MLEA at the University of Illinois

On October 11 & 12, the University of Illinois College of Law will host the 12th annual Midwestern Law & Economics Association conference. The event consists of law professors and economists presenting papers with varying degrees of law-and-economics content, ranging from empirical analyses and formal economic modeling to legal philosophy and doctrinal papers infused with economic thinking. Paper submissions are due by August 1 and should be submitted to me at rlawless-at-illinois-dot-edu. More information can be found here.

On the Valuation of Hedge Funds (or Hedge Fund Managers)

So Felix Salmon has taken a justifiable swipe at some oddish Bloomberg articles on Citibank's spinoff of its internal hedge fund, as required by the Volcker Rule.

But in doing so, it seems as though he may have hit his own wicket.  (OK, I'll admit to wishing I was here, rather than grading Con Law exams).

For example, he argues that "all future income is reliant on both the investors and the managers sticking around, which means that the value of a hedge fund to its managers is always going to be higher than the value of a hedge fund to an outside investor with little ability to keep the managers in place."

First off, I assume he is referring to the manager, rather than the fund itself. And if value is reliant on the managers sticking around – why is a hedge fund that much different than any other company? Even a company with a large amount of fixed assets depends on the quality of its management to give those assets real value (e.g., GM) and companies with slight physical assets don't disappear when a key manager departs (e.g., Apple).

He also says "almost nobody buys and sells stakes in hedge funds as an investment" and thus suggests that hedge fund "valuation should start at zero, rather than with some academic discounted-cash-flow analysis."

Well there is the case of Och-ZIff, a publicly traded hedge fund manager. Its outside shareholders do seem to think that there is some value in the future cashflows there, despite the fact that the managers might up and leave at a moment's notice. Either that or investors are buying the stock regardless of price. That seems likely.

Cries for Relief from the Hungarian Financial Crisis

No, not that Hungarian financial crisis. Now that the country seems to have more or less righted itself, its citizens are still struggling with their own debts. Reuters reports that the Managing Director of the National Bank of Hungary has called for the country to adopt a personal insolvency law, much as Ireland just did in the midst of its own crisis. The Director seems to envision an approach along the lines of an emerging European standard, a clean slate after a 4- to 5-year payment plan. The IMF agrees, noting in its latest annual report on Hungary (see p 15, para  25) that establishing a personal insolvency system would help the banking sector to clear out its portfolio of non-performing loans and get Hungarian productivity back on track.

So what's the holdup? "Resistance from the banks." Where have we NOT heard that before!? Of course the banks resist, because they want to continue to maintain the illusion that their non-performing loans are actually worth more than a few fillér on the forint (if not zero). A Hungarian economics ministry secretary reports in the Reuters story that they're in talks with the banks about a potential personal insolvency law, but it is "unlikely to be launched this year," as "there should be sufficient time to prepare for it." Time!? A full-blown and well-developed proposal for a new personal insolvency law was floated and commented on by, among others, me, beginning in the fall of  ... 2008!  Is five years not "sufficient time" for these banks? And why did the 2008-09 proposal fail?  "Resistance from the banks." Someone over there in Hungary needs to stand up to the banks and stop allowing the time-honored cry of "we need more time" to delay reasonable relief that complies with an international standard that has developed throughout Europe during the past 30 years.

Forint photo courtesy of Shutterstock.

Who is Mel Watt?

On May 1, President Obama nominated Rep. Mel Watt (D-N.C.) to be the director of the Federal Housing Finance Agency, the conservator for the mortgage giants Fannie Mae and Freddie Mac.

These two entities together currently back a large majority of new mortgages and hold or guarantee about half of all U.S. mortgages. Like other entities immersed in the mortgage market, Fannie and Freddie suffered great losses in the mortgage meltdown and were taken over by the federal government at the end of the Bush administration in September 2008.

Watt could be a key figure in the late stages of the mortgage crisis and in redefining the role of Fannie Mae and Freddie Mac going forward.  So who is this eleven-term congressman and what does he care about most?

Probably the most important points to stress are these:  He rose from humble beginnings through the meritocracy and is a Yale-educated lawyer who likes to immerse himself in the facts.  He is broadly respected at home in Charlotte, N.C., and represents a safe district where he has biracial support.  He carefully listens to the financial services industry, a major player in his community, and one that has supported his campaigns.  Most important of all, he has made working for the economic well-being of African Americans his life’s work, whether as a lawyer in private practice representing minority businesses or as a lawmaker seeking to shore up consumer protection, particularly to strengthen the legal basis for challenging predatory lending, often used against racial minorities and other vulnerable populations.

