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Friday, June 21, 2013

How big is the hole in the bottom?

Detroit's Emergency City Manager claims to have found evidence of fraud in the city pension and insurance funds:
Orr ordered an investigation into employee-benefit programs yesterday, including the insurance and pension systems. He told the inspector general and auditor general offices, which both have subpoena power, to deliver their reports within 60 days. The documents should cover “next steps, and any corrective, prospective, legal, additional investigatory or other action designed to address any waste, abuse, fraud or corruption uncovered,” according to the order.

Wages, benefits and pensions took 41 percent of city revenue this fiscal year, according to a report from Orr. It showed that benefit and pension costs per employee had increased to $24,000 from $18,000 in 2000. Skipping payments to the funds and borrowing has kept the city afloat, according to the report. 
As Karl Denninger has pointed out, this is potentially much bigger than it sounds.  The suspicion is that due to the MERS-related fraud, a lot of the pension "investments" were never perfected, are already in default, and therefore a considerable amount of the money in the already woefully underfunded funds does not exist.  If fraud on a similar scale to that which took place in the housing market is discovered, it could render a number of state and municipal pension plans across the nation unable to continue to pay out benefits.

And the consequences of that would likely be interesting....

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44 Comments:

Anonymous Idle Spectator June 21, 2013 4:00 AM  

Obama is gunna pay Detroit's mortgages.

Anonymous FrankNorman June 21, 2013 4:04 AM  

A government is supposed to be able to just print money...

Blogger Some dude June 21, 2013 4:18 AM  

Would the consequences involve sweet sweet justice?

Anonymous AnalogMan June 21, 2013 4:37 AM  

... waste, abuse, fraud or corruption ...

I'm shocked.

Anonymous Idle Spectator June 21, 2013 4:52 AM  

Would the consequences involve sweet sweet justice?

When they find out their pensions are gone...

Rape Victim: Oh God, I was so scared! Thank you!
RoboCop: Madam, you have suffered an emotional shock. I will notify a rape crisis center.

Robocop's Detroit

Why is the Detroit in Robocop from 25 years ago more accurate than the one I see on the news today?

To steal a line from Dirty Harry in Sudden Impact: Call D'Ambrosia over at the D.A.'s office. Ask him if movies are psychic.

Blogger Rantor June 21, 2013 5:01 AM  

I recently read that there are over 70,000 abandoned buildings in Detroit. Possibly enough to give one building to each pensioner in lieu of their pension. Fix it up, rent it out, that can be there inheritance.

Of course they'll need renters... Might be a problem

Anonymous sprach von Teufelhunden June 21, 2013 5:01 AM  

JPMorgan Chase is already beginning to refuse financial instruments from the State of California, and other banks are at least applying a two week hold period. JPMC manages the entire unemployment and food stamp disbursements. Food stamps and unemployment checks are largely now Chase Debit cards. Most people are utterly clueless to the invisible soup lines, right in front of their faces.

and..

I guess we can safely put Dr. Paul Craig Roberts in the hyperinflation column...

The Rational Market Myth

I suspect that the recovery, although officially a weak one, does not really exist. However, thanks to statistical artifacts that understate inflation and unemployment and overstate GDP growth, the Fed and the markets think that a recovery of sorts is in process and that the unprecedented money printing by the Fed will succeed in shifting the economy into high gear.

No such thing is likely to happen. Instead, as 2013 progresses, a further downturn will become visible through the orchestrated statistics. This time the Fed will have to get the printed money past the banks and into the economy, and inflation will explode. The dollar will collapse, and import prices–as globalism has turned the US into an import-dependent economy–will turn high inflation into hyperinflation. Disruptions in food and energy deliveries will become widespread, and a depreciated currency will cease to be used as a means of exchange.

Blogger Rantor June 21, 2013 5:06 AM  

Some friends had to go to a conference in Detroit a couple of years ago. Seems they have a first rate convention center and some nice hotels in the middle of this mess they have created. Some conference attenders were robbed and at least one was assaulted, seems you can't go outside the hotel or conference center at night.

Blogger Rantor June 21, 2013 5:15 AM  

Hey sprach v T, well at least this prediction will be easy to measure as it is for this year.

Neither the Fed nor Barack has done a good job at giving money to anyone where it will do some good. O just greases the palms of the indolent poor and pays off some union cronies. The Fed gives to bankers to prop up their banks and the stock market. Prepare to double short the market, Mr Bernanke's wild ride shall continue.

Anonymous Outlaw X June 21, 2013 5:23 AM  

Interesting, as I rolled my 401K into an IRA not letting him invest it in the markets, He said I wouldn't make any money (wealth) and I said your illusions of wealth have been greatly exaggerated. He didn't understand that until today; after today and sent me a personal email asking me how I knew. I'll call him tomorrow as he had a real bad day today.

Anonymous Idle Spectator June 21, 2013 5:33 AM  

Some friends had to go to a conference in Detroit a couple of years ago. Seems they have a first rate convention center and some nice hotels in the middle of this mess they have created. Some conference attenders were robbed and at least one was assaulted, seems you can't go outside the hotel or conference center at night.

