16 June 2014

One Step Closer for Detroit

Bloomberg reports here that Detroit and the insurer for its limited-tax obligation bondholders have struck a deal. That the bond insurer is willing to settle when, as the report notes, municipal bondholders had thought they were "golden" when it came to repayment suggests I was correct. My recently published article, Municipal Bankruptcy: When Doing Less Is Doing Best (download here) argued that, on the one hand, the Bankruptcy Code provided that bondholders should get paid the same percentage as retirees and, at the same time, the law provides that retirees should in effect get first dibs.

The Bankruptcy Code's internal and inherent contradiction makes a roll of the dice for either set of creditors a great risk. A win would be great but a loss would be disaster. Thus, we have a statutory game of Chicken in which rational players (creditors) will lock in at least some gain and call it a day. And that's what seems to be happening in Detroit.

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