Notes on the Detroit Bankruptcy

bankruptcy

1. Looking back, it was all but inevitable. Kevyn Orr, who was appointed to be Detroit’s emergency manager by Governor Rick Snyder back in March, is a bankruptcy lawyer. He was selected to fix the city, and everything looks like a nail when you’re holding a hammer. Orr himself likened bankruptcy to a hammer of sorts, stating at a press conference that “in each restructuring I’ve been in, I’ve heard the same thing: This is a crisis. . . . Not at all. This is a tool.” The question, then, is what does this tool do.

One thing such tools do is produce winners and losers. Before filing for bankruptcy, Orr sat down with the city’s creditors to try to get them to voluntarily take a hit on what they were owed. Most of these creditors, which include “wealthy investors, money market bonds, bond funds, insurance companies, banks, hedge funds, and debt-traders,” would have received 10 cents on the dollar. Underfunded pension claims, however, would have received less than the 10 cents offered to the Wall Street counterparts. From the perspective of the emergency manager, not all debt obligations are created equal. Some, goes this line of thinking, can be squeezed harder than others. Although this proposal was rejected, the same logic continues to operate in the actual bankruptcy filing: retirees will take the hit while Wall Street gets paid first. And for corporations, of course, it’s an opportunity. “Crisis,” in other words, is never evenly distributed.

Moreover, even positing an equivalence between large bondholders and pension funds is like comparing apples and oranges for at least two reasons. First, these bondholders will invariably have forms of insurance (such as swaps) on their positions, which means that even in the event of a total default they will still receive some form of payment. Pension holders, on the other hand, do not. Second, bonds are truly debt instruments—investors know they carry risks, which is why they buy them—while pensions are essentially wages. Pensions are not IRA investments and should not be treated as such. By comparing the two sets of creditors, we impose a level of risk on pension funds that they did not carry for their original recipients, to whom they were sold as forms of deferred compensation.

2. Many activists, organizers, and especially liberal politicians have identified the emergency manager as the target of criticism and protest, arguing that his dictatorial powers—he is unelected and can override the decisions of the city’s elected officials at will—have been the critical element of the bankruptcy arrangement. This claim parallels the argument laid out by Naomi Klein in her well-known book The Shock Doctrine. Neoliberal reforms and austerity, she writes, are so unpopular that politicians can’t implement them through normal democratic procedures. Crisis, however, provides the opening and the opportunity to ram them through.

This is a compelling argument, especially to progressive-minded commentators, but at least in this case it is deeply misguided. The crisis in Detroit has little to do with “democracy”—the business-as-usual form of party politics dominated by corporate interests. In fact, “democracy” is what got us into this mess in the first place. Even beyond Detroit’s headline-catching ex-mayor Kwame Kilpatrick (elected in 2002 and currently awaiting sentencing on a new round of felony convictions), city governance has been notoriously corrupt, not to mention astonishingly incompetent. Since 2005, for example, the city has turned to Wall Street for help in funding its pension obligations—essentially kicking the can down the road—in exchange for what by now has added up to $474 million in fees alone.  That’s more than enough to pay off the city’s current budget deficit, estimated at about $380 million.

Another example is the infamous revenue-sharing deal signed between the city and the state back in 1998. The idea was for Detroit to gradually reduce its income taxes, which were deemed by the state government to be too high, by a third, from 3 to 2 percent. In return, the state would contribute $333.9 million annually for a period of nine years. While the city kept its part of the bargain, the state—run at different times by members of both political parties—did not. As a result of this arrangement, Detroit lost out on about $700 million between the loss of tax revenue and the state’s declining contributions. Again, that’s almost double the city’s current deficit.

However much what’s happening in Detroit seems to resonate with the popular notion of disaster capitalism, no solution will be found in getting rid of the emergency manager and restoring authority to elected officials. We can’t vote capital out of office. To focus on the sphere of official politics is to fundamentally misrecognize the terrain on which this conflict is being fought.

3. To some extent, then, the fiscal crisis facing Detroit is the result of misguided priorities, ethical lapses, and effective spin on the part of the ruling elite. This last point is worth considering. There is good reason to be skeptical, for example, about the emergency manager’s “massively inflated” claims about the extent of the city’s pension liabilities:

Pension liabilities are enormously important but imaginary numbers based on projections about a combination of factors. Perhaps the most important of these is the discount rate, which in turn is usually based on the bond market. Using a higher discount rate makes liabilities seem smaller, and vice versa. The power to define that rate confers the right to define a pension’s viability.

