Wall Street's Hardball Backfires

The Masters of the Universe get a comeuppance in the Stockton bankruptcy:

In a blistering critique, the judge assailed major Wall Street bondholders, Assured Guarantee Corporation and National Public Finance Guaranty Corp., for acting in a heavy-handed manner by refusing to negotiate the city's bond debt unless Stockton took actions to cut its massive employee pension obligations.

Klein concluded that National Public Finance and Assured "each took the position that there was nothing to talk about" unless the city sought concessions from the California State Employees Retirement System, to which it was paying $29 million a year. The city and CalPERS argued that pension costs had to be met.

"The translation (was that) if you don't intend to impair CalPERS, we're not going to talk to you," Klein said of the creditors. "They absented themselves from all discussions....And, having voted with their feet, there was no point in talking to them further."

The judge ruled that Stockton had put forth a reasoned effort to resolve its massive fiscal debt but received "nothing but a stonewall on the other side."

He also chastised the city's creditors for refusing to pay their required share of costs of pre-bankruptcy mediation, declaring, "The capital market creditors did not negotiate in good faith. And therefore, they do not have the ability to complain."