26 posts from February 2018

Education Department Request for Information on Student Loan Discharge in Bankruptcy

posted by Pamela Foohey

Following up on Alan White's post from this morning about the Education Department's draft notice about debt collection laws applicable to student loan debt collectors that prompted a Twitter moment, some more student loan news from the Education Department. Last week, it posted a less Twitter-popular request for information on evaluating undue hardship claims in adversary proceedings seeking discharge of student loan debt. The summary in the request:

"The U.S. Department of Education (Department) seeks to ensure that the congressional mandate to except student loans from bankruptcy discharge except in cases of undue hardship is appropriately implemented while also ensuring that borrowers for whom repayment of their student loans would be an undue hardship are not inadvertently discouraged from filing an adversary proceeding in their bankruptcy case. Accordingly, the Department is requesting public comment on factors to be considered in evaluating undue hardship claims asserted by student loan borrowers in adversary proceedings filed in bankruptcy cases, the weight to be given to such factors, whether the existence of two tests for evaluation of undue hardship claims results in inequities among borrowers seeking undue hardship discharge, and how all of these, and potentially additional, considerations should weigh into whether an undue hardship claim should be conceded by the loan holder."

Responses must be received by May 22, 2018.

Why Not Accelerate and Sue Venezuela Now?

posted by Mark Weidemaier

Mark Weidemaier and Mitu Gulati

People have been asking for months when investors will accelerate PDVSA and Venezuela bonds that have fallen into default. Rumor has it that some investors have already done so. But there seems to be a consensus that investors aren't in a hurry. U.S. sanctions prohibit a debt restructuring, and few investors are eager for the legal battle that would follow acceleration. But we’re wondering if this view misses something important and unique to the Venezuelan crisis. It seems to us that investors who file suit may be able to negate most of the Republic's and PDVSA's restructuring tools, significantly enhancing leverage when a restructuring finally does occur and making it easier to hold out. So we’re a bit puzzled why some of the more aggressive investors aren’t already rushing to get judgments.

Continue reading "Why Not Accelerate and Sue Venezuela Now?" »

Preempting the states: US Ed to shield debt collectors from consumer protection

posted by Alan White

As if the power to garnish wages without going to court, seize federal income tax refunds and charge 25% collection fees weren't enough, debt collectors have now persuaded the Education Department to free them from state consumer protection laws when they collect defaulted student loans. Bloomberg News reports that a draft US Ed federal register notice announces the Department's new view that federal law preempts state debt collection laws and state enforcement against student loan collectors. This move is a  reversal of prior US Ed policy promoting student loan borrower's rights and pledging to "work with federal and state law enforcement agencies and regulators" to that end, as reflected in the 2016 Mitchell memo and the Department's collaboration with the CFPB.

Customer service and consumer protection will now take a back seat to crony profiteering by US Ed contractors. This news item has prompted a twitter moment.

Merit Mgmt. Group LP v. FTI Consulting Inc.

posted by Adam Levitin

The Supreme Court weighed in today on one of the the most important circuit splits in the bankruptcy world, namely the scope of one of the section 546(e) safe harbors from avoidance actions in bankruptcy.  Section 546(e) has two safe harbors, one for "settlement payments" and the other for transfers "made by or to (or for the benefit of) a ... financial institution ... in connection with a securities contract … commodity contract… or forward contract…”. This latter safe harbor had been read (ridiculously) broadly by some of the courts of appeals, as every non-cash transaction has to go through some sort of financial institution.  Specifically, imagine a transaction in which funds are moving from A to D, but go through intermediary financial institutions B and C:  A-->B-->C-->D.  Can D shelter in the fact that the transfer went through financial institutions B and C?  

The Supreme Court unanimously said no, and I think they clearly got the right result, although I fear the methodology the court used may ultimately be unhelpful for those who think that fraudulent transfer law has an important role to play in policing the fairness of financial markets and preventing against excessively risky heads-I-win, tails-you-lose gambles.  

