Chase Amassing Lehman Claims

On Monday, JP Morgan Chase reported that it had purchased more than $60 million in claims from Raiffeisen Zentralbank Osterreich AG. In July Chase bought about $200 million in claims. And while Chase has sold some claims too -- back in May they sold a couple of big claims -- it appears that there are more and larger claims going to Chase, including some "partial" claim transfers, which should add a special something to the plan negotiations:  what debtor wouldn't like to find it has even more creditors post-petition?

And then there is the matter of how all these claims play into the ongoing litigation between Lehman and Chase . . . 

N.B.  Some of the August 30th transfers are docketed as transfers from Chase, but the underlying documents show that they are Chase purchases.

Welcome to New York; the Bankruptcy Court is Below the Museum

While most of the recent focus in the reorganization area has been on a handful of “mega” cases that played key and controversial roles in the financial crisis, the bankruptcy court in Manhattan has quietly become the international center for corporate reorganization. And I’m not just talking about chapter 15 cases, like those recently filed by Mexicana Airlines, and a boatload of English reinsurance companies, that simply ask the US court to help enforce a foreign bankruptcy proceeding.

A Code Head-Scratcher

From a retention application in Lehman,

By this Application, the Debtors seek entry of an order, pursuant to section 327(e) of the Bankruptcy Code, authorizing the employment and retention of KBT&F as special counsel to the Debtors, to perform necessary legal services pertaining to the Debtors’ chapter 11 cases . . . (emphasis added).

And section 327(e) of the Code, which provides

(e) The trustee [or debtor, in chapter 11], with the court’s approval, may employ, for a specified special purpose, other than to represent the trustee [or debtor] in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed. (emphasis added). 

Pay the Bums

Over at the NY Times, William Cohan has a post complaining about a pending motion in Lehman. Unfortunately this represents just another example of how the mainstream press continues to muddle their reporting of chapter 11.

Will Dodd-Frank Reduce Safe Harbor Overreach?

As loyal Slips readers will no doubt recall, I've been something of a broken record (what's the modern version of that saying? Buggy mp3?) on the issue of the safe harbors in the Bankruptcy Code, especially as expanded by the 2005 Amendments. In short, I believe that that special treatment of derivative contracts is both more likely to increase systemic risk than reduce it, and incredibly overbroad, giving parties an incentive to disguise regular contracts as derivatives to get out of the automatic say and the operation of section 365.

But I wonder if the recently enacted Dodd-Frank financial reform legislation might reduce the temptation to claim that every routine supply contract is actually a protected swap. Under the legislation, a "Major Swap Participant" is subject to new capital and margin requirements, if not otherwise subject to prudential regulation. A big energy company that is routinely arguing in chapter 11 cases that their supply contracts are subject to the safe harbors might back itself into these capital and margin rules, especially given that the definition of "swap" under the reform legislation is quite similar to that under the Code.

A Puzzle

Working my way through the local paper today, I stumbled across a story on consumer credit. Against my usual inclinations, I read on. It tells the story of how banks routinely sell old debts, that is, debts past the statute of limitations, for about 0.2 cents per dollar. For my co-bloggers, this is probably old news.

But the question that occurs to me, is why do we allow such sales? Just as we don't allow markets to sell expired milk, no matter what the discount, it would seem that allowing sales of debts that can only be enforced by trick is unlikely to be socially useful or something that our banking regulators should condone.

The Code and the new Financial Reform Act

Unless you have been living under that rock, you probably know that the President signed the new Financial Reform Act yesterday. Good summaries of the various stages of implementation, and the overall Act are already available online.

But what is the effect of the new Act on the Bankruptcy Code?

What's a Poor (Corporate) Debtor to Do?

So Felix Salmon has joined SIGTARP in faulting Treasury for not considering the collateral effects of rejecting dealer contracts in the GM and Chrysler chapter 11 cases. Everyone seems to be missing the basic point that corporate debtors never consider the plight of their creditors.

The Cost of Rushing GM?

Recently a reporter emailed me a claims objection from the "old" GM case. In the objection, the GM Committee objects to two claims filed in connection with an interesting lending arrangement that GM entered into before bankruptcy.

It seems that GM set up an unlimited liability subsidiary in Nova Scotia ("NSF") that borrowed money in GB pounds. This borrowing was guaranteed by GM. NSF then entered into currency swaps with GM to convert the money into Canadian dollars, and then lent the same to GM Canada.

BP & Bankruptcy

Notwithstanding my soothing words, the Treasurer of Louisiana is "fretting" over a possible BP chapter 11 case. It seems that John Kennedy (no, not that one) believes that BP only has about $12 billion in liquid assets. As I explained in the linked article, a cash flow problem could lead BP into chapter 11, but creditors should still not worry about it -- at least not yet. So long as BP's assets are substantially larger than their debts, even taking into account cleanup costs, it's the shareholders that should worry.  Creditors will be paid in full if BP is overall solvent, but if BP is short of cash, the most likely outcome in chapter 11 is payment in BP shares -- in short, the shareholders will either be  diluted or eliminated.

Of BP, Caps, and Chapter 11

As BP moves through plans B through G in its attempts to stop the oil flow, and some analysts are suggesting BP faces liability of $40 billion or more, Congress has been looking at raising the current $75 million cap on BP's liability under federal law.

The disconnect between $75 million and $40 billion is striking -- and we should be clear that every dollar of cap below the actual damages caused by this event represents a subsidy to BP. On the other hand, some Senators have argued that exposing oil companies to uncapped damages will result in greater cost in terms of lost jobs in the energy sector.

But this argument ignores the role of chapter 11. In every other industry that has faced massive, escalating liabilities (e.g., asbestos), chapter 11 imposed a de facto liability cap. The cost of the tort liability is then shouldered by the shareholders, and in extreme cases the junior bondholders, rather than the employees.

Let me be clear, I don't think BP is near a chapter 11 filing, although the risk has clearly increased, as shown by the spike in CDS prices. According to Bloomberg, at the end of 2009 BP reported assets of $236 billion and debts of $134 billion, so it can easily absorb several billion of new debt onto its balance sheet, assuming its banks and trade creditors don't panic.

But we should also be careful about suggesting that seemingly infinite liabilities will destroy employers. Shareholders will suffer, but the company will continue -- especially if it does not intend to make a habit out of creating massive environmental destruction.

Atomic

Having been thinking about resolution authority for a while now, I'm coming to the conclusion that the resolution authority is not really designed to be used. Rather it is there for its deterrent effect. Like a nuclear bomb. It's atomic.

