What if Stockton is denied bankruptcy?
Another city, Harrisburg Penn., is blazing that trail. Harrisburg went broke over a “trash- to-energy incinerator” boondogle. But the city lost its bid for bankruptcy.
Yet it still may not end up paying 100 percent of its debt. The city is leasing or selling off assets to pay over $300 million in debt, but its fire sale may not raise enough money.
Then what? “Creditors who covered the city’s payments may be forced to take less than the full principal due,” Bloomberg reports.
The federal bankruptcy judge would not impose a cramdown; the city would impose one on its creditors through stark insolvency. Harrisburg would give its creditors what it can, but no more. Because the money simply isn’t there.
This is breaking an old bond market taboo. In this respect, Harrisburg proposes to do outside of bankruptcy what Stockton proposes to do inside it: create precedent by give bondholders and bond insurers a haircut.
A parting laugh in the Bloomberg story is the name of the spokesman for a bond insurer: Michael Fitzgerald. Considering the low opinion I have formed of bond insurers — their unwillingness to pay claims though they evaluated the risk and got paid to assume the risk – the man must be my evil twin.