Jon Stewart's Residential Evil

Any time The Daily Show has a piece that mentions both MERS and the OCC, it gets a link on Credit Slips. There is even a short clip featuring former Credit Slips blogger and current U.S. Senator (in that order) Elizabeth Warren. 

Bankruptcy Filings Over the Next 12 Months

Bankruptcy filings have continued to decline, and using data supplied by Epiq Systems, my analysis suggests the same trend will occur over the next twelve months.

First, looking back at March and April, bankruptcy filings declined 12.0% and 11.8% respectively on a year-over-year basis. The daily filing rate in March was just short of 4,900 and in April was 4,575.

If we extrapolate these numbers out over the rest of the year, bankruptcy filings should just barely surpass 1.0 million for calendar year 2013. If filings continue for the rest of 2013 at the same pace they have for the first four months, the number will be closer to 1.1 million, but the filing rate is typically strongest in the spring and then tapers off each year. Thus, a figure closer to 1.0 million is more likely and that rate of filing would represent an annual decline of 14% in the number of U.S. bankruptcies for the second straight year in a row.

Obama to Replace DeMarco at FHFA

with Mel Watt, according to an AP story today. Congressman Watt of North Carolina was a moving force behind Miller-Watt-Frank, the mortgage reform legislation that eventually found its way into Dodd-Frank financial reform. Given that our all-but-nationalized housing finance system is directed by this somewhat obscure agency, the occupant of this post can have a huge influence on the future direction of credit, housing and the economy.

If he is confirmed, Watt can be expected to make major changes to Fannie and Freddie policies, for example on principal write-downs and cracking down on mortgage servicer errors and abuses. Perhaps he could also begin to envision a more rational future assignment of the public and private roles in financing homes, in which public subsidy serves a public purpose and private capital carries the burden of its own credit risk.

The Stakes Of Design

That 99% invisible is a vibrant architecture and design podcast might have been beside the point in Credit Slips land -- but for the fact that its current show (Episode 78) focuses on the design and technology of casino slot machines, and the particular profitability of penny slot machines. The short piece is built on the work of M.I.T. professor and anthropologist Natasha Dow Schüll. Lots on the consumer finance and cognitive behavioral side of things; don't expect any mention of bankrupt casinos.

Slot photo courtesy of Shutterstock.

Harry's Here! -- Everyone Wants a Piece of NML's Pari Passu Pie [Updated]

Just two sunny weekend days after NML et al. filed their rejection of Argentina's offer, a new batch of defaulted bond holders have come to ask the court for their piece of Argentina's pari passu distribution. The Duane Morris Individual Plaintiffs apparently believe that

[T]he only sensible resolution is a lump-sum payment of all interest and principal that has accrued and become due and payable in eleven years to all the current holders of the holdout bonds ... . Such a payment would be directed through an order for specific performance, which this Court has endorsed as the appropriate remedial device. NML Capital Ltd., 699 F.3d at 261-262.4B. [Emphasis in the original.]

NML et al. disagree and urge the court to reject the proposed amicus brief:

[T]his Court’s March 1 Order directed Argentina to state what it is prepared to pay Appellees specifically, not what it is willing to pay adversaries in other cases.

No, they are not talking about adversaries suing Argentina for unpaid paperclips -- but other bondholders under the very same 1994 Fiscal Agency Agreement that laid the golden ratable payment egg for the plaintiffs-appellees. 

Argentina, Fintech, and two groups of restructured bond holders don't want the court to friend Duane Morris either, but there is more than a whiff of we-told-you-so in their filings:

[T]he Motion demonstrates that the present appeal does not concern “only” the $1.47 billion demanded by NML and the other plaintiffs-appellees ..., but potentially the entire amount of outstanding defaulted Republic debt subject to a pari passu clause. ... [A]cceptance of the district court’s “ratable payment” formula could open the floodgates for over $15 billion in similar pari passu claims.

In retrospect, one wonders why it took Harry as long as it did to join Tom and Dick at the pari passu party. And when will Sally, Sue and Fred wake up?

