Thursday, July 25, 2013

Detroit, the Law, and Leonard Garment

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

The City of Detroit, Michigan's petition for "bankruptcy protection and the adjustment of debts under chapter 9 of the United States Bankruptcy Code" (case number 13-53846 United States Bankruptcy Court for the Eastern District of Michigan, Southern Division), offers plenty of opportunity. Among the potential windfalls are to those who buy contracts at a discount, the clarity of bondholder claims, and the clarity of retiree benefit claims.

For claimants, it is now a roll of the dice. When a municipality enters bankruptcy, the court can exert enormous control over mayors, city councils, and legislative bodies.

The judge is a wildcard. In this case, the nitwit-end-of-the-spectrum has already revealed itself. Ingham County Circuit Judge Rosemary Aquilina ruled - if that's what this is called - that Michigan Governor Rick Snyder should read "certain sections of the [state] constitution and [reconsider] his actions." According to the Detroit News, Her Honor hectored the Michigan attorney general: "It's cheating, sir, and it's cheating good people who work." Presumably, she is addressing city workers' negotiated benefits, which is not a reason to banish the bankruptcy petition, but, if she believes what she claims, for the court to rule. This "unconstitutional" prerogative is bunk, stated by the public-union representatives and some untutored legal scholars.

On the other end of the spectrum, public unions are "unconstitutional," and should have been dismantled as such 80 years ago. Public workers already had Civil Service protection, which was specifically authored for the protection of state and municipal workers against the turmoil of party politics and Tammany Hall job favors. If the Civil Service protection was inadequate, the lawful response was to strengthen the hand of the Civil Service. Politicians, of course, would be the last to favor such resolve.

School children are taught the three branches of government balance and adjourn interests in a republic. The judicial branch has let us down (as have the others.) It has reinterpreted the Constitution to avoid unpopular decisions.
The judicial branch is in decline. Its capricious disposition has sown doubts among the people. What is this "secret FISA court," authorizing the National Security Agency's petitions to spy on every American because each might be a foreign menace?  

Ingham County Circuit Judge Rosemary Aquilina claimed a second reason Governor Snyder should be required to deny Detroit's bankruptcy petition: "It's also not honoring the [United States] president, who took [Detroit's auto companies] out of bankruptcy." Aquilina is a reason The Onion must create ever more improbable inventions of the absurd to stay in business. (If Aquilina has a say, recall what happened to bondholders in the General Motors and Chrysler bankruptcies.)  

AT A HEARING OF THE HOUSE JUDICIARY COMMITTEE ON TUESDAY, JULY 16, 2013, The NSA (National Security Agency) came under attack. Rep. Bob Goodlatte (R-Va.), chairman of the committee, said he was surprised that the programs had been kept secret for so long.

REPRESENTATIVE BOB GOODLATTE: "Do you think a program of this magnitude gathering information involving a large number of people involved with telephone companies could be indefinitely kept secret from the American people?" Goodlatte asked.


-Washington Post, July 17, 2013

Federal Reserve Chairman Ben S. Bernanke or his successor may be asked a similar question.

For those old enough to remember, does the current atmosphere remind you of the early days of the Watergate hubbub? That is, the odd sensation of keeping one eye on TV hearings (during the daytime, an oddity) not knowing if the legal to-and-fro would develop, but with a sense this was an important, historic moment.


February 1933 - City of Detroit defaulted on interest payments. The 1933-1934 Detroit budget dedicated 50% of estimated tax revenue to interest payments. Tax delinquencies rose from 36% in 1932-1933 to 80% in 1933-1934. Detroit issued scrip (rather than money) to pay city employees. Scrip was refused by local stores. (Many other cities issued scrip for wages in the Depression.) Detroit was able to negotiate much lower interest payments and longer debt maturities with bondholders. It was able to do so because bondholders knew Detroit was out of money with no ability to borrow.

Please note the parties compromised and did not rely on a court decision. It was approved by bondholders because they knew Detroit had no means to pay its bills, other than a reduction of interest payments. (After the negotiation succeeded, City of Detroit bonds rose $25.) 

May 1933 - Yields on some issues became meaningless. All City of Miami bonds (yields ranged from 4-3/4% to 5-1/2%, maturities from 1935 to 1955) were quoted at $26. It was nearly impossible to get price quotes for a wide range of municipal bonds. Arkansas and Detroit were in default.

