Where does the buck stop in Stockton’s BK?

City Manager Bob Deis is asking the City Council to publish an open letter to the city, explaining yet again what Stockton’s trying to accomplish in bankruptcy and why you, the average Stockton Joe, won’t notice a negative change to your life, if they pull it off correctly.

Nor will the mom and pop who invested their life savings in Stockton’s bonds, some of which the city has defaulted on, Deis said.

Here’s the entire letter, but this paragraph on page three jumped out most strikingly. It says:

While the City has Defaulted on some debt obligations, it should be noted that the majority of City debt is covered by insurance and the bondholders will be paid as required under the applicable insurance policy. Bond issuers are paid upfront when the bonds are first issued, to protect the interest of investors in the event of, among other risks, a bankruptcy filing. This bankruptcy risk was fully disclosed in the Official Statements and agreements between the City and the bond insurers. The insurers were compensated for covering this risk when the bonds were sold.

Pretty clearly the bond insurers are the ones feeling the pain. Think Assured Guaranty. Their attorney was front and center in the city’s first court hearing on its bankruptcy. They’re sure to put up the biggest fight. But according to Deis’ letter (Mayor Ann Johnston will actually sign it) Assured Guaranty knew what it was doing when it wrote Stockton insurance on its bonds.

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