Continue reading "Merit Mgmt. Group LP v. FTI Consulting Inc." »

Seventh Circuit Victorious Again in Merit Mgmt

posted by Jason Kilborn

If you're challenging a Seventh Circuit ruling in a bankruptcy case on appeal to the Supreme Court, especially if (retired) Judge Posner was in the majority, you've got a challenge ahead. The Court's announcement this morning of its judgment in Merit Management Group v. FTI Consulting demonstrates this yet again. Long story short: paying for stock via a bank transfer (rather than a bag of money) is still a transfer from the buyer to the seller, not the buyer's and seller's banks, and therefore not "by or to ... a financial institution." That is, such transfers are not protected by the securities safe harbor provision in section 546(e) and are subject to avoidance as constructive fraudulent conveyances and/or preferences. The seeming silver-bullet arguments to the contrary in this battle of "plain meanings" apparently remained unarticulated and unavailing (see footnote 2 in the Court's opinion, suggesting someone up there might be reading CreditSlips!). Other big winners in addition to the Illinois-based Seventh Circuit are University of Illinois College of Law professors Charles Tabb and Ralph Brubaker, both of whom are cited prominently and approvingly in the opinion. Congratulations, Illinois!

The Student Loan Sweatbox

posted by Alan White

Studentloandebtballchain Student loan debt is growing more rapidly than borrower income.  The similarity to the trend in home loan debt leading to the subprime mortgage bubble has been widely noted. Student loan debt in 1990 represented about 30% of a college graduate’s annual earnings; student debt will surpass 100% of a graduate’s annual earnings by 2023.  Total student loan debt also reflects more students going to college, which is a good thing, but the per-borrower debt is on an unsustainable path. Unlike the subprime mortgage bubble, the student loan bubble will not explode and drag down the bond market, banks and other financial institutions. This is because 1) a 100% taxpayer bailout is built into the student loan funding system and 2) defaults do not lead to massive losses. Instead, this generation of students will pay a steadily increasing tax on their incomes, putting a permanent drag on home and car buying and economic growth generally. Student loan defaults do not result in home foreclosures and distressed asset sales. They result in wage garnishments, tax refund intercepts and refinancing via consolidation loans, and mounting federal budget outlays. In many cases, borrowers in default repay the original debt, interest at above-market rates, and 25% collection fees. In other words, defaulting student loan borrowers will remain in a sweatbox for most of their working lives. Proposals to cut back on income-driven repayment options will only aggravate the burden, further shifting responsibility for funding education from taxpayers to a generation of students.

Continue reading "The Student Loan Sweatbox" »

Central Bank Immunity - Don't Miss

posted by Anna Gelpern

This is an important intervention about a massively important topic that comes up over and over again in sovereign restructurings, and will come up in more and more interesting ways in the next few years.

Short version here.

New Saudi Bankruptcy Law ... A Boon for SMEs?!

posted by Jason Kilborn

Saudi Arabia's King Salman has approved a new bankruptcy law. {Download Saudi BK final 2-2018} Commentators have heralded this new law as a boost to economic reforms, in particular to the SME sector, but I have some serious doubts about this. A member of the Shura Council, the King's advisory body, is quoted in one report as explaining "[t]he idea is to simplify and institutionalise the process of going out of business so new organisations can come in." That latter part--new businesses coming in--requires individual entrepreneurs, either the one whose business just failed or new ones, to embrace the major risks of starting a new venture. In either event, a crucial aspect of an effective SME insolvency law, and I would argue THE most crucial aspect, is a fresh start for the failed entrepreneur (and a promise of such a fresh start for potential entrepreneurs). This fresh start is promised and delivered most effectively by provision conferring a discharge of unpaid debt. The new Saudi law all but lacks this key provision. Article 125 on the bottom of page 50 is quite clear about this: "The debtor's liability is not discharged ... for remaining debts other than by a special or general release from the creditors." It seems highly unlikely to me that creditors will offer such releases with any frequency. Yes, the new law provides a useful framework for negotiating restructuring plans, and the Kingdom deserves praise and respect for finally adopting such a measure. But the lack of a law- imposed discharge following liquidation when creditors are not willing to agree is not a foundation for a thriving SME recovery (though I understand and respect the reason why the Saudi law lacks an imposed discharge). Most SMEs are not enterprises--they are entrepreneurs; they are people, not businesses. Leaving these people to bear the continuing burden of unpaid debt does not, in my mind, reinvigorate failed entrepreneurship or entice others to join the movement. I'm afraid the effects on the SME sector of this law will be muted at best. I hope I'm wrong. 

