- Detroit, once a prosperous city known as Motown or the Motor Town, filed for bankruptcy in 2013 due to declining auto industry and massive pension debts. - The auto industry crisis in 2008 greatly impacted the Big Three automakers Ford, GM, and Chrysler based in Detroit, leading to job losses. Rising fuel prices also reduced sales of SUVs and trucks. - Detroit has struggled with a declining population, high poverty and illiteracy rates, and an inability to fund promised pension benefits to retired city workers. The city's bankruptcy filing may lead to cuts to those pension payments.

1. When the Giant falls…….
Can Motown be saved??
When Greece ran into financial troubles and filed for bankruptcy, the World did not anticipate
that it would take down with itself almost the whole of Europe. The Greece were thought of as
tax evaders and considered to have been serving a fate they well-deserved. The Portugese, the
Italians and the Spanish believed their financial fundamentals were sound only to get a rude
shock later on. Result is that, European economy is yet to recover.
The American economy seems to be trotting a similar path of denial. It has been making
promises of healthcare and pension benefits thinking there is no crisis waiting for it at the next
corner. Detroit is the largest American city to have filed for bankruptcy on July 18, 2013. Its long
term debts are estimated to be about $18 billion. Of these about $9 billion are unfunded
retirement benefits. Nearly half the debts of Detroit arise from pension and retirement promises
made to workers.
So what caused the collapse of the automobile hub? As Detroit files for bankruptcy, it brings
down with it the automobile giants Ford, General Motors and Chrysler known as the ‘Big Three’
automakers.
In 1960, Detroit became the richest per capita City as per the US census bureau. The current state
is that now sixty percent of Detroit’s children are living in poverty. Fifty percent of the
population is believed to be functionally illiterate.
Is it hard to believe that a city which was once the fountainhead of the innovation aspect of
America has become a specimen of financial failure? Let us analyze the causes behind the failure
and try to understand if this could have been prevented.

2. The Auto Industry crisis 2008:
The automotive industry was not insulated from the global financial downturn. The crisis
affected European, Asian and American car makers. What was driving the crisis was the
substantial increase in the automotive fuel prices which weakened the automotive industry to the
core. The ‘Big Three’ whose success thrived on Sports Utility Vehicles(SUV) and pickup trucks,
were hit the most. The increase in fuel prices discouraged the sale of these automotives as they
did not offer much fuel efficiency. With fewer fuel efficient models to offer to the consumers,
the Big Three sales started to decline. The Big Three US market share fell from 70% in 1998 to
53% in 2008. Entry of other foreign makers into the industry led to further deterioration.
The Big Three entered Detroit back in 1903 when Ford Motors was founded. Soon after, General
Motors and Chrysler followed. Fifty years ago the city was rich and nearly all car sales in
America were cranked out by them. Detroit was home to 1.8 million people. Today only about
700000 remain. Many are poor and poorly educated. The city extends over an unmanageable 140
square miles. Delivering services to barely populated neighborhoods would be tough even if the
city government were well-run, which is not.
Facing financial losses the Big Three started cutting down jobs. General Motors lay off several
employees in order to save its plummeting sales revenue. The spin off led to the woes of the
people of Detroit. The city which was once called ‘Motown’ or the ‘Motor Town’ now
desperately needed a bail out by the Government. The Big Three could not anticipate the shift
from SUVs to commercial vehicles in the minds of the people. As a result, they were far slower
in launching other models other than SUVs than its foreign competitors, which simply added to
their woes.

3. (Source: US Census bureau)
Who Pays the Bill?
Edmund Larry was sitting patiently on his wheelchair outside City hall waiting for a lift home.
He worked as a carpenter in Detroit but had to seek an early retirement owing to his knee injury.
He remembered how beautiful the island was before people started to move out of the town and
crooked politicians moved in. The city has already paid one-third of his pension. He believes the
remaining amount is protected by the contract and he shall get it no matter what financial
troubles the city was running into. He is not worried about the city’s bankruptcy. He should be!
By filing for chapter 9 of bankruptcy, Detroit seeks protection from all its creditors including
pensioners like Edmund Larry. Kevyn Orr, the emergency manager appointed by Governor of
Michigan, says there shall be cuts in the future pension payments. Retirement benefits shall also
be squeezed substantially.
This brings us to another possible cause of the Detroit bankruptcy. It highlights another long
term problem which most American cities face, how to manage pension funds and retirement
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2013
Detroit City Population
Detroit City Population
1903: Ford Motor
1908: General Motor
Co. founded
1925: Chrysler Corp.
founded
1940-45: 'The Arsenal
of democracy'
1959: Motown Records
founded
1967: Race
riots
1973: Oil
crisis
2009: Car industry
bailout
July 2013: Detroit files for
bankruptcy
1903: Ford Motor
1908: General Motor
Co. founded
1925: Chrysler Corp.
founded
1940-45: 'The Arsenal
of democracy'
1959: Motown Records
founded
1967: Race
riots
1973: Oil
crisis
2009: Car industry
bailout
July 2013: Detroit files for
bankruptcy
1903: Ford Motor
1908: General Motor
Co. founded
1925: Chrysler Corp.
founded
1940-45: 'The Arsenal
of democracy'
1959: Motown Records
founded
1967: Race
riots
1973: Oil
crisis
2009: Car industry
bailout
July 2013: Detroit files for
bankruptcy
1903: Ford Motor
1908: General Motor
Co. founded
1925: Chrysler Corp.
founded
1940-45: 'The Arsenal
of democracy'
1959: Motown Records
founded
1967: Race
riots
1973: Oil
crisis
2009: Car industry
bailout
July 2013: Detroit files for
bankruptcy

