Some thoughts over at Dealbook.
Lots of questions about the Blackstone CDS trade that Bloomberg wrote a great piece on back in October, and that Jon Stewart has now brought (finally) out into the light.
In short, Blackstone buys CDS on a company's bond debt while giving the same company a new senior loan facility. One provision of the loan facility is that the company promises to pay its bonds after the grace period – which constitutes a technical "failure to pay" under the ISDA credit definitions.
A few quick thoughts:
First, while the trade undoubtedly is valid by its strict contractual terms, I would not assume that it could not be challenged. Namely, if ever there was an opportunity to invoke the old implied covenant of good faith and fair dealing, it might be here. Normally the covenant is a last resort argument in finance transactions, but maybe, just maybe ...
Second, however, this is a relatively small trade and Blackstone's counterparties probably value Blackstone's overall business too much to litigate this one. But do future trades with Blackstone get priced with an eye to this trade? That is, will Blackstone pay in the long term?
Two big rulings in Detroit's Chapter 9 bankruptcy today: first that Detroit is eligible for Chapter 9 and second that it may impair its pension obligations in bankruptcy. Both rulings were delivered orally from the bench and transcripts aren't yet available, so it's hard to really parse them other than through selected quotations in the media. With that major caveat, here are my initial thoughts on each issue in turn:
The latest bankruptcy filing statistics from Epiq Systems have just been released. They show that U.S. bankruptcy filings in November were just over 3,700 per business day. That is a 15.0% decrease on a year-over-year basis from last November. With just one month left in the calendar year, it looks like 2013 will see a total of around 1,030,000 total bankruptcy filings, representing a 13.1% decline in bankruptcy filings as compared to 2012.
My posts on the bankruptcy filing rate inevitably lead to questions about the reasons for the decline. If you are new to the blog, you can find many old posts discussing the reasons for the decline on our bankruptcy data page. I will try to write more about the patterns and trends I see in the bankruptcy filing rate decline after the first of the year when the full year's worth of data is in.
Until then, it seemed useful to note that the percentage of bankruptcy cases that are chapter 13s has been increasing ever since the bankruptcy filing rate started declining in 2011. In an earlier post, I noted that the decline in the filing rate seems to be less in judicial districts where chapter 13 rates are high. A similar dynamic appears to be present in the annual data. Chapter 7 filings seem to have greater variation than chapter 13 filings, although it is fair to say the effect is not of a huge magnitude.
A headline about Ireland's new personal insolvency relief system crows, "Most of borrower's debt written off in first deal under new insolvency regime." I thought, "Great news!" Both that the new system is up and running, and that creditors are already agreeing to relief, which I had thought earlier was extremely unlikely.
Then I read the details. "Most" is quite a relative term. It turns out that creditors agreed to write off 70% of a reported "unsecured debt for a six figure sum." In other words, the debtor had agreed to pay creditors a 30% dividend. As readers of this blog will know, that's an extraordinary dividend. Most consumer bankruptcies around the world offer creditors zero or close to it, and even payment plans tend to offer in the single-digit range.
The CFPB just settled an enormous enforcement action against payday lender Cash America. Under the settlement, Cash America will pay $5 million in penalties and $14 million in refunds to overcharged customers. The CFPB found that Cash America or its affiliates robo-signed documents in debt collection lawsuits, made loans to military servicemen in violation of the federal Military Lending Act, and even destroyed documents during discovery.
My student Andrew Anders is writing a paper about the other enforcement actions the CFPB has been bringing. As most of you know, the Dodd-Frank Act gives the CFPB various enforcement powers including the authority to engage in administrative enforcement actions (typically followed by a consent order) and to bring civil litigation proceedings. The CFPB is required to report all public enforcement actions to which it is a party, which is where Andy got his data, all from 2012.
During the time period of January 1, 2012 through December 31, 2012, the CFPB was involved in nine public enforcement actions. Of these actions, five were administrative actions and four were
Yesterday, the Supreme Court agreed to hear Clark v. Rameker to decide whether inherited IRAs are exempt from a bankruptcy estate. The cert grant brings the number of Supreme Court bankruptcy cases this term to three. Take note, Nina Totenberg!
The Bankruptcy Code exempts IRAs (and some other retirement assets) from the bankruptcy estate. Exempt assets are not available to pay creditors and belong to the debtor after the bankruptcy case is over. In Clark, the U.S. Court of Appeals for the Seventh Circuit in Chicago had to rule on whether inherited IRAs enjoy the same protection as a debtor's own IRA. The Seventh Circuit decided the IRA the debtor had inherited from her mother was not exempt from the bankruptcy estate. The ruling conflicted with a Fifth Circuit decision, creating a need for Supreme Court guidance.
We still have a ways to go, five years after the Global Financial Crisis. Total mortgage debt has eased down from 10.5 trillion dollars to 9.3 trillion, but that 10% drop aligns poorly with the 25% drop in home values, not to mention stagnant real wages. Reuters reports that home equity lines of credit (HELOCs) will be the next wave of defaults as many 10-year interest-only periods expire. After that will come the mortgages modified to below-market rates, which go back up after 5 years...