How S.2155 (the Bank Lobbyist Act) Facilitates Discriminatory Lending

posted by Adam Levitin

If you think it's ridiculous that the CDC can't gather data on gun violence, consider the financial regulatory world's equivalent:  S.2155, formally known as the Economic Growth, Regulatory Relief, and Consumer Protection Act, but better (and properly) known as the Bank Lobbyist Act.  S.2155 is going to facilitate discriminatory lending. Let me say that again.  S.2155 is legislation that will facilitate discriminatory lending. This bill functionally exempts 85% of US banks and credit unions from fair lending laws in the mortgage market.  Support for this bill should be a real mark of shame for its sponsors. 

Continue reading "How S.2155 (the Bank Lobbyist Act) Facilitates Discriminatory Lending" »

Bankruptcy Venue Reform -- Yes, Again, But Maybe This Is the Time?

posted by Bob Lawless

As many Credit Slips readers will know, chapter 11 venue reform has been an issue for decades. As corporate filers have flocked to the Southern District of New York and the District of Delaware, the real reason some observers say is that these courts favor corporate managers, dominant secured lenders, bankruptcy attorneys, or a combination of all of them. Regardless of the merits of these claims, it certainly undermines respect for the rule of law when faraway federal courts decide issues affecting local interests. A great example comes from right here in Champaign, Illinois, where local company Hobbico has recently filed chapter 11. The company, a large distributor of radio-control models and other hobby products, has more than $100 million in debt. The company has over 300 employees in the Champaign area who own the company through an employee stock ownership plan. Yet, the company's fortunes are now in the hands of a Delaware bankruptcy court.

Continue reading "Bankruptcy Venue Reform -- Yes, Again, But Maybe This Is the Time?" »

People’s Pre-Bankruptcy Struggles -- New Paper from the Consumer Bankruptcy Project

posted by Pamela Foohey

The current Consumer Bankruptcy Project (CBP)’s co-investigators (myself, Slipster Bob Lawless, and past Slipsters Katie Porter & Debb Thorne) just posted to SSRN our new article (forthcoming in Notre Dame Law Review), Life in the Sweatbox. “Sweatbox” refers to the financial sweatbox—the time before people file bankruptcy, which is when they often are on the brink of defaulting on their debts and lenders can charge high interest and fees. In the article, we focus on debtors’ descriptions of their time in the sweatbox.

Based on CBP data, we find that people are living longer in the sweatbox before filing bankruptcy than they have in the past. Two-thirds of people who file bankruptcy reported struggling with their debts for two or more years before filing. One-third of people reported struggling for more than five years, double the frequency from the CBP’s survey of people who filed bankruptcy in 2007. For those people who struggle for more than two years before filing—the “long strugglers”—we find that their time in the sweatbox is marked by persistent debt collection calls, the loss of homes and other property, and going without healthcare, food, and utilities. And although long strugglers do not file bankruptcy until long after the benefits outweigh the costs, they still report being ashamed of needing to file.

Continue reading "People’s Pre-Bankruptcy Struggles -- New Paper from the Consumer Bankruptcy Project" »

Other (Non-Religious) Non-Profit Organizations Also File Bankruptcy

posted by Pamela Foohey


NumberNRYesterday I posted about the number of religious organizations that filed chapter 11 between 2006 and 2017, and how their filings track fluctuations in consumer bankruptcy filings during those years. Non-religious non-profit organizations also file chapter 11, but in fewer numbers than religious organizations. As shown in this graph, between 2006 and 2017, a mean of 44 other non-profits filed chapter 11 per year (note: I count jointly-administered cases as one case).

