Have nothing to do with the [evil] things that people do, things that belong to the darkness. Instead, bring them out to the light... [For] when all things are brought out into the light, then their true nature is clearly revealed...

-Ephesians 5:11-13

Tag Archives: Bankruptcy

“13th-month” Checks Just One More Indicator of Detroit Corruption

This article was first published at The McAlvany Intelligence Advisor on Friday, September 27th, 2013:

When Kevyn Orr was named Detroit’s interim financial manager by Michigan Governor Rick Snyder back in March, he was picked because he had experience in resurrecting other cities that found themselves in trouble. But it’s doubtful that Orr had any idea of the width, the breadth, and the depth of the corruption and deceit that awaited him when he began.

By June he had a better idea. In announcing that he was going to seek bankruptcy protection he said

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Detroit’s Bankruptcy Hastened by “13th Month” Checks Issued to Pensioners

When Kevyn Orr was appointed as Detroit’s interim financial manager back in March, he launched an investigation into just how deep the city’s financial hole really was. He should have waited until September when,

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The Atlantic magazine laughs off America’s debt burden

When the senior editor of The Atlantic, Derek Thompson, tried to explain away concerns over the massive unfunded liabilities facing the U.S. government repeatedly pointed out by experts such as Peter Peterson (the former chairman of the Council on Foreign Relations), Boston University economics professor Laurence Kotlikoff, and James Hamilton of the University of California, he used a combination of

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First Detroit, Now Chicago?

The unfunded pension liabilities facing Chicago are only the most recent troubles threatening the Windy City, according to the New York Times. The recent credit downgrade of Chicago’s general obligation bonds by Moody’s, Standard and Poor’s and Fitch just brought the matter to the surface. Crime, corruption and a shrinking population also are beginning to make Chicago look like an out-sized version of Detroit.

According to the city, the four pension plans for its police, teachers, firefighters and office staff, are all dreadfully underfunded to the tune of some

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Will Scranton be Next?

Following Detroit’s application for bankruptcy protection under Chapter 9 last week, pundits have had a field day predicting which city would be next. Fox News thinks it’s going to be Chicago, which Moody’s just downgraded because of its $19 billion unfunded pension liabilities. The agency said those liabilities are “very large and growing” and as a result the city faces a “tremendous strain.”

Other cities like

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Detroit: the First Domino to Fall

This article was first published at The McAlvany Intelligence Advisor on Monday, July 22nd, 2013:

 

The city of Detroit is living proof that Herb Stein is right: if something cannot go on forever, it will stop. For Detroit, it stopped last week when

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Detroit Bankruptcy: No Winners

When Michigan Governor Rick Snyder announced his approval for Detroit’s emergency manager Kevin Orr to file for a municipal Chapter 9 bankruptcy, he admitted that Detroit’s problems were decades in the making:

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Securities Agency Sues Jon Corzine, former MF Global head, over theft of customer funds

The sanctions sought against Jon Corzine, the former head of MF Global, by the U.S. Commodity Futures Trading Commission (CFTC) in a lawsuit filed in U.S. Southern District Court in New York on June 27th should end Corzine’s career as a Wall Street manipulator and send him into

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House can starve Obamacare, but it won’t.

The current scandals rocking the IRS are giving an excuse for some in the House to threaten shutting off funding for Obamacare. The optimist side of me says, Yea, Do It! The pessimist side says they’ll get their funding. The realist side says Obamacare will speed up the bankruptcy of the US.

All funding bills start in the House and I’ve long wondered why

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Detroit Creditors’ haircut: 90 percent!

At the conclusion of Friday’s 2-hour meeting of more than 180 of Detroit’s creditors, unions and pension trustees, Emergency Manager Kevyn Orr’s plan to rescue the city from bankruptcy was met with predictable responses: lawsuits and strikes. It was an altar call to accept reality, but denial, anger and threats were the response of many. One unnamed bond holder said, “It’s just too much. It is an unprecedented amount to ask.” Mike Mulholland, secretary of American Federation of State, County and Municipal Employees (AFSCME) Local # 207, was equally blunt: “When you’re backed into a corner, the only thing you can do is fight and the only way we can fight is to strike.”

