"Oh Dear Me No, I Couldn't Possibly Hear Another Appeal..."

posted by Mark Weidemaier

The Second Circuit has refused to hear Citibank's appeal of Judge Griesa's order enjoining Citi from making payment on USD-denominated, Argentine-law bonds. The Second Circuit's order is a bit... Delphic. Weighing in at all of 56 words, not counting citations, the court simply "decline[d] to find jurisdiction" because the district judge's order "is a clarification, not a modification" of the injunction. The distinction seems a bit fine, given the stakes. Recall that some USD-denominated, Argentine law bonds are Exchange Bonds (and thus subject to the injunction) while some are not. But it seems that it is impossible to tell them apart. Two options, then: (1) forbid Citi to pay anyone, even though NML concededly has no right to block payment on non-Exchange Bonds, or (2) allow Citi to pay everyone, thus allowing a subset of Exchange Bonds to escape the injunction. The district judge chose option one. In theory, the district judge can reconsider (re-clarify?) that decision, but I am not holding my breath.

New ADP Garnishment Report

posted by Jason Kilborn

A Adp-garnishment-report-1 valuable and groundbreaking source of data on wage garnishment has just been released by ADP, the nation's largest payroll services provider. I immediately recalled a great paper by Rich Hynes about the paucity of wage garnishments in Virginia and Illinois in the mid-2000s. According to ADP, things have changed since the recession, especially for blue-collar (manufacturing and transportation/utilities) workers in the Midwest making between $25,000 and $40,000 a year, of whom more than 10% suffered a garnishment in 2011-2013. About half of these garnishments were for child support, but the other half were for taxes, consumer debts, and bankruptcy cases (presumably wage orders entered for Chapter 13 plans). The report is available here in html and here in pdf and makes for very interesting reading.

Continue reading "New ADP Garnishment Report" »

Digital Wallets

posted by Adam Levitin

Interesting op-ed on digital wallets by Edward Castronova and Joshua Fairfield in the NYT. I'm a little more skeptical. Thoughts follow the break.

Continue reading "Digital Wallets" »

Settling Detroit: Remembering General Unsecured Creditors

posted by Melissa Jacoby

ChessThe trial on the City of Detroit's restructuring takes a hiatus while insurer Syncora and others try to finalize a settlement. The deal seems to be a hybrid of enhanced treatment for Syncora's class of claims in Detroit's plan (class 9) and other value for Syncora alone, such as rights in Detroit property, and possibly a release from insurance obligations on interest rate swaps. The deal does not resolve class 9 objections as a whole. Indeed, it may give others in the class, e.g., insurer FGIC, more to grumble about. Signals are flashing that the judges (intentionally plural) overseeing Detroit's bankruptcy want a full class 9 settlement and want it now. At the end of Wednesday's bankruptcy court hearing, Judge Rhodes requested an off-the-record conference with representatives from FGIC and the City. Yesterday, the lead facilitative mediator entered a bring-your-toothbrush order; it requires mediation participation "continuing day-to-day thereafter as deemed necessary, until released by the mediators." (document 7419)

But what about plaintiffs alleging civil rights violations/constitutional torts who had section 1983 actions pending before the bankruptcy? Or plaintiffs holding state law tort claims, or rejected contract claims? In a municipal bankruptcy pitched as a battle between workers, Wall Street, and residents, it can be easy to overlook other kinds of unsecured creditors. 

Continue reading "Settling Detroit: Remembering General Unsecured Creditors" »

Apple Pay and the CFPB

posted by Adam Levitin

Apple Pay has been getting a lot of attention, and I hope to do a longer post on it, but for now let me highlight one possible issue that does not seem to have gotten any attention. I think Apple may have just become a regulated financial institution, unwittingly. Basically, I think Apple is now a "service provider" for purposes of the Consumer Financial Protection Act, which means Apple is subject to CFPB examination and UDAAP. 

Continue reading "Apple Pay and the CFPB" »

Isis Wallet Mobile Payments

posted by Adam Levitin

One of the competitors in the Great Mobile Payments Race is changing its name. Isis Wallet, a mobile payments joint venture of AT&T, Verizon, and T-Mobile is changing its name to Softcard for fairly obvious reasons. Isis Wallet operates by having the consumer store his/her payment card information on a "secure element"--tech speak for a tamper resistant chip that safely stores encrypted information.  (The particular secure element for Isis Wallet depends on the phone model.) That payment information is then communicated with merchants using NFC (near field communications, i.e., contactless).  Isis Wallet also integrates various loyalty programs and merchant offers (including some that are proximity based). As Apple's Apple Pay platform shows, mobile payments is becoming a crowded field with some real heavyweights. Yet, as I'll blog shortly, there are some real challenges ahead for anyone in the field. 