Where was Robocop at? Busy arresting Clarence Boddicker.

I work for Dick Jones!

Dick Jones! OCP runs the cops!

This is still more accurate than the news, with the Detroit cops being totally corrupt, and now being curtailed due to city budget cuts.

Anonymous DT June 21, 2013 5:40 AM  

I recently read that there are over 70,000 abandoned buildings in Detroit.

I'd buy that for a dollar!

Anonymous Auntie Whyte Jemisin June 21, 2013 5:51 AM  

My father was afraid for me to come to Detroit. After 3 days there, having my laptop and iPhone robbed, I know now that Dad was right to worry. This is not a safe city for humans.

I am calling for Reconciliation, namely, that the people of Detroit admit to the failure of their value system. That means going to the people who've been wronged, and listening while they tell you just how much of a shit you are.

It means apologizing. It means knowing your own fucking history -- not just the propaganda, but the reality. And see, reconciliation doesn't mean civility. It means acknowledging a wrong has been done, on the part of the wronger.

Detroit sucks; admit it, and admit why it sucks. Hint: it's not because of me.

Blogger Remo June 21, 2013 6:32 AM  

You mean to say the cops will stop working (i.e. writing tickets and eating doughnuts) when their paychecks stop and their pensions disappear? And this is a bad thing how?

Anonymous boomer June 21, 2013 6:44 AM  

Whats in your pension?
All pensions are run like SS. The money doesn't belong to the worker.
To think we have elected people that believe your 401k doesn't belong to you and judges that believe that to.
Before Grandholm was elected Governor of Michigan. she was investigating voter fraud in Wayne, Oakland and Macomb county's. These county's all voted for her.

Anonymous boomer June 21, 2013 6:50 AM  

When enron pension scandle broke the news media was investigating other pension fund then all of a sudden they stop.

Anonymous Roundtine June 21, 2013 6:53 AM  

r/K selection theory. The Democratic coalition splinters when resources become strained.

Government workers are a wealthy minority. I would bet against them when it comes to lavish pensions that were never funded. Voters will not think it's terrible that these government workers get SS and Medicare instead of their plans, especially when the city government will have to basically shut down for several years to fund the pensions.

Blogger James Dixon June 21, 2013 7:00 AM  

> The suspicion is that due to the MERS-related fraud, a lot of the pension "investments" were never perfected, are already in default, and therefore a considerable amount of the money in the already woefully underfunded funds does not exist.

I honestly doubt any of the people currently involved have enough knowledge o check for that. I suspect this is the more usual type of fraud, where money that was claimed to be going into the pension was used for other purposes.

Anonymous realmatt June 21, 2013 7:08 AM  

Warren buffet is going to pay for everything.

Anonymous zen0 June 21, 2013 7:12 AM  

boomer laments:

To think we have elected people that believe your 401k doesn't belong to you and judges that believe that to.

Hey, you know what else? That money you think you have in the bank does not belong to you either. Same elected people and judges say so.

Blogger tz June 21, 2013 7:16 AM  

The leaders of Detroit lost their principles first, while the electorate lost interest.

Unfortunately, pension debt is guaranteed in the state constitution. I haven't read up on the details, but Michigan might turn into California or Illinois overnight.

As soon as one link in the pinwheel breaks...

Anonymous Van June 21, 2013 7:27 AM  

Nationalizing private retirement accounts coming a little early? Everyone needs to share the burden.

Anonymous Outlaw X June 21, 2013 7:30 AM  

Simple math. If you have 10 dollars in the market and it falls 10% you now have 9 dollars. If it goes back up 10% you now have 9.90 dollars. If you have 10 dollars in the market and it drops 50% you have 5 dollars. How much must the market rise to get back even? Math question.

Anonymous Outlaw X June 21, 2013 7:33 AM  

Man can't people see how easy it is to steal their money?

Anonymous anon123 June 21, 2013 7:53 AM  

It's time for the Sequestrationator to act.

Anonymous boomer June 21, 2013 7:54 AM  

I hate story math problems
money for nothing chicks for free

Blogger swiftfoxmark2 June 21, 2013 7:55 AM  

So wait, you're telling me that a collective retirement plan, managed by bureaucrats, is fraudulent?

But I thought the government was full of loving, unselfish individuals who have our best interests at heart...

Anonymous Salt June 21, 2013 8:01 AM  

Detroit is going under faster than a Corvette on nitrous.

Anonymous Jerome Horowitz June 21, 2013 8:27 AM  

From the article...."Officials representing police and firefighters said they would study and respond to Orr’s proposal, which would affect about 30,000 current and former city workers."
..
Since the boys in blue have shown the ability to use violence against citizens ( all be it limited ) when they were being paid, what will happen when the payments stop for current and retired member of the gang in blue?

Blogger Bernard Brandt June 21, 2013 8:41 AM  

The last time I looked, the law regarding pensions was that only vested pensions (i.e., those paid to retirees who had completed their 'term of duty') were legally required to be paid under the terms of said pension.