Orr has played a savvy game around Detroit’s discount rate. In his creditors’ report, he noted that the old discount rate yielded a funding gap of just under $700 million, while using “more realistic assumptions” would boost the liability nearly five-fold to $3.5 billion. By repeating that number in talking to the press, without ever revealing the methodology behind it, Orr has mainstreamed the notion that the pensions face a funding crisis that demands emergency tactics.

That being said, the decline of Detroit is not only “imaginary”—it is also objective. Popular discourse about the city is so oversaturated with knowing assertions and lamentations about factory automation, outsourcing, white flight, and population decline that at times a sense of skepticism automatically kicks in, lending support to the counterargument that, if only we could reorganize our priorities or (the politicians say) vote someone else into office, the problem could be resolved. Unfortunately, this is not the case. What is happening in Detroit is one result of the reorganization of the global economy that began in the late 1960s and early 1970s. The “golden age” of manufacturing is long gone and it’s not coming back. The terrain of conflict in Detroit, then, is not democracy but capitalism. (Another way to put it would be to say that the only way the question of democracy enters into the picture is not in the form of political representation but workplace organization: “What kind of a society gives a relatively tiny number of people the position and power to make corporate decisions impacting millions in and around Detroit while it excludes those millions from participating in those decisions?”)

DETROIT, Mich. — The most segregated city in America, Detroit's inner city is almost exclusively black, except for a small Hispanic corner in the southwest called "Mexicantown." The suburbs like Grosse Pointe, Dearborn, and Ferndale are heavily white.

4. The bankruptcy petition filed by Orr includes a statement of approval signed by Governor Rick Snyder, which identifies population decline as one of if not the key element responsible for the fiscal state in which the city finds itself today. “Mr. Orr’s letter and prior report put in stark reality the dramatic impact of the City’s plummeting population. . . . The City’s population has declined 63% from its peak, including a 28% decline since 2000. That exodus has brought Detroit to the point that it cannot satisfy promises it made in the past. A decreasing tax base has made meeting obligations to creditors impossible” (p. 15). The statement does not note, however, the racial dynamics of these demographic changes. As many critics have observed, what happened in Detroit was an exodus not of a general population but specifically of the white population, which fled to the suburbs (with its tax dollars) beginning in the 1940s and 1950s. It was fueled formally, by racist policies like redlining—in 1941, a segregation wall was even built off 8 Mile Road to separate the white neighborhoods from the black ones—and informally, by varied and violent configurations of discrimination and fear. Today, Detroit’s population is still 83 percent black.

While that exodus has decimated the city’s tax base, it has also produced stunning concentrations of wealth just beyond its municipal lines. According to Forbes, there are seven billionaires living in the metro Detroit area. For example, Dan Gilbert, the owner of the mortgage company Quicken Loans who has been buying up massive amounts of downtown real estate, is worth $3.5 billion. While many in the media call him a hero who’s going to “save” Detroit, he’s not accumulating the built environment out of kindness—he’s in it for the money. Coincidentally, that’s precisely the amount of the city’s entire pension liabilities if we assume Orr’s sketchy calculations are correct. There is plenty of wealth in southeast Michigan—we just have to know where to look for it.

5. Which brings us to targets. Pleas to authorities will accomplish nothing, as the authorities are by design not accountable to the public. But even politicians who are nominally accountable will not listen—they are accountable only to the needs of the market. An offensive strategy must be creative, identifying points in the circuit at which the immaterial flows of capital through and around the city (e.g. debt) become material and concrete, able to block, break, or take.

What about, say, the Goldman Sachs aluminum scam? The other day, the New York Times published an article on the notorious Wall Street firm, which has coordinated muni bond sales for Detroit that were good for Goldman and bad for the city. By purchasing a company based in the Detroit area called Metro International, Goldman has been able to acquire a stranglehold on the world aluminum market.

The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.

This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country.

(…)

Only a tenth of a cent or so of an aluminum can’s purchase price can be traced back to the strategy. But multiply that amount by the 90 billion aluminum cans consumed in the United States each year — and add the tons of aluminum used in things like cars, electronics and house siding — and the efforts by Goldman and other financial players has cost American consumers more than $5 billion over the last three years, say former industry executives, analysts and consultants.

Unlike the financial trades in which Goldman tends to deal, these warehouses are material and can be mapped. Blockading the warehouses, preventing the trucks from making one section of the loop, could cause a backup throughout, bringing the circuit of aluminum ingots—and the generation of profits—to a grinding halt. Interrupting this movement would be one small way of putting pressure on Goldman, and our blockade could last until the firm cancels the debt owed to it by the city of Detroit. The response to the bankruptcy must not be indirect, based on misplaced faith in political representatives, but direct, by intervening in the everyday operations of an economy that increasingly concentrates more wealth in the hands, and cities, of the few and leaves behind pockets of poverty and devastation.

(thx for the graffiti)