So this morning's FT tells us that Royal Bank of Scotland is in hot water for allegedly playing hardball with its borrowers, in the hopes of acquiring some of their assets on the cheap. That is RBS has adopted something of a "loan to own" strategy.
That would be perfectly dull news if RBS were a distressed investing fund. And while banks continue to talk about client "relationships" we might not be too surprised if they – through a special arm of the bank, of course – did the same thing.
The trick in this instance is that RBS is largely owned by the UK government since its bailout. And unlike the larger US firms, RBS does not look likely to get out from government ownership anytime soon.
The government criticizing its own portfolio company then does have a certain element of naval gazing.
And it leaves the real question of what the plan is. Does the UK government want RBS to act like a cutthroat, nasty old private bank? Or does it want it to be kinder, gentler?
Just as I was getting ready to roll out an article agreeing with Creola Johnson and explaining why Congress should implement a 36% cap, like the Military Lending Act, for all of us, the Dealbook rolled out this story. As it turns out, the Military Lending Act is not stopping payday-style lending to the military after all.
Alarmed that payday lenders were preying on military members, Congress in 2006 passed the law, which was intended to shield servicemen and women from the loans tied to a borrower’s next paycheck. These loans carry double-digit or triple-digit interest rates and plunge customers into debt. Now, seven years since the Military Lending Act came into effect, government authorities say the law has gaps that threaten to leave hundreds of thousands of service members across the country vulnerable to potentially predatory loans — from credit pitched by retailers to pay for electronics or furniture, to auto-title loans to payday-style loans. The law, the authorities say, has not kept pace with high-interest lenders that focus on servicemen and women, both online and near bases.
The short-term loans not covered under the law’s interest rate cap of 36 percent include loans for more than $2,000, loans that last for more than 91 days and auto-title loans with terms longer than 181 days.
Lenders who specialize in ripping off military personnel have official sounding names like Military Financial, Just Military Loans, and Patriot Loans. They like lending to the military because they get paid from the military allotment, which virtually assures payment. Moreover, soldiers have to stay in good financial shape in order to maintain their security clearance, which means lenders have maximum leverage over their borrowers. One lenders web site claims “We know the military because we are former military,” Lenders also lure customers by offering $25 Starbucks gift cards for referrals and throw parties with free food.
If the Russian Duma adopts the pending consumer bankruptcy bill, it will fill in the final (very large) link in an unbroken chain of countries circling the globe who have adopted a debt relief law. No country seems to have taken this step as an early planning measure. Only the impeding doom of a huge credit bubble or, more likely, the aftermath of the bursting of such a bubble has spurred lawmakers to action. Russia seems perfectly poised to follow that path.
First regional banks and credit reporting agencies and now the Central Bank have begun to sound alarm bells about the rapid rise of consumer (over)-indebtedness in Russia. According to a study of credit reports from summer 2013, the number of consumer borrowers with five or more loans increased to nearly 20% in 2012, with average debt mounting to over US$15,000 (average annual income in Russia is only US$7500). In only the first nine months of 2013, consumer lending rose nearly 40%, and about 8% of those loans are already non-performing (an increase of about 33% in NPLs from the beginning of 2013). Standard & Poor's expects Russian consumer credit to expand another 30% in 2014.
I've got a new article out in the Duke Law Journal entitled The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title. The article is about the confusion securitization has caused in foreclosure cases because of the shift in legal methods for mortgage transfer and title that accompanied securitization.
The Paper Chase is not exactly a short article, but if you're the type that's into reading about UCC Article 3 vs. Article 9 transfer methods for notes and MERS, then this piece is for you. There's a lot of technical stuff in the article, but there's also a discussion of the political economy of mortgage title and transfer law, and some thoughts on how to fix the legal mess we currently have. Abstract is below the break:
For years, "product innovation" in financial services made consumer advocates squirm. This was the cover term for the 2/28 teaser ARM, automatic and costly overdraft protection, and direct deposit "payday" style loans. It was a great term because it's hard to be anti-innovation, especially in a world where every day a new app or technology proves useful. A new credit card, called "Voice" from Huntington Bank, is innovating in the credit card space. While the pros and cons of rewards are debatable (Ronald Mann's Charging Ahead has a dated but good discussion of rewards), the marketing and design of the Voice card are intriguing. What do I see?
1) The personification of the bank. It "listens." Consumers can "tell the card" things.
2) Big touted benefit of a one-day late fee. That's a nice consumer perk but perhaps telling about how many late fees are really the result of simple mistake rather than financial hardship. And that's a fact that perhaps should play into what a "reasonable" v. "abusive" late fee is.
3) That consumers presumably will be drawn to this idea of switching up rewards. If people forget to pay on time, are they really going to log on at the start of every quarter to change up and maximize rewards. The card allows consumers to "Earn a point per dollar on all purchases with Voice and pick a triple rewards category. So, you get the flexibility to earn 3x points in the category where you spend most. Go from triple gas points in fall to triple utility points for winter. It’s your choice." Huntington presumably will track whether consumers actually make such choices, and it would a field day for a behavioral economist to study how consumers use such a product.
