No More Bailouts

I have a new white paper out from the Roosevelt Institute's Great Democracy Initiative. The paper, which is co-authored with Lindsay Owens and Ganesh Sitaraman, proposes a standing emergency economic stabilization authority to provide an off-the-shelf immediately available response to common problems that recur in national economic crises.

The motivation for the white paper is that in the past dozen years we've been through two rounds of massive ad hoc bailouts. We shouldn't be doing this on the fly. Instead, we need to have a suite of programs ready to go. Think of this as an "in case of emergency, break glass" approach.

Seila Law v CFPB: Winners and Losers

The Supreme Court's long-awaited decision about the CFPB's constitutionality is out. It's a tricky opinion to parse politically. The Court, in a 5-4 partisan decision, held that the CFPB's structure violates the separation of powers because of the for-cause only removal provision for the CFPB Director in conjunction with the Bureau's other features. Accordingly, the Court found that the Director must be removable at will. Here's my attempt to lay out the winners and losers. As you'll see, they do not track with the headlines of the CFPB losing—the CFPB was actually the winner here for most purposes.  

Puerto Rico as a State?

The House of Representatives has just voted to make the District of Columbia a state. Obviously the Senate half of the process might have to wait until next year, at least.

What about Puerto Rico? Obviously there is the question of whether the people of the Commonwealth want statehood. But if at least a majority do want statehood, it would seem to make sense address the issue at the same time that DC goes up.  

And of course, given that this is Credit Slips, we might also wonder what would happen to PROMESA, if statehood were to happen. Do we wait until the process is over, or end it "now," leaving the creditors to negotiate with a debtor that now has the benefit of the Eleventh Amendment?  Interesting things to mull over, but potentially at issue as soon as early next year.

Best Interest Blog

There's a new bankruptcy blog around:  the Best Interest Blog.  Welcome to the blogosphere!  

I'm delighted that the blog features a great post by my former student and research assistant Mitchell Mengden about the "J. Screwed" maneuver of stripping out collateral from the restricted group and then pledging it to other creditors. While the maneuver has been going on for a while, as Mitchell explains, it's interesting how infrequently underwriter's counsel has insisted on J. Crew provisions in bond indentures, although the use seems to be picking up in junk indentures. 

How Many People Have Filed Bankruptcy?

The past few days I had been wondering exactly how many persons in the U.S. have filed bankruptcy. By that, I don't mean how many filed last week, last month, or last year. Rather, how many persons walking around the U.S. have ever filed a bankruptcy case? My estimate is around 10% or 33 million persons. Here is the math.

David Graeber’s Debt, The First 5000 Years

I’m just getting around to reading a 2014 book some Creditslips readers may be familiar with, Debt: The First 5000 Years. In this utterly fascinating work, Anthropologist David Graeber exhaustively recounts the history of debt and money. He begins by debunking the myth of barter, the story told in introductory economics textbooks that money was spontaneously invented to permit merchants to exchange goods and services in imaginary markets, as an improvement over primitive market economies based on barter. In fact, early human societies all relied on central planning (by kings and high priests), communism, gift-giving, redistribution, and various forms of debt, notably in Mesopotamia, Egypt and Greece, the earliest western civilizations, and probably in India and China as well. Debts and their units of account (i.e. money) arose to compensate for injuries, to seal marriages and other relationships, and to tabulate taxes paid and owed to sovereigns. Kings invented coinage both to relieve the poverty of their subjects and to provision their armies by spending coins, and as a convenient means to collect taxes. Modern monetary theorists like to cite this research to make the essential point that money and markets are created by sovereigns and states, and rarely if ever arose spontaneously. The idealized construct of a free market based solely on exchange first arose much later in economic history, in mercantilist societies and then with the liberal philosophers (Bentham, Owen, Smith, Ricardo) of the Industrial Revolution. 

Bankruptcy has always been with us. From the earliest times debt-based money led to  periodic crises and debtor revolts, and wise rulers from the dawn of written history periodically decreed the cancellation of all debts, sometimes memorialized by the physical destruction of debt tokens. The biblical inscription on the Liberty Bell from Leviticus, “proclaim liberty throughout the land”, was the announcement of a debt jubilee including the liberation of debt slaves. The Rosetta Stone was a similar Ptolemaic royal decree announcing a tax and debt jubilee.

Capitalism had its origins not in the exchange of goods and services between free traders and workers but in slavery and debt peonage, not only in the United States but in every colonial empire.  After reminding us of Martin Luther King’s description of the founding documents as an unpaid debt to Black Americans, Graeber concludes by reminding us that the validity and morality of various debts can and should be determined democratically. Thought provoking in a moment when we hear calls for both payment of reparations and cancellation of student loan and housing debts.  

