By: Mark Glennon*
William Isaac knows insolvency when he sees it, and how to deal with it. As Chairman of the Federal Deposit Insurance Corporation from 1981 to 1985, he was on the forefront of the banking crisis at the time. He founded The Secura Group, a leading consulting firm in financial regulation, and is a respected voice in the world of finance.
Bankruptcy, not just for Chicago, but for Illinois as well, he says.
“The city and the state should act now to restructure their liabilities and put the fiscal mess behind them. This can be accomplished by utilizing Chapter 9 and other tools Congress just gave Puerto Rico,” wrote Isaac in an opinion piece published Thursday in The Bond Buyer.
Tax increases and spending cuts won’t work, he wrote:
In the short run tax increases can partly bridge the deficits, but even this benefit will prove pyrrhic. Recent tax increases have already made the state and the city less competitive venues. As for expenditures, there’s still fat that can be cut from the budget, but it’s difficult to see this making more than a dent.
Why is his opinion a watershed? He’s the first major financial figure to outright call for bankruptcy. Others have said to start thinking about it or that it might be needed eventually — for Chicago. Pass the needed federal legislation now, says Isaac. Federal legislation would be needed to allow a whole state to file for bankruptcy. “Once a financial mess of the first order is at hand, as is the case with Chicago and Illinois, it can be far better to act decisively by restructuring rather than prolonging the pain.”
He’s not speaking to shame Illinois Democrats, avoid tax increases or hurt unions. Isaac is a Democrat himself and was appointed to the FDIC by President Carter.
Isaac also suggests using the authorization for bankruptcy as a hammer to first attempt a negotiated restructuring. That, actually, should go without saying. It’s a requirement for eligibility under the Bankruptcy Code. Isaac specifically suggests something like the PROMESA legislation recently enacted for Puerto Rico, which puts a hold on creditor collection pending attempts to negotiate.
Nobody in the Illinois press has reported Isaac’s assessment. Read his article, then read it again. It’s a pretty good summary of what we “boo-birds” and alarmists, as the “sky isn’t falling” crowd in the Illinois press and General Assembly call us, have been saying for years. We’ve said here that bankruptcy is inevitable for Chicago. We retain hope that Illinois can avoid it, but time is running out.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.