Some other developments during the 1930s, trends which may or may not be mirrored as more cities go to court:

By 1933 - across the U.S., every form of municipal expenditure had been cut since 1930 with the exception of relief payments. Welfare had risen from $100 million in 1929 to almost $500 million. Grants-in-aid from federal government to municipalities rose from $500 million in 1933 to $1.6 billion in 1934.

1933 - General sales taxes were introduced on a significant scale in Illinois, Michigan, New York and North Carolina. (Ability to raise taxes at this time was concentrated in the states rather than cities.)  

April 1933 - House of Representatives bill that would have given the courts the power to delay municipal debt payments up to 10 years. This cleared the House Judiciary Committee. Municipal bond prices fell. Bill was defeated on a House vote.

May 1934 - Municipal Bankruptcy Bill became law. Set a formula under which insolvent municipalities could refinance themselves - at the expense of current creditors - in "[f]ederal courts under their constitutional powers to deal with bankrupts." In May 1936, the U.S. Supreme Court ruled the Municipal Bankruptcy Bill was unconstitutional.

            Some differences between then and now: municipal workers' benefits were insignificant; the sense today there is always more money to solve a problem; the arbitrary dismissal in courts of legal contracts.

LEONARD GARMENT, AN ADVISER TO PRESIDENT NIXON, DIED ON JULY 15, 2013. According to the Los Angeles Times, he was "born in Brooklyn in May 1924... the son of a Lithuanian father and Polish mother, both immigrants." Alan Greenspan was born in Manhattan in March 1926, the son of a Romanian father and a Hungarian mother, both immigrants.

During World War II, Garment played the saxophone and Greenspan the bass clarinet in the Henry Jerome Orchestra. Middle Europe was well represented. By the 1960s, Garment had risen to partnership at the Wall Street law firm Nixon, Mudge, Rose, Guthrie, Alexander, and Mitchell. According to Garment, Alan Greenspan happened to bump into the prospering and influential attorney in 1967. The economist invited the lawyer to lunch at the Banker's Club. Knowing the (mis)calculating economist has planned every opportunistic step in his life, chances are Greenspan hid in a trashcan at the corner of Wall and Broad, saw Garment approaching through his periscope, and offered him front-row tickets to the World Series.

Garment mentioned his introduction of the future Federal Reserve chairman to Presidential candidate Richard Nixon in his autobiography (Crazy Rhythm). Greenspan's verbal meanderings were "pretty technical stuff" and "Nepal Katmandu language." But Nixon loved it: "That's a very intelligent man." Of Richard Nixon's misjudgments, this remains the most destructive to the American people.

        There are rumors Greenspan is writing another book, this one chastising us for always being wrong and explaining why he has always been right. As if we didn't know. 

Friday, July 12, 2013

Inflation - The Real Thing

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

"[T]he concept of the general price level is extremely vague and we cannot even speak of a very approximate determination of the average price level. Every index number is to a certain extent arbitrary: the selection of the commodities that are to be included, the choice of the weighting, the base from which the index starts, and, lastly, the mathematical processes applied, are all arbitrary..."

                                                            -Wilhelm Röpke, Crises and Cycles, 1936

            As everyone not beholden to the current corrupt structure knows, prices are rising at an unseemly pace. Röpke had it right. The corrupt structure abuses the trust it is accorded by claiming "inflation is too low," then publishing inflation figures not worth the paper they are printed on.

            Although everyone knows prices are rising fast, there has not been, in general, a rush to get rid of dollars, as there was in the 1970s. The rush was to buy before prices went up. We are approaching a moment or period of recognition, all the more predictable since incomes are flat to falling. Incomes rose through the 1970s.

The backlash will open with revulsion towards government scrip (dollars) and a rush to stuff will follow, particularly into gold and silver. 

            Without the slightest attempt to cover the waterfront, a portrait follows.

            Flipping through a "What to Do" pamphlet when staying in New York, the price for assaulting the Empire State Building, $25, struck an ill-tuned cymbal.  