 In comparison, a mean of 79 religious organizations filed chapter 11 per year between 2006 and 2017. Over these twelve years, 36% of all chapter 11 cases filed by non-profit organizations were filed by non-religious non-profits.

Continue reading "Other (Non-Religious) Non-Profit Organizations Also File Bankruptcy" »

Churches Are Still Filing Bankruptcy

posted by Pamela Foohey

Not only are religious organizations still filing under chapter 11. As in prior years, they continue to file under chapter 11 in line with fluctuations in consumer bankruptcy filings. Find a couple graphs below to show this. But first, some background.

In my prior work, I analyzed all the chapter 11 cases filed by religious organizations from the beginning of 2006 through the end of 2013. (I define any organization with operations primarily motivated by faith-based principles as religious.) I found that these chapter 11 cases were filed predominately by small, non-denominational Christian churches, which mainly were black churches (80% of more of their members are black). And, also, that the timing of the filings tracked consumer bankruptcy cases (chapters 7, 11, and 13), not business bankruptcy filings, but lagged by one year. That is, if consumer bankruptcy filings decreased in a given year, religious organizations' chapter 11 filings decreased in the next year. I linked this result to how religious organizations' leaders came to think about using bankruptcy to deal with their organizations' financial problems.

NumbersSince my original data collection, four years has passed. I thus recently identified all the religious organizations that filed under chapter 11 between the beginning of 2014 through the end of 2017. During these four years, religious organizations continued to file, but in smaller numbers per year, as shown in this graph (note: I count jointly-administered cases as one case).

Continue reading "Churches Are Still Filing Bankruptcy" »

Strip, Swap, Restructure

posted by Mark Weidemaier

Mitu and I have been posting jointly of late about restructuring options for PDVSA and Venezuela. Alas, I’ll have to write this one myself, because it’s time to talk about an idea that Mitu and Lee Buchheit have proffered for restructuring much of PDVSA’s debt. Their proposal has important similarities to one by Adam Lerrick (also described briefly here and in more detail in the Financial Times), so I’ll cover both.

Both proposals are laudably clear-eyed about some fundamental aspects of the Venezuelan debt crisis. First, if it ever made sense to view PDVSA and the Republic as separate credits, that time is long past. Second, for a restructuring plan to be feasible, it must simplify an enormously complicated debt stock and encompass more than bond creditors. Thus, while neither creates a mechanism for encompassing all of PDVSA’s liabilities, both the Lerrick and Buchheit/Gulati proposals envision a restructuring of both bond debt and the pesky promissory notes that PDVSA has issued to trade creditors. The latter instruments are especially problematic from a restructuring perspective, because they lack contract-based mechanisms for modifying their terms. Finally, both proposals recognize that something must be done to protect oil-related assets, including future receivables, from holdouts.

These shared assumptions result in similar proposals. The difference is in the details, which turn out to be important. Let’s call the Lerrick proposal Strip, Swap, Restructure.

Continue reading "Strip, Swap, Restructure" »

Wacky Warehouse Lien Scam

posted by Adam Levitin

The US Trustee's office just prevailed in a sanctions case against a law firm with a most creative fee scam.  To oversimplify (and leave out certain other issues of bad behavior), the law firm steered debtors who owned cars in which they had zero equity into an arrangement in which the debtor's car would be towed for an (unpaid) fee by an affiliated firm and then stored in Indiana. The existing auto lender would never be notified of any of this. The affiliate would then assert a warehouseman's lien for the unpaid fee and foreclose on the car, and use the sale proceeds to pay back the fee and pay the debtor's bankruptcy filing fee to the law firm, with the auto lender getting nothing. 

