http://www.zerohedge.com/news/2013-10-27/detroit-pensioners-face-miserable-16-cent-dollar-recovery
Submitted by Tyler Durden on 10/27/2013 11:12 -0400
Detroit Pensioners Face Miserable 16 Cent On The Dollar Recovery
If there is ever a case study about people who built up their reputation and then squandered it for first being right for all the wrong reasons, and then being wrong for the right ones, then Meredith Whitney certainly heads the list of eligible candidates. After "predicting" the great financial crisis back in 2007 by looking at some deteriorating credit trends at Citigroup, a process that many had engaged beforehand and had come to a far more dire -and just as correct - conclusion, Whitney rose to stardom for merely regurgitating a well-known meme, however since her trumpeted call was the one closest to the Lehman-Day event when it all came crashing down, it afforded her a 5 year very lucrative stint as an advisor. Said stint has now been shuttered.
The main reason for the shuttering, of course, is that in 2010 she also called an imminent "muni" cataclysm, staking her reputation once again not only on what is fundamentally obvious, but locking in a time frame: 2011. Alas, this time her "timing" luck ran out and her call was dead wrong, leading people to question her abilities, and ultimately to give up on her "advisory" services altogether. Which in some ways is a shame because Whitney was and is quite correct about the municipal default tidal wave, as Detroit and ever more municipalities have shown, and the only question is the timing.
However, as Citi's Matt King recent showed, when it comes to stepwise, quantum leap re-pricings of widely held credits, the revelation is usually a very painful, sudden and very dramatic one. This can be seen nowhere better than in the default of Lehman brothers, where while the firm's equity was slow to admit defeat it was nothing in comparison to the abject case study in denial that the Lehman bonds put in. However, as can be seen in the chart below, when it finally came, and when bondholders realized they are screwed the morning of Monday, September 15 when the Lehman bankruptcy filing was fact, the move from 80 cents on the dollar to under 10 cents took place in a heartbeat.
It is the same kind of violent and anguished repricing that all unsecured creditors in the coming wave of heretofore "denialed" municipal bankruptcy filings will have to undergo. Starting with Detroit, where as Reuters reports, the recovery to pensioners, retirees and all other unsecured creditors will be.... 16 cents on the dollar!... or less than what Greek bondholders got in the country's latest (and certainly not final) bankruptcy.
From Reuters:
On Friday, city financial consultant Kenneth Buckfire said he did not have to recommend to Orr that pensions for the city's retirees be cut as a way to help Detroit navigate through debts and liabilities that total $18.5 billion.Buckfire said it was clear that the city did not have the funds to pay the unsecured pension payouts without cutting them."It was a function of the mathematics," said Buckfire, who said he did not think it was necessary for him or anyone else to recommend pension cuts to Orr."Are you saying it was so self-evident that no one had to say it?" asked Claude Montgomery, attorney for a committee of retirees that was created by Rhodes."Yes," Buckfire answered.Buckfire, a Detroit native and investment banker with restructuring experience, later told the court the city plans to pay unsecured creditors,including the city's pensioners, 16 cents on the dollar. There are about 23,500 city retirees.
One wonders by how many cents on the dollar the recovery to pensioners would increase if the New York-based Miller Buckfire were to cut their advisory fee, but that is not the point of this post (it will be of a subsequent).
What is the point, is that creditors across all products, aided and abetted by the greatest credit bubble of all time blown by Benny and the Inkjets, will find the kind of violent repricings that Lehman showed take place whenever hope dies, increasingly more prevalent. And since retirees and pensioners are ultimately creditors, this is perhaps the fastest, if certainly most brutal way, to make sure that the United Welfare States of America is finally on a path of sustainability.
The only question is how will those same retirees who have just undergone an 84 cent haircut, take it. One hopes: peacefully. Because among those whose incentive to work effectively has just been cut to zero, is also the local police force. In which case if hope once again fails, it is perhaps better not to contemplate the consequences. For both Meredith Whitney, who will eventually be proven right, and for everyone else.
http://live.detroitnews.com/2013/10/25/drama-builds-detroit-bankruptcy-trial/#liveblog-entry-789
Protestors outside U.S. District Court this week included a mask of Gov. Rick Snyder.
The state constitutional protection of vested public pensions was not “relevant” when restructuring experts considered slashing retiree benefits, said an investment banker working on restructuring Detroit’s finances.
Banker Kenneth Buckfire was questioned about Emergency Manager Kevyn Orr’s restructuring proposal issued on June 14, which calls for cuts to retiree pensions. The cuts would come despite the state constitutional protections.
AFSCME lawyer Jack Sherwood
“In concluding the proposal is even-handed and fair, did you consider the argument that vested pension claims are protected by the constitution of the state of Michigan?” asked attorney Jack Sherwood, who represents the American Federation of State, County and Municipal Employees.
“I am aware of that argument,” Buckfire said.
“Did you incorporate that argument into the proposal?” Sherwood asked.
“No,” Buckfire said.
“You don’t give that argument much value, do you, when you conclude that the proposal made on June 14 is even-handed and fair?” the lawyer asked.
“They don’t have security,” Buckfire said. “We did give it some weight but did not deem it relevant.”
Investment banker Kenneth Buckfire repeatedly answered “I don’t recall” Friday when asked about the first time he talked with Emergency Manager Kevyn Orr about slashing retiree pensions and health care benefits.
The exchanges were tense, terse and marked a stark reversal from Buckfire’s testimony a day earlier under direct examination from the city’s bankruptcy lawyers, who are trying to show the city is insolvent and eligible for Chapter 9 bankruptcy relief.
“When, sir, is the first time you recall you and Mr. Orr discussing the reduction of pension benefits and health care benefits, if ever?” Detroit retiree lawyer Claude Montgomery asked.
“I don’t recall,” Buckfire said.
“It never happened?” the lawyer asked.
“I said I don’t recall,” Buckfire said.
“Did it?” Montgomery asked.
“I don’t recall,” Buckfire said.
Orr is proposing to treat classes of creditors equally. The city’s largest secured bond debt would be restructured with new bonds. Unsecured bonds and other debt, including the city’s two pension funds, would divide $2 billion in “non-recourse participation notes” payable once the city’s financial condition improves.
Retirees are being treated “no better or worse than any other unsecured creditor of the city,” Buckfire testified today.
“The pension obligations of the city, is it fair to treat those exactly the same as trade creditors?” Montgomery asked.
“They’re unsecured claims,” Buckfire said.
“Isn’t the city paying trade creditors?” the lawyer asked.
“They are,” Buckfire said.
The city also is paying pension benefits. Pensions have not been slashed while the city tries to become eligible for Chapter 9 bankruptcy relief.
Pension cuts would be included in a plan of adjustment that could be filed later in bankruptcy court.
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