Now Might Be the Time for the Longest Pending Catholic Diocese Chapter 11 Case to Settle

posted by Pamela Foohey

The Archdiocese of Milwaukee is one of 11 dioceses (plus 2 other Catholic-affiliated religious orders) to file under Chapter 11 -- and it likely will not be the last. All of the cases were filed in hopes of achieving global settlements of sexual abuse claims. The Milwaukee Archdiocese filed over 3.5 years ago, in January 2011, making it the longest running Diocese case. 6 of the 7 other dioceses that filed before it confirmed reorganization plans in an average of about 2 years after filing. The shortest time to confirmation was 10 months, while the longest was 2.75 years. The other diocese, San Diego, negotiated a settlement, via mediation, in approximately 9 months.

The Milwaukee Archdiocese and its creditors (predominately abuse claimants) have spent the last 3.5 years, despite a trip to mediation in 2012, primarily fighting over a $55 million trust fund established to pay for upkeep of the diocese's cemetery. Without the $55 million, abuse claimants are likely to receive no more than $4 million. The $4 million figure would be smallest settlement paid to abuse claimants in any of the Catholic Church bankruptcies so far. The cemetery trust issue is pending before the 7th Circuit. Meanwhile, attorneys' and other professionals' fees are rising, leading Judge Kelley to order the parties back to mediation, starting tomorrow.

Continue reading "Now Might Be the Time for the Longest Pending Catholic Diocese Chapter 11 Case to Settle" »

Is Housing Such a Bad Investment? Maybe Not...

posted by Adam Levitin

One of the post-bubble conventional wisdom stories that has gotten a lot of traction is that housing is a bad investment and that consumers would do better to rent and invest in the stock market.  The problem is that it's wrong.

The prooftext for the idea that housing is a bad investment is a straightfoward comparison of the returns on stock market indices with those on housing market indices.  If one compares the return on the S&P500 index vs. the S&P/Case-Shiller Composite 10 index from the beginning of the Case-Shiller data (1987) to present, one sees that the S&P500 went up 630%, while the Case-Shiller went up only 197%.  Even if one uses an average return (averaging the monthly index values, relative to the starting value), S&P500 is 244%, while Case-Shiller is 98%.  Ergo housing is a bad investment compared to the stock market, right?

That's certainly what a bunch of smart people have argued. (I won't link or name names, but Google isn't coy.) There are two problems with this line of argument.

First, it fails to account for the leveraged nature of housing investment.  Most homes are purchased on leverage, and housing is the only leveraged investment broadly available to the middle class. When one factors in leverage, housing massively outperforms stock market mutual funds, making it a pretty sensible investment in most cases.   

Second, the simple return comparison fails to account for the indirect benefits of housing, such as school districts, commuting time, quality of life etc. I'm not going to try to quantify the indirect benefits, although some of them definitely translate into pecuniary terms (schooling, for example).

If you'll indulge me with some number play below the break, you'll see that the leverage point alone blows the "housing is a bad investment" argument out of the water. Leverage is not without its complications, though.  

Continue reading "Is Housing Such a Bad Investment? Maybe Not..." »

Contract Exuberance

posted by Anna Gelpern

Ding Dong! The Witch is Dead! We have a contract fix against holdouts in sovereign debt restructuring. Here are my two cents on the proposed reforms, as of last Friday. Bottom line is way positive. In my admittedly biased opinion, this is unusually meaningful change. That said, after three days of celebrating in the press and debt relief circles, it is time for a bit of perspective.

Continue reading "Contract Exuberance" »

Detroit: "Now Is Not the Time for Defiant Swagger..."

posted by Melissa Jacoby

3dPuzzlePlan confirmation time. Doesn't everyone relish a big trial? Headlines in national newspapers breathlessly proclaim that the fate of Detroit's future is in the hands of one single judge!

Well, no.

Let's get literal about the judicial role at this juncture. There's no way over the finish line without a determination by the bankruptcy court that the City has met its burden of showing its plan satisfies all legal requirements by a preponderance of the evidence.

This standard includes the City showing that the plan is not likely to fail. Back in January 2014, as the parties negotiated the plan's initial version, Judge Rhodes called for restraint in creditor demands, modesty in City promises:

Now is not the time for defiant swagger or for dismissive pound-the-table, take-it-or-leave-it proposals that are nothing but a one-way ticket to Chapter 18 ... . If the plan ... promises  more to creditors than the city can reasonably be expected to pay, it will fail, and history will judge each and everyone of us accordingly.