Orr was ready for them. In his 134-page proposal, he blamed “financial mismanagement, a shrinking population, [and] a dwindling tax base … over the past 45 years [which] have brought Detroit to the brink of financial and operational ruin.” Indeed, his proposal spelled out the denial of reality that Mayor Dave Bing and his city council had been enjoying for years when it showed that Bing’s people thought that the annual deficit for the city for Fiscal Year 2013 was $47 million when the actual deficit is more than twice that, and for FY 2014 is estimated to approach $200 million. It’s no wonder that Michigan Governor Rick Snyder declared a financial emergency, and appointed bankruptcy attorney Kevyn Orr to take over from the city council in March.

The task facing Orr is horrifying. Faced with more than $18 billion in debts and just $68 million in the bank, Orr started off the meeting by announcing that the city would not make a $40 million payment due that day on a $2.5 billion certificate of participation (COP). He announced further that the city wouldn’t be making $104 million in pension contributions that are currently due either. In addition, retirees hoping that the city would be providing them with health care and full payouts of their pension benefits also received the bad news: they too would be forced to rely on the state’s insurance exchanges to obtain health coverage under Obamacare or Medicare, and could expect significant reductions in their retirement checks as well, approaching $800 a month in many cases.

Orr’s report was equally blunt for those hoping for a miracle: “The City is Insolvent” (Page 7): “the city is not paying its bills,” the city’s infrastructure is deteriorating, “costs associated with unoccupied property” continues to mount, the city’s credit ratings were borderline “bankrupt” by all three agencies, and “Priority One” police response times had increased in just one year from 30 minutes in 2012 to 58 minutes in 2013. In 2012 Detroit “had the highest rate of violent crime of any U.S. city having a population over 200,000 [Detroit’s population is just over 700,000, 40 percent of what it was 1950], five times the national average.”

There are “approximately 78,000 abandoned and blighted structures in the City, nearly half of which are considered ‘dangerous’ [while there are] 66,000 blighted and vacant lots within the City limits.” There are between 11,000 and 12,000 fires in Detroit every year, most of them occurring in those blighted and abandoned buildings.

Orr’s plan, on the surface, is elegant simplicity: if the creditors – pension trustees, unions, bond holders and retirees – will sit still for these massive haircuts, then the city can, under a newly created facility, borrow $2 billion to pay off the $11 billion in unsecured creditors. Orr said that translates, after other demands on that new money, to about 10 cents on every dollar owed. Secured creditors will be better off but they will be asked to take a haircut as well. If the proposal is accepted, lawsuits and strikes notwithstanding, then Orr can take this to court as a pre-packaged bankruptcy, giving him the power to enforce the agreement.

On the other hand, if his proposal can’t get sufficient agreement in the next 30 days from all interested (and now properly chastened) creditors, then he’ll ask the court to grant Detroit bankruptcy protection with himself as trustee. In essence, Orr is dealing from strength: go along with me now and get the best deal possible, or push me and you’ll get less, it’ll cost more and it’ll take longer.  Said Orr: “I have a very powerful statute. I have an even more powerful Chapter 9. I don’t want to use it, but I am going to accomplish this job. That will happen.”

There’s a constitutional issue here as well. Under the Tenth Amendment, “powers not delegated to the federal government by the Constitution … are reserved to the states,” which means that guarantees in Michigan’s state constitution that protect pension and retirement benefits from federal bankruptcy rulings could be put at risk in a court battle. If a high court rules that federal bankruptcy laws override state protections, then every pension plan in the country thinking it has state protection will be affected negatively, with national and perhaps even international ramifications. The municipal bond market is nearly $4 trillion in size, and such a ruling could, at the very last, unnerve that market, raising the cost of borrowing significantly, forcing other cities bordering on bankruptcy over the edge.

Michael Sweet, an attorney at Fox Rothschild who helped the city of Redmond, California restructure its finances in order to avoid bankruptcy, noted: “The last thing [union pension funds] may want is for a judge to rule on that … because if the judge ruled on that against them, it would open the floodgates” for similar cases.

 

The Bankruptcy of Better Place Served Its Purpose

This article first appeared in the McAlvany Intelligence Advisor newsletter:

 

The announcement of the bankruptcy of a tiny electric car company called Better Place barely created a ripple in financial circles. The Financial Times noted that while Better Place was once “hailed as a visionary pioneer,” it was now being relegated to history as

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Chicago Sun-Times Photographer Shocked – Shocked! – About Being Laid Off

This article first appeared in the McAlvany Intelligence Advisor newsletter:

 

Steve Buyansky, who was, until last Thursday, a professional photographer for three of Sun-Times Media’s 39 suburban papers, said he was surprised when he was asked to turn in his magnetic employee badge and his photographic equipment: “I’m still in shock. I’m not angry right now. Maybe I will be later.”