The resolution authority as drafted leaves a good deal unanswered. For example, who will run the bridge financial institution? FDIC? Resolving Citigroup as a whole is a lot different from resolving Citibank. And I tend to doubt many of the employees will stick around, since it has been made plain that the goal is a quick death for financial institutions. And because the resolution authority lacks a provision like §363(f), how is FDIC going to handle all the loss sharing that will be needed to make this work? All this uncertainty will undoubtedly foster a run on any institution that gets anywhere near the resolution authority.

So the goal must be deterrence -- make the executives so afraid of resolution authority that they become risk adverse. That might work for entities that are clearly "too big to fail," but what about a large hedge fund? At some point ex post they might be deemed systemically important, but ex ante what do they do?

Once again I'm left wishing the banking people had talked with the insolvency people before developing this resolution authority thing.

Naked Credit Default Swaps

Floyd Norris has an interesting column today in the Times, arguing that speculative (i.e., "naked") credit default swaps should be outlawed. As I've long noted, credit default swaps (CDS) do have problematic effects on the bankruptcy system. CDS can encourage creditors to file involuntary petitions that trigger the swaps. CDS also discourages out of court resolution of financial distress, since a bankruptcy filing is more valuable to a creditor with CDS, as many North American CDS contracts will not be triggered by a non-bankruptcy restructuring. And nobody has studied the effects of receiving a CDS payout on post-petition creditor behavior.

But none of these bad effects are the result of an investor who holds CDS without owning the underlying debt -- indeed, these effects only arise from hedged creditors, not holders of naked CDS positions. Such CDS investors have no direct role in the reference entity's bankruptcy case or workout, and only can hope that the CDS market will influence the debtor's fate.

Moreover, I continue to struggle with the attacks on naked CDS, because on some level they are really not that different from pork belly or orange juice futures bought by those who don't indulge in either pork or OJ. Yet we don't see a lot of hand-wringing about the incentives futures create to burn down orange groves.

The difference is that CDS references a specific company, rather than an entire industry. Credit is not a commodity. But the Norris article, nor any other that I'm aware of, does not address why this difference matters.

No Safe Harbor Reform, Yet

As some of you know, I've been working with Senator Bill Nelson and his staff on an amendment to the financial reform bill that would have rolled back the special treatment of derivatives under the Bankruptcy Code. Unfortunately, with today's cloture vote, it does not look like the amendment will get a floor vote. While the amendment was backed by many, including the chair of the judiciary committee and eventually the agriculture committee, Treasury and FDIC never got on board. The gulf between banking and bankruptcy persists.

End User Exemptions

I've been talking with Mike at Rortybomb about derivatives and bankruptcy, and the pending financial reform legislation. But being a professor, I of course have more to say about the ongoing debate about exempting certain "end users" of derivatives from the proposed rule that all derivative trades go through a central clearing process and trade on an exchange.

The key complaint that "end users" have is this new trading and clearing structure will require collateral to be posted to ensure the "out of the money" party's ability to perform on the deal.  For railroads, manufacturers, and others who use derivatives as hedges, this means that cash or other cash-like stuff will be parked somewhere, unavailable for use. And their ability to use derivatives will be limited by their ability to post collateral.

First, I'm beginning to wonder about how you define "end user," which is why I've been using the obnoxious quotes up to this point. A hedge fund is an end user of derivatives. Really anyone who has an unbalanced position in derivatives could be considered an end user. Congress has to be really careful on this slippery slope.

Second, if the "end users" of the world think that getting out of clearing and exchange trading gets them out of posting collateral, they might want to think about that some more. There is nothing in the new law that would prevent a big bank from demanding both mark to market and "additional" collateral in connection with an OTC trade. Indeed, since these banks are going to be under increased regulation, they may be required to get collateral from big customers. So if the end users get their exemption, what have they achieved? Exposure to the risk that the big bank will fail, taking their collateral with it.

Resolution Authority: Dodd-Shelby Amendment

Still digesting the new Dodd-Shelby compromise, but so far the implications for resolution authority that I can see are:

• Proceedings move from the Delaware bankruptcy court to the D.C. District Court.
• There is a hard cap on the length of proceedings at 5 years (3 yrs. plus two 1 yr. extensions)
• There is a new priority for employee wage claims, like the one found the Bankruptcy Code

The New York Times on Chapter 11 Fees

As Adam has noted, the Times is out with a big article today on chapter 11 fees, focusing particularly on Weil, Gotshal and the Lehman case, where Weil acts as lead counsel. My thoughts:

I found the article disappointing, in that the obvious attempt to bring chapter 11 practice into the larger stream of rage directed at Wall Street often leads the reporters to pettiness. Yes, an out of town partner spent more than $600 a night at a hotel, but it might be nice to mention that the hotel is right next door to Weil's offices. And given that the attorney in question probably only spent three hours a night out of the office, having the hotel next door is important. And then there is the dammed if you do, damed if you don't aspect to dinging attorneys for using the hotel next door, but also criticizing them for using car services (and yes, it can be hard to get a taxi at 3am -- they are all in Chelsea and the Meat Packing District then).

As Adam notes, the article is also entirely without context:  for example, how much has Sullivan & Cromwell made from seemingly advising every side in the financial crisis, all without any press scrutiny?  Is there any good reason to pick on Weil and not Sullivan? Maybe they are both getting too much, but then it's no longer a bankruptcy problem but a problem of corporate lawyers generally. It would have been nice if the reporters had placed these fees in their larger context.

The reporters also don't put the fees in the context of creditor recoveries, except for the quote from yours truly and a reference to the fact that some unsecured classes in the Lehman plan are getting just under 15%. The professional fees are the cost of going from a 0% recovery to a 15% recovery. You can't do that for free, despite what the article implies.

The real question is whether the creditors are overpaying for the move to 15%, but that's a complex question that's hard to address in the popular press, but the Times, of all publications, should have been able to give it a try. For example, if you find cheaper bankruptcy counsel, are we sure that creditor recoveries go up, as the article implies, or do recoveries go down, because the cheaper firm is too inexperienced, too small, etc.? Sometimes it is true that you get what you pay for.

The reporters also give the fee examiners something of a free pass, despite their $250,000 a month budget and the fact that the biggest study of professional fees found that fee examiners don't actually save the estate any money, but instead impose the cost of fee examiners on the estate. I somehow doubt I failed to mention the study in my two interviews with the reporters.

