Will Washington Bail Out Detroit?
Capital Markets Law Journal, Forthcoming
Posted: 2 Nov 2013 Last revised: 17 Mar 2014
Date Written: October 31, 2013
Detroit, Michigan filed for bankruptcy protection in the summer of 2013 with $18 billion of accrued obligations. Pensioners and bondholders make up the majority of the city’s unsecured creditors and face pennies on the dollar recoveries. This essay explores whether the United States federal government will bail out Detroit and concludes that as long as Detroit does not present contagion risk to other entities any bailout requiring Congressional action is unlikely. This essay presents considerations for municipal debt investors resulting from the early stages of Detroit’s bankruptcy including the circumstances under which the federal government may provide bailout funds, whether those funds could contain restrictions limiting their value to market participants and if state and local debt should be thought of distinctly since states are not eligible for bankruptcy protection.
Keywords: Detroit, Chapter 9, bailout, bail out, state and local debt, municipalities
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