UPDATE: Things happen quickly in the pari passu world. Apparently convinced that no one wanted Duane Morris at the party, the Second Circuit denied their motion to file an amicus brief earlier today. Hat-tip to Joseph Cotterill at FTAlphaville, who posts the order here.

Qualified Residential Mortgages

The New York Times has a major article about the Qualified Residential Mortgage rulemaking under the Dodd-Frank Act. I think there's a lot of confusion about this ruling-making. I'm going to try and clarify a few things in this post.

MF Again

The MF Global trustee filed his lawsuit against Jon S. Corzine and other former MF Global executives.

But the complaint itself, while quite well done, makes for rather strange reading upon further reflection.

Adam Levitin awarded the Young Scholar's Medal of the American Law Institute

Congrats to Credit Slip’s Adam Levitin for winning a prestigious honor! Of course, this award is well deserved.

The American Law Institute announced today that Adam Levitin of Georgetown Law Center has been awarded its Young Scholar’s Medal.  ALI says that this honor is “designed to recognize early-career law professors whose work is relevant to the real world and has the potential to influence improvements in the law.”

William Treanor, Dean of Georgetown Law Center, said: "Professor Levitin's work not only has the potential to improve American law, it already has influenced improvements in law in multiple areas across the financial sector."

Justice Goodwin Liu of the California Supreme Court, who chaired the Young Scholars Medal Selection Committee, said, "Professor Levitin's work on the recent financial crisis has helped to guide lawmakers in the areas of housing finance and bank regulation."

Pay Dick, Ditch Harry: More on 'Ratable Payment' and Its Implications

Creditors owed identical amounts under identical defaulted Argentine bonds, including identical pari passu clauses, could get very different recoveries under the plaintiffs' theory of ratable payment--unless all such creditors are corralled into a mandatory class action that divvies up Argentina's surplus among them under equitable supervision of the courts.

NML et al Decline Argentina's Offer ... and Ratable, Elaborated

Surprise, surprise -- NML and colleagues would just as soon pass on Argentina's offer of 2010 restructuring terms. Plaintiffs' submission (ahead of schedule) is full of the sort of language I love to learn in this case and deploy on disobedient children: "plainly believes rule of law does not apply to it ... predictably and characteristically defiant ... fails completely ... astoundingly ... has the temerity to claim ... manifests yet again its contempt ... unyielding disregard for the law ..." All this in the first few pages of the filing.

Nothing astounding about this rejection. But one point in the filing is quite intriguing: the plaintiffs explain how one should deal with the prospect of future plaintiffs with the same rights as these coming to claim their own ratable payment, but finding the till empty:

Accordingly, the only amount Argentina would pay as a result of this Court affirming the district court’s Injunction is $1.47 billion, which is a mere fraction of what Argentina paid to the Exchange Bondholders in December 2012 alone. If holders of other defaulted indebtedness later bring equal treatment claims of their own, Argentina will have ample opportunity both to litigate the merits (taking into account any factors that may distinguish those bonds from the ones at issue here, including different contractual language and governing law) and to make a showing of financial need, based on circumstances then prevailing, for the district court to consider in shaping a remedy. [Emphasis in the original.]

In other words, if a sovereign borrower from Tom, Dick, and Harry pays Tom and is sued by Dick on the ratable payment theory, the borrower has to pay Tom and Dick ratably. If Harry happens to be asleep and forgets to sue, that is Harry's loss--especially so if by the time Harry wakes up, the borrower is out of money. There you have it, equitable debt collection outside bankruptcy.

Mortgage Settlement Checks Bounce

Remember the $3.6 billion settlement the government made with huge lenders accused of wrongful evictions and other abuses? Wronged homeowners are beginning to get their settlement checks in the mail, only to find that some of them bounce. That’s right. After more than two years of waiting for the checks, the first round of checks arrived last week, but the company chosen to distribute the checks, Rust Consulting, failed to fortify the account upon which the checks were written, Huntington National Bank in Ohio. Read the dealbook story by Jessica Silver-Greenberg and Ben Protess here.

Trivia Time: Bankruptcy Lawyers in the Senate

I always figured that Elizabeth Warren was the first bankruptcy lawyer to serve in the Senate.  Turns out that there's at least one other.  (I'm not counting Senators who have served as Chapter 7 trustees.) Anyone know who? Answer under the break.