Selling CITGO--Timing and Process

Yesterday was the deadline for opening briefs regarding the writ of attachment and potential execution sale of PDVSA’s shares in PDVH, the parent company of US oil refiner CITGO. As expected, Venezuela has asked the court to set aside the writ of attachment. Other briefs argue about what an execution sale should look like, if a sale goes forward. An execution sale is typically an informal, auction-on-the-courthouse-steps kind of thing. That’s not the usual way to sell a multi-billion dollar oil company.

Here’s a very quick summary of the filings, with links to the briefs. And here’s a bit more background, focusing on the timing and process of any execution sale.

How to Start Closing the Racial Wealth Gap

I have an article out in The American Prospect about How to Start Closing the Racial Wealth Gap. Unlike a lot of writing bemoaning the racial wealth gap, this piece has a concrete reform that could be undertaken on day 1 of a Biden administration without any need for legislation or even notice-and-comment rulemaking. The article  points the disparate impact of an obscure, but enormous indirect fee on mortgage borrowers that the Federal Housing Finance Agency has required Fannie Mae and Freddie Mac to charge since 2007. The fee is structured in a way that disadvantages borrowers with fewer resources and lower credit scores, which has a disparate impact on borrowers of color. (I'm not saying it's an ECOA violation--that's a different analytical matter.) The fee was adopted in response to a competitive environment in 2007 that doesn't exist today; there's really no good reason for the fee to exist any more. 

Brazilian 5 Year Sovereign Bonds at a 2.875% Yield: Aiyiyiyi

Paul Krugman had a piece in yesterday’s NYT about the lunacy in the stock market, where a bankrupt company like Hertz is merrily issuing new stock (here).  Matt Levine of Bloomberg has similarly, and hilariously, discussed the Hertz case and other recent examples of this bizarre pandemic bubble (here). Why the rush to buy overpriced rubbish?

I have no answer to the question posed by Krugman. But it is not just the stock market. A similar lunacy is occurring in the sovereign bond markets (here). Exhibit number one: Brazil. Reading the press, it seems clear that Brazil is in deep crisis thanks to the disastrous manner in which it has handled the covid-19 pandemic so far (see here and here, for discussions of how Brazil’s response to the pandemic has been among the worst in the world).  Yet, on June 3, it issued over 3 billion dollars in five- and ten-year bonds.  The five-year bonds had a coupon of 2.875%.  (the ten-year bonds were at 3.875%). I cannot understand this yield. What sane investor could possibly look at the current state of Brazil’s response to the pandemic, the fact that its leadership seems to show no signs of reversing course, and the resulting economic forecasts, and think that Brazil is such a safe bet to repay its borrowing in just five years that it should receive funding at 2.875%. Of course, from Brazil’s perspective, why not issue even more debt, if the response of the market to worsening conditions is to offer even more and cheaper money.

It is worth, however, thinking about what will happen if and when countries like Brazil cannot repay these bonds when they mature. I suspect that investors will not remember that they deliberately anesthetized their risk instincts when they bought the bonds. Some of those investors will loudly demand payment in full -- in other words, it's Brazil's fault for having offered the bonds, not the investors' fault for ignoring the risks when they bought them. Along those lines, I wonder why official sector institutions like the IMF – who know how bleak the latest economic forecasts are -- are not urging sovereigns to take advantage of the market lunacy to put in pandemic clauses. These are clauses that would give the countries like Brazil relief in the future if it turns out that covid-19 causes so much harm to the Brazilian economy that it cannot pay back the debt. After all, if investors are willing to buy any rubbish that is put out there, why not ask for better contract terms for when the party ends?

Italian Sovereign Debt: Time to Worry or Party?

Italian sovereign borrowing is increasing, as the costs of dealing with a stalled economy and the pandemic build.  A recipe for disaster?  Turns out that Italian yields (and spreads with the risk free benchmark rate) are actually going down; down in the vicinity of zero. (for the WSJ's treatment of this last week, see here). And at least some Italian economist friends of mine are beginning to talk about how debt/GDP levels around 180% or maybe even 200% could be sustainable.  Aiyiyiyi. That sounds loony; given that the economic fundamentals -- thanks especially to the horror of covid-19 -- are going in the opposite direction. That said, I'm no economist and I definitely do not understand the current market patterns. As further evidence of this lunacy, Brazil was able to borrow $3.5 billion a few weeks ago at lower rates than it was having to pay before the pandemic; a pandemic to which its response has been spectacularly Trumpian. (And yes, I have economist friends of mine who insist that Brazilian debt is safe and will remain sustainable because of factors such as Fed swap lines and Trump's friendship with Bolsonaro. I'll readily admit that I don't understand the swap line theory of debt sustainability. But on that other point . . . . Really dudes? You are going to bet on Trump bailing out Bolsonaro because of their special relationship?).

