Last Tuesday, Goldman Sachs (NYSE:GS) announced that it would be bringing its 10,000 Small Businesses initiative to Detroit, the 11th city to be involved. Goldman has pledged $15 million of lending capital to support Detroit’s small business community and an additional $5 million for business and entrepreneurial education programs.
“We would not be investing here if we didn’t believe that Detroit has a bright future,” said Goldman CEO Lloyd Blankfein, via USA Today.
“The potential’s huge,” said Warren Buffett, the CEO of Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB), who co-chairs the 10,000 Small Businesses initiative. “The United States with a flourishing Detroit is going to be a lot better than a United States without one.”
Wall Street moguls aren’t the only ones interested in the city, either. The Michigan Film Office recently announced that the next Batman and Superman movies — the first of which stars Ben Affleck — will be filming in Detroit in the first quarter of 2014. The films won’t only make Detroit look good on the big screen, but it will also provide a whole host of temporary job opportunities as well as additional work for vendors, hotels, and merchants.
The MFO reports that the film will employ more than 400 workers and thousands of extras, along with the help of about 500 local vendors. The city is expected to receive a total financial windfall of more than $100 million.
On July 18 — with a headline unemployment rate of 18.8 percent, a $300 million deficit, and approximately $18 billion in debt and unmet financial obligations — Detroit became the largest municipality in the United States, measured by both dollars and population, to file for bankruptcy protection.
“Let me be blunt,” Michigan Gov. Rick Snyder said in a video statement the day that Detroit filed for Chapter 9. “Detroit’s broke.”
In many ways, the event marked a change in tone of the narrative of the broader post-crisis economic recovery in the United States. At a macro level, unemployment was falling, home prices were rising, and the story was one of cautious optimism. Things weren’t great but they were getting better slowly.
Detroit wasn’t the only exception to the trend, but it was perhaps the largest and most visible. Its bankruptcy filing reminded the nation that record equity valuations do not necessarily reflect real economic conditions. Detroit was and still is in trouble, and it will take massive financial restructuring and a tremendous amount of investment to return the city to its former self. Once upon a time, remember, Detroit was at the heart of the American economy.
For a brief interval – between 1994 and 2002, when Dennis Archer was mayor of the city — Detroit seemed to have hope despite its slowly sagging economy. Archer was able to manage the city in such a way that actually resulted in its bond rating being upgraded several times. Maintaining a high credit rating was necessary if Detroit, already borrowing a tremendous amount of money, was to skate through its financial difficulties without disaster.
But when Archer left office in 2002, he was replaced by the now notorious Kwame Kilpatrick, who ended up in a federal penitentiary for a sex scandal, perjury, obstruction of justice, fraud, and almost two dozen more felonies. Kilpatrick resigned in 2008, by which time the damage had been done.
When Detroit entered a state of “financial emergency” in March, it turned toxic in the eyes of many investors. Municipal bondholders were set to lose big, and businesses had no interest in investing in a city where the population had shrunk from 1.8 million to just 700,000 over the past six decades.
But other investors — call them value investors — saw something different. As Buffett once famously said: “The best thing that happens to us is when a great company gets into temporary trouble. … We want to buy them when they’re on the operating table.”
The same logic can be applied to Detroit.
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