4) No annual fee, so hey, maybe chasing rewards on cards with high annual fees would do well here. Typically we see high rewards paired with high annual fee (think airline cards). Query how good the rewards perks can be if the bank doesn't have annual fee revenue. Maybe the answer is that Huntington is marketing this card to its retail customers, and it knows enough about their habits to have optimized this product--both in terms of attracting them and being profitable. There's been a lot of talk about personalized medicine, but personalized finance is a reality too.
Banks and insurance companies are apparently gnashing their teeth at the news that the Mt. Holly case pending before the Supreme Court has been settled. The case itself does not involve financial services; it arose from a Fair Housing Act claim that a neighborhood redevelopment plan would have a discriminatory impact on black residents. The legal issue is whether the Fair Housing Act permits discrimination claims based on disparate impact. This issue has been resolved unanimously by 11 Circuit Courts of Appeal. HUD, the agency charged with enforcing the FHA, recently issued regulations confirming its long-standing interpretation that disparate impact claims are permitted. The Supreme Court's grant of review in the case is a clear signal that at least 4 activist Justices were prepared to overrule all 11 Courts of Appeal and HUD, and insist on proof of discriminatory intent in fair housing suits.
The 1968 Fair Housing Act is not new, nor is disparate impact analysis, i.e. establishing race discrimination without showing intent to discriminate. What has prompted an all-out assault by banks and their lawyers is the decision by the Justice Department under Attorney General Holder and by other federal agencies to use disparate impact analysis against mortgage lenders, and not just against realtors and landlords. Banks and their allies in the business press are hysterical about disparate impact analysis because it forces financial institutions to be mindful of the impact their credit policies have on the huge and recently expanded racial wealth gap in this country, and to adjust lending policies to mitigate the racial divide. Between 2005 and 2009, white Americans lost 16% of their net worth; black Americans lost 53% of their net worth. Access to mortgage credit, and the interest rates paid for that credit, have a major impact on family wealth.
If realtors and landlords must avoid discriminatory policies to further the goal of equal housing opportunity, it seems only fair that banks, beneficiaries of continuing taxpayer subsidies and safety nets, should have some duty to advance the same public goal.
On the train back to NYC – with menus not often seen on the Northeast Corridor – after presenting my take on OLA after SPE (or SPOE, take your pick). All part of the Roosevelt Institute and Americans for Financial Reform's new report on what remains to be done with regard to financial reform.
Credit Slips contributor John Pottow will be arguing the upcoming EBIA v. Arkison (née Bellingham) case in the U.S. Supreme Court. As briefly summarized in an earlier post, the question in the case has to do with federal bankruptcy court jurisdiction over a lawsuit within a bankruptcy case, namely a fraudulent transfer action.
We have a broad audience so I'll leave the description at that one sentence. If you are bankruptcy expert you should already know the case. If you are not, it would take about 70 pages of explication about the historical development of the bankruptcy system to understand the convoluted jurisdictional framework both Congress and the Supreme Court have bestowed on the bankruptcy courts. Fortunately, the 70-page brief for the respondent, written by Pottow with attorneys G. Eric Brunstad, Jr., and Kate M. O'Keeffe, is exactly such a tour de force explication. Indeed, even if you are a bankruptcy expert, the brief will be a great resource for you on the issues the case raises.
And, although it pains me ever to write such a phrase . . . Pottow is right.
Credit Slips is a virtual community so very few of you know that I go to Starbucks at least once a day, although a small detail in the pic here was a hint in that direction. It's not a cheap habit, as personal finance writers have observed here and here. But does it drive people to financial ruin, or even indicate a failure of sound financial habits?
I've never thought so. The decades of research on consumer bankruptcy show that the big 3--job problems, medical problems, and family changes--are underlying structural problems. My thoughts on the "latte problem" are now enshrined in print in Helaine Olen's new book, Pound Foolish. It's tone is largely that of an expose, which makes for fun reading, although academics may find some of the research a bit light. But part of the problem that the book reveals is the lack of innovative solutions to improve financial advice. Certainly the CFPB has undertaken this as a major part of its mission. I'd love to hear readers' suggestions for innovative (not more junior high financial education, please) ways to get people to be more critical "consumers" of financial advice and to take the time and effort to make strides toward their financial goals. In the meantime, I'll enjoy my latte and procrastinate on rebalancing my retirement portfolio!
Suffolk Law School and the National Consumer Law Center are convening a Research Symposium on Student Loans in Boston on April 10th and 11th. The goal of the Symposium, which is invitation-only, is to bring together the nation’s top experts, including academics, attorneys, industry representatives, consumer advocates, and government officials, to discuss research and policy related to student loans. We invite paper proposals that are empirical, qualitative, theoretical or policy-oriented. Topics of particular interest are:
The Impact of high levels of student debt
Impact of debt on individuals
Impact of student loan debt on the economy, e.g. housing markets and consumer spending
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