Tuesday, June 25, 2013

EFM Orr to Bondholders: You F-ed Up. You Trusted Detroit.

The Detroit News: Lenders take it on the chin in Orr's plan

Emergency Financial Manager Orr just declared that bond holders with limited and unlimited general obligation debt were now unsecured lenders with the debt not backed by the full faith and credit of the city. In other words, from what was a historically safe loan made to a city backed by its power to tax and obligation to pay the lenders back, the lender now holds a piece of paper they'll be lucky to get pennies on the dollar for.

This is known as changing the terms of the loan after you've already received the money.

The reason for this change - well, according to Orr, the lenders should have known better than to lend money to the City of Detroit, promises and contracts for repayment be damned.

“If you lent money to an insolvent city that has been going insolvent as openly and notoriously as possible since 2000, and you don't have a security interest, then you are an unsecured creditor,” he told The Bond Buyer in a recent interview. “This has been building for decades and decades. They understood the risk.”

This reminds me of a similar situation where a good faith lender gets taken to the cleaners by his debtors.

Yep, same thing, just delivered a tad more politely.

Given his statement, where exactly does Orr think he will find a lender for the City now?

This turns the rules of municipal lending on their head, and expect that the bond markets are going to react and start reconsidering their loans to all troubled municipal debtors as a result and not consider Detroit to be an isolated case.

If you hold any municipal bond funds, it is likely time or well past time to get the heck out, as this "safe investment" now unequivocally isn't.


Expatriate Owl said...

What if a white EFM had made the same statement? Would everyone be calling him or her a racist?

Aaron said...

It's quite likely they would have been so labelled as pointing out reality, depending on who points it out, must be racist.