Investing in Detroit: Automobiles, bankruptcy, and the future of municipal bonds

Municipal bondholders, who are primarily retail investors, should be protected by the SEC and provided with easily accessible information on municipal bankruptcy law and precedent. This note proposes specific bankruptcy-related disclosure requirements to enable these investors to properly price in the risk of bankruptcy. Part I of this note traces the history of Detroit, with a focus on its municipal bond issuances and descent into bankruptcy. Part II describes the history and current state of municipal bond regulation. Finally, Part III proposes two important initial regulatory steps that will improve disclosure of bankruptcy risks and potential outcomes for bondholders in bankruptcy.