    --Jan 22, 2014, afternoon session

Detroit's plan includes revitalization investments, and does so not merely to show how it will service its debt. That scope takes the court into a farther-reaching review.  And the judge appointed his own feasibility expert, and is planning to conduct the direct examination of the expert himself. Such factors further fuel the image of a judge as gatekeeper of Detroit's future.

Yet, no bankruptcy judge should be saddled with the full weight of longstanding socio-economic and geographic challenges. Historian Thomas Sugrue teaches us that the roots of Detroit's crisis run quite deep. Deeper than the recent past of corruption in the Kilpatrick administration, or dependence on casino revenues, interest rate swaps on certificates of participation, or questions about thirteenth checks. Even before the height of worries about auto industry competition abroad, or the enactment of Michigan constitution language on pensions. By Sugrue's account, Detroit's economic decline started in the 1940s and 1950s with hemorrhaging (his word) of good jobs and capital. For the spiral downward from there, the book is here, the speech, 19 minutes into the video, there.  Repair depends on collaborative work: many tools, many hands. How to engage all communities in the effort to conquer longstanding racial tensions and segregation, achieve regional cooperation, expand jobs that offer more security and opportunity than downtown coffee shops and sports stadiums? ("Downtown does not trickle down," said Sugrue at a Wayne State conference earlier this year; explanation here). Again, many tools, many hands.

Although these challenges illustrate how the judge's plan confirmation role operates within a much broader framework of actors, judges also can shape a municipality's restructuring and future throughout the bankruptcy process, in more informal ways. In Detroit's case, Judge Rhodes planted the seeds of oversight and influence in the earliest days of the bankruptcy. He drew on tools and techniques used decades earlier in other kinds of complex litigation, including prison reform and school desegregation cases. See here, here, here, and here.

Among the most consequential moves was delegating to Chief District Judge Rosen the authority to mediate nearly every substantive issue in the case. Detroit heads into the confirmation hearing with many settlements in its pocket - with financial creditors as well as workers and retirees. Most discussed is the pension/art settlement (a.k.a. Grand Bargain) that looks the least like a conventional mediated settlement. Chief Judge Rosen has suggested the deal could be a model for other distressed cities. On harnessing the power of the non-profit sector, maybe so. On a sitting life-tenured judge being the designer, broker, and closer of this type of deal, not so much. However socially desirable the content of the Grand Bargain may be (and that debate will rage on), the costs and risks of this procedural model are simply too great. 

So, as the last phase of the historic Detroit bankruptcy commences, the question of judicial responsibility and influence must be put in context. The role of federal judges in shaping Detroit's future has been overstated in some ways, understated in others. Trials matter. But if they capture too much of our attention, we will miss other important things.

Puzzle picture courtesy of Shutterstock

 

Single-Point-of-Entry: No Bank Left Behind

posted by Adam Levitin

Last December the FDIC put out for comment a proposal for a Single-Point-of-Entry (SPOE) Strategy to implement its Orderly Liquidation Authority (OLA) under Title II of Dodd-Frank. Single-Point-of-Entry has gotten a lot of policy traction. The Treasury Secretary supports it and there’s huge buy-in from Wall Street.  And it’s an approach that is likely to ensure financial stability in the event that a systemically important financial institution gets into trouble.  There’s just one problem with it.  SPOE means “No Bank Left Behind”.  

Continue reading "Single-Point-of-Entry: No Bank Left Behind" »

With a whole lot more

posted by Stephen Lubben

Thoughts on cramdown and "make whole" call provisions, over at Dealb%k.

Duties to Serve in Housing Finance

posted by Adam Levitin

Mark Fogarty has a nice write-up in National Mortgage News of a book chapter about duties to serve in housing finance that I wrote with Jannecke Ratcliffe for a volume entitled Homeownership Built to Last (Brookings/Joint Center on Housing Studies 2014).  It's a real pleasure to realize that someone has actually read our chapter! 

MBS Settlements--Following the Money

posted by Adam Levitin

Financial crisis litigation has been going on for several years now and has been resulting in lots of piecemeal settlements. As a result, it's easy to miss the big picture.  There's actually been quite a lot of settlements covering a fair amount of money.  (Not all of it is real money, of course, but the notionals add up).  

By my counting, there have been some $94.6 billion in settlements announced or proposed to date dealing with mortgages and MBS.  