That said, I think the professionals do have to bear some of the blame for billing in these high profile cases without any sense of the optics. For a few thousand dollars they could have had somebody go through the bill to remove things like the airport gum and hotel dry cleaning that fee examiners and reporters love to rave about. (At most, the client should have been responsible for difference between "normal" dry cleaning rates and "hotel" dry cleaning rates, and even then it would have been smarter for the firm to eat that nominal cost.)

The failure to appreciate the larger audience of these cases, especially in this economic context, makes them no better than the tone deaf Wall Street bankers demanding bonuses when they wouldn't even have jobs but for taxpayer assistance.

The Financial Reform Legislation

Having been involved at the edges of the financial reform legislation for the past few weeks, a few observations to date:

• Warren Buffett apparently supports derivative regulation, so long as it does not apply to him. "Me too" say Goldman, JP Morgan, Morgan Stanley, several dozen hedge funds, GM, Union Pacific, . . .:
• ISDA and friends have a new argument for why derivatives should get special treatment under the Bankruptcy Code:  collateral.  "If regulators want everyone to use collateral to back up derivative trades, we need special treatment."  Why they can't be treated like every other secured creditor under the Code remains unexplained.
• Another argument in favor of retaining special treatment, even made by those who work for the financial regulators, is that the move to central clearing requires special treatment. Unaddressed is the problem that many derivatives are still not centrally cleared, and won't be for a long time. And I worry that without the incentives that come from facing real bankruptcy risk, central clearing authorities will become little more than a kind of Central Services, routing paper (or electrons) between the relevant parties, and not performing the kind of counterparty risk assessment that clearing is supposed to bring.

Resolution Authority: Voting Rules

Presently both the new Financial Stability Oversight Counsel and the Federal Reserve Board must each vote to recommend action under the resolution authority, and each must do so by a 2/3 vote. More over, the Secretary then must decide if a petition actually will be filed.

This structure seems overly cumbersome, and essentially means that all three actors must agree before the resolution authority can be invoked. This might create problems in the future – for example, imagine a Secretary that objected to ever invoking the resolution authority.

Solution: Make the “and” into an “or” with regard to recommending action:  either the Counsel or the Board can recommend action by a 2/3 vote. And allow the two acting in unison to override the Secretary and file a petition with the Panel. The Secretary can have standing to object in front of the Panel.

Resolution Authority: Missing an Umpire

The current draft of the Dodd bill does not provide for a anyone comparable to the bankruptcy judge in a chapter 11 case. Instead, the proposed legislation allows parties to seek review of the receiver’s decision to allow or disallow a claim in the district court “for the district within which the principal place of business of the covered financial company is located (and such court shall have jurisdiction to hear such claim).”

First note that this means that case will start in Delaware with the Panel, but will likely end up in the Southern District of New York for claims resolution. Moreover, the court seems to be limited to hearing claims disputes – whereas it arguably might be better to have a general “referee” for all disputes. But most importantly, I doubt that the district court in the SDNY is the right place to resolve these matters. The SDNY district court is widely perceived to be slow in acting on bankruptcy appeals, and is often weighed down with a lengthy docket of criminal cases that understandably has priority on the judges’ time. Bankruptcy judges – particularly those that routinely handle large chapter 11 cases – are more accustomed to acting with the kind of speed that is required for these matters. Otherwise the FDIC will face the prospect of some district judge ruling against its treatment of a claim years after everyone thought the case was fully administered.

Solution: When picking the members of the Panel (see my last post), pick a fourth judge who will act as trial judge to resolve these issues.

Resolution Authority: The New Court

Under the Dodd bill, petitions to invoke the resolution authority are to be presented to a new Liquidation Authority Panel. Under section 202 of the bill, the Panel is to be comprised of three Delaware bankruptcy judges, selected by the Chief Judge. Presently there are seven bankruptcy judges in Delaware, including the Chief.

This seems like too small of a pool to select the judges from, and Wilmington seems like an unlikely place to hold the kind of secret hearings contemplated in this legislation. Moreover, most of the key governmental, legal, and financial actors in these matters are based in New York.

Solution:  Create a nationwide court, based in New York, utilizing the best bankruptcy judges from around the country. Having a bigger pool also provides a source for alternate members if a particular member is unavailable when the Panel is called. The Panel can share infrastructure with the SDNY bankruptcy court. Since the Panel’s role is essentially administrative, you might even consider having a non-judge on the Panel (e.g., a legal or finance academic). Finally, perhaps there should be annual education requirements for panel members so they stay up to date with the latest developments.

Resolution Authority: Safe Harbors

This is the first of a series of posts commenting on the resolution authority as it currently appears in the Dodd bill.

The present draft of the bill includes “safe harbors” that excuse derivatives from the normal operation of the resolution authority – with a vague suggestion that the safe harbors might be suspended for five days while the receiver tries to transfer assets to a buyer, although no indication if termination provisions can be enforced once the derivatives are in the hands of the buyer. And the draft does not address the safe harbors already in the Bankruptcy Code, even though the resolution authority contemplates that all but the largest institutions will proceed under the Code.

Every legal academic that has considered the “safe harbors” that excuse derivatives from the normal operation of the Bankruptcy Code has determined that these provisions increase systemic risk. In a recent paper I show how the intersection of derivatives and insolvency could be better addressed with narrowly targeted amendments to the Code, rather than safe harbors.

Safe harbors are typically justified in terms of systemic risk. The systemic risk argument for the safe harbors is based on the belief that the inability to close out a derivative position because of the automatic stay would cause a daisy chain of failure amongst financial institutions. The problem with this argument is that it fails to consider the risks created by the rush to close out positions and demand collateral from distressed firms. Not only does this contribute to the failure of an already weakened financial firm, by fostering a run on the firm, but it also has consequent effects on the markets generally, as parties rush to sell trades with the debtor and buy corresponding positions with new counterparties.

Solution:  Safe harbor provisions should be removed from the bill and from the Bankruptcy Code. These statutes can be slightly modified to account for the reality of derivatives in modern finance (e.g., allow “mark to market” collateral adjustments to continue until the derivative is assumed or rejected).

The President on Financial Reform

I had the honor of being invited to the President's speech on financial reform this morning at Cooper Union. The speech was somewhat general, but that is probably to be expected when talking for a short time about a complex issue and a massive chunk of legislation.

(N.B.  I'm writing this up before looking at any of the press coverage so I can present my impressions "untainted" by the conventional wisdom.)

