Caveat Emptor

My subject is the impending bankruptcy of the City of Detroit—and the anxieties that in that process such institutions as the Coleman A. Young International Airport, Belle Isle Park, an island in the Detroit river, and the holdings of the Detroit Institute of Arts (DIA) might be auctioned off to satisfy Detroit’s bondholders and other creditors.

The dominant impression that arose in my mind while reading an article about this in the New York Times (our distressed city is now national news) concerned the very strange disconnect between ultimate buyers of municipal bonds and the condition of the entities whose bonds they buy. Let me spell that out more. We hold municipal bonds. But to tell you the truth, we’ve no real idea just how financially solvent are the cities whose bonds we own. Why this ignorance? Well, we rely on an intermediary, in our case Merrill Lynch, in general the financial industry. If we trace the slow deterioration of Detroit’s financial standing, it is obvious that shoddy goods were sold, in massive quantities, by our financial sector to all kinds of people—that bond rating firms must have failed to give the right signals, or loudly enough, years and years ago. A decade ago already, Detroit should have found it impossible to sell any bonds—if our financial system practiced, on behalf of its customers, that old Roman warning: Caveat emptor.

The feedback systems aren’t working. It benefits the financial sector to sell bonds, good or bad. If the transactions are large enough, government will eventually bail out the banks, investment type or otherwise. The Great Recession was the direct result of major financial giants’ actions, their selling questionable instruments with a caveat emptor and a wink, but the wink only visible to their insiders.

Now it strikes me that selling off the airport, Belle Isle, or the arts held by the DIA is illegitimate. The bondholders need to be asked: “Do you own airport bonds? No? Do you own Belle Isle real estate? No? Do you hold DIA bonds? You don’t? Well, in that case, you cannot have these things. What you own are Detroit municipal bonds. You shouldn’t have bought them in the first place. Then Detroit would have had to cope, years ago, before the debt accumulated to an $18 billion mountain.”

The debt should be cancelled. Bond sellers bought them knowingly—even if they resold them later to the stupidly innocent. Let those who hold the debt pay for their failure of due diligence. And leave what belongs to the public to the public.