The State Bankruptcy Threat
Jan 25, 2011
Crushed with debt, labor contracts, and a floundering business model, General Motors underwent one of the largest bankruptcies in U.S. history—reorganizing $27 billion in debt and shaking up its stock—replacing original investors with the U.S. Treasury and the old bondholders, who were forced to trade bad debt, with equity ownership. It was a huge and messy process, gobbling up many billions of U.S. taxpayer resources, but, in the end, GM survived.
Now, financially unfit states are looking at the GM bankruptcy as a model to get out from under crushing debt loads and enormous pension promises. But as of right now, states are forbidden from filing bankruptcy—which puts contracts up on the chopping block and allows bankruptcy judges to reorganize debt and wipe out bondholders.
According to the New York Times, lawmakers are studying the ramifications of state bankruptcy—and how it could affect the $2.9 trillion market, which includes state bonds and “muni” bonds (any government or local debt below the state level).