Two important points that I was glad to hear. First, he noted that resolution authority could be paid for ex ante or ex post, and people could legitimately disagree over which was better, but you needed to find a way to make sure the financial industry paid for its own resolution. I think this is right, and reflects the realistic options. I know some suggest we can simply put the big financial firms into bankruptcy without doing anything more, but if Paulson and Bush couldn't stomach that (after one attempt), I don't know who could. The broader consequences of that intellectually pure approach will never be politically palatable.

Second, he refused to demonize derivatives, which would have been the easy political move. He explained that there are legitimate uses for derivatives, but the real issue was bringing transparency to the market, so it would be clear to all if somebody like AIG went off the deep end in terms of counterparty risk and exposure.

The one thing I would have liked to have seen was some support for the safe harbor reforms now percolating through Congress, such as Senator Bill Nelson's proposal. This amendment is not perfect, and I've explained what I think works as a compromise position, but amendments of this sort are a big step in the right direction, and get the issue on the table.

Some Thoughts on Central Clearing

As the financial reform legislation moves forward, central clearing of derivatives has become a key topic of interest, along with the related, but distinct issue of exchange trading of derivatives. Central clearing refers to having a party that acts as the "hub" in derivatives transactions, so that a bilateral contract actually becomes two bilateral contracts, with the clearing agency in the center. This should generally increase transparency, including with regard to conterparty risk.

Most of the focus has been on the counterparties, and which sorts of counterparties should be required to transaction through a central clearing house. But I do worry that not enough focus is being placed on rules to govern the central clearing agency. As I have argued in some recent papers, the central clearing agency must have robust margin requirements for its members, as well as an ability to draw liquidity from at least the larger members in times of crisis. Otherwise the central clearing agency itself will become a "too big to fail" entity in need of a bailout.

I also continue to believe that repeal of the special treatment of derivatives in bankruptcy (and in the resolution authority, as proposed in the Dodd bill) is needed to give the central clearing party the appropriate incentives to monitor its exposure to counterparties.

On the issue of clearing itself, I think we need to take some of the uproar with a grain of salt. The big players -- banks, large hedge funds and the like -- are already moving toward clearing and posting collateral with third-parties. I suspect that sooner or later they are also going to figure out that they are much better off dealing with a single entity in the corporate chain, or at least entities that are all in a single jurisdiction, to avoid the problems seen in Lehman. Thus, putting all derivative trading into a single sub will make sense anyway.

Why then are some of these same parties so vocal in their opposition? Well, some of it surely has to do with the sale of derivatives to parties who might not be ready to take these steps, and a fear that these parties will simply reduce their derivatives purchases rather than take the steps to comply with the new rules. They might also replace more complex swaps with simpler contracts like futures. Neither is clearly bad or inefficient from a societal perspective, but you can understand why the banks might not like it.

That said, I'm going to challenge the conventional reformist wisdom by wondering aloud if its really necessary to centrally clear everything. Some flexibility might be good. Of course, there needs to be a cost to taking that option, since it could impose a cost on the rest of us -- most obviously, the collateral posting requirements could be substantially higher for trades that are not cleared. Perhaps a multiple of margin required for a cleared trade?

UPDATE:  Risk magazine has more.

Collateral and Derivatives

One of the arguments I've been seeing a lot of lately is that industry X needs an exemption from the financial reform legislation, because the new requirements that most swaps be collateralized -- that is, backed up with collateral to support the "out of the money" party's ability to perform -- would drain capital out of said industry.

But never mentioned is the simple fact that many of these industries did not transact under derivative agreements until after the 2005 amendments to the Bankruptcy Code massively expanded the safe harbors that exempt derivatives from key provisions of the Code. After 2005, many ordinary commodity supply agreements suddenly became swaps. Warehouse loans to mortgage originators suddenly became repo agreements. The economic terms of the deals were essentially the same as before, but now the agreements were exempt from the automatic stay and the normal rule that you can't terminate a contract simply because the other side is in bankruptcy.

So I suspect that many of these industries that claim that they would be hurt by having so much money tied up in posted collateral could easily avoid this fate by simply returning to normal, non-derivative contracts. But then they'd have to give up their special bankruptcy exemption . . . of course, they shouldn't have that in the first place.

The Rhetoric of "Ending" Too Big To Fail

From both right and left the theme of the recent days has been the need to end too big to fail. The left seems to think this can be done by breaking up financial institutions, the right thinks it will be done by simply throwing financial institutions into chapter 11, Lehman style. They're both wrong.

Breaking up financial institutions does very little to solve the real problem of too big to fail, which is really too interconnected to fail. The horizontal relationships between financial firms make them unlike other firms, and it really does not matter how big these firms are. So unless we are going to regress to some sort of Jeffersonian paradise without financial firms, breaking them up is at best an indirect solution to the problem. Remember that Long Term Capital Management was not actually that big, compared to the likes of Lehman or AIG. 

On the other hand,the idea that we should simply allow financial firms to liquidate sounds good if you consider the firm in isolation, but really bad once you remember the firm is part of a larger economic system. Moreover, the argument seems to ignore recent history -- if the past administration was not able to commit to such a strategy, is it realistic to expect any politician to simply stand by while the economy unwinds?

In short, a more realistic option is to give politicians a system that provides for a soft landing - that is, the system can't be too harsh, because even though a harsh system may make sense from a philosophical perspective, it will never be used. But we also need a system that avoids what happens in AIG -- shareholders remaining in place, while taxpayers took on the risk of not getting repaid. Shareholders and creditors have to lose their position -- and management face the consequences -- just as they would in any other corporate bankruptcy. 

For this reason, I'm not totally opposed to the Dodd bill.  I do think a chapter 11 model makes more sense than an FDIC model, but the $50 billion fund actually makes some sense. Yes it shows that we're not going to stiff arm the financial firms, which might create moral hazard, but I really don't think the stiff arm threat is credible anyway.  And at least the fund makes the industry pay for the cost of cleaning up its own mess -- although the $150 billion the House proposes is a much better number if we really want to make sure taxpayer funds are not used.

My ideal? A chapter 11 system, where the regulators can file an involuntary petition, no safe harbors for at least a period of time, so the firm can be sold or recapitalized, and use the $150 billion fund to provide short term DIP financing.  And have real regulation, of all aspects of financial firms, not just the insured bits, ex ante to avoid problems.