Continue reading "Wacky Warehouse Lien Scam" »

Financial Education Isn't Consumer Protection

posted by Adam Levitin

The CFPB is out with its Strategic Plan for FY 2018-2022, also known (without any apparent irony) as The Five Year Plan.  Lots to chew on in this doozy, starting with this:

If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further. Indeed, this should be an ironclad promise for any federal agency; pushing the envelope in pursuit of other objectives ignores the will of the American people, as established in law by their representatives in Congress and the White House. Pushing the envelope also risks trampling upon the liberties of our citizens, or interfering with the sovereignty or autonomy of the states or Indian tribes.

I've written about envelope pushing and Mick-Mulvaney-Think previously, but there's two new things here.  First there's the claim that going beyond the Bureau's statutory responsibilities violates the will of Congress.  (Note the unusual addition of "the White House" to the formulation.)  Narrowly that's uncontroversial, but the way Mulvaney-Think approaches the Bureau's statutory responsibilities, if there isn't a statutory clearly and directly prohibiting something, then there's no prohibition. Standards-based regulation is gone, even if that is exactly what Congress (and the White House when the bill was signed into law) demanded.

Second, there is a curious solicitousness for the rights of states and Indian tribes.  The CFPB has never previously been accused of trampling the rights of states, but the inclusion of states is all the more confusing given the Bureau's newfound commitment to protecting the sovereignty of Indian tribes. The only relevance of Indian tribes to the CFPB is that a few of them partner with "fintechs" in rent-a-tribe schemes to avoid state regulation, particularly state usury laws. It would seem that upholding state sovereignty and rights would require cracking down on rent-a-tribe schemes; the idea that a tribe has immunity for commercial activities extending outside of tribal lands is clearly wrong--were it so all of federal law could be subverted. It looks like someone forgot to remove the "states rights" talking point from the usual GOP talking points deck because someone didn't realize that it conflicts with the new tribal rights talking point.  Oops.  

But let's turn the the actual plan itself, not just the opening rhetoric. I'm only going to focus here on item number 1:  more financial education. This might qualify as Worst. Consumer. Protection. Idea. Ever. 

Continue reading "Financial Education Isn't Consumer Protection" »

Letting the Money Changers Back in the Temple

posted by Alan White

Screen Shot 2018-02-12 at 2.36.55 PMGolden Valley Lending, Inc. is a payday lender that charges 900% interest on consumer loans sold over the internet. Golden Valley relies on the dubious legal dodge of setting up shop on an Indian reservation and electing tribal law in its contracts to evade state usury laws. In April 2017 the Consumer Financial Protection Bureau filed an enforcement action asserting that Golden Valley and three other lenders were engaged in unfair debt collection practices because they violated state usury laws, and also failed to disclose the effective interest rates, violating the federal Truth in Lending law (enacted in 1969).  Screen Shot 2018-02-12 at 2.35.39 PM

 Mick Mulvaney, President Trump’s interim appointee to direct the CFPB, has now undone years of enforcement staff work by ordering that the enforcement action be dropped.  The advocacy group Allied Progress offers a summary of Mulvaney’s special interest in protecting payday lenders, in South Carolina and in Congress, and the campaign contributions with which the payday lenders have rewarded him.

 

 

Catch Veinte Dos

posted by Mitu Gulati

A few days ago, Mark and I put up a post on the possibilities of using Chapter 15 bankruptcy for Venezuela's state-owned company, PDVSA.  In response, we received a number of terrific comments, both via email and in the comments section.

One of the particularly interesting points that was made to us (both in email and in one of the comments), that we had not raised was the following: 

PDVSA is not just a Venezuelan company; it is the Venezuelan company -- the company responsible for generating 95% of the foreign currency earnings of the entire country.  Placing the fate of PDVSA into the hands of a bankruptcy judge poses an existential risk to the economy and to the government as the sole owner of the company unless, of course, the government can control the outcome of the insolvency proceeding.  But insolvency proceedings in which the equity owner of the bankrupt enterprise can control the outcome are not proceedings likely to be recognized or enforced by foreign courts.

Catch Veinte Dos?

