August 5, 2013

The Largest Bankruptcy in U.S. History: Detroit


Detroit

We would be remiss if we didn’t discuss the recent bankruptcy declaration by the city of Detroit.  Fifty years ago, Detroit was one of the wealthiest cities in America (if not the wealthiest).  Its booming auto manufacturers were providing jobs to practically the entire city, which had a population of over two million.

However, after the near failure of Chrysler and GM in 2008, the city has essentially collapsed.  It has $20 billion in debt, there are over 78,000 abandoned buildings, and about 20% of the population is unemployed (compared to the national average of 7-8%).  This is not to mention that the population is only about a third of what it was in the 1950’s.

Recently, the emergency manager of the city, Kevin Orr, had to make a tough decision when faced with the $380 million deficit in this year alone and piling up accumulated debt from years past.  He decided that, despite the large negative impact it would have on the reputation of Detroit, it would be best to declare bankruptcy and conserve cash rather than move it away from government programs like police.

Creditors that are owed money by Detroit will take pennies on the dollar in the settlement.  Some of these people include retirees who are counting on pensions.  However, there is potential for rebound by Detroit if the move to declare bankruptcy is successful and they are able to diversify the economy.  Unfortunately, it appears that Detroit is going to have to get worse before it gets better.

 

Posted In: Bankruptcy