When Ford faced a grim financial reality back in 2006, they went all in of a turnaround financing plan that pledged virtually everything the company had, including its iconic logo, as collateral for a capital injection. The gamble turned out well for the automaker as it was able to avoid bankruptcy (though not, despite what you may read on bumper stickers, a bailout) and it's reporting expectation-shattering profits.
Is Detroit EM Kevyn Orr considering a similar trick, using the DIA art collection as collateral, for the bankrupt city? Maybe, depending how you read a section of Orr's recent deposition.
Detroit News: In a deposition with a lawyer representing Syncora Guarantee Inc., Orr answered “yeah” in response to a truncated question that ends “are you going to pledge the art?” — before his counsel objected and said “we’re getting into specifics, and I’m going to instruct him not to answer.”
Meaning what? That some of the DIA’s most prized works could be offered as collateral to secure a $350 million loan (called debtor-in-possession, or DIP, financing in bankruptcy jargon) the city is trying to arrange? Or that Orr’s “yeah” was simply lawyerly cross-talk in one portion of a lengthy deposition?
Wednesday, a spokesman for Orr declined to clarify the statement offered in the sworn deposition. In it, the emergency manager again reiterated that everything is “on the table” in his effort to restructure the city’s $18 billion in liabilities.
Of course, there is a very big and very relevant difference between Ford and Detroit.
Ford is a profit-seeking enterprise. It used its turnaround loan to fund improving the business and it paid, or is paying, back the debt from revenue generated by selling all those F-150s and Focuses and Tauruses.
Detroit is a government tasked with providing public services that can't be adequately supplied by the private sector. Public safety and trash pick-up are public goods because while your life isn't affected if your neighbor doesn't want to buy a car, it would really suck if his house caught on fire or his trash wasn't ever picked up because he was too cheap to pay for voluntary public safety/sanitation services.
And, considering Detroit's largely impoverished population and already high tax rates, it isn't likely to (even as a healthy, post-bankruptcy entity) generate revenue sufficient future revenue to pay down additional debt and provide the necessary public services it exists to provide. In fact, trying to finance it's way out of debt was kind of how it ended up bankrupt in the first place. You may remember the Orwellian-sounding "deficit elimination bonds?"
This is why "running government like a business" is as stupid as running a business like a social welfare charity.
Photo illustration by Lauren Ann Davies
