What will be the effect if Detroit decides not to honor its general obligation bonds?
The municipal bond market will be paying particular attention to Detroit because of what it may mean for investing in general obligation bonds. In recent weeks, as Detroit officials have proposed paying off small fractions of what the city owes, they have indicated they intend to treat investors holding general obligation bonds as having no higher priority for payment than, for instance, city workers — a notion that conflicts with the conventions of the market, where general obligation bonds have been seen as among the safest investments and all but certain to be paid in full.
Lawsuits, yes I can see that happening, but why would they fail?
- Anonymous7 years agoFavorite Answer
You are right - "general obligation bonds have been seen as among the safest investments and all but certain to be paid in full.". Bonds are debt security - they are a promise to pay off a loan, and in any bankruptcy proceeding they are the first to be honored when a judge is disposing of assets.
Corporations, too, issue bonds - which are rated by agencies like Moody's based on a company's solvency, ability to pay, and cash position - and while they aren't backed by the same kind of taxing authority a municipal, state, or federal bond has they are affected by the same laws and considered to be extremely safe.
That is, until Barack Obama came along. Do you remember the Chrysler bankruptcy? Obama went after the Chrysler bondholders and painted them as "Evil Capitalists" for wanting the bankruptcy courts to follow the law and honor the bonds. While he had no real recourse under the law, he threatened these investors with the "Full Force of the White House Press Corps" if they did not settle for pennies on the dollar.
In the end, the investors were cowed, and the money went to the auto workers union - presumably in exchange for the votes that helped Obama get elected in 2012. Of course, many of these "What Have You Done For Me Lately?" Union members are starting to regret that little bit of Quid Pro Quo now that they've read what's actually written in Obamacare ...
But I digress. What will happen? Who knows? I think you're right - the investment world will be thrown by this - traditional means for making investment decisions will be disregarded, many people will lose, and faith in the American economy will erode just a little bit more. It may go to court - but if it does the decision won't really matter. The safety and security of these instruments will have been compromised by the mere threat of possibility.
Maybe investors will start seeking safer, more predictable markets in places like Switzerland or the Cayman Islands.
"Why would they fail?" In the article, the New York Times says that the bondholders, contrary to investment law, would be treated as no different from the municipal workers. The workers mentioned are unionized in Detroit. The Detroit unions are extremely powerful, and have a lot of backing from the local, state, and Federal government in influencing all kinds of judicial decisions. This really is no different than the Chrysler situation mentioned above.
I think that this entire situation will be resolved by politics, not law, and within the current political climate and the easily aggravated animosity toward "Investors", I'd say that the bondholders would stand no chance if it ever got that far.
Even so, as you point out, bond investments have traditionally been viewed as "Rock Solid". This perception has already been completely undermined in the eyes of investors. The damage is done.
- Anonymous7 years ago
If we had lived in a capitalist country the bond holders would have the right to take over and control the city. That would have meant no more welfare for demonrats like me. What most likely will happen is that Obama will bail them out but their credit is toast. So as long as Obama stays in office he will be their sugar daddy. Detroit is just the first one to declare bankruptcy and believe me there will be plenty more. Soon Obama will pay for everyone's gas and other bills.Source(s): This lady was right she must be a prophet. http://www.youtube.com/watch?v=P36x8rTb3jI
- EdwardLv 77 years ago
Bond holders will get the shaft in the unions have their way but it will all be up to a bankruptcy court to decide.
- luisLv 47 years ago
It will have a negative effect in that it will make it more expensive for municipalities to borrow money, further compounding the crumbling infrastructure problem.
- How do you think about the answers? You can sign in to vote the answer.
- Anonymous7 years ago
Lawsuits but they will fail.Source(s): 想改善經痛C~ NRA STAND AND FIGHT TYRANNY