Marblegate and the Use of Exit Consents to Restructure (Venezuelan) Sovereign Debt

posted by Mark Weidemaier

This is a joint post by Mark Weidemaier and Mitu Gulati.

About a decade and a half ago, exit consents were a big deal in sovereign debt restructuring. At the time, sovereign bonds governed by New York law required unanimous bondholder approval before any modification to the payment terms of the bonds. The result was that creditors could easily hold out from a restructuring. Needing to mitigate the holdout problem in Ecuador in 2000, sovereign debt guru Lee Buchheit borrowed a technique from corporate bond restructuring practice in the United States. There, the Trust Indenture Act forbids out-of-court bond exchanges that modify "the right of any holder ... to receive payment ... or to institute suit" without the consent of each affected bondholder. To oversimplify, Buchheit leveraged the fact that other terms of the bonds could be amended with a lesser vote, often a simple majority or 66.67% of the bonds. This meant that potential holdouts risked having key protections stripped from their bonds in a restructuring that won the approval of a majority of bondholders.

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Two Books About Selling Math and Its Consequences for Inequality

posted by Pamela Foohey

EconomismOver at Consumer Law & Policy Blog, Jeff Sovern recently discussed James Kwak's new book, Economism: Bad Economics and the Rise of Inequality, which mounts a convincing case against the blind application of Economics 101 to important policy questions, such as healthcare, international trade, the minimum wage, mortgages and other financial products, and taxes. Kwak details the consequences of "economism," which he defines as "the belief that a few isolated Economics 101 lessons accurately describe the real world." Kwak analogizes using economics in this way to justify widening socioeconomic inequality to prior century's reliance on religion and applications of Darwinian evolution to justify the social order of those times. Part of the lure of economism, and how it can be used as an effective justification, is that it seemingly is grounded in math. And math appears to many as absolute, complicated, and scary. 

Weapons of Math DestructionWhich made me think of another relatively new book, Cathy O'Neil's Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy. O'Neil chronicles the repercussions of relying on algorithms fed by big data to assess everything from grade school teachers' effectiveness to credit worthiness to which households politicians should target during election campaigns. When not used properly, these "weapons of math destruction" can entrench and perpetuate inequality.

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Stripping PDVSA's Assets

posted by Mark Weidemaier

This is a joint post by Mark Weidemaier and Mitu Gulati

In a previous post, we talked about how ordinary corporate-law principles, and especially the rules concerning piercing the corporate veil, might play an important role in any debt restructuring conducted by Venezuela or PDVSA, the state oil company. As an example, we cited the fact that PDVSA doesn't own the oil reserves it exploits and the possibility that Venezuela might transfer the right to exploit these reserves to a new entity. Readers who have been following the Venezuelan crisis will recognize that we were not-too-subtly referring to a proposal floated back in October 2016 by Ricardo Hausmann and Mark Walker, writing on Project Syndicate. (Registration required.) In a nutshell, their proposal with regard to PDVSA is that Venezuela can induce PDVSA creditors to participate in a restructuring--conducted either in bankruptcy or through the use of exit consents--by withdrawing or modifying PDVSA's right to exploit hydrocarbon reserves. Essentially, that is, Venezuela can strip the company of its primary productive asset.

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Jeb Hensarling's Alternative Facts

posted by Adam Levitin
House Financial Services Committee Chairman Jeb Hensarling (R-Texas 5th) has an alternative fact problem. In a Wall Street Journal op-ed Hensarling alleged that "Since the CFPB’s advent, the number of banks offering free checking has drastically declined, while many bank fees have increased. Mortgage originations and auto loans have become more expensive for many Americans.
 
The problem with these claims?  They are verifiably false.  Free checking has become more common, bank fees have plateaued after decades of steep increases, and both mortgage rates and auto loan rates have fallen. One can question how much any of these things are causally related to the CFPB, but using Hensarling's logic, the CFPB should be commended for expanding free checking and bringing down mortgage and auto loan rates. Hmmm.  
 
Below the break I go through each of Chairman Hensarling's claims and demonstrate that each one is not only unsupported, but in fact outright contradicted by the best evidence available, general FDIC and Federal Reserve Board data. 

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What Would a CFPB Commission Have Done Differently?

posted by Adam Levitin

Here’s the question CFPB commission proponents need to be able to answer convincingly:  what would the CFPB have done differently over the past five and a half years if it had been a commission, rather than a single director?  What supposed overreach would not have occurred?  

So, CFPB commission proponents, here's your chance. Comments are open.

Mr. Regling's "Alternative Facts" About the Greek Debt

posted by Mark Weidemaier

(This is a joint post by Mark Weidemaier and Mitu Gulati.)

In November 2016, Klaus Regling, managing director of the European Stability Mechanism, announced that reforms were going so well in Greece that it would be able to return to the private debt markets by 2017. It's 2017, and neither the markets nor the IMF seem to share the sentiment. Yields on Greek bonds, already high, have increased, and the IMF has concluded the debt is unsustainable. Greece needs an infusion of cash to make a large payment due in July, but the private debt markets aren't willing to oblige.

