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.



  1. RIOT. This is outrageous. How about eliminate the pay of all city council and mayor? They ARE our public servants!

  2. Where did you find this out? I would rather they kept the idea of it being a state park, but THIS is Horrific. This is basically saying we don't care about you and your history just the money

    1. It's satire. It's not happening...yet. Vote to repeal Public Act 4 on the Michigan ballot referendum if you want to prevent this from becoming reality. PA4 gives emergency managers the power to sell off a city's assets. Scary stuff.

      Thanks for visiting my blog.


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