I Don't Get It

So yesterday Lehman filed a motion, asking for permission to buy stakes in the CDOs that have been the subject of dueling opinions in New York and London. The plan is to buy the stakes and force an unwind in Lehman's favor.

But now that Lehman has filed the motion, don't the hedge funds buy up the notes, knowing that there will soon be an eager buyer?  (The motion will be heard on April 20, by which time it may become pointless if the price goes up too much -- so the funds need to be careful not to overplay this.)

The Fed as Distressed Investor

Fascinating article over at Bloomberg detailing all the distressed assets that the Fed took onto its balance sheet during the financial crisis. Among other things, it appears that the Fed will be a beneficiary of the recent moves at Ambac, since ISDA has decided that the Wisconsin partial-bankruptcy triggered Ambac CDS. But the article also suggests the Fed is now exposed to the commercial real estate market, which one of our co-bloggers has been warning might be the next big problem area.

The Need for More Bankruptcy Knowledge on the Circuit Courts

So today I take up Adam's invitation and talk a bit about the 3d Circuit's recent opinion in Philadelphia Newspapers. I previously had posted suggesting it was a good thing that the 3d Circuit was getting involved, because the District Court clearly didn't understand the Bankruptcy Code. Turns out at least two members of 3d Circuit don't either, although I'll concede that they might have been mislead by some loose drafting in the Code.

Why do I think they don't understand the Bankruptcy Code? Because they fall into the same bizarreness that the District court did:

We are asked here not to determine whether the “indubitable equivalent” would necessarily be satisfied by the sale; rather, we are asked to interpret the requirements of § 1129(b)(2)(A) as a matter of law. This distinction is critical . . . We approve the proposed bid procedures with full confidence that such analysis will be carefully and thoroughly conducted by the Bankruptcy Court during plan confirmation, when the appropriate information is available. (Page 32).

First, how can you have a sale "under a plan" if you don't have a confirmed plan yet -- to my mind any pre-confirmation sale should be under §363, which obviously must include credit bidding under §363(k).  Second, the court's approach sets up the obvious possibility that the sale might happen, and then the bankruptcy court will rule that the plan can't be confirmed. Then what happens? I think this further suggests that all the confirmation requirements are to be applied at once, and not piecemeal as in the 3d Circuit's opinion.

More generally, the 3d Circuit seems not to understand the point of sections 363(k) and 1111(b). Both protect secured creditors against judicial valuation errors and collusive sales by requiring a sale for at least the amount of the secured debt -- in 363(k) by allowing credit bidding, and in 1111(b) by allowing the creditors to resist lien stripping under §506. How can a sale ever provide the "indubitable equivalent" of the secured creditors' claim if it strips off this basic protection?

It would have been helpful if the Code expressly referenced section 1129(b)(2)(A)(ii) in 1111(b), but I think the structure is reasonably plain, if one does not get too hung up on reading 1129(b)(2)(A)(iii) in isolation.

Here's hoping for en banc review.

UPDATE:  The request has been made.

Ambac & the Safe Harbors

Ambac, the former municipal bond insurer who decided it would be fun to write CDS on mortgage backed securities, has entered into an interesting arrangement in Wisconsin, that has some implications for those of us who think the safe harbors for derivatives in the Bankruptcy Code should be repealed, and replaced with more narrowly tailored provisions.

As I understand it, Ambac's insurance subsidiary has created a "segregated account" comprised mainly of its CDS contracts on collateralized debt obligations. Next that account has been placed into a rehabilitation proceeding by the Wisconsin insurance regulator, who has asked the State court for an injunction to prohibit the CDS counterparties from exercising their rights to terminate, etc. under the ipso facto provisions in the contracts. The State's brief pointedly notes that Wisconsin insurance law, unlike the federal Bankruptcy Code, contains no safe harbors for derivatives and that it will be impossible to unwind Ambac's contracts in a considered manner if the ipso facto provisions are enforceable. (The thud you just heard was ISDA's amicus brief arriving at the Wisconsin court).

I obviously share the concern that safe harbors make it near impossible to conduct an orderly reorganization or liquidation of a counterparty, and often increase the disruption to the financial markets as everyone rushes to close out and reestablish positions. But I have some concerns about the Ambac approach. For example, what is the legal basis for the "segregated account"? If it's a separate legal entity, do the CDS counterparties have an argument that their contract has been novated (i.e., assigned) without their consent? That could be a problem. If the segregated account is not a separate entity, how do you put part of a company into rehabilitation and keep the creditors from going after the part this is "out"?

I know insurance insolvency is different from bankruptcy, but the more I think about this, the more questions I have.

Consumer Protection & Bank Soundness

To date I've left the issue of the "Consumer Financial Products Safety Commission," or whatever name it ultimately ends up with, to my co-bloggers, who are much more versed in matters consumer. But then today I read that Senator Shelby had this to say at the American Bankers Association:

Safety and soundness trumps everything," Shelby said to loud applause. "It trumps the consumer finance whatever."

Although the bankers apparently ate this up, they should really run from this argument as if it were the swine flu.The argument only makes sense if the nation's banks are so horribly undercapitalized that they depend on the extra margin they get from confusing their customers and getting them to make poor choices regarding their finances. Under the Senator's argument, banks need to conduct "unfair, deceptive, or abusive" advertising and write their documents in "unplain" English in order to maintain their soundness.

Wow.

This has to be his argument, otherwise the argument makes no sense. In every other respect, the new consumer protection agency should help bankers and their ilk by improving their reputation among consumers and protecting them from class-action lawsuits whenever they foul up. Wouldn't the latter increase their soundness in direct proportion to their decreased insurance premiums? How does consumer protection threaten bank soundness? Did toaster companies go out of business when the Consumer Product Safety Commission stopped letting them sell exploding toasters? I guess the ones who couldn't make it selling legitimate toasters did -- but the Senator can't really be saying that America's banking industry is like a shoddy toaster company, can he?

If the Senator (or, more realistically, a member of his staff) would like to explain what he really meant, I'm available -- feel free to contact me offline.

The Financial Stability Oversight Counsel

I want to pick up on yesterday's post by Bob and friend and expand upon it a bit. Under section 111 of Chairman Dodd's proposed bill, the new Financial Stability Oversight Counsel will be made up of

• the Treasury Secretary, who would serve as chair
• the Federal Reserve Chairman
• the Comptroller of the Currency
• the Director of the new Bureau of Consumer Financial Protection
• the Chairman of the SEC
• the Chairman of the FDIC
• the Chairman of the CFTC
• the Director of the Federal Housing Finance Agency
• and an independent member, who must have an insurance background, and would serve a 6 year term

This is a banking heavy group. Especially given that all the key votes by the Counsel require a two-thirds majority.

