Detroit Will Get Worse Before It Gets Better: Bankruptcy a Game-Changing Event (820 hits)
Meredith Whitney
It’s been just over a week since Detroit filed for the largest municipal bankruptcy in U.S. history and, so far, there are more questions than answers about how this will all shake out. On Wednesday, a U.S. Bankruptcy judge ruled Detroit’s Chapter 9 filing can proceed but local unions, pension funds and other creditors will continue to try and stop the process.
Related: Detroit Will Get Worse Before It Gets Better
Regardless of how the legal proceedings unfold, Meredith Whitney thinks she knows what will happen as a result of Detroit’s bankruptcy filing: “staggering aftershocks” for the muni bond market and “important precedents” for other state and local governments.
“We know [Detroit’s bankruptcy] is a game-changing event for certain,” says Whitney, author of Fate of the States and founder of Meredith Whitney Advisory Group LLC. “It will galvanize other municipalities to either get their act together or follow Detroit’s lead.”
Asked what other municipalities might follow Detroit’s lead into bankruptcy, Whitney cited the five other Michigan cities currently under emergency management: Flint, Pontiac, Ecorse, Allen Park and Benton Harbor. She also reiterated her concerns about the states of New Jersey and Illinois.
The Wall Street Journal recently cited Oakland, Philadelphia and Chicago as other big cities with the potential to follow Detroit’s lead but Whitney declined to mention other cities.
“I’m not sure it’s constructive to name towns [and] sound the alarm,” she said. “But there are numerous others across the country. Detroit is hardly unique.”
Of course, Whitney gained increased attention – and considerable criticism – when she sounded the alarm on 60 Minutes in late 2010. At that time, she predicted “a spate of municipal bond defaults. You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."
Nothing close to that level of muni bankruptcies has occurred, to date, but ask yourself: Was Whitney 'dead wrong' on 60 Minutes, as her critics continue to claim, or just early?
And check the accompanying video to hear specifics on why Whitney believes Detroit’s bankruptcy is such a “game changing event” and whether she believes the city of Detroit can be 'restructured' via bankruptcy as were automakers GM and Chrysler.
Related: Why We Should Care About Detroit’s Future
Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo! Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com
Detroit Looks to Health Law to Ease Costs As Detroit enters the federal bankruptcy process, the city is proposing a controversial plan for paring some of the $5.7 billion it owes in retiree health costs: pushing many of those too young to qualify for Medicare out of city-run coverage and into the new insurance markets that will soon be operating under the Obama health care law.
Officials say the plan would be part of a broader effort to save Detroit tens of millions of dollars in health costs each year, a major element in a restructuring package that must be approved by a bankruptcy judge. It is being watched closely by municipal leaders around the nation, many of whom complain of mounting, unsustainable prices for the health care promised to retired city workers.
Similar proposals that could shift public sector retirees into the new insurance markets, called exchanges, are already being planned or contemplated in places like Chicago; Sheboygan County, Wis.; and Stockton, Calif. While large employers that eliminate health benefits for full-time workers can be penalized under the health care law, retirees are a different matter.
