August 10, 2010

Antioch Mulls Bankruptcy

1

The city of Antioch in California is considering filing for bankruptcy protection. Already another California city, Vallejo has filed for bankruptcy and now Antioch city officials are bracing themselves to be the next on the list. With weak revenue earnings and low property taxes, the prospect of bankruptcy seems increasingly likely.

The city has undertaken various measures to reduce expenditure and costs from spending cuts to layoffs to furloughs but they have proven to be inadequate. In fact, Orange County treasurer, Chriss Street expects more local governments in California to have similar experiences. A case in point is Sacramento County where one of its top finance officers predicted a worse-than-expected shortfall of $181 million for the county, which could trigger more than 1,000 layoffs among the county’s workers.

Back in 1994, Orange County, the third most populous county in California filed for bankruptcy protection after they experienced $1.7 billion in losses due to bad investments. It took 2 painful years before the county emerged from bankruptcy in 1996 and had its credit rating restored from its pre-bankruptcy ‘junk’ status. Earlier this month, Fitch Ratings affirmed its ‘AA’ rating on the number of the county’s long-term obligations.

On the other hand, municipal officials are not rushing to the bankruptcy courts because they recognize the very real consequences of bankruptcy. It is not all about getting rid of debts. Filing Chapter 9 bankruptcy, which is the part of the bankruptcy code that applies to municipalities, has dire consequences on the counties such as lower credit ratings which in turn affect borrowing costs. Another consequence municipalities want to avoid is being locked out of the municipal debt market, which would worsen fiscal problems. In addition, bankruptcy could frighten potential investors and thereby dispel the job opportunities that come along with them. This would only serve to exacerbate the unemployment rate, which for California stands at 12.6% in April. For these reasons, most states limit the number of Chapter 9 bankruptcy filings among their counties.

But despite all the gloomy prospects of bankruptcy for other cities, Vallejo has its bankruptcy filing to thank for some positive developments. The move to file bankruptcy has forced public employee unions to negotiate with city officials thus providing city leaders an opportunity to limit compensation, which makes up more than three-quarters of Vallejo’s general fund spending.

Los Angeles, like Vallejo, sees bankruptcy as a viable option for it between now and 2014. Mayor Richard Riordan is of the opinion that bankruptcy would draw the city’s public employee unions back to the negotiating table. Also, it could pave the way for adopting 401(k) retirement accounts for new city workers instead of pension benefit plans with escalating costs.

But the influential public employee unions are not in favor of bankruptcy. Some of these unions are demanding for the state legislature to pass a bill that would require local governments to get the approval of a state board before filing for bankruptcy. Since the board could comprise of many members considered union-friendly, moves toward bankruptcy could be easily rejected or delayed.

Related Blogs

Filed under Chapter 7 (Tampa) by dmishesq on Aug 10th, 2010. 1 Comment.

July 13, 2010

Stern Call to Prevent Major Bankruptcies

0

The nation’s top three finance officers lobbied before the House Financial Services Committee for more stringent regulatory measures over financial markets to prevent any more major bankruptcies like Lehman Brothers. Treasury Secretary Tim Geithner, Federal Reserve chairman Ben Bernanke and Securities and Exchange Commission (SEC) chairwoman Mary Schapiro who have come under sharp criticism lately for their institutions’ failure to prevent Lehman from going bankrupt, appealed for an overhaul of the financial systems.

At the opening of a hearing to discuss policy matters on financial markets, the case of Lehman’s bankruptcy was brought up highlighting the fact that the nation’s financial regulatory bodies did not pick up on Lehman’s exposure to risky derivatives and their highly questionable accounting practices to hide these activities in the years prior to their collapse.

Financial reform has been in the forefront of many people’s minds not least because the SEC last week charged another Wall Street giant, Goldman Sachs with fraud. At the hearing, legislators began their debate on the tough measures needed to be taken for the government to better regulate derivatives and the appropriate capital requirements for Wall Street firms.

One of the matters brought up in the debate was how Lehman surreptitiously used an accounting trick known as ‘Repo 105’ to mask its massive losses and remove some $50 billion of assets from its balance sheet instead of selling them off at a loss.

At the discussions, lawmakers from both sides of the political divide decried Lehman’s gross mismanagement and expressed disappointment at the feeble regulatory system that did not detect their wrongdoing and under-capitalization until it was too late.

This led to a call for the need to enforce the Wall Street Reform bill that was proposed by the Democrats and passed by the Senate Banking Committee last month. But this proposal was quickly shot down by the GOP representatives, branding such a move as trying to reinforce a broken system. The Republicans are generally against giving the Fed Reserve and SEC more regulatory authority.

The committee questioned Shapiro on how the SEC could have overlooked Lehman’s condition and did not take action on the investment bank earlier. In reply, Shapiro stated that the SEC did not have “the staff, the resources or…the mindset” to effectively regulate the operations of the world’s largest financial institutions. At the time of Lehman’s bankruptcy, the SEC had only 24 employees overseeing five of the largest investment banks in the world.

Shapiro was quick to add that the SEC had learned from its mistakes and has adopted more stringent methods of cracking down on the types of transactions that led to Lehman’s downfall. The SEC has sent letters to all major financial institutions requesting detailed descriptions of accounting practices including possible Repo 105 type transactions and will make its findings public after reviewing them.

Related Blogs

Filed under Chapter 7 (Tampa) by dmishesq on Jul 13th, 2010. Comment.

July 3, 2010