The foregoing also brings up a slightly different question that Bob Rasmussen asked when he was visiting us last week, which was whether the bankruptcy proceeding could be conducted in a manner such that the 100% equity holder (who would normally have to turn over control to the debt holders in an insolvency) could retain all or almost all of the equity.  After all, it does seem clear that Venezuela is not going to accept giving up full control of PDVSA.  Bob did have some very interesting thoughts as to how this might be done in a purely domestic context.  The question that remained though was whether something similar could be engineered for the foreign state-owned company context that wasn't going to give up any control of the process.  But more on this later

 

Trump’s “Draining the Swamp” Scorecard: One Year In

posted by Mitu Gulati

Donald Trump came into office promising, among other things, to “drain the swamp” and get rid of all that corruption.  One year in, how are things looking in terms of swamp draining? 

The following is based on work with my super co author, Stephen Choi, of NYU Law School.

To answer (at least partially) the question posed at the start, we have analyzed data on Securities and Exchange Commission (SEC) enforcement actions under the Foreign Corrupt Practices Act – the primary U.S. statute that gets at, among other things, bribes to influence foreign officials with payments or rewards. 

We report data that compares SEC enforcement actions against public companies and subsidiaries of public companies under the FCPA from both the final year of the Obama administration and the first year of the Trump administration. We focus on public companies and subsidiaries of public companies because these are the larger economic actors that affect the economy. The Department of Justice also has authority to bring actions, but there were 0 actions brought by the DOJ against public companies and subsidiaries of public companies during the period we examined (although the DOJ has brought several actions against non-U.S. reporting issuers including a number of prominent foreign companies).

Image1

Figure I, we think, speaks for itself. On the graph, actions brought during the Trump months (from January 20, 2017 to January 31, 2018—roughly Trump’s first year) are in red, those during the Obama months (January 1, 2016 to January 19, 2017) are in blue. As compared to SEC enforcement activity under the Obama administration, the SEC under the Trump administration, appears to have taken a pause from FCPA swamp cleaning activities. For those who saw our report on partial year information (up to the end of September 2017) here, some months ago – the story has only become clearer with the passage of more time).  

The data is from the Securities Enforcement Empirical Database (SEED),a collaboration between NYU and Cornerstone Research.  It tracks SEC FCPA actions from January 1, 2016 to January 31, 2018. SEED defines a public company as a company with stock that trades on the NYSE, NYSE MKT LLC, NASDAQ, or NYSE Arca stock exchanges at the start date of the SEC enforcement action (note that this includes both U.S. incorporated and foreign incorporated companies). 

There, of course, are caveats as to what else might be going on.

Continue reading "Trump’s “Draining the Swamp” Scorecard: One Year In" »

Student loans - the debt collector contracts

posted by Alan White

Twelve senators have just written EWKHto Education Secretary Betsy DeVos questioning why the Education Department continues to award lucrative contracts to debt collection firms, and criticizing the seriously misaligned incentives embedded in those contracts.

While most federal student loan borrowers deal with loan servicing companies like PHEAA, Navient and Nelnet, defaulting borrowers in an unlucky but sizeable minority (roughly 6.5 million) have their loans assigned to debt collectors like Collecto, Inc., Pioneer Credit Recovery, and Immediate Credit Recovery Inc. Borrowers assigned to collection firms immediately face collection fees of 25% added on to their outstanding debt. The collection firms harvest hundreds of millions of dollars in fees, mostly from federal wage garnishments, tax refund intercepts, and new consolidation loans borrowers take out to pay off old defaulted loans. Wage garnishments and tax refund intercepts are simply involuntary forms of income-based repayment, programs that could be administered by servicers without adding massive collection fees to student debt. Similarly, guiding defaulted borrowers to consolidation loans, and putting them into income-driven repayment plans, are services that servicing contractors can and do provide, at much lower cost. In short, the debt collector contracts are bad deals for student loan borrowers and bad deals for taxpayers.

 According to a Washington Post story, one of the collection firms to be awarded a contract this year had financial ties to Secretary DeVos, although she has since divested those ties. In other news, the current administration apparently reinstated two collection firms fired under the prior administration for misinforming borrowers about their rights. More in-depth analysis of the collection agency contract issue by Center for American Progress here.