Not everyone, fortunately, thinks that the markets are going to continue to adequately and fully fund this covid-19 recovery.  Below is the abstract of Tyler Zelinger's new paper on preparations Italy could make in anticipation of the need to do a debt restructuring someday soon (and he is only using them as an exemplar, since they seem to be on the precipice -- despite their current borrowing costs). If things begin to tank -- as I worry they will sooner rather than later -- papers like this that do the advance preparation that governments are refusing to do, will be invaluable. Tyler even finds a silver lining in all of this for the hypothetical Italian debt restructurer.

The abstract of the paper (just posted on ssrn) is below:

As the global economy has become more integrated and increasingly complex, the need for a system that administers government default has become more and more apparent. The body of "sovereign debt law" that has emerged to fill this need in the context of the Eurozone is an amalgamation of treaty obligations, domestic law constitutional principles, and tensions between state government and supranational government actors. Using a hypothetical Italian restructuring, this paper seeks to explore how these different bodies of law operate together to create a system that protects government function as opposed to guaranteeing creditor recovery. Further, this paper explores how an exogenous shock as the COVID-19 pandemic effects the analyses undertaken at various points in the sovereign debt legal framework.

This analysis reveals a silver lining: although Italy has suffered horrible losses as the result of the COVID-19 pandemic, the effects of the pandemic will help mitigate the legal challenges faced by Italy in the course of a local-law restructuring effort and thus smooth the path to a successful post-COVID recovery.

Fun with CLOs

Frank Partnoy has an important and unsettling piece in The Atlantic about how CLOs (securitized syndicated loans, in short) might be at the core of the next bank meltdown, which he sees coming as soon as later this year. Because 2020 was starting to get dull ... 

Keeping Cosy by the Dumpster Fire: Argentina Reads Its Contracts ... Twice ... Quel Scandale!

Argentina's capacity to trigger outrage in sovereign debt circles is to behold. After nine defaults, thousands of lawsuits, and enough intrigue and screaming matches to break Big Data, wouldn't you think that someone somewhere would learn to yawn at another Argentina debt drama. And yet ... on the eve of tomorrow's debtapalooza, the internet is hopping mad again about a restructuring proposal from Bueons Aires--not the money (that's regular old mad), but the red-hot-appalling abuse of the shiny new Collective Action Clauses (CACs) in the 2016 bond indenture. The government again managed to tick off both its private creditors, who discovered that their contracts let the debtor gerrymander bond voting pools after the vote, and the well-wishing policy wonks watching their baby--decades of international bond contract reform--swirl down the drain with this one deal's bathwater. Because much of the technical ground was ably covered by my colleagues earlier this evening (don't miss the link to Rodrigo Olivares-Caminal), I have the luxury of using the rest of this post to speculate about the implications of the brouhaha for sovereign debt policy and sovereign debt markets.

The Argentine Re-Designation Drama: Notes From Two Frustrated Readers

By Mitu Gulati and Mark Weidemaier

In 2014, after much fanfare, a shiny new set of collective action clauses was released by ICMA (the International Capital Markets Association), with the endorsement of the IMF, the US Treasury, and others. The inspiration for these clauses? The fact that Argentina, after its 2001 default, got taken to the cleaners by hedge funds who found ways to exploit ambiguities (pari passu) and oddities (FRANs) in the terms of its debt contracts. The new ICMA CACs were supposed to protect against the risk of holdouts (by letting a super-majority of bondholders quash minority holdouts) while constraining opportunistic behavior by sovereigns (by limiting the sovereign’s ability to coerce creditors into supporting a restructuring). But for all of the good intentions behind these 2014 ICMA CACs, they are long, complicated, and leave gaps for clever parties to exploit. And Argentina’s 2020 restructuring proposal may just illustrate the problem.

Many creditors are irate about Argentina’s exchange offer, so much so that some of them say they no longer want the 2014 ICMA CACs. We have been struggling to understand why the offer got them so upset. Fortunately, Anna Szymanski of Reuters Breaking Views put out a piece titled “Argentina Gets Cheeky With its Creditors” earlier today that makes the basics of the drama clear (here). Cribbing from Anna’s research, here is how we understand what is going on and why creditors are irate.

Keeping Cosy by the Dumpster Fire: A Sovereign Debt Series

Lest anyone thought they could quarantine or protest in peace, no such luck in the sovereign debt world.

Remember when everyone thought a standstill starting May 1 was a great idea, at least through the rest of 2020? For all the good will, May 1 has come and gone, with few takers and fewer givers.

On the subject of give-and-take -- with another default in the rear view mirror, Argentina's government and its creditors are edging closer to a deal this week ... unless their talks get bogged down in extreme distrust, undo more than two decades' worth of sovereign debt contract reform, and drag the rest of the world off the cliff with them ... which would surprise exactly no one who has ever followed that dysfunctional marriage. 