On what planet has Buyansky been living? How could he not know what was happening in front of his very eyes? Sun-Times Media hasn’t been profitable for years. It filed for Chapter 11 bankruptcy in 2009. Where was Buyansky while that was going on? When the group was bought by Wrapports LLC in 2011, salaries were cut by 15 percent, the pension plan went from defined-benefit to defined-contribution, and seniority rights regarding layoffs were ended. Where was Buyansky then?

In March, the Sun-Times fired several editors and staff members for several of its suburban papers, and consolidated operations of those papers to its downtown location to save money. It had fallen behind in making its monthly payments for the Chicago Tribune which was printing its papers after the Sun-Times shut down its own printing facilities.

The paid circulation base for the Chicago Sun-Times has been shrinking, having lost 25 percent in just the last six years. In its announcement last week, the media group said:

The Sun-Times business is changing rapidly and our audiences are consistently seeking more video content with their news. We have made great progress in meeting this demand and are focused on bolstering our reporting capabilities with video and other multimedia elements.

The Chicago Sun-Times continues to evolve with our digitally savvy customers, and as a result, we have had to restructure the way we manage multimedia, including photography, across the network.

Wrapports thinks there’s still some life in the dinosaur. It’s an investment group made up of Michael Ferro of Merrick Ventures, Timothy Knight (former publisher of Newsday, another newspaper struggling to be profitable), and three other private equity or venture capital firms. They have seen the handwriting on the wall for years. Why hasn’t Buyansky?

The new strategy is to allow, no, require, their remaining news reporters to use their iPhones to take pictures to supplement their articles! What a concept! Talk about being late to the party! Last week it was announced that Facebook gets 208,300 photos uploaded every minute, along with 100 hours of video onto YouTube! Yahoo estimates that next year 880 billion photos will be taken and downloaded somewhere on the Internet.

Efforts to regain profitability have so far come up short. In February Sun-Times launched an online video news program, a 90-second flash news segment. That effort ended in May.

Also in February the paper launched Grid, a Sunday business news magazine that was just ended last month.

Life magazine’s domination of the all-photographic news magazine niche ended in 1972. Efforts to resuscitate the brand failed, and Life published its last issue in April, 2007 – six years ago. Look magazine died in 1972, and no one even tried to resuscitate it. Wasn’t Buyansky aware of that?

Or what about the reality check written by professional photographer Talbert McMullin last summer, entitled “Professional Photography is Going Away?” McMullin saw what’s been happening for years:

My little Panasonic point-and-shoot will take hundreds and hundreds of photos one after another on a single memory card, and it rivals the quality of my Nikon SLRs! That is an amateur photographer’s dream, but unfortunately it is not as beneficial for the pros. Suddenly, the playing field is level for everyone. Technology has not yet put pros out of business, but it is setting the stage – even our mobile phones have cameras!

Professional photography is going away. That’s right, going away. I can’t say it is going to happen today, next week, next month, or even next year, but at some point in the future it will. Fact: The transition has begun. You cannot change it; you can only adapt. Before you wet your pants, please notice I did not say all photography is going away, only professional photography. Ignore or distort the facts at your own peril!

Some professionals will thrive, but the rest will be left behind. The number of successes will continue to shrink until the professional photographer becomes … an anomaly.

What did Buyansky do when he was suddenly informed that his skills as a professional photographer were no longer needed? He joined 10 other equally surprised former photographers from the Sun-Times at the Billy Goat Tavern, a local watering-hole for journos, and celebrated the glory days long past, saying “The Sun-Times had an amazing photo staff.”

The emphasis was on the word “had.”

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Sources:

Chicago Sun-Times Lays Off All Its Full-Time Photographers

Chicago Sun-Times lays off all photographers

Chicago Sun-Times lays off its photo staff

Chicago Sun-Times fires all staff photographers

Reality Check: Professional Photography Is Going Away

How Many Photos Are Uploaded to The Internet Every Minute?

An Editorial: Is the Internet a Photographer’s Friend or Foe?

