8 posts from January 2018

House Financial Services Fintech Hearing

posted by Adam Levitin

This Tuesday I'm going to be testifying about "fintechs" before the House Financial Services Committee's Subcommittee on Financial Institutions and Consumer Credit.  My written testimony on this impossibly broad topic is here.  It contains lots of good stuff on the so-called Madden Fix bill, "true lender" legislation, data portability, federal money transmitter licensing, small business data collection, and the need for a general federal ability-to-repay rule.    

The Pari Passu Strategy in Venezuela

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

Should Venezuela worry that holdout creditors will use the strategy that NML Capital and other holdouts successfully used against Argentina? In this article, The Pari Passu Fallacy—Requiescat in Pace, Lee Buchheit and Andrés de la Cruz at Cleary Gottlieb argue not. Lee in particular has made no secret of his distaste for the “ratable payment” interpretation of the pari passu clause. (As many readers know, he is also Mitu’s longtime collaborator.) When interpreted to require ratable payments, the pari passu clause requires a government to pay holdouts in full if it intends to pay restructuring participants in accordance with the terms of their debt instruments. In Argentina’s case, the injunction resulted in another massive default, as the government refused to pay holdouts but could not find a way around the injunction.

Lee and Andrés argue that NML’s pari passu strategy was essentially killed by the person who gave it life, the late Judge Griesa. To oversimplify a bit, the judge’s initial decision--and a decision years before in Brussels in a case involving Peru and Elliott Associates--strongly implied that selective nonpayment is enough to violate the pari passu clause. That is, a government violates the clause simply by paying some equally-ranked creditors but not others. And, crucially, he remedied this breach by issuing an injunction barring everyone with any connection to the United States from cooperating in the continuing violation of the pari passu clause. Without that remedy, Argentina would simply have defied his ruling and continued to stiff holdout creditors.

Continue reading "The Pari Passu Strategy in Venezuela" »

Student loans - the other debt crisis

posted by Alan White
Screen Shot 2018-01-26 at 11.21.36 AM
Brookings Institute 2018

In a low unemployment economy, an entire generation is struggling, and millions are failing, to repay student loan debt. As many as 40% of ALL borrowers recently graduating are likely to default over the life of their student loans, according to a recent Brookings Institute analysis. Total outstanding student loan debt is approaching 1.5 trillion dollars, exceeding credit card debt, exceeding auto loan debt. Two other key points from the Brookings analysis: 1) for-profit schools remain the primary driver of high student loan defaults, and 2) black college graduates default at five times the rate of white college graduates, due to persistent unemployment, higher use of for-profit colleges and lower parental income and assets.

The rising delinquency (11% currently) and lifetime default rates are all the more disturbing given that federal student loan rules, in theory, permit all borrowers to repay based on a percentage of their income. Most student loans are funded by the U.S. Treasury, but administered by private contractors: student loan servicers. Study after study has found that student loan borrowers are systematically assigned to inappropriate payment plans,  yet the U.S. Education Department continues renewing contracts with these failing servicers. The weird public-private partnership Congress has created and tinkered with since the 1965 Higher Education Act is broken.

Unmanageable student loan debt will saddle a generation of students with burdens that will slow or halt them on the path to prosperity. Student loan collectors have supercreditor powers, to garnish wages and seize tax refunds without going to court, to charge collection fees up to 40%, to deny graduates access to transcripts and job licenses, and to keep pursuing debts, zombie-like, even after borrowers go through bankruptcy and discharge other debts. Recent graduates cannot get mortgages to buy homes, even if they are not in default, because their student loan payments are taking such a bite out of their monthly incomes. State legislatures have piled on educational requirements for a variety of entry-level jobs (nurse's aides, child care workers, teachers, etc.) while cutting state funding for public colleges and increasing tuition: unfunded job mandates. Finally, the combination of high debt and the harsh consequences of default are widening the racial wealth and income gaps.

Current reform proposals would make a bad situation worse. For example, it is difficult to see how increasing the percentage of income required for income-based repayment plans will help student borrowers, nor how extending the repayment period before loan retirement would reduce defaults. What is needed instead is to 1) deal with the for-profit school problem, 2) restore the state-level commitment to funding public colleges, 3) fix the broken federal student loan servicer contracting, 4) rethink the collection and bankruptcy regime for student loans and 5) repeal the student loan tax, i.e. the above-cost interest rates college graduates pay to the Treasury. Among other things. More on these themes in later posts.

