Rodin's 'The Thinker' (Detroit Institute of Arts)
Detroit’s holdout bond insurers, facing the prospect of meager returns in the city’s historic bankruptcy case, are not going quietly.
In a pre-emptive strike just days from the start of the city’s confirmation trial, a lender that accepts art as collateral is offering to loan Detroit as much as $4 billion to be secured by the encyclopedic collection of the Detroit Institute of Arts. Never mind that it’s a transaction the city is neither seeking nor likely to seriously consider given the implications for pensioners, the DIA’s credibility and approval of the city’s restructuring plan.
The pre-trial move by Art Capital Group LLC, backed by Financial Guaranty Insurance Co. and implicitly supported by Syncora Guarantee Inc., is being billed as an effort to provide “the city, and the entire community, $3 billion to $4 billion,” the New York-based Art Capital said in a prepared statement. “Our goal is to do everything we can to keep the DIA’s art collection in the city and intact. We’ll work with the city to structure the loan with the flexibility needed so it does not become an unreasonable burden.”
FGIC called the Art Capital offer “a game changer,” adding: “It represents a real and viable solution that could enhance recoveries for all creditors by billions of dollars and catalyze the revitalization of the City — while also keeping the DIA collection in Detroit. Choosing to proceed with the inferior ‘Grand Bargain’ would be opting to disregard common sense at the expense of all parties.”
Right. Art Capital’s sweetened bid, up from $2 billion last spring, is yet another attempt by creditors to scuttle the multiparty grand bargain designed to protect the DIA’s collection from creditors and funnel the equivalent of $816 million into city pension funds. Why would a city aiming to use Chapter 9 to shed $7 billion in debt agree to add as much as $4 billion in debt?
It wouldn’t. Nor are Emergency Manager Kevyn Orr and his bankruptcy team keen to imperil the deal with foundations, DIA donors and the state that likely would portend deeper cuts for pensioners and reopen legal wrangling over the state constitutional protections of vested pension benefits. That’s a risk the city’s lawyers are not prepared to take, no matter how much legal battering FGIC and Syncora deliver.
Choosing to dump the grand bargain in favor of the bond insurer-backed Art Capital offer would risk deeper cuts to city pensioners because theoretically larger recoveries would be spread across a broader pool of unsecured creditors, the city says; would saddle Detroit with new debt it cannot easily manage; would ease the financial pain for bond insurers who reaped high yields off risky investments now gone sour.
That’s a) why they call it risk and b) why they created insurance. Detroit’s financial collapse, at least 10 years in the making, was perhaps the poorest-kept secret in American municipal finance, at least to those willing to look deeper than the easy fees and high yields they could reap from a political class too cowardly and too financially unsophisticated to make tough calls.
What we have here are the holdouts and their “Big Stall” on a collision course with a fast-moving restructuring plan set to be litigated starting next week in front of U.S. Bankruptcy Judge Steven Rhodes. The city’s bankruptcy team, working as much for Gov. Rick Snyder as it is for Orr and the city, know they need to keep the plan intact and on track — just as the holdouts appear to be on the losing side of the issue and they know it.
“It’s not going to happen,” Bill Nowling, chief spokesman for the emergency manager, said in an interview Wednesday. “If the city sells the art or uses it as leverage, the grand bargain goes away. The pensions will do worse under this plan.
“The words ‘scorched earth’ have been tossed around, and this is what this is. Syncora and those guys don’t give a rip about the pensions. They don’t give a rip about the art. They just care about their recovery.”
Um, yeah. Financial creditors are not in business to give money away; they’re in business to make money off lending money. And the riskier the loans, the more money they stand to make because many of their competitors steer clear of high-risk deals more likely to go bad.
The grand bargain, shaped by federal meditators led by Chief U.S. District Judge Gerald Rosen, is a largely community-funded response to extraordinary circumstance, essentially a guarantee to ease cuts to city pensioners and protect the DIA collection from both creditors and potential mismanagement by future mayors and city councils.
Bond insurers have every right to press their case before the bankruptcy judge, starting next week. But they also should demonstrate why assuming billions in fresh debt is good for the city, its art museum and its pensioners — beyond, that is, theoretically boosting recoveries to lenders who should have known better.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays.