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Chicago Is Going Bankrupt

Written by Gary North on May 16, 2015

Rahm Emanuel was re-elected Mayor of Chicago. Lucky Rahm! He will get to oversee the official bankruptcy of the city.

He will go down as the mayor who took the third largest city in the United States into financial Armageddon. The man who said, “You never want a serious crisis to go to waste,” will get to test his theory.

The bondholders will not agree with him. But bondholders are the least of his worries. They do not vote in Chicago. They merely trust in Chicago.

Blind faith.

The city keeps getting its credit ranking lowered by ratings agencies. With each decline in its debt rating, the city’s interest rate climbs for new bond issues. With each tick up of the interest rate, the market value of existing Chicago bonds ticks down.

There is an old definition of bankruptcy. Ernest Hemmingway put it in the mouth of one of his characters in The Sun Also Rises A character had gone bankrupt. A friend asked him how this happened. The answer is classic: “Two ways. Gradually, then suddenly.”

Chicago is in the “gradually” stage. This will not last much longer.

As City Hall races to avoid a financial collapse, the first indications are coming of how big the hit to Chicago taxpayers will be, and the figure indeed is eye-popping.

According to Chicago’s Bill Brandt, a municipal finance expert who was involved in the recent Detroit bankruptcy, the market probably will allow Chicago to refinance up to $2.2 billion in variable rate debt, short-term loans and swaps that now are subject to demand for immediate repayment, thanks to the decision by Moody’s Investors Service earlier in the week to drop Chicago debt to junk level. “My sense is that this is a situation where serious people will be sobered by the consequences of pre-emptory action,” said Brandt, who is president of Chicago-based DSI and served two stints as chairman of the Illinois Finance Authority.

But there will be a price, Brandt said. The cost “could be as much as a couple of hundred basis points” more than Chicago normally would have to pay.

So, if the city proceeds with plans to begin refinancing up to $900 million in variable-rate debt next week, trading relatively low-cost callable debt for higher priced long-term bonds, the extra cost could be as much as $18 million a year, by Brandt’s calculations.

And that’s just to refinance the $900 million. To close out its positions on hundreds of millions of dollars of interest-rate swap deals originally entered into by former Mayor Richard M. Daley, the city will have to come up with more than $200 million. City officials say agreements are in hand to close out about half of those deals, with the remainder expected to close around June 8.

By comparison, $18 million a year is almost what is spent annually to operate the entire City Council and its 50 aldermen.

There is no sign of reversal. That which is statistically inevitable is unfolding before our eyes.

Yet bondholders do not believe these numbers. “There is still hope.” There is no mad dash to sell.

Hope springs eternal.

Fools and their money may not be soon parted, but they are eventually parted: gradually, then suddenly.

Continue Reading on www.chicagobusiness.com

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