interest payments for the city's bonds. Underwritten by banks such as Citigroup, JPMorgan, Loop Capital, Morgan Stanley, SBS and UBS, a bond default would mean these banks face diminished profits. Of course, credit default swaps purchased by the city will likely prevent default on the bond payments -- the issuer of the credit default swaps, in essence an insurer of the bonds, will make the principal and interest payments should the city default, but under that eventuality, the insurer requires the city to make accelerated, lump sum payments -- similar to a mortgage balloon payment.

"That would be the worst case scenario." Hal Itocis said. "In that case the banks just won't get paid, they will lose money, and then all hell breaks loose. Basically."

Itocis described the scenario this way: if the city defaults on its bond payments, the city's credit rating will be downgraded, possibly to junk bond status, which would require the city to pay elevated interest rates on future bond issues. In addition, if the city fails to make its accelerated, lump-sum payment then the insurer might tumble (remember AIG?), and there will be no firewall to protect underwriters -- banks such as Citigroup, JPMorgan, Loop Capital, Morgan Stanley, SBS and UBS. If no one pays the banks, they will take a hit to their balance sheets and ultimately face diminished employee bonuses. That is a scenario that neither Hal Itocis nor Neo Conservatorio was willing to comment on. Given the close ties between bankers and politicians fostered by generous campaign contributions and revolving door employment opportunities offered to "retired" politicians, most lawmakers consider pleasing bankers one of the foremost obligations of their office.


Friday, August 3, 2012

The Superfluous Class


For a republic founded by proponents of meritocracy, dedicated to "life, liberty, and the pursuit of happiness," it seems we stray from our mission a little. European style inherited royalty and persistent aristocracy represent the antithesis of our founders' ideals: life, liberty, and pursuit of happiness. Those founders supposed happiness and prosperity would accrue to those who earned it, not those who belonged to the right church, club, political party, or corporate board (race and sex were omitted from that list).
Now, reversion from the meritocratic ideal infects our culture. Few take offense at the cultivation of a crass ruling-class in our midst. With obscene piles of cash, our self-appointed aristocracy insulate themselves from the endemic sickness, poverty, and inadequate opportunity to learn and earn that plague the vast majority of us. Few objected while those who profited most over the last three decades decreed they should contribute the least. Toward that goal, the rich mastered a strategy to retain wealth; that is, to minimize their taxes. Equally insidious, they elevated their social status and esteem via the media outlets they own: movies, television shows, and magazine articles that celebrate riches but ignore the method of acquiring those riches. Not only do they extract wealth from us -- the vast un-wealthy majority -- but they extract our praise and admiration, too. They seize their pound of flesh, and expect us to applaud as they lop it off.
Our praise and admiration yields more than icing on the cake. Praise serves an essential purpose. Our collective fawning over the rich erects in our minds psychological barriers to the creation of laws that would impede retention of filthy lucre. We want so much to be like them we defy egalitarian attempts to inhibit unjust concentration of wealth. We fear friction on the upward flow of wealth will prevent our own acquisition of fabulous excess. In addition, our universal admiration of wealth grants the overfed an unassailable bully pulpit.

Of course, the rich do not risk climbing the towering pulpit themselves, their loyal designees do: politicians. Politicians financed by the wealthy eagerly and often reel off the virtues of their benefactors. And, like artists blessed with a devoted patron, the art tends to fit the taste of the sponsor. Bought politicians remind us, falsely: the rich create jobs for the rest of us. That sounds logical. It sounds inevitable. But it is not true. The vast majority of the rich are not business operators, but passive investors. They do not hire anyone. They seek maximum gain on investment. They are part of the constituency corporate CEO's and boards swear their allegiance to: investing shareholders (mutual and pension fund managers form the remaining bulk of that constituency).
Maximizing returns for shareholders does not require facilitating prosperity for domestic wage earners. On the contrary, with laws passed over the last thirty years by presidents and legislatures beholden to the rich, most corporations find it easier to exploit "free" trade rules and create wealth overseas. Overseas labor comes cheap. Overseas workplaces profitably omit modern standards for worker safety, health, and pensions, not to mention environmental protection. If free markets existed, this would not be the case. Impoverishing, poisoning and maiming your employees and rendering your environment toxic imposes costs. In a free market, violators would logically pay the assessed cost of worker and environmental abuse. Consumers would reject purely on a price basis products from companies that incur the highest overhead for worker injuries, workplace induced ill-health, and environmental degradation.

Besides pure cost consideration, would you buy a product from someone you knew poisoned your wife and then fired her, or lopped off the hand of your cousin and then fired him, or spilled mercury in your drinking water and ignored your plea for cleanup? Not likely. Not if you had a choice. A free, fully transparent market reveals such realities.