This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Imported From Detroit: Financial Fallout





When Detroit declared bankruptcy last week, the financial markets took the news more or less in stride. However, this could become yet another factor affecting interest rates on savings accounts, mortgages and other bank products.

Detroit is the largest American city to file for municipal bankruptcy. It has just over 700,000 residents, and its financial liabilities could reach $20 billion. At a staggering $28,500 in liabilities per resident, that presents a compelling reason why the city declared bankruptcy.

Indeed, Detroit's condition has been so bad for so long that perhaps the muted response from the financial markets can be chalked up to a sense of inevitability. Still, while this bankruptcy may not have been a huge surprise, it does raise a number of questions whose answers are as yet unknown:

  1. Who's next? Detroit is far from the only U.S. local government in deep financial trouble -- even some states face unmanageable pension obligations. Mayors, governors and other officials around the country are going to be watching the Detroit bankruptcy carefully, and if it turns out to be a fairly painless way of hitting the reset button, expect a series of other governments to start showing up in bankruptcy court.
  2. How far does Detroit want to go? Bankruptcy does not have to be drastic. Sometimes, a slight reorganization of obligations can structure them in a more manageable way. If, on the other hand, Detroit looks at this as an opportunity to wipe much of the slate clean, expect it to have a much more disruptive impact on the pension system and on lenders -- if, of course, the bankruptcy judge goes along.
  3. How do Detroit's creditors make up their losses? The lenders and bond holders to whom Detroit owes money have their own obligations to meet. If they are caught seriously short by Detroit's bankruptcy, then there could be a ripple effect of other defaults.
  4. What are pensioners going to do? While private employees have largely been set adrift on the uncertain waters of defined contribution plans over the past three decades, public employees have enjoyed the certainty of defined benefit plans. Detroit's bankruptcy could undermine that certainty, and add to America's already troubling retirement crisis.
  5. Will lenders become more reluctant? As it stands now, banks already have very low ratios of loans to deposits, meaning they have little incentive to attract more deposits. If high-profile loan defaults make banks even more skittish about lending, it could result in a worst-of-both-worlds scenario for consumers, where loan rates go up while rates on savings and money market accounts and stay near zero.

From Wall Street to the European Union, the domino effect when one of a series of interdependent entities gets in financial trouble has been painfully evident in recent years. With its bankruptcy announcement, Detroit becomes the latest domino to wobble. How far it tips over and how many other dominoes it takes with it will be an important story in the second half of 2013.

null

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,805.41 +127.51 0.76%
S&P 500 1,964.58 +13.76 0.71%
NASDAQ 4,483.7150 +30.9230 0.69%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs