James Pethokoukis

Politics and policy from inside Washington

Did Wall Street nix GOP push to let states go bankrupt?

January 25, 2011

As they used to say in the Soviet Union, “It’s no coincidence.” At least, I suspect is isn’t. Yesterday, House Republican Majority Leader Eric Cantor came  out strongly against the idea of changing the federal bankruptcy code to let states declare bankruptcy, an idea being pushed by some Republicans, including Newt Gingrich:

“I don’t think that that is necessary because state governments have at their disposal the requisite tools to address their fiscal ills,” Cantor said. ”They’ve got the ability to enter into new negotiations if there are any collective bargaining agreements in place. They’ve got the ability to adjust levels of spending as well as revenues at the state level.”

Yes, but filing for bankruptcy would allow states to restructure government union contracts. Even the threat of doing so could make negotiations easier. That’s arguably how it worked for U.S. automakers. Despite incremental concessions over the years due to the vague threat of bankruptcy, only the reality of an actual bankruptcy, instigated by Washington, achieved sweeping change — whether at General Motors and Chrysler, which filed, or Ford, which avoided doing so. States don’t have that ability right now.

But let’s speculate a bit, let’s try and connect a few dots:

1. In 2010 election cycle,  Wall Street campaign contributions shifted to Republicans from Democrats. For instance, Goldman Sachs, via its PAC and employees, allocated 59 percent of political contributions to Republicans in 2010 against just 26 percent in 2008.

2.  Wall Street does not like the idea of states being given the power to file for bankruptcy. Such a move might spook markets, or spook them even more:

The municipal bond market, which has recently been rocked by fears of possible defaults, could suffer another blow, driving up borrowing costs further, if the legislation gained traction. The idea is “clearly not beneficial to an already fragile municipal market,” said Chris Mauro, municipal strategist for RBC Capital Markets, in a statement.

It might hurt their holdings of state bonds. Overall, banks own some quarter-trillion bucks worth of state and local debt.

3. Also, some Wall Street firms make a lot of money off the public pension system and don’t want to get on the wrong political side of the issue. Take the Blackstone Group, a private equity firm.  More than a third of its investors are public pensions. Here is the text of  a press release it put out last week:

Blackstone’s view on public employee pensions is clear and unambiguous: We believe a pension is a promise. Working men and women should not have to worry about their retirement security after years of service to their communities. We oppose scapegoating public employees by blaming them for the structural budget deficits that cities and states face. We at Blackstone are committed to helping public employees retire with confidence in the strength and reliability of their pensions.

4. Billionaire Blackstone CEO Steve Schwarzman is a big Republican moneyman who famously likened Democratic efforts to impose higher taxes on private equity firms to Adolf Hitler’s invasion of Poland. “It’s a war. It’s like when Hitler invaded Poland in 1939.”

5. Many Republicans would love to cement their rekindled financial relationship with Wall Street heading into 2012 when they have a good chance of retaking the Senate.

Now there is a reasonable argument against giving state’s this new power. But the anti-bankruptcy GOPers have yet to supply it. Perhaps other forces are at play. If not, more explanation is needed.

Comments

Please take the time to read the U.S. Constitution; Specifically Article I Section 10. After you’re done, explain how this particular effort by the GOP is not going to be declared unconstitutional.

Posted by ARJTurgot2 | Report as abusive
 

The Constitution says that no state shall make a law impairing the obligation of contracts. If states can declare bankruptcy, they could restructure their spending as well as their revenues at the state level. This would include restructuring government contracts and that would mean auto unions or any unions might find themselves in jeopardy, after the nation had bailed them out, so that a state could survive. This would be putting the state’s interest above the nation’s. Unconstitutional. However, as with so many things, I believe we should have let some bankruptcies take place and when asked to do what we can for the nation, after having a taste of what it could be like, we might be more receptive to the idea. In the Great Depression, people lost EVERYTHING and had to scrape and work to survive and rise again. That might be good for America, remind us what we were all about, and we might not belong to China. (and I am not talking about the people who have lost their jobs or pensions–they have not only had a taste of it, but a whole meal!!)

Posted by dardyl | Report as abusive
 

There are three solution options:

1. Punish the government employee union members who voted for the union officers who greedily negotiated these ridiculusly unaffordable pensions (this is the “allow states to declare bankruptcy” option).

2. Punish the residents of those states whose cowardly elected representatives stupidly negotiated from positions of weakness in allowing those union officers to greedily negotiate these ridiculusly unaffordable pensions (this is the “make the irresponsible states bail themselves out on the backs of their own taxpayers” option).

3. Punish all American citizens equally, both the responsible and the irresponsible, including those in most states who elected intelligent representatives to negotiate from positions of strength in preventing those union officers from greedily negotiating ridiculusly unaffordable pensions (this is the “make the responsible states bail out the irresponsible states on the backs of all American taxpayers” option).

Posted by GirthBrooks | Report as abusive
 

Why should any state be allowed voting rights if it can’t be fiscally responsible! Might suggest those states that file bankruptcy, and they will, should loose state rights and become territory’s until they can demonstrate they are capable of containing their foolish spending and give aways. I, for one, care not to bail out any state that cannot meet a payroll or balance a budget.

Posted by n84daride | Report as abusive
 

For those of you citing the Contracts clause and arguing that this would be unconstitutional:

“No state shall . . . pass any law . . . impairing the obligation of contracts.”

This would be a federal law–as bankruptcy courts are arms of the federal judiciary. When you hear about “Chapter 7 bankruptcies,” for example, we are talking about Chapter 7 of Title 11 of the United States Code. The Contracts Clause does not restrict the ability of the federal government to interfere with existing contracts.

Posted by Johnny_Lawrence | Report as abusive
 

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