Speaking of no one -- no one seems to have a handle on who owes what to whom on what terms -- not with any precision, in any event -- which is an awkward place to be when pitched warnings of a mega-debt crisis migrate from research volumes to the New York Times.  And no, it is not all China's fault, it's a structural problem with this ecosystem.

Meanwhile, fears of worldwide sovereign debt distress seem to be driving comparisons to the 1980s, which in turn mean different things to different people -- a banking crisis and a Lost Decade to some, market-based (aka publicly subsidized) debt operations to others, and giant shoulder pads to the rest. 

And yet--against predictions and barring classification error--markets have been lending up a storm to vulnerable countries without bothering too much about their contracts.

All this begs two questions--what gives, and what do we do now? -- that are the subject of what should be an excellent Sovereign Debt Forum panel on Wednesday morning, led by Rosa Lastra at Queen Mary, co-sponsored with Georgetown IIEL, and including all the usual suspects. Of course I have no answers, but I will try to noodle these and related questions here in the next few days. In particular, I want to unpack what might have gone wrong with the G-20 call for a standstill, ask whether Argentina's debt restructuring threatens international financial architecture, and yell a bit about our collective obsession with Default ... among other things that will surely come up in the next 24 hours. 

The Great American Housing Bubble

My new book, The Great American Housing Bubble:  What Went Wrong and How We Can Protect Ourselves in the Future was just released by Harvard University Press. The book is co-authored with my long-time collaborator, Wharton real estate economist Susan Wachter. It's the culmination of over a decade's worth of work on housing finance that began in the scramble of fall 2008 to come up with ways of assisting hard-pressed homeowners.

Personal Bankruptcy Coming to China

The English-language press has discovered a long-gestating project to introduce personal bankruptcy law in China. The project is described as "China's first personal bankruptcy law," though it remains just a draft for now, and it is strictly limited to longtime residents of Shenzhen, in the special economic zone just north of Hong Kong. If it's a success, something like this law may be rolled out across the country, as the CCP Central Committee (meeting at the 3rd session of the 13th National People's Congress a few weeks ago) explicitly announced its intention to "promote individual bankruptcy legislation" (see item 8, first paragraph). As far as the suggestion that this has been prompted in any sense by the COVID-19 pandemic, lawyers in Shenzhen have been working on this project since at least 2014, and they released a book-length discussion of this project in 2016. And as far as the characterization of this being "the first" such draft law, another extremely thoughtful and impressive draft law was released a few weeks ago by a group of bankruptcy scholars associated with the Research Center for Personal Bankruptcy Law of Beijing Foreign Studies University (coordinated by the amazingly energetic and dedicated Prof. Liu Jing). Meanwhile, courts in several southern coastal cities have been undertaking their own experiments with dealing with debt collection cases involving insolvent debtors. So ... BIG things have been underway in China on this topic for some time now. Stay tuned for more details on these interesting developments (I'm working on a couple of articles on developments in small business bankruptcy in the Arab world and in China this summer and fall ...).

California sues Devos over PSLF

California's Attorney General has filed a lawsuit against Betsy Devos challenging the failure to discharge student loans under the Public Service Loan Forgiveness program. The suit asserts that US Ed's failure to create a simple and effective application process injures the state of California by discouraging qualified workers from seeking or staying in state jobs. California joins New York and Massachusetts AGs who have filed similar lawsuits. Secretary DeVos has had a poor record of compliance with court orders compelling student debt relief, but hope springs eternal.

Chapter 11 Filings in May Are Not Up as Much as Everybody Will Say There Are

Prediction: you will begin to see stories about an explosion of chapter 11 filings in May 2020. Well, that is not much of a prediction because I already have seen two. Chapter 11 filings did not explode in May.

A few weeks ago, I posted about the huge drop in overall bankruptcy filings and what looks like a modest rise in chapter 11 filings. I did not want to venture more because chapter 11 filings are hard to count. Every petition filed by every subsidiary in a corporate group gets counted as a case, and the number of subsidiaries in a corporate group is arbitrary. Thus, one economic unit can generate what looks like many bankruptcy filings.

Puerto Rico and the Oversight Board

The Supreme Court's opinion is out today, and the short answer is that the Board's appointment did not violate the Appointments Clause of the Constitution (Article II, Section 2, Clause 2), and thus the First Circuit is reversed.

But take a look at Justice Sotomayor's concurrence. She is all but inviting the Commonwealth to argue that Congress had no power to enact PROMESA in the first instance, given that it had arguably given up much of its power over Puerto Rico back in the 1950s. It is an argument I had hoped the Court would take up in connection with the Recovery Act.

In short, more interesting legal questions to come (maybe).