All In   |  December 03, 2013

Detroit's bankruptcy and cutting pensions

Chris Hayes talks to a former Wall Street banker about what really caused Detroit to go bankrupt.

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This content comes from Closed Captioning that was broadcast along with this program.

>>> cut from the city of detroits employees.

>> about 20,000 workers were promised pensions. a federal judge ruled today that detroit is eligible to go forward with it's chapter nine bankruptcy. it's the largest city in u.s. history to do so. when detroit filed for bankruptcy in july it was an open question if the city met the legal requirements for chapter nine. today, a bankruptcy judge ruled that it did, saying in part, quote, the city no longer has resources to provide the citizens with police, fire, and emergency services . of particular importance are those 20,000 or so city retirees with guaranteed pensions that are no longer guaranteed. the ruling holds that federal law supercedes. detroit is now officially out of voters hands.

>> i don't think we have a final determination as to what although of the elements are going to be to get us through this process. but it is a process that i think we need to take a lot of care because there are going to be pain for a lot of different people.

>> joining us now is a former investment banger with goldman sachs where he specialized in stance. what's your reaction to today's court ruling ?

>> thank you for having me here. this thing of saying they can cut the pensions, that was all about the court saying we have the power to do it. they also said we're going to be cautious about cutting the pensions and try to be fair. the court talked about the states involvement. he said there was evidence of it in the record, but not enough to make the case solid.

>> that's an important point, so they investigated whether or not the state pushed them into bankruptcy indegsally. and they played a crucial role in tipping them into bankruptcy, what was that?

>> they cut revenue sharing .

>> meaning the state would take the taxes collected from all over the state and it would go back out --

>> yeah, parse it out. one was because of the detroit losing population. most of it, $44 million, what was a state la that went into effect in 2012 just before the city ran out of cash.

>> they pass a bill that takes $47 million out of the ledger of detroit , and detroit files for bankruptcy.

>> then the emergency manager appointed by the governor, who is virtually a dictator, did the bankruptcy filing. it was the governor's agent.

>> the judge said there is not enough evidence to say the fix was in, what was your opinion of -- when people look at detroit , they say classic story of big government gone awry. too many employees and pensions, why did detroit go bankrupt?

>> the numbers just don't depict that. we took a good look at the numbers, the great reception drove unemployment up to 30%. it was a devastating event. since the great depression, they cut their budget by 38%.

>> so they are spending 38% less?

>> yes. the number of employees per capita in detroit , there is many fewer employees per capita . there is many indications that they were trying to cut. on the other side of the ledger, the revenues were being devastated.

>> annihilated from unemployment, exodus --

>> 70% of the mortgages were bad mortgages --

>> 70% of the mortgages in detroit ?

>> yeah.

>> so you have 30% unemployment, bad mortgages, the state that comes in and says that's another -- they say we're going to take $47 million away with you, and now you're making deals with banks.

>> i'll make it real simple.

>> and you were a wall street company.

>> yes, i know how to do this. they borrowed $1.6 billion in 2005 . half of that, for half of that, they made a deal where it was under a derivative. they paid the banks on wall street the interest and the principal was paid to the bondholders. the deal with the banks on wall street , it's as if you have a mortgage and you pay your interest to someone else. if you got nicked, all of the interest for 20 years would come due today.

>> you're detroit , you're hoovering over getting a downgrade, and the structure of the deal was you can borrow this money, but the day after you get downgraded you have to pay us everything due.

>> yeah, they don't have that kind of money. i -- in 1990 i did a transaction to try to keep detroit , and successfully kept detroit investment grade rated. that was 23 years ago. they have severe structural problems. to enter a transaction like that, it's not an interest rate bet, it was a bet on staying solvent.

>> and they lost that bet. quickly, is there a way for detroit to pay the promise to it's retirees and get out of this?

>> well, yes there is. so there are several aspects to it. you have to be creative about how you drive down their catch throw deficit. but the way to do it, and tragically the bankruptcy court can't order the state to kick in a little money, to put back the $47 million they paid, that's the way to do it. so --

>> so if they wanted to reinstate that revenue sharing they took away, you could create a cash flow to get their head above water?

>> yes, and you could do it that way ininstead of bankruptcy.

>> when you look at the number of bills passed by the house and the paltry number of bills passed by the senate you can see where the problem is.

>> yes, we can. and we'll talk about it next. hey