Look magazine

Life magazine

Wrapports

Newsday

More on Ponzi schemes like Social Security

I haven’t seen much lately about Ponzi schemes, much less about how Social Security is a Ponzi scheme “with a gun”. I first became aware of the nature of Social Security when I got into the life insurance business and was able to discern the difference between insurance, and Social Security which

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Cyprus Deal Turns Bank Depositors into Lenders, Abolishes National Sovereignty

Late Sunday night the president of Cyprus, Nicos Anastasiades, was officially informed of the deal the unelected Eurogroup had come up with in order for Cyprus to receive its bailout from the European Central Bank. Anastasiades flew to Brussels on Sunday to meet with Mario Draghi, the president of the European Central Bank (ECB), Christine Lagarde, the managing director of the International Monetary Fund (IMF), and Jose Barroso, the president of the European commission. The meeting was run by Herman Van Rompuy, the president of the European Council. On his way to the meeting, Anastasiades admitted that

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Cypriots Forced to Pay the Piper

In an outrageous, audacious and unprecedented move, the European Union has abrogated Cypriot sovereignty and imposed an immediate tax on citizens of Cyprus holding their money in local banks. The rate is 6.7% on accounts under 100,000 euros and 9.9% on accounts over 100,000. It was imposed on Saturday even before the Cyprus government met to approve it. In other words,

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Henrik Fisker Quits His Company, Leaving Taxpayers with Another Loss

Fisker Automotive, the company founded by automobile designer Henrik Fisker back in 2007 and funded in part with U.S. taxpayer monies, announced his departure on Wednesday due to “disagreements,” according to the New York Times. This could be the final straw as the company has

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Michigan Governor Snyder Declares Detroit a Fiscal Disaster

On the surface, Friday’s announcement by Michigan Governor Rick Snyder that Detroit’s financial situation was so grievous that a special emergency financial manager (EFM) would have to be appointed to take over from the city council appeared to be the end of the line for a once great city.

A city that was once the fifth largest and wealthiest in the country, Detroit has apparently 

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Good News from…Detroit?

A friend used to say that he’d read so much about the harmful effects of alcohol and tobacco that he decided to give up reading.

I’ve read so much about Detroit’s troubles that when somebody tells me there are good things going on there, I almost laugh out loud. And yet…

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Student Loan Consequences: Real, Costly and Personal

The consequences of making low-interest loans to unqualified buyers created the real estate bubble that popped in 2007, resulting in the Great Recession. According to Gary Jason at the American Thinker, it’s about to happen again only this time over student loans. He wrote: “This bubble has been fueled by the federal government’s lavish subsidization of the student loan program … in a way similar to how the housing bubble was fueled by government agencies pushing subprime mortgages.”

Under the Student Aid and Fiscal Responsibility Act (SAFRA) signed into law as part of Obamacare in March, 2010, students may borrow money directly from the federal government regardless of their credit score or any other financial “issues” they may be facing. They are not priced according to any “individualized measure of risk” nor are the loan limits. They are instead politically determined by Congress with undergraduates receiving lower interest rates than graduate students, but graduate students allowed to borrow more than undergrads.

This forced entry by the government into what was once a private market transaction has numerous consequences, nearly all of them negative, and most of them predictable.

First, private lenders disappeared from the market as they could not compete with taxpayer funds and taxpayer guarantees and the resulting below-market interest rates that became available.

Second, the growth in the education industry expanded far beyond what was normal as college administrations saw their opportunity to dip into the “honey bucket” of federal funds, with the consequent growth in administration overhead and higher tuition fees. According to a study by Bain & Company (yes, Mitt Romney’s Bain), “operating expenses are getting higher [at major colleges and universities like Cornell, Harvard and Princeton] and they’re running out of cash to cover it.” According to that study, the growth in those colleges’ debt and rate of spending on new buildings and equipment rose far faster than did their spending on actual education itself. Said Bain,

Boards of trustees and presidents need to put their collective foot down on the growth of support and maintenance costs.

In no other industry would overhead costs be allowed to grow at this rate – executives would lose their jobs.

Thirdly, this growth in the cost of obtaining what was one a coveted possession, a college degree, makes any mathematical justification or cost-benefit analysis highly questionable. Many students are entering a job market with degrees that over qualify them for what the market is able to provide. According to Jason, “over half of all recent college grads are unemployed (or employed only at jobs not requiring a college education).”

The unnatural increase in the flow of funds into the education industry has predictably driven prices higher. As Jason Bower pointed out at The Freeman,

Since 2000, tuition at public, four-year colleges has risen by an inflation-adjusted 72 percent, and over the past 25 years it has increased at an annual rate 6 percentage points higher than the cost of living. (emphases added)

Fourth, when the deferred payments on these loans start, the newly-minted grads without work cannot make them and they go into default. In a recent Department of Education study, loan default rates have risen in each of the last five years, and at an increasing rate, now touching almost one in every seven students with a loan.