4. benefits which have become unaffordable. The problem lies with the propensity of politicians to
promise such liberal benefits to public servants rather than increasing their wages.
The same mindset was adopted by the Big Three to enter into agreements with workers for gold
plated pension and attractive retirement benefits. In the short term this brought industrial
prosperity, in the long run this bankrupted the Big Three and caused the entire city to collapse.
The question that now faces Motown is that who pays its bills, the promises of pension benefits
that it made to its people. This issue shall be settled in Court. The upshot will severely affect
holders of municipal bonds, insurers, state and public sector workers and the tax payers of
America. All in all, the future of Detroit now depends on what deal Orr can cut.
North American Free Trade Agreement (NAFTA)
A major reason for the economic malaise of Detroit is often sighted from a review of the US
2010 census data which notes Detroit lost 48 percent of its manufacturing jobs from 2000- 2010.
The answer lies in the major effect of NAFTA that was signed in 1994 which was supposed to
create jobs in the American economy. Economist Paul Krugman was at the forefront in
espousing the Agreement.
Today, however, most believe that NAFTA has cost the US, millions of manufacturing jobs.
Although it successfully created 1.5 to 1.75 millions of jobs in the service sector, it took away
large number of high paying skilled jobs from the manufacturing sector of the US to
Mexico, those jobs which once made Detroit the economic powerhouse.
After years of job losses, the white flight began from Detroit in search of better economic
opportunities. Now that the city’s bankruptcy is imminent, it seems that its legal battle would be
a long one and prove quite an ordeal for the remaining residents of the city.

5. Is Motown too big to beg??
Many speculate that Detroit might sell its assets to pay off its debts. The Detroit Institute of Arts
has a magnificent collection of old masters. The aged might as well have a pension rather than
historical art paintings to gaze at. And bondholders who face severe uncertainty about their
investments have stronger views about this. But others worry that selling all its valuable assets
might make it an even lesser attractive place to live in. The Court shall not tell what to sell and
what to keep, but any deal between the city and its creditors shall require his approval.
Some business leaders are still sanguine that the bankruptcy shall mark the end of Detroit’s
decline. They believe once Detroit comes out of this phase it shall mark a new beginning for
itself and its entire people will start heading back to their homes, industries would flourish and
people would once again reap benefits of pension and retirements. While others believe that
things are only going to get worse. With lesser population and high debts the public facilities in
the city would get worse, thereby reducing the value of properties.
It seems that the future of the city now lies with Mr. Kevyn Orr. According to his interview
published in The Economist, he argues that if this city wants to surmount this bankruptcy it needs
an investment of about $1.25 billion in restoring its services. Neither the Federal Government
nor the State has, yet announced any bailout package. He says that a bankruptcy, as complex as
that of Detroit, can take years to resolve, however, he is aiming to do so by autumn 2014. His
spokespersons say that steps to move ahead have been deliberated upon and listed. However,
their approval shall depend on Judge Steven Rhodes.
Underlying problem
Most people wonder what happened to their money, for it wasn’t too long ago when Henry Ford
offered his workers $5 a day and profit-sharing. How did Detroit manage to come to this
abysmal stage within the same century?
The reasons most believe are civil mismanagement by the municipality, white flight and race
riots. To top it all its corrupt leaders sought debt more than what the scarce city population could
repay.

6. Is only Motown in trouble??
One question that all business leaders should ask themselves is that is the fate of Detroit its own.
Is the rest of America insulated from such a crisis? Data shows that Illinois has the largest
pension funding gap. The leaders need to take cognizance of the fact and work in unison to
prevent the fall of another giant.
It is only recently that American economy has begun to revive owing to its shale gas discovery.
This discovery promises America stable revenue for a long period of time. The economy is still
precariously balanced. It certainly cannot afford its cities to go bankrupt like Detroit.
Pension Funding Gaps:
Adjusted net pension liabilities as % of state revenues
Rank State %
1 Illinois 241
2 Connecticut 190
3 Kentucky 141
4 New Jersey 137
5 Hawaii 133
6 Louisiana 130
7 Colorado 118
8 Pennsylvinia 105
(Source: Moody’s)
When a giant falls, an earthquake is bound to come. Detroit has taken down with itself the
housing market also. As Dr, Svenja Gudell, senior economist says, “If the city continues to
hollow out, it’s unlikely the housing market will continue to recover.” “Restarting the Motor
City’s economic engine, and soon, will be critical if Detroit is to have any hope of attracting the
kinds of workers and homebuyers necessary to jump-start demand,” she adds.