Detroit's Next Bankruptcy Battle: Who Foots the Bill?

December 4, 2013 | | CNBC |

The bill for decades of Detroit's financial decline has now come due.

A federal judge's ruling approving the largest municipal bankruptcy in U.S. history Tuesday sets the stage for an epic legal battle over who will be asked to help pick up the tab, including bond investors, retired city workers, city vendors, state taxpayers, or Wall Street bankers.

"You're going to see battles and battles and battles on a variety of things," said Randye Soref, a bankruptcy attorney with Polsinelli in Los Angeles. "The question is whether you're going to see any real negotiation toward a plan." [...]

"The swaps were an egregiously imprudent deal," said Wallace Turbeville, a municipal finance expert and former Goldman Sachs investment banker.

Now, rather than take the kind of haircut offered to other creditors now waiting their turn in bankruptcy court, the banks are proposing the city pay them 75 cents on the dollar, according to Bernstein.

"They seem to have negotiated a pretty good deal," he said. "But the other creditors are saying they shouldn't be treated as secured creditors. That test remains to be seen."

Holders of Detroit's $576 million worth of general obligation municipal bonds also face an important test—one being watched closely investors in the $3.7 trillion municipal bond market. Widely considered as safe as secured debt, the city is proposing that investors in these so-called "limited tax" bonds accept as little as pennies on the dollar. 

Read the Demos report: The Detroit Bankruptcy