Fifth, those loans cannot be dissolved or forgiven in bankruptcy except in extreme circumstances, leaving students in “debtors’ prison” interminably. As Charles Scaliger wrote at The New American,

Inasmuch as the student borrowers are uniquely required by law to repay under [nearly] any circumstances, the student loan business is the closest thing … to debtor prison in modern society.

With such a debt burden, students are forced to make, or avoid making, life choices, such as getting married or buying a home. Who would want to take on a partner who owes tens of thousands to the federal government on the day of the wedding?

And then there is the issue of bribery and insider-dealing. Lenders found ways to entice school officials to direct students needing money to them in exchange for incentives. In addition administration officials found it profitable to support candidates willing to enhance the loan programs for the benefit of the schools. Peter Wood, executive director of the National Association of Scholars, put the matter succinctly:

 The ‘free market’ in this case was never anything close to lean and efficient. To the contrary, it was (and still is) inefficient and frequently corrupt, dominated by players who found it easy to bribe college officials, wring favors from politicians by means of campaign contributions, bilk the Department of Education, and live off generous    subsidies.

All of these consequences come from first causes: the belief that the government has the right to impose its ideological position onto students and then force taxpayers to pay for those consequences when they inevitably arrive. As Kevin Villani, former chief economist at Freddie Mac, wrote in the American Banker, the progression from ideology to practice is fraught with danger. First, he says, the government must

declare that the opportunity to … go to college, is a basic right. Then [it sets] a goal for … college attendance well above private individual demand. When budgets become tight, have government lenders replace private lenders…

This cements into place the “moral hazard” that provides government loans to students without concern about how they might be paid back, because ultimately all government promises are backed by the taxpayer.

The ultimate consequence is borne by the student himself. Once he realizes his predicament – like a lobster trap – it’s too late.

For 36-year-old Nick Keith, it’s too late.

When he decided to go to culinary school, he was persuaded that he could indulge his interest in food by learning the food service industry. The school provided him with all the answers to his questions (for which the school later was successfully sued for making false statements but far too late to help Keith), and pointed him to the sources to lend him the money. Said Keith, “I should have seen all the signs. [The campus tour guide] had a used car salesman’s answer for everything,” including the lie that 99 percent of all graduates found work after graduation. It turned out later – much later – that the real number was closer to 48 percent, and that counted graduates who had to find work outside of food service. Keith’s first job upon graduation was working on a meal assembly line, making $10 an hour.

But that’s when his student loan payment program kicked in. He had to make a choice: pay the rent, or his student loan, but not both.

It’s now nearly a decade since his graduation. His debt, with interest compounded upon interest, is $142,000, at a 17 percent interest rate. He can’t get out:

I get my groceries at the local food bank. I have sold or lost 99 percent of everything I ever owned.

He can’t get work because his bad credit turns off prospective employers. He lives in an aged minivan, relies on the Salvation Army for meals, and parks his van at highway truck stops. For all intents and purposes, he is homeless.

Solutions abound, at least in theory. The government should get out of the student loan business altogether and let the private market take over. And congress should allow students to declare bankruptcy over their loans when necessary. Even there, however, the consequences are towering. There is more than $1 trillion in student loan debt. Almost 15 percent of loans are already in default. The Department of Education would have to receive special funding from congress – the taxpayer – to be able to write off the bad loans that would result.

The costs of college education would rise to more normal, market-driven levels, no doubt keeping some qualified students away. Colleges and universities would have to make massive, perhaps draconian, cuts in their overhead. It would take years for some semblance of balance between supply and demand to return to the education industry. And changing the laws would have precious little immediate impact on people like Keith.

Restoring freedom through private markets, however, is worth the effort despite the pain. The alternative – a continuing debtors’ prison for students and a continuing of the corrupt educational cartel and its incestuous relationship with politicians – is unthinkable.

 

 

 

 

 

A Rand Paul/Mike Lee Ticket for 2016?

Bernie Quigley, writing at the Pundit’s Blog for The Hill on Wednesday, considered the fiscal cliff bill that became the American Taxpayer Relief Act of 2012 (ATRA) as a “touchstone…a benchmark…to mark the progress of history.” He considers the law as a

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Many of the articles on Light from the Right first appeared on either The New American or the McAlvany Intelligence Advisor.

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