People who think the city of Detroit should sell the Detroit Institute of Art’s collection tend to either not understand bankruptcy, or the implications of the art’s sale.
Here is an explanation of both:
First, bankruptcy exists to offer debtors either complete or partial relief from the claims of creditors. Debtors are people, businesses, or in rare cases cities, ones who owe money. Creditors are the individuals or businesses who lent debtors money. For example, for a home loan, you’re the debtor and the bank is the creditor.
Detroit is a debtor. The city’s debts and liabilities are estimated to be $18 billion. On July 18th, 2013 the city declared bankruptcy. Ever since, the city has been in a federal bankruptcy court bargaining with its creditors – a cast of characters that numbers over 100,000. This is partly what made it impractical for the city to negotiate down its debts outside of federal court.
These many creditors and interested parties can be broken up into factions. There are the banks, bondholders, bond insurers and pensioners; all of whom are likely to take a loss in the overall scheme of things. In its plan of adjustment, the city’s official plan to restructure its debts and liabilities it proposed to offer bondholders (people who lent the city money and received what amounts to an IOU) 20 cents on the dollar.
That means if a bondholder lent the city $1,000 they would only receive $200 back. The bankruptcy process is meant to help debtors, but creditors attempt to squeeze as much out as they can in order to stem their losses.
Bonds are essentially IOU’s from whatever entity issued them. In the case of Detroit, with the purchase of bonds came the purchase of insurance on those bonds. So in case the debtor failed to pay his bond (IOU) the bond insurer would help the creditor recover their losses. In other words, that $800 that went unpaid by the debtor in the earlier example would be paid by the bond insurer.
In the case of Detroit, there are two bond insurers who worked with the city, Financial Guaranty and Syncora. Both bond insurers are unhappy about the city’s plan to restructure and reduce its debts because they’ll be on the hook for much of the difference.
This is why the two companies have raised many objections to the city’s plan. One plan in particular, to save the DIA’s collection from sale has been especially contentious.
Financial Guaranty and Syncora see the DIA’s collection as an asset which can be sold, as do many other spectators outside the process. This is a mistake, but we’ll tend to that later.
Early in the bankruptcy process Detroit commissioned Christie’s, the auction house, to appraise the works within the DIA. Christie’s appraised part of the DIA’s collection and said it was worth between $454 million and $867 million. Some creditors claim that because of the small scope of the appraisal the art could be worth as much as $2 billion.
This is the point where confusion happens. ‘The city doesn’t have money, and the art is worth a lot of money, so the city should sell it’ say a lot of people. But this is often under incorrect assumptions.
Like a lottery winner, people start to list off what the city could do with that money: build better schools, hire more police officers, put up more street lights. The problem is none of the money would be used to build better schools, hire more police officers, or put up streetlights. The money would be used to pay off creditors and save companies like Financial Guaranty and Syncora money.
Nor is it a certainty the money would be used to make pensioners, who arguably have the most to lose, whole. Detroit has $18 billion in debts and liabilities, of that $18 billion only $3.5 billion of those liabilities are related to pensions. The money could easily be passed around to other creditors, creditors who may have helped break the city.
It is also noteworthy that because of the nature of Chapter 9 bankruptcy, the part of the bankruptcy code which applies to municipalities the city cannot be ordered to sell the art. That would be unprecedented. Detroiters should not be bullied by Financial Guaranty and Syncora. The art is the public’s and the consequences of its sale are terrible.
Its cultural value aside, once the art is sold, it is unlikely to resurface, despite claims that it could be loaned to the city. Philanthropists would also doubt the city as a place where art can be stored and seen and enjoyed by the public, which means the DIA would likely cease to be the recipient of further donations.
There are difficulties in the law. Michigan Attorney General Bill Schuette, a Republican, has said the art is protected and is held in the public trust. The DIA also receives tax revenue from Macomb County, Oakland County, and Wayne County. Surely these three have “claims” on the art.
There is a plan to save the art, a partnership between the state and the philanthropic community. National and local philanthropies have already raised $330 million to save the artwork. Another $350 million in state funds must be approved by the state Legislature. Michigan Gov. Rick Snyder, a Republican, supports the use of taxpayer money to save a public treasure. In total, $817 million is intended to be raised in order the save the art from sale.
The two companies, Financial Guaranty and Syncora, presented four potential offers on April 9.. Art Capital Group, Catalyst Acquisitions, Marc Bell Capital Partners, and the Beijing Poly International Auction Company were the interested parties listed in the counter-proposals by the bond insurers. Offers made in the proposals by the bond insurers were reportedly for more than the $817 million from the deal made between the philanthropic community and the state, but such offers are tentative.
The deal made with the philanthropic community and the state legislature is far better for pensioners. In the deal, the money raised will be used to satisfy the needs of pensioners rather than a panoply of other creditor classes such as banks. This move will make the sale of the art moot.
In accordance with the rules of Chapter 9 bankruptcy, the judge, Steven W. Rhodes, cannot force the city to sell the works in the DIA. Kevyn Orr, the emergency manager appointed to handle the city’s finances by Snyder, has already said the art will not be sold. It is curious why so many people so readily surrender their culture. More than a jewel for the city, the DIA is a public treasure for the entire state and should remain as such for future Detroiters and state residents to enjoy.