PDVSA's Debt Restructuring: The Chapter 15 Option

posted by Mark Weidemaier

Mitu Gulati and Mark Weidemaier

This past week, Bob Rasmussen of USC Law gave a talk at Duke on “Puerto Rico and the Netherworld of Sovereign Debt Restructuring.” Luckily for us, he also took a detour to UNC to talk to our International Debt students about whether PDVSA might use Chapter 15 of the Bankruptcy Code to restructure its debts. Our foil for that discussion was a recent paper by Rich Cooper (Cleary Gottlieb) and Mark Walker (Millstein & Co.) proposing Chapter 15 as a possible solution to PDVSA’s woes. This is one of a number of extant restructuring proposals for Venezuela and PDVSA; Lee Buchheit (working with Mitu) has published several others (here, here, and here). The Cooper and Walker proposal is the only one to explore the Chapter 15 possibility in detail, and it thoughtfully makes the case for that restructuring option. In very condensed form, the proposal is for Venezuela to pass a new bankruptcy law governing PDVSA and other public sector entities, for PDVSA to restructure its debts using that process, and then for PDVSA to ask courts in the U.S. to recognize that bankruptcy under Chapter 15.

Continue reading "PDVSA's Debt Restructuring: The Chapter 15 Option" »

Bankruptcy's Lorelei: The Dangerous Allure of Financial Institution Bankruptcy

posted by Adam Levitin

I have a new (short!) paper out, Bankruptcy's Lorelei:  The Dangerous Allure of Financial Institution BankruptcyThe paper, which builds off of some Congressional testimony from 2015, makes the case that proposals for resolving large, systemically important financial institutions in bankruptcy are wrongheaded and ultimately dangerous. At best they will undermine the legitimacy of the bankruptcy process, and at worst they will result in crash-and-burn bankruptcies that exacerbate financial crises, rather than containing them.  The abstract is below.

The idea of a bankruptcy procedure for large, systemically important financial institutions exercises an irresistible draw for some policymakers and academics. Financial institution bankruptcy promises to be a transparent, law- based process in which resolution of failed financial institutions is navigated in the courts. Financial institutions bankruptcy presents itself as the antithesis of an arbitrary and discretionary bailout regime. It promises to eliminate the moral hazard of too-big-to-fail by ensuring that creditors will incur losses, rather than being bailed out. Financial institutions bankruptcy holds out the possibility of market discipline instead of an extensive bureaucratic regulatory system.

This Essay argues that financial institution bankruptcy is a dangerous siren song that lures with false promises. Instead of instilling market discipline and avoiding the favoritism of bailouts, financial institution bankruptcy is likely to simply result in bailouts in bankruptcy garb. It would encourage bank deregulation without the elimination of moral hazard that produces financial crises. A successful bankruptcy is not possible for a large financial institution absent massive financing for operations while in bankruptcy, and that financing can only reliably be obtained on short notice and in distressed credit markets from one source: the United States government. Government financing of a bankruptcy will inevitably come with strings attached, including favorable treatment for certain creditor groups, resulting in bankruptcies that resemble those of Chrysler and General Motors, which are much decried by proponents of financial institution bankruptcy as having been disguised bailouts.

The central flaw with the idea of financial institutions bankruptcy is that it fails to address the political nature of systemic risk. What makes a financial crisis systemically important is whether its social costs are politically acceptable. When they are not, bailouts will occur in some form; crisis containment inevitably trumps rule of law. Resolution of systemic risk is a political question, and its weight will warp the judicial process. Financial institutions bankruptcy will merely produce bailouts in the guise of bankruptcy while undermining judicial legitimacy and the rule of law.