Felix Salmon noted in a recent post that "[o]ne of the problems with giving lots of supervisory authority to the Fed is that the Fed is run by economists who care primarily about setting monetary policy, as opposed to being run by bankers who care primarily about bank regulation and systemic risk."

Although this is on track, to my mind it does not go far enough. And from my lawyer's perspective, the distinction between economists and bankers is kind of like the difference between policemen and constables. Treasury, the Fed, and the rest of the crew are stacked with economists, bankers, and lawyers focused on banking law.

But one of the obvious lessons of the past two years is that there really is no such think as a unique universe of "banking" or banking law in a world where GMAC and E-Trade are offering home loans, people in the Netherlands have passbook accounts in Reykjavik, and seemingly simple online banks have $26 billion derivatives portfolios (table 1, here).

Avoid Chapter 11 at All Cost!!!

One thing that I think we all agreed on in yesterday's panel on "too big to fail" was that many of the plans for a separate resolution authority are being driven toward a FDIC model by Treasury and the Fed, both are whom are more familiar with that approach, rarely talk to restructuring or chapter 11 people, and continue to have an unbridled fear of chapter 11.

More of that can be seen in yesterday's TARP COP report on GMAC, which really seems like the little sister to AIG. I believe both GMAC and AIG would have been better handled in a government-supported chapter 11 process, that would have provided a legal framework for driving a hard bargain with the firms' counterparties and showing shareholders and bondholders that failure has real consequences.

In Case You Didn't Feel Like Showing Up

I'm on a panel tomorrow at the Dow Jones Restructuring and Turnaround Summit about how the government should address "too big to fail" and the collapse of systemically important firms. For those of you who won't find yourself in lower Manhattan tomorrow, my current thinking on the subject is thus:

• We need a common forum. Be it insurance company, broker-dealer, hedge fund, or bank the entire enterprise needs to be addressed in one place, at one time. Ideally this forum would encompass all the major financial jurisdictions (New York, London, Zurich, etc.) but for now I'd be willing to settle for a single forum for the U.S. part of the problem.
• The mechanism needs to provide liquidity to the failed firm until resolution. And it needs to accommodate the possibility that the liquidity provider might be the government (either the Treasury or the Federal Reserve) or some quasi-governmental thing like the IMF. I note that chapter 11 already has such provision, including provisions for subordinating preexisting liens.
• Regulators need to be able to institute proceedings, because if the failing firm is big enough sometimes nobody else will have the incentives to face the inevitable (see, General Motors, Lehman, etc.).
• Moreover, we need to institute proceedings while the firm still has some working capital, instead of allowing management to drive until the tank is dry (see, Lehman, AIG, Morgan Stanley (almost), etc.).
• Modeling the resolution system on the FDIC approach only makes sense if we think there should be similar goals -- namely, protecting customers of the failing firm from losses and reducing the costs to the government. The second one might be applicable, but I'm not sure about the first -- that sounds a lot like destroying incentives to monitor counterparty risk (or that "Moral Hazard" thing everyone was talking about in August 2008.).
• I don't think it makes a lot of sense to "reinvent the wheel" and create an entirely distinct resolution authority that (hopefully) will only be used once or twice every twenty years.
• Instead, why not use a modified chapter 11, that gives the failed firm a brief period (90 days at most) to reorganize, recapitalize, or sell the debtor? Locate the court in New York, but cherry pick the best judges from around the country to staff it. Or at least look to the SIPC proceedings, which bring in Bankruptcy Code provisions except where there is an express need to do it differently.
• I keep hearing that the Bankruptcy Code won't work because the judge has to consider everyone's interests -- I'm not sure that the lack of transparency and due process has helped in the current situation -- shall we ask the WaMu shareholders and bondholders what they think? -- and the GM, Chrysler, and Lehman sale hearings show that speed, respect for the collateral effects of a case, and due process are not inconsistent.
• Talking about too big to fail or derivatives markets reform without addressing the safe harbors, and their effect on systemic risk, leaves the job half-done, unless we really think no big financial firm will every fail again. In which case, why are we worrying about a resolution authority?
• Overall, the traditional separation between bankruptcy and banking law collapses in a financial crisis. The financial system would be better off if these two disciplines talked more often, and definitely before the petition date.

While everyone (including me) is talking about too big to fail . . .

The small banks are dropping like flies.  At this rate the only banks left are all is going to be too big to fail.

What? Sovereign Debt Edition

I'm sure our current guest blogger will have more to say about the current state of the sovereign debt markets, but I could not resist commenting on this rather confusing and odd article in today's FT about Goldman and Greece. Turns out part of the problem is that the article uncritically rehashes this letter from Representative Maloney, which is itself confusing and odd.

The key quote from both is this: "The increase in demand for insurance on government debt through credit default swaps harkens back to the activities that brought down American International Group." I'm not sure quite what this means, but the apparent analogy is flawed for several reasons. First, AIG was selling CDS with no real risk management, whereas Goldman is now buying CDS. Greece is neither buying nor selling CDS, although the article and letter might leave you with that impression. Second, while I've certainly argued that corporate CDS can generate perverse incentives to push a company into bankruptcy, I've also warned against the unthinking importation of corporate bankruptcy concepts into the sovereign debt world, and this analogy seems to be headed in that direction. Sovereigns -- at least at the national and state level -- can't be pushed into bankruptcy involuntarily, indeed they can't file for bankruptcy at all. That's an important difference that is often lost in the breathless commentary that the CDS markets will lead to a Greek/Icelandic/Portuguese/Californian "bankruptcy." Finally, I'm not sure why the "increase in demand" for sovereign CDS is itself anything to be concerned about -- other than what it suggests about the underlying problems with sovereign borrowers.

Indeed, I don't really understand the basis for the argument, made in the New York Times this week, that sovereign CDS will somehow push Greece to default, although I note that the AIG quote from FT and the Congresswoman could be charitably described as a restatement of the second paragraph of the NYT article. The Times article itself suffers from the sovereign/corporate confusion I discuss above.

At heart, the FT article (along with the Congresswoman's letter) seems like a rather feeble effort to link the present problems regarding Greece to the new easy target for all financial reformers:  CDS.

