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.