Kevyn Orr, center, speaks at a news conference last week where Gov. Rick Snyder, right, announced his appointment Detroit's emergency manager with Detroit Mayor Dave Bing, left,standing by. (AP Photo/Paul Sancya)
Former Chrysler bankruptcy counsel Kevyn Orr, Detroit's new emergency manager, is a reminder that President Barack Obama, did — his campaign narrative aside — let Detroit go bankrupt.
Municipal bankruptcies are rare, but it is lost on no one that Gov. Rick Snyder had selected a bankruptcy expert for Detroit — as opposed to an accountant or former elected official. Orr's selection reveals a state strategy very similar to Obama's government takeover and bankruptcy restructuring of Chrysler after it faced a cash crisis in 2009.
The irony of Michigan's Detroit emergency takeover is that — while Detroit politicians hailed the auto czar's takeover of Chrysler — Motown pols have scorned the emergency manager. Yet both Steve Rattner's White House auto task force and Orr's emergency financial team exist to achieve three key goals:
1) Pre-emptive bankruptcy. Like Chrysler's highly unusual, government-managed restructuring using Section 363 of the Chapter 11 bankruptcy code, Michigan wants to avoid a full-blown Chapter 9.
2) Preventing a larger collapse. An extended Chrysler (and GM) Chapter 11 bankruptcy during the Great Recession would have caused a chain reaction of failures among its "tail" of suppliers. A Detroit bankruptcy would have a ripple effect across Metro Detroit's "tail" of municipalities, tanking their bond ratings.
3) Restructure long-term liabilities. Chrysler and Detroit had unsustainable pension and debt obligations that were consuming operating cash.
Of course, there are obvious differences between the Chrysler and Detroit government restructurings.
Detroit Councilwoman JoAnn Watson, speaking for many Detroiters after Obama's re-election last fall, suggested he should bail out the city just as he did the autos. "(Obama should come) home with some bacon. That's what you do," she said.
Trouble is, there are only three auto companies whereas there are hundreds of American cities. Bailing out one would set a terrible precedent. Second, Obama's "UAW Bailout" was crucial to his party as the UAW is a major Democratic donor and a key to his Midwest campaign strategy. And, finally, federal money was hardly free — in exchange for $8 billion loan, Washington demanded that the auto czar take over Chrysler in order to address its long-term liabilities.
Sound familiar? That's exactly what the state of Michigan intends with Detroit's emergency manager.
My Detroit News colleague, Dan Howes, points out that while Michigan doesn't have $8 billion to loan (who does?), the state did extend $137 million in loans last year and will likely back up restructuring with more as the EM's terms are met.
Believers in the Bailout Fairy should also recognize how unusual the Chrysler-GM bailouts were. They were rightly controversial because they involved government intervening in private markets. By contrast, Michigan's emergency manager law is less controversial because cities are legal wards of the state. Lansing has every right to intervene to prevent municipal disasters — which is why the EM law has had bipartisan support for years.
Indeed, Orr's appointment is a reminder of just how extra-legal the Obama administration's actions in Chrysler were. Consider:
— Auto Czar Rattner gave priority to Chrysler unions ahead of its secure bondholders, a violation of U.S. law.
— The czar forced Chrysler bondholders to take 29 cents on the dollar, gutting the pensions of bondholding Indiana teachers and policemen — who then unsuccessfully sued Chrysler (which was represented by. . . Mr. Orr).
— The auto czar fired GM's CEO, Rick Wagoner.
No similar, Detroit-related travesties are likely to happen under Orr's new Republican boss, Rick Snyder.
Rattner's task was formidable. Orr's is even tougher. Chrysler had valuable assets that could earn money under restructuring. Detroit has few — though Belle Isle, the Water Department and other entities can help. But, as the very presence of Kevyn Orr testifies, Detroit — like Chrysler — is getting special government intervention. Indeed, the closeness of Orr and Snyder to Obama suggests that a good-faith Detroit restructuring may ultimately reap federal benefits.
With such state leadership, Detroit pols should be so lucky.
CORRECTION: An earlier version of this column mistakenly referred to Chrysler avoiding Chapter 11 bankruptcy with a "Chapter 363 restructuring." In fact, the auto czar used a controversial interpretation of Section 363 of Chapter 11 as the foundation for Chrysler's restructuring.
Henry Payne’s online column runs every Tuesday. Payne is a Detroit News editorial writer and editorial cartoonist. He also is editor of The Detroit News Politics forum. Email him at hpayne@detroitnews.com
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