Continue reading "MBS Settlements--Following the Money" »

Toward a Universal Ability to Repay Requirement

posted by Adam Levitin

The latest consumer financial product to come under the regulatory microscope is subprime auto lending, which has seen a boom in the last few years.  The subprime auto market's boom underscores a real problem in consumer financial regulation: different consumer financial products have developed different substantive regulatory regimes that are not justified by differences in the products. Most fundamentally, we have an ability-to-repay requirement for mortgages, a different ability-to-pay requirement for credit cards, and nothing else for other products. In light of the changes in all consumer finance markets, in which securitization and sweatbox lending have undermined the traditional lender-borrower partnership that encouraged responsible lending, it is time to consider a universal ability-to-repay requirement for consumer credit. 

Continue reading "Toward a Universal Ability to Repay Requirement" »

Sovereign Chicken

posted by Mark Weidemaier

Nothing to see hereSo Argentina plans to ditch Bank of New York Mellon, deposit funds with a local payment agent, invite bondholders to swap into local law and local payment bonds, etc. Not an optimistic sign for those hoping for a quick resolution. And such a transparent violation of the injunction that there really isn't much to say about it. Here's Judge Griesa anyway, from yesterday's hearing: "I want to be very clear, and I want to state it right now. This proposal is a violation of the current orders of this Court and of the Second Circuit. It is illegal, and the Court directs that it cannot be carried out."

But still, no contempt sanctions. Judge Griesa knows he can't win this game of chicken. A federal court's power to impose contempt sanctions on a foreign government is uncertain. The issue is complicated not only by sovereign immunity but by the intricacies of contempt law. There is some precedent for imposing monetary fines, at least for civil contempt. (A contempt order is civil if it is intended to induce compliance; it is criminal if intended to punish past non-compliance. The latter is especially problematic in the sovereign context.) Here's a case imposing a $50,000-a-day fine against the Russian Federation until it complies with a court order to turn over cultural artifacts. But imposing a fine is not the same as collecting it. Russia hasn't paid its rapidly-accumulating fines, which now total around $15 million. Stay tuned; the plaintiffs want a money judgment for that amount, which they can then try to enforce by seizing Russian assets. (Funny, right?) The US government opposes the request.

An order imposing contempt sanctions would just give Argentina something else to ignore.  So the court, quite sensibly, took a pass. But it hardly matters. In a very real sense, Argentina is not the target of the injunction. The targets are the payment intermediaries, who still risk contempt if they facilitate a swap into local bonds. (As, in theory, do bondholders who participate in the swap or modify their rights to facilitate a violation of the order, although this risk seems remote.) Even if there is a swap, then, participation will probably be low. And that's before we even get into the "murkyparticulars of a swap. Argentina watchers might want to find a comfy chair, because the case doesn't look like it's going away soon.

Car Crash image courtesy of Shutterstock

Criminal Law and Financial Distress

posted by Stephen Lubben

I commend to Slips readers Alex Tabarrok's post over at Marginal Revolution entitled "Ferguson and the Modern Debtor’s Prison." 

Argentina and the Swap Puzzle

posted by Anna Gelpern

President Cristina Fernandez de Kirchner has proposed a law authorizing the executive to reroute payments on the restructured bonds out of New York, and to offer all bondholders local-law bonds on 2010 exchange terms. All the buzz has been about the swap. But there is no swap on the table, no capacity to execute a swap, and no more details about the swap than there have been in the press for months. We have even had a hearing about this swap (no, Judge Griesa did not like the idea--though he will have more to say soon, I am sure).

Even if Argentina put a real proposal on the table and figured out a way to execute a swap without the help of any of the mainstream intermediaries worried about New York court orders, any new FX bonds issued in that swap would likely be covered by the same injunction that threatens Argentine-law FX bonds paid through Citi, pending appeal. (Would a swap announcement help or hurt the appeal? Hmmm....) In other words, miles to go from here to there, and nothing to act on for the bondholders just now.

On the other hand, Argentina has the capacity on its own to deposit the next bond payment at Banco Nacion. Sure, this would violate the various court orders and the indenture, but if you are a bondholder and want to get paid, you might just have a real choice come September. I still think few people will show up, for many of the same reasons that would gum up a swap--but there is a high probability of an action-forcing event here.

More to the point, any attempt at firing Bank of New York Mellon and unilateral action in contempt of court would present a real problem for BNYM, the various clearing houses, paying agents and advisers involved. I suspect more lawsuits and resignations will come before any swap is launched.

... which makes me think, again, that this was more about the 40-page retelling of the history and the politics of it all. Escalation is the message.

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