Unvested pensions are subject to change without notice.

At first approximation, in the event that a bankruptcy court were to take over Detroit's finances, the judge or panel in charge would probably axe all pensions other than to retirees. Then the government unions would send their attack lawyers in to defend their union members' "rights". As the judges and panels appear all to ascribe to the current practice of 'robbing selected Peter to pay for collective Paul', the result would most likely be that Detroit's municipal bond debt would be reneged upon, and discharged in bankruptcy.

As many cities in the U.S. are close to bankruptcy themselves, and would appear to be in the same boat as Detroit, expect the same process to repeat itself. Thus, a substantial portion of the several trillion dollars currently invested in municipal bonds would likely disappear as well.

I leave the rest of the playing out of this scenario as an exercise for the student. (A hint to the wise: expect another bubble like the real estate one of 2008 to the present to repeat itself.)

Have fun, kiddies.

Anonymous Jerome Horowitz June 21, 2013 8:56 AM  

This is not a positive response...
" “We have reservations about the EM’s authority to conduct an investigation,” the pensions said in the statement sent by Bruce Babiarz, a spokesman for the police and fire plan."

Anonymous JartStar June 21, 2013 9:56 AM  

There's no indication that the Federal government is going to bail out these municipalities so it will be interesting to see what happens to them over the next decade.

Anonymous Daniel June 21, 2013 9:59 AM  

Detroit is going under faster than a Corvette on nitrous.

What is this, 1993? Detroit is dead and buried. There is nothing left to go under:

http://www.architonic.com/ntsht/the-presence-of-absence-detroit-s-haunting-architectural-relics/7000519

Anonymous Cheddarman June 21, 2013 10:37 AM  

It dawned on me a couple of years ago, how insane our age is. We let other people control our money, and laugh at those who bury theirs in mason jars, or convert it to gold and silver and hide it on their property. Know i know who will get the last laugh.

Anonymous Jeigh Di June 21, 2013 10:49 AM  

"i know who will get the last laugh."

The guy with the gun?

Anonymous anti-racist June 21, 2013 10:53 AM  

http://asoiaf.westeros.org/index.php/topic/80972-a-rebuke-of-a-song-of-ice-and-fire/

Anonymous Mike M. June 21, 2013 12:41 PM  

This can get interesting on several grounds.

First, the Democrats rely on state and municipal employee unions for a lot of their money. Threaten the pensions - even worse, have it turn out that the pensions were never funded - and the rank-and-file will get very unhappy.

Second, this will cascade to other areas. The Dirty Little Secret about unions is that many of the union leaders are in collusion with the management. Government unions particularly so. Democrat politicians protect the union thuglords, the thuglords shake down the members for contributions to the Democrats. Once the regular members realize how badly they are being robbed, there will be an upheaval.

Third, municipal corruption is going to go up dramatically. Which will become very ugly, as the government is so very intrusive these days.

Anonymous Gen. Kong June 21, 2013 12:54 PM  

Paul Kersey refers to the general phenomenon of Detroilet as the "visible black hand of ecnonomics". Combined with the activities of the Babylonian vampire-squids of Wall Street it becomes the bottomless black hole of economics. YT gets to pay in any case. He doesn't mind one bit either, only too glad to shell out for the glorious privilege of being able worship a Mocha Messiah.

Blogger CarpeOro June 21, 2013 1:07 PM  

No surprise to someone who lived in the suburbs for three decades. Wikipedia is just propaganda and progressive boiler plate when it comes to covering the corruption that has been endemic since the first black mayor (that and crime). It was regularly discussed in any non-progressive news outlet how both were under or misreported. Simple math showed that long ago that pensions were unsupportable. Nothing to see here. What will force the idiots to take notice is when Chicago can't find anyone to take their IOUs. An event closer than many would suppose is my guess.

Blogger CarpeOro June 21, 2013 1:11 PM  

"Third, municipal corruption is going to go up dramatically. Which will become very ugly, as the government is so very intrusive these days."

It doesn't need to go up. It just needs to be exposed to the light of day.

Anonymous Mike M. June 21, 2013 1:22 PM  

What infuriates me about all this is that the Federal Government figured out that they had a pension problem in the early '80s. So they changed the retirement system in 1983. EVERY state and local government should have taken the hint.

This isn't rocket science. Merely minimal competence.

Anonymous Idle Spectator June 21, 2013 2:04 PM  

This isn't rocket science. Merely minimal competence.

Bzzzt. That's a bridge too far.

RoboCop 3: What's it like being a rocket scientist?

Blogger The Deuce June 21, 2013 2:06 PM  

And the consequences of that would likely be interesting....

Welcome to the Flash Mob States Of America.

Blogger Doom June 21, 2013 8:45 PM  

One can hope. I think it would be absolutely beautiful to have most public municipal, and maybe, just maybe federal! (stretching, dreaming, but not beyond the pale) retirees receive nothing... tomorrow. Collective public bargaining my ass. Fuck em'.

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