A Snow Day Diversion

My new Economist arrived today, cover story is The Data Deluge, And How to Handle It:  A 14-Page Special Report. Next week they'll have a cover story on irony.

2Big2Fail -- snow day edition

From this morning's Financial Times:

Congress is still discussing proposals to give regulators a new “resolution authority” to wind down large financial institutions. The new powers could enable regulators to force creditors of failing institutions to ­suffer losses on their debt.

Yes, forcing creditors to take losses . . .  if only we had something like that.

Sovereign CDS -- Random Thoughts

Lots of attention on Greece these days, but has anyone noticed that France's CDS has declined more on a percentage basis this year (from 32.05 to 53.40)? Even Germany has seen a bigger percentage decline (from 26.33 to 37.84). And Iceland has completely fallen off a cliff, closing today at 639.42. That's the fourth highest price for sovereign CDS, after only Argentina, Venezuela, and the Ukraine.

Just saying, maybe we're a bit too focused on Greece . . .

Meanwhile, it's been a bit since I've talked about California, but today its CDS was selling for 327, which means that the market currently thinks California is more likely to default than Lithuania (270.80) and somewhat less likely to default than . . . Greece (396.83).

Meanwhile, US CDS is trading at 46.71, which puts us right between Germany and Switzerland (49.21), but we're all in a twitter about the federal budget deficit and debt burden.

Notes:  all prices are for 5 year CDS and come from Bloomberg. CDS prices are in basis points, so that California's price suggests that one would have to pay 3.27% of the amount you want to buy protection against (or $3.27 for every $100 of protection).

Lehman, Synthetic CDOs, Sapphires, etc.

The Lehman bankruptcy court is out with a new decision that has the financial community somewhat miffed, since it removes one more piece of their mistaken belief that they don't have to understand or deal with the Bankruptcy Code. The decision will also lead to some interesting discussions with members of the English bench, who reached a contrary decision with regard to the same issue and parties. I'm extending an open invitation to all the judges to join me for coffee and bagels at my apartment on the UES to sort things out.

I've represented the transaction in question, which involved the issuance of synthetic CDOs, in this simplified diagram. The key thing to understand is that under the terms of the deal, which contains an English choice of law clause, the priority rights to the collateral switch if there is a Lehman default under the CDS contract. And Lehman Brothers Holding's chapter 11 filing in September 2008 constituted a default, since Holdings was a "credit support provider" under the terms of the CDS contract. The CDS buyer, LBSF, also filed a chapter 11 case of its own in October 2008, resulting in another default.

The other thing to understand is that there are reportedly about 1,000 similar Lehman transactions waiting in the wings.

The US bankruptcy court held that the collateral priority switch was an unenforceable ipso facto (bankruptcy termination) clause, and that the derivative "safe harbor" provisions in the Code did not apply.

The UK Court of Appeal, affirming a decision of the High Court of Justice, reached the exact opposite conclusion, holding that the deal did not violate the "anti-deprivation rule," which is essentially their rule against ipso facto clauses, based on a case from 1818.

(How we ended up with the pseudo Latin, when their rule is from 1818 and ours is from 1978, I don't know.)

My thoughts on the bankruptcy court decision, and the conflict with the prior decision from the UK, after the jump.

On Break Up Fees

Or "break fees," as Pottow would call them. The 3d Circuit is just out with a new opinion that's primary contribution will be to add a dozen words to the asset purchase agreement.

In the case, the debtor entered into an asset purchase agreement whereby it agreed to try to get the deal approved without competitive bidding, but if the court required an auction, the debtor was obliged to seek approval of a break up fee.

The bankruptcy court orders an auction, and the debtor sought approval of the fee -- but the court denied it. After another bidder wins, frustrated initial bidder seeks payment of the break up fee and appeals.

The Circuit essentially says:  the debtor's obligation was to seek approval of the fee, the deal was not predicated on approval of the fee, and the bankruptcy court acted consistent with existing 3d Circuit caselaw.

So the next APA that you draft, won't you simply add "The buyer's obligations are predicated on approval of the break up fee"?  Am I missing something?

90 page law review article to follow.

Chapter 11 Costs -- Help?

As part of my sabbatical project this semester, I'm returning to the ABI Chapter 11 Fee Study database in the hopes of further refining my model of professional fees in chapter 11 cases. As one part of this, I'm trying to resolve several pesky "missing data" issues in the dataset of big cases, so that my model can benefit from all the cases we collected in that project. One persistent problem I'm running into is retention applications filed without any indication of what the professional's hourly rates will be -- instead, the professional simply states that they will charge their "customary hourly rates," without any indication of what those might be. It's a problem that exists with regard to all types of law firms, big and small, and I've attached an example application and affidavit from a particularly well-known debtor firm that shows what I'm talking about.

So my question to the loyal readership is:  why are retention applications like this filed, and why are they routinely approved?  Is it simply a matter of "everyone" knowing what that firm's customary rates are?

Somewhat related, I'm also hoping to improve my model of chapter 11 costs as applied to the broad run of chapter 11 cases. The model currently works rather well with regard to big cases, but not quite as well with regard to the more typical chapter 11 case. Given that my practice experience was in the New York-Delaware style case, I suspect I'm missing some key factor in smaller cases that influences professional fees, and I hope our readers might point me in the right direct.

The comments are open. And my sincere thanks in advance.

A Special Bankruptcy Court

Lots of news today about a Congressional plan to create a special bankruptcy court for financial services firms. One question that jumps to mind:  who staffs the court?

The most likely answer is that the court would draw from other bankruptcy courts -- there is some precedent for that sort of thing.

Another, less likely, option would be to draw the court from a panel of bankruptcy professors. Presumably this would have to come with an obligation to stay current on the state of the art in finance, and the panel membership would have to be updated on a regular basis. Arguably even the worst bankruptcy judge would be better than Prof. Deadwood and his collection of war stories about the Bankruptcy Act and the Penn Central case.

Not that there is anything wrong with a Penn Central fixation, of course.

Chrysler on Vacation

Many have speculated, in both the comments to my post yesterday and on other blogs, about the editorial significance of the Supreme Court's vacatur of the 2d Circuit's Chrysler opinion -- the most common reading being that the Court intended to signal that Chrysler was somehow unique. But this seems to miss that just one week ago the Court did the exact same thing in a non-bankruptcy case (08-351) involving Illinois seizure proceedings. In that opinion, the Court vacated the 7th Circuit's opinion after the last of the underlying cases settled after cert. was granted, but before oral argument at the Supreme Court.