An armchair investigation turned up the following:

Top of Empire State Building:


Adults - $9
Children - $4


Adults - to 86th floor - $25
Adults - to 102nd floor - $42
"Express Pass to Top" (whatever that means) - $47.50
Children to 86th floor - $19

MOMA - Museum of Modern Art -

2001 -

Adult - $10  
Child - free under 15

2013 -

Adult - $25
Children - under 16 for free

Cloisters - Metropolitan Museum of Art, at 190th street in Manhattan:  

2001 - adults - $10 "suggested"
2013 - adults - $25 "suggested"

Cab from JFK to Manhattan:

2001 -

Standard rate - $30, plus, pay for tunnels, bridges, which certainly cost more than in 2001. Tip - for the consistent 15% tipper, was lower on the 2001 fare than on the 2013 fare.

2013 -  

Standard rate - $52, plus etc.

New York City taxi -basic charge (leaving out: "after 8 PM", bridges, tips)

1 mile -

1987 - $2.20 ($1.15 first 1/8th mile, 15 cents, each add'l. 1/8th
2004 - $3.20 ($2.00 first 1/5th mile, 30 cents for each add'l. 1//5th mile)
2013 - $4.50 ($2.50 first 1/5th mile, 50 cents, for each addl. 1/5th mile)

Source for 2001 prices = Frommer's New York City with Kids

            Over the post-millennial period, what served as the better conduit to save or invest for the weekend getaway to New York? The S&P 500 peaked at around 1550 in March 2000 and is about 1660 today. Since 2001, gold (from around $300 to $1200) and silver (from about $4.50 to $19.00) did a better job of paying the bills.  

Saturday, July 6, 2013

Notes at a Funeral

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

In Memory of My Father
Frederick J. Sheehan
July 27, 1924 - June 27, 2013

My father was often in the right place. He was at Fenway Park when Lefty Grove won his 300th game. Years earlier, he stood by the players' exit and asked the great left-hander for his autograph: "Scram, kid!" He sat behind the basket at Boston Garden when "Havlicek stole the ball."

I am left-handed, as was my father, as, of course, was his one-time hero, Lefty Grove. I was going to be tall, so I would be a first baseman. My father taught me to pull bad throws out of the dirt - an ability rare enough to be chosen first among first basemen at Little League and Babe Ruth League tryouts. He spent countless hours throwing to me. My confidence and stamina often flagged; his did not.

He had foresight. In 1975, a young colleague planned to throw his hat in the ring for a presidential candidate. My father counseled, "I'd work for this governor from Georgia, Jimmy Carter. I think he may win the election."

"Jimmy who?"

His were more than predictions. My father looked through to the truth of things. His thinking was his own. Oh, the hours we spent together, up until the end, discussing the Senate - he knew every member - and how the Supreme Court no longer knew the law. And how these Red Sox remind him of the 1938 team. These were talks between just us.

He had gone to law school in an earlier era. He profited from the GI Bill. A professor told his class on the first day: "None of you should be here. The GI Bill is unconstitutional." This was not a condemnation on the professor's part. It was a fact. He was teaching the law.

My father taught me to do the right thing, always. His was a habit of mind. He was born with it.

            The right path is easy to identify, when the alternatives do not cross one's mind. Flannery O'Connor wrote "...habits have to be rooted deep in the whole personality. They have to be cultivated like any other habit, over a long period of time, by experience...I think it is more than just a discipline, although it is that; I think it is a way of looking at the created world and of using the senses so as to make them find as much meaning as possible in things."

            Our minds are swamped by the noise and intrusions of popular notions. They are repeated and accumulate until they are believed. Unless, one's habits of thinking and acting are rooted and unassailable. We choose our thoughts. They are not forced upon us. It is these choices upon which we will be judged.

            The right thing may be difficult, well-nigh impossible, to accomplish. In my father's teaching, that is the only path one may follow. It is the effort and struggle that mattered to my father. Not success in a worldly sense; that is fleeting and forgotten.

            My father was in his early thirties at the State House where most of the tendencies were to cut corners, trade favors, get known as someone who would get the job done - at a price.

            I heard how popular people achieved popular acclaim when I was a four, six, and ten-year-old. "He's a trimmer, a beef stew, a ...." These classifications had very specific meanings, which my father refused to define, but the barn yard was easy to identify.

            Alan Greenspan's process of thinking and astounding success still mystify the world. My father met a thousand Greenspans before he was forty. (Greenspan was a "trimmer," by the way.)

The dedication in my book Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession reads:

         To my father, who helped and encouraged me to write this book,
                   even when it seemed futile. My confidence and stamina
                                      often flagged; his never did.

Frederick J. Sheehan, Jr.             June 30, 2013