20 November 2013

Heads I Win, Tails You Lose. Or Is It The Other Way Around?

Say what you will about the over-the-top opposition of municipal bond insurers to the eligibility of Stockton, California for Chapter 9 bankruptcy protection, at least they know when they were beaten. National Public Finance Guarantee Corporation and Assured Guaranty Corporation objected to Stockton's eligibility and fought a three-day trial back in March after which the Bankruptcy Court not only upheld the city's eligibility but chastised the insurers in no uncertain terms: "The decision makers for the capital markets creditors need to check their testosterone at the door," according to Bankruptcy Judge Klein in a published opinion. The insurers got the message and eventually negotiated a consensual plan of adjustment that seems likely to be approved.

Compare Stockton's two bond insurers to their nemesis CalPERS and then to Detroit's AFSCME union. CalPERS lost its eligibility battle in the San Bernadino bankruptcy but rather than taking its loss as an invitation to negotiate, it has appealed. Not an ordinary appeal to the District Court, mind you, but an attempted direct appeal to the Ninth Circuit Court of Appeals. And not simply a petition to the Ninth Circuit but a simultaneous request to Bankruptcy Judge Jury to certify its appeal. All of this is more detail than an ordinary reader needs to know so let me summarize CalPERS position: We lost but come hell or high water we'll make San Bernadino pay!

Detroit's unions might be showing even more temerity. After finishing a nearly two-week long trial on Detroit's eligibility--and before the judge has ruled--the union are asking Bankruptcy Judge Rhodes to certify an appeal to the Sixth Circuit (again, by-passing an ordinary appeal to the District Court) regardless of Judge Rhodes's decision. "Gee Judge, we don't care what you do, it's wrong."

As I argue at length in Fairness and Risk in Stockton: Pensions, Bonds, and Taxes -- When Doing Nothing is Doing Well, intransigent creditors in Chapter 9 cases have more to lose than win. Unlike Chapter 11 where the inability to confirm a plan of reorganization leads to a debtor's liquidation, in Chapter 9 it leads to dismissal of the case--a lose-lose situation. CalPERS in San Bernadino and AFSCME in Detroit are thus not fighting in good faith; their litigation tactics demonstrate that they don't sincerely hope to get a bigger piece of the pie. Rather, in San Bernadino, CalPERS is using its hammer to bludgeon other cities into not messing with it and in Detroit, AFSCME is pandering to its political base. Only time will tell if either pulls back before heading over the cliff in a high-stakes game of Chicken.

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