English v. Trump Amicus Brief

posted by Adam Levitin

Slipsters/Slips Guest Bloggers Kathleen Engel, Dalié Jiménez, Patricia McCoy and I submitted an amicus brief (with numerous other co-signors) to the DC Circuit in support of appellant Leandra English in English v. Trump, which, despite its caption is not about assault and battery, but about who is the rightful acting Director of the CFPB.  We believe that the text, legislative history, and order of enactment of the relevant statutes makes clear that the Consumer Financial Protection Act, not the Federal Vacancies Act control.  We further argue that there are particular problems with the OMB Director serving as the acting Director of the CFPB given that OMB has certain oversight roles vis-à-vis CFPB, but is also in other case specifically precluded from exercising control over CFPB.  

The Bootstrap Trap

posted by Adam Levitin

I just had the pleasure of reading Duke Law Professor Sara Sternberg Greene's paper The Bootstrap Trap.  I highly recommend it for anyone who is interested in the intersection of consumer credit and poverty law.  The paper is chok full of good insights about the problems that arise when low-income households strive for the goal of self-sufficiency, which results in the replacement of a public welfare safety net with what Professor Sternberg Green describes as a private one of credit reporting and scoring systems.  The paper shows off Professor Sternberg Greene's training in sociology with some amazing interviews, particularly about the perceived importance of credit scores in low-income consumers' lives.  

Other respondents referred to their credit reports or scores as “the most important thing in my life, right now, well besides my babies,” as “that darned thing that is destroying my life,” and as “my ticket to good neighborhoods and good schools for my kids.” Many respondents believed that a “good” credit score was the key to financial stability.

One respondent, Maria, told a story about a friend who was able to improve his score. She said, “He figured out some way to get it up. Way up. I wish I knew what he did there, because I would do it. Because after that, everything was easy as pie for him. Got himself a better job, a better place to live, everything better.” Maria went to great lengths to try to improve her score so that she, too, could live a life where everything was “easy as pie.”

Credit scores have become a metric of self worth and the perceived key to success.  

Continue reading "The Bootstrap Trap" »

Mick-Mulvaney-Think

posted by Adam Levitin

A couple of weeks ago there appeared a remarkable memo written by Mick Mulvaney (who claims to be the Acting Director of the CFPB) to the CFPB staff. The Financial Institutions practice group at Davis Polk, one of the top financial institution practices nationwide, seems to have elevated the ideas expressed in the memo into what one might call “Mick-Mulvaney-Think.”

The basic idea behind Mick-Mulvaney-Think is “a deep commitment to the rule of law as a philosophical concept and as an important brake on agency discretion in the administrative state.” In other words, agencies should not undertake any discretionary actions, but only enforce clear violations of express statutory prohibitions. There are two problems with this idea.

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Jayfest and Bankruptcy Cases in the Supreme Court

posted by Jason Kilborn

Most of us Credit Slipsters enjoyed an absolutely fabulous symposium over the weekend celebrating the illustrious career of one of our own, Jay Westbrook. The Texas Law Review will publish a selection of several of the papers presented at the symposium (and TLR editors pulled off an amazing feat of organization in coordinating the travel and other logistics for this major event--kudos to them). All of the presentations were cutting-edge and extremely impressive, and many are available on the SSRN profiles of the authors listed in the symposium program. I want to highlight just one that I thought would be of particularly broad interest to Credit Slips readers.

The always impressive Ronald Mann described his recently released book, Bankruptcy and the U.S. Supreme Court. In his characteristically insightful and probing way, Mann looks into the private papers of the Justices for evidence of how and why they decide bankruptcy cases as they do. In his fascinating presentation at the symposium, he challenged conventional explanations of why the Court has construed the law to provide generally narrow relief (not only because of their boredom with the subject matter and/or a supposed adherence to narrow construction of statutory language) and offered provocative explanations based on, among other things, the presence (or absence) of a federal agency to advance a case for broader relief. The introduction of this new book immediately brought to my mind another recent and impressive analysis of Supreme Court bankruptcy jurisprudence, Ken Klee's Bankruptcy and the Supreme Court: 1801-2014. But Mann's latest contribution really seems to add something valuable, illuminating, and entertaining. Readers of this great new book will not find themselves, as Mann described one Justice's reaction to an oral argument, "in sleepy distress." Check it out, and watch for what will be a value-packed Texas Law Review symposium issue.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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