Detroit's bankruptcy battle likely to be long and painful
So will this fix the city's problem? GM and Chrysler went through bankruptcy and they're doing great. Can't Detroit do the same?
That's what Orr and Snyder are hoping. But these are two very different bankruptcies.
GM and Chrysler went into court expecting to apply the same business model that had served them well through booms and busts over the last century. (To be sure, the 2008 bust was a lot bigger than most.) After a relatively short trip to court - and an infusion of $80 billion in federal bailout funds – both companies are now back on track. Car sales are zooming and profits are rolling in again.
Detroit's business model, on the other hand, is about as badly broken as the four out of ten city street lights that don't work. Citizens wait an average 58 minutes for the police to respond. Only a third of ambulances are in working order.
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But the city can't raise more money to fix the mess. Real estate taxes are falling along with property values. Income taxes are down because unemployment is so high; the city has hit the legal limit on income tax rates.
So people are leaving. The shrinking population further cuts tax revenues, but the city boundaries and the cost of city services haven't shrunk at the same pace. Cutting services only drives more people away, further eroding the tax base.
The only hope is that by drastically cutting debt and pension payments—to as little as ten cents on the dollar—the city can regroup and try to rebuild.
How long is all this going to take?
It could be fairly quick—or it could take years. A lot depends on how hard the unions and investors dig in for a fight.
The next step will be for the court to identify various classes of creditors, some of whom have stronger claims than others. Creditors like bond investors and pension trustees have access to substantial legal firepower, which they can use to fight hard for a better deal.
On the other hand, the bankruptcy filing gives the city a much stronger had in negotiating with creditors. If the city can get the biggest creditors to go along with an overall plan, smaller creditors will have a tougher time holding out.
"There will be a big battle in the beginning and then you'll see is things calm down—or if there's a battle on every front," said Soref. "If that happens, it's going to take a long time."
—By CNBC's John W. Schoen. Follow him on Twitter @johnwschoen.