Keeping it In-House

Rather than risk a Dubai World chapter 11 case, Dubai is apparently doing a quickie revamp of its bankruptcy code. Of course, the code itself is only half, or less, of the issue -- you also need the structures to properly implement the code (see China, People's Republic of). I suspect many international creditors would still prefer a New York or Delaware bankruptcy court, but it may not be their choice to make.

I Know It's Over

And it never really began -- the Supreme Court has denied the Indiana Pension Funds' appeal as moot in Chrysler.

UPDATE:  A few further thoughts on this: First, because the Supreme Court has vacated the 2d Circuit opinion, the bankruptcy community has lost an appellate precedent on §363 sales. To be sure, I expect the opinion to remain highly influential, even if no longer binding. Second, while this potentially opens up an avenue for appeal in the GM case, I still think the most likely result there is dismissal for mootness. The Supreme Court's actions today seem to make that more likely. Finally, for those of you up on your "vacation" law, you might wonder why the Court didn't vacate "all the way down." I assume the answer is that they didn't want to "undo" the bankruptcy court's sale order.

What's Your Point?

Over the past year there have many, many articles about the perils of our nation's debt load, and I've been largely context to see these dispatched by that other New Jersey professor.

But now the WSJ has entered my territory, arguing in a recent personal finance column that the CDS market shows that US government debt is not as safe as many might think, because there is a positive price to be paid to protect against the risk of default. This argument represents a failure to do much hard thinking about what exactly a CDS contract written on US government debt represents.

Dubai World

Over the long holiday weekend, we have been treated to a series of increasingly breathless stories about Dubai World's decision to seek a six-month moratorium on some $60 to 80 billion of debt. How Dubai World, a corporation owed by the government of Dubai, will resolve its debt issues has been the subject of much speculation, and little hard fact. Indeed, I believe I saw one story that said Dubai was going to trade Clay Buchholz for Roy Halladay at the Winter Meetings -- but maybe I'm getting my rumor-filled stories mixed up.

One option that has yet to be mentioned is a Dubai World chapter 11 filing. Foreign companies file chapter 11 all the time. Sure the automatic stay is unlikely to have much effect on local creditors in the UAE, but such a filing would prevent any creditor will "minimum contacts" with the United States from taking any of the debtor's assets. That would cover most financial institutions, including many hedge funds, and might allow Dubai World sufficient time to resolve its problems -- and even impose a compulsory workout plan on the same group of creditors. The key question is whether the government of Dubai wants to expose its key asset to an American bankruptcy process.

Professional Retention & Compensation under the Code

More fun with the Code, or "Bankruptcy Nerdcore," {my attempt at nerdy humor -- "nerdcord" -- apparently lost on one and all} as one recent commentator has described it.

It is the reality of current academia that we don't do much in the way of "close readings" of the Bankruptcy Code anymore, at least in our published scholarship. But today was the day to teach professional retention in my Bankruptcy class. Normally I've done an introductory lecture before working on the problems, but I find that the relevant Code provisions are so many and scattered that students have trouble following the lecture. So this morning I trashed the lecture notes and quickly made this slide, which formed the basis for our discussion.

And in the process of putting together the slide, I came to a few conclusions:

1.  While courts sometimes talk about "retention under §328(a)," there really is no such thing. Rather, retention must be under §327 or §1103, as the plain language of 328(a) itself suggests. The implication:  cases like Circle K are misguided, because 328 simply provides authority to retain a professional under 327 or 1103 under something other than a traditional hourly rate structure. As I read it, 328(a) simply provides that the compensation structure is to be set ex ante, and not revisited unless the final sentence of 328(a) applies. In short, no fair using 20/20 hindsight to change the terms of retention -- the amount of compensation is a different story, although I'll agree that it is hard to untangle the two if you are dealing with something other than an hourly rate.

2.  Retention under §363(b) should not be permitted, despite the practice in the SDNY, Delaware, and perhaps other jurisdictions. While the Code clearly does not work well with turnaround firms that take over management of the debtor before bankruptcy, I don't see how using the generic provision (363) can be justified in the face of the rather elaborate system outlined in my slide. And §330 by its terms seems to suggest that the only avenues for retention are 327 and 1103.

I know many Credit Slips readers are "in the trenches," working with these provisions on a daily basis. I'd appreciate your thoughts on my two conclusions (or the slide, particularly if I've missed some key provision).

My general thought is that these issues suggest yet another way in which chapter 11 could benefit from an update, inasmuch as the retention provisions of 1978 have been strained to their limits by current practice. I suggest that considering how the Code should adapt is a more productive avenue than debating whether or not these efforts to stretch the Code are "illegal."

Son of Pine Gate

As Credit Slips readers may know, a group of key Philadelphia newspapers are currently in chapter 11. The debtor that owns the papers owes its secured lenders north of $290 million. It wants to sell itself under a plan to a group of buyers that include some insiders. The deal will net the lenders $36 million. You'll be shocked to learn the lenders are not fond of the proposed plan.

But when the debtor sought approval of bidding procedures that denied the lenders a right to credit bid under §363(k) or exercise their right to an "1111(b) election," under the theory that the debtor's proposed plan was providing the lenders with the "indubitable equivalent" of their claims under §1129(b)(2)(A)(iii) the bankruptcy court said "not so fast." Among other things, that court said that the "indubitable equivalent" bit of 1129(b)(2)(A) could not be used to rather obviously avoid the more specific provisions of 1129(b)(2)(A).

But the debtor appealed to the district court, whose 57 page opinion was issued a week ago.  After a discussion about whether the court had jurisdiction to hear the appeal, the opinion moves on to an extensive discussion of the "plain meaning" approach to statutory interpretation.  Those of you who have heard of the "plain meaning" rule can skip right to page 23 of the opinion, where the action starts.

In short, the district court rules that the only relevant statutory provision is §1129(b)(2)(A)(iii), and because each subpart of 1129(b)(2)(A) is separated by an "or," the plain reading of the statute must give each subpart independent significance.  That is, subpart (iii) is not limited by anything in subparts (i) and (ii), and a sale under subpart (iii) is not subject to the limitations in those other subparts.  That is, no credit bidding or 1111(b) elections need be provided in a sale under the "indubitable equivalent" prong.

I've been waiting for the same crowd that got all hot and bothered about GM and Chrysler to rear up, but it hasn't happened yet.  So I'll have to be outraged all by myself.