The Detroit Free Press has produced some really fine coverage about the debt Detroit Emergency Manager Kevyn Orr is trying to renegotiate. In the interest of “balance,” one supposes, they’ve also published a pedantic screed from a municipal bond investor named Peter Hayes.

His argument for putting bondholders above all other creditors boils down to: YOU PROMISED TO PAY US!

One might be, upon reading Mr. Hayes’ whine, shocked at the hubris of bondholder arguing his claim to a piece of Detroit’s financial pie morally trumps that of a resident in need of police assistance or a retired garbage man subsisting on a few hundred dollars a month in pension income.

However, while such complaints may be valid, they miss the larger point: Hayes' argument betrays an ignorance of the financial world in which he operates. Reading his guest column leads me to conclude that I would not want to invest my money with anything managed by Hayes or his firm, BlackRock. They don't seem to know their business.

Detroit Free Press: These individuals include retirees, savers and everyday workers striving to build a retirement nest egg or set aside assets for their children’s college education. These investors — many of them Michigan residents — have long looked to the safety of municipal bonds to help fulfill their financial goals.

On their behalf, we would submit: “A promise is a promise.”

Well, no. Investments, whether made by faceless multinational corporations or “everyday workers striving to build a retirement nest egg,” are risk-taking activities. Bonds are considered a lower-risk investment than penny stock schemes advertised on Facebook, sure, but risk does exist.

There was no inherent “safety” of Detroit’s municipal bonds. Ratings agencies have been consistently downgrading the Detroit’s bonds for about a decade.

With that higher risk came higher interest rates. And, boy oh boy, if Detroit could keep paying on those bonds — many of which were written to pay for short-term spending — investors stood to make a killing.

The flip slide, losing that proverbial nest egg, was also very real and very obvious.

Everyone who invested in Detroit’s bonds had every opportunity to understand these facts of life. They went in eyes wide open or were ignorant and irresponsible investors. Either way, no tears should be shed because some Ma and Pa Kettle put their meager few shekels in Detroit’s bad paper and will likely lose their “nest egg.” The same must be said for Detroit's pensioners who will likely take a haircut in part because pension funds invested in Alabama airlines instead of Berkshire Hathaway. 

The notion that default, renegotiated payments, or bankruptcy settlements weren’t potential outcomes of investing in Detroit’s bonds (or any financial instrument) is laughable.

Just stupid or willfully ignorant?

“Detroit further deemed the GO bonds to be “first budget obligations,” and agreed to levy additional taxes as necessary to repay them if Detroit’s general funds were insufficient to do so, subject only to applicable constitutional, statutory and charter tax limitations,” Hayes argues.

Is he aware that Detroit’s tax structure — insanely high compared to other municipalities — exists only because Lansing rewrote state laws twice since the turn of the century so Detroit could continue levying income, utility, and other special taxes?

You have to assume he must since, as a professional investor focusing on municipal bonds, he’d have surely undertaken research into the tax structures of the municipalities in which he had his clients invest in.

Regardless of what Peter Hayes did or did not know about Detroit taxes, there is no more blood to take from that stone.

Hayes’ notion that the city’s promise of its “full faith and credit” (larfs!) to repay general obligation bond debt trumps state constitutional protections of pension obligations is also ludicrous. In truth, both “protections” hit the circular file the second this thing is walked into bankruptcy court.

Investors and pension fund managers who don’t like what Orr is currently selling are free to wait quietly and take their chances in Chapter Nine. Municipal bankruptcy exists in federal law for a reason and that reason is personified by Detroit.

If Hayes invested money behalf of his firm and his clients in Detroit bonds because he assumed the state of Michigan would have to bail out bondholders, as he advocates for in his column, then he was reckless beyond belief.

Would the first outstate/suburban politician willing to explain bailing out Detroit’s debt load to their constituents please stand up?

(Crickets)

I don’t know if this guy honestly failed to understand risk inherent in dumping money in Detroit’s below investment-grade bonds (unsecured by physical assets or revenue streams) or if he offers a willfully ignorant Hail Mary argument that might pull his chestnuts out of the fire. Either way, you have to question his competence as a financial professional.

Detroit’s bonds have been a terrible investment for years, both for the city issuing them and anyone who bought them. That reality was as plain as the nose on your face.

In a free market, we shouldn’t bail out reckless investors lest we want to encourage even more reckless future investment. 

Necessary Pain

As for Hayes’ contention that scalping Detroit’s bondholders will cost Michigan and its local governmental units more to borrow in the future, as a taxpayer, I say good.

Maybe that reality will prevent elected officials from papering over untenable fiscal situations with cheap credit in the future. Maybe it will finally force them to consider the necessary consolidation of governments and shared service agreements long overdue to create more efficient local government.

Maybe, by turning off the cheap credit spout, citizens will come to grips with they reality that we can’t maintain both robust public services without a tax structure capable of paying for them. Maybe we’ll also realize that we can’t, over the long run, dump an entire region’s poverty and despair onto a single municipality without serious blow back.

Hayes is correct on one point alone: Detroit’s bankruptcy or bankruptcy-avoiding restructuring will cause pain beyond the city’s borders.

It’s pain we’ve brought upon ourselves.

Whining like petulant children (buh…buh…but you PROMISSSSED!!!!!) isn’t going to make it hurt less. On the other hand, if we face this grim reality like adults and behave more responsibility going forward, Michigan and Detroit will come out better on the other side of this proverbial tunnel.