Detroit was an Investment Too Good to Be True

Our investment committee found a recent WSJ article regarding the impact of Detroit’s bankruptcy on a number of European banks quite interesting. The article gave some detail surrounding Detroit bonds structured by UBS and sold to a number of European banks in 2005. At the time, Detroit was struggling to fund its pension obligations and turned to UBS for help. UBS found a number of European banks desperate for new sources of income, and very willing to buy Detroit debt at what appeared to be attractive rates.

One of the key tenets of investing is to avoid buying things you do not understand. In a presentation from a Swiss banker, Detroit, circa 2005, might have appeared to be a good investment. There were some positive things happening: Businesses had begun to move back downtown, casinos were expanding, Detroit had the MLB All-Star game, the World Series, and was getting ready to host the Super Bowl. However a drive around town, or the coverage of Mayor Kilpatrick’s saga told a different story, one that residents have been aware of for years. This story is of crumbling infrastructure, minimal services, empty neighborhoods, lack of oversight, and overall corruption in city hall. Detroit’s bankruptcy appears to be news to everyone around the world, except for those who know and live in the Detroit Metropolitan area.

One of the common questions around our investment committee is “What could go wrong?” If there are too many answers to that question, it is an investment we likely avoid. We make our best efforts to understand the long-term positives and negatives of each investment we make. If a deal looks too good to be true, it probably is.

Marisa A. Lenard, CFA, CFP®