An Update on the Lerrick Nomination

posted by Mitu Gulati

Among the multiple offline comments that I received on our post yesterday was a piece of information updating us on the Lerrick nomination and the drama with the Irish SPV that held Argentine debt (the one where a local children's charity was a trustee).  Two sources emailed to say that that the Irish SPV issue may be a thing of the past given that folks have discovered that the US Exim Bank has used the identical structure for virtually every major aircraft financing over the last 25 years (apparently this is publicly available information). 

This is not to say that the nomination is now going to sail through.  New drama can always show up (daily drama seems to be the defining characteristic of this administration).

Venezuela Errata: Airline Deposits and Administration Posts

posted by Mark Weidemaier

By Mitu Gulati and Mark Weidemaier

The new semester has begun, and we are excited about the International Debt class we teach together, with students from both UNC and Duke thinking about the Venezuelan debt crisis. Their first task—and ours—is figuring out how much Venezuela owes, to whom, and under what contract terms. This year, we have been especially unreasonable, asking students, in just a few weeks, to find, read, and code all relevant contract terms for the entire unmatured bond debt of Venezuela and PDVSA. And the bond debt is only part of the story. For instance, another category of debt, which we haven’t encountered before, consists of local currency (bolivar) bank deposits of international airlines that fly routes to and from Venezuela, which the airlines are not-so-patiently waiting to convert into other currencies.

Continue reading "Venezuela Errata: Airline Deposits and Administration Posts" »

Aurelius Seeks a Do-Over; Puerto Rico and the Appointments Clause Litigation

posted by Melissa Jacoby

The lives of Puerto Rico residents remain profoundly disrupted by the aftermath of Hurricane Maria measured by metrics such as electricity, clean water, and health care access, with death tolls mounting. This week, though, in a federal court hearing on January 10, 2018, Puerto Rico has the extra burden of confronting Hurricane Aurelius.

Continue reading "Aurelius Seeks a Do-Over; Puerto Rico and the Appointments Clause Litigation" »

The Hausmann Addendum to the Roosevelt Corollary to the Monroe Doctrine

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

Ricardo Hausmann, Harvard economist and former Venezuelan Planning Minister, has been a thorn in the side of the Maduro administration. His blog posts at Project Syndicate condemning the Maduro administration’s continued payment of bondholders while the people of Venezuela starve may well have deterred new lending to the regime. Among other things, Hausmann-induced opprobrium at Goldman Sachs’s infamous "hunger bond"—now trading at a deep discount--has scared many in the market. For more background, check out Cardiff Garcia’s FT podcast interview with Hausmann.

Hausmann’s latest Project Syndicate post goes well beyond complaining about the ethics of Wall Street bond investors. Hausmann first sets out his view of the political realities, in which Maduro’s manipulation of elections and co-option of the military negate any realistic chance for the political opposition to overthrow the regime, notwithstanding U.S. economic sanctions. Given the severe humanitarian crisis, astonishing depletion of national wealth, rampant inflation, widespread corruption, and other harms inflicted or exacerbated by the Maduro regime, Hausmann advocates military action by the United States and like-minded nations. The other nations presumably include countries like Peru, Colombia, Honduras, Argentina, and Chile, all signatories to the Lima declaration condemning the Maduro regime. 

Continue reading "The Hausmann Addendum to the Roosevelt Corollary to the Monroe Doctrine" »

Implications of the Third Circuit’s Crystallex Decision

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

On Wednesday, the Third Circuit granted Venezuela a victory in its ongoing settled-but-not-settled litigation with Crystallex. The case deals with a limited issue: Whether Delaware law imposes liability for the fraudulent transfer of an asset on an entity that is not itself a debtor.  We want to use this post to speculate a bit about the implications the decision may have for the bigger Venezuelan debt drama. If the new decision is important, it is because it signals something about the receptivity of US courts toward claims that Venezuela, PDVSA, and perhaps US entities like CITGO are “alter egos.” We disagree a bit about that question. But first, some background on this aspect of the Crystallex case.

Continue reading "Implications of the Third Circuit’s Crystallex Decision" »

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