What does Mr. Regling say? That the IMF (and, apparently, the markets) are wrong; that the ESM's long time horizon and Greece's relatively low debt servicing costs mean there is no cause for alarm (Financial Times, subscription required). Referring to the 174bn euros that the ESM and EFSF have already lent to Greece, he says: "We would not have lent this amount if we did not think we would get our money back." Implication: the IMF and the Euro area nations should lend even more.

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Veil Piercing When a Sovereign Owns the Shares; Venezuela Edition

posted by Mark Weidemaier

This is a joint post by Mark Weidemaier and Mitu Gulati.

At least in the short term, the odds of Venezuela continuing to service its mountain of external debt are looking slightly better, though long-term prospects remain bleak. State-owned oil company PDVSA may be even worse off. A default or restructuring by one or both borrowers will raise issues that are typically peripheral in a sovereign debt crisis. If Argentina's pari passu saga tested the willingness of courts to approve novel injunctions, Venezuela's debt crisis will test the willingness of courts to disregard the legal fiction that corporations are separate legal "persons." That fiction means that a corporation's shareholders are not liable for corporate debts (or vice versa), unless a creditor can "pierce the corporate veil"--i.e., prove the shareholder abused the corporate form to engage in "fraud or inequitable conduct."

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More Evidence that a For-Cause Removal of CFPB Director Corday Would Be Pretextual

posted by Adam Levitin

If Trump is planning on attempting to remove CFPB Director Richard Cordray "for cause" he's hardly going about it in a smart way.  The Trump administration keeps generating more and more evidence that any for-cause removal would be purely pretextual, which strengthens Corday's hand were he to litigate the removal order (as he surely would).  

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Dodd-Frank: Executive Order O'Rama

posted by Stephen Lubben

The new Executive Order is out. At heart, it says nothing. The press will probably make it into a big deal. 

Update:  I should clarify that I have no doubt the administration plans to gut Dodd-Frank. The order simply says "we plan to gut Dodd-Frank," and thus I don't find it particularly interesting.

Dodd-Frank and the New Order

posted by Stephen Lubben

Apparently just in time for another missive from the White House – and a bit of a tantrum from the House – I've got a new Dealbook up where I suggest that Orderly Liquidation Authority and title II might be a first target. I also argue that there is no real plan for what to do after OLA is gone.

What to Expect From Justice-To-Be Gorsuch on Bankruptcy

posted by Jason Kilborn

When I heard that the President had nominated 10th Circuit Judge Neil Gorsuch for the Supreme Court, I wondered what his bankruptcy-related opinions might tell us about him. Bill Rochelle beat me to it, with his characteristically insightful analysis of a few salient Gorsuch opinions. But I found three more that I thought worth highlighting, as well. A simple takeaway from all of these cases is that Gorsuch is not at all what one might call “debtor-friendly.” In fact, I don’t think one of the dozen-or-so opinions I found ruled in favor of the debtor(s). But a more nuanced takeaway is that Gorsuch is a careful and serious jurist who will apply the letter of the law in tight and cleverly written opinions. At least he should be fairly predictable, a virtue that the person who nominated Judge Gorsuch does not share.

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What's Wrong with the Bankruptcy Courts?

posted by Jason Kilborn

The Judiciary Data and Analysis Office of the Administrative Office of the US Courts has launched a new feature called "Just the Facts," highlighting statistical trends in the US judiciary. Table 2 and Chart 3 of the inaugural report reflect a curious spike in the appellate reversal rate in bankruptcy cases in 2015. While the reversal rate for both ordinary civil cases and bankruptcy cases in the Courts of Appeals had hovered steadily around 10-12% from 2011 to 2014, the reversal rate in bankruptcy cases suddenly shot up to double that, 24% (!), in 2015. It is not entirely clear to me whether this is reversal of the Bankruptcy Courts' rulings or the District Courts' rulings (it may be a bit of both, taking into account direct appeals, etc.), but in either case, whoa! Anyone have any idea what happened here? Why did the appellate courts get so mad at the lower courts in bankruptcy cases all of a sudden the year before last? I wonder if this continued in 2016. Lots of Stern reversals? Something else? Curious.

UPDATE 1/31/17: Bankruptcy statistics guru, Ed Flynn (whose fabulous work you've probably seen in the ABI Journal), helped me to understand that (1) the statistics referenced here (from Tables B-1 and B-5)  are for appeals from District Courts to Courts of Appeals, as BAP cases and District Court bankruptcy appeals are reported elsewhere (Tables BAP-1 and -2 and C-7, none of which indicates the numbers of reversals at these intermediate appeal levels), (2) the 110 merits reversals in 2015 come predominantly from the 11th Circuit and involve mostly one appellant, (3) we can probably now guess who it was and therefore what happened: Bank of America's appeals of wholly underwater second mortgage stripdown in Ch. 7  had to be granted (lower courts reversed) after the Supreme Court reversed the aberrant 11th Circuit position on allowing such stripdowns in Caulkett in mid-2015. Mystery most likely solved. Thanks, Ed!

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