26 posts from March 2010

The Need for More Bankruptcy Knowledge on the Circuit Courts

posted by Stephen Lubben

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.

Redemption (of the 722 variety) for Struggling Homeowners

posted by Katie Porter

Homeowners continue to struggle, foreclosures continue to climb, and loan modification efforts continue to lag. A persistent problem, pointedly described in these letters (July 10, 2009 and March 4, 2010) from Rep. Barney Frank to the large banks, is that the banks that hold second mortgages are not modifying those loans. (Yep, these are the same banks that took TARP money). The reluctance of the second lienholders to agree to a modification gums up the process for trying to get a modification on first, and usually much larger, mortgages. The investors in the first loan somewhat sensibly resist modifications, particularly those with principal write-downs, pointing out that it doesn't seem right that they should take a haircut, while junior lienholders refuse to modify their loans. And while the Administration announced new initiatives with HAMP and FHA to help with the second lien problem, I remain skeptical. After all back in April 2009--a year ago, they also made an announcement that they were revising their loan modification programs to deal with second liens. Hhmm . . . Deja vu? Why wait another year while servicers build a platform and train personnel, and Treasury writes regulations, etc.

Here's a legislative solution to the second lienholder hold-out problem. Congress should amend section 722 to permit chapter 7 bankruptcy filers to be able to redeem any junior loan on a debtor's principal residence. Current bankruptcy law permits debtors in chapter 7 bankruptcy to redeem personal property, such as cars, by paying the lienholder the value of the collateral. This redemption right exists regardless of the terms of the loan contract. The effect of the redemption is to remove the lien from the collateral. To redeem, a debtor must pay the secured party the amount of the allowed secured claim that is secured by such lien in full at the time of the redemption. If a secured party is completely underwater because the value of the first mortgage exceeds the house's value, the debtor would file a motion to redeem under 722 and pay nothing (that's the amount of the allowed secured claim!))  I think this legislation would provide some real leverage to get banks to agree to write down second loans.

Continue reading "Redemption (of the 722 variety) for Struggling Homeowners" »

Ambac & the Safe Harbors

posted by Stephen Lubben

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.

Credit Bidding

posted by Adam Levitin

The Third Circuit has ruled in Philadelphia Newspapers that a cramdown plan that includes an asset sale not subject to credit bidding is confirmable.  The ruling overs only sales under a plan (1123(a)(5)(D) sales), not pre-plan sales (363 sales).  It is the latest example (with Chrysler and GM's plans being the next most recent) of the tension between sections 363 and 1123/1129.  In Chrysler and GM, a 363 sale was used to effectuate a plan, whereas in Philadelphia Newspapers, an 1123/1129 sale is being used to effectuate a 363 sale without credit bidding.  It's becoming increasingly clear that integrating 363 and 1129 protections for creditors is going to be at the heart of the next round of corporate bankruptcy reform.   

Some thoughts below.  I suspect that Stephen Lubben will chime in as well...

Continue reading "Credit Bidding" »

Today's Consumers Prefer Chapter 7 Bankruptcy 3 to 1

posted by Katie Porter

While the media focuses on the total number of filings, a drill down into those data can also tell us something about the pain that families are suffering. In the last two years, since the foreclosure crisis, the fraction of all consumer filings that are chapter 13 cases has plummeted. In the language of taste tests of soda pop, today's consumers prefer chapter 7 three-to-one over the competition (aka chapter 13). Check out these data from the UST Program. In 06-07, chapter 13s averaged about 38% of all filings. In 08, there was a steep drop to 31%; and in 09, a further drop to 26.5%. These are really big changes in such a large system.


The obvious explanation for this fall in chapter 13 is a decline in people trying to save their homes, which we think is a major reason that people chose chapter 13 instead of chapter 7. 

Homeowners in 2008 and 2009 seem to have realized three things: 1) home prices are not going up anytime soon; the "crisis" is  a long-term change in the housing and mortgage markets; 2) they are not going to get a loan modification; the Administration's projected numbers of those who would be helped by HAMP and HARP were fanciful (dare I say "misleading"?); and 3) they simply cannot make their mortgage payments in a world where overtime is being eliminated, unemployment is a fear or reality, increased tax burdens loom as states and localities can't make ends meet, and many other costs remain high (gas, health care, etc.) Many people had these realizations in 2008, and many more had them in 2009. Each year, the share of chapter 13 filings plummeted. And all this, despite BAPCPA's purported intent of driving up chapter 13 filings and making people pay more of their debts.

Homeowners' pessism may not be a bad thing. In a research paper that I authored with John Eggum and Tara Twomey, we found that chapter 13 filers in April 2006 (before the foreclosure crisis) had very high homeownership costs, with more than 70% of homeowners trying to save homes that subsumed more than 30% of their incomes (the long-standing standard for affordable housing). The lower fraction of chapter 13 filings may ultimately translate to a higher rate of plan completion for chapter 13; if consumers are reticient to try to save homes with high costs, maybe more than 1 in 3 chapter 13 plans will make it to completion and a higher fraction of chapter 13 debtors will earn a discharge. Time--a long time, given the five year repayment plans that dominate chapter 13--will tell if the lower proportion of chapter 13 cases as a share of total bankruptcies will correlate with a higher discharge rate for chapter 13.

Consumer Protection & Bank Soundness

posted by Stephen Lubben

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.


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

posted by Stephen Lubben

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).

Continue reading "The Financial Stability Oversight Counsel" »

Reasonably Equivalent Value for Academic Prestige?!

posted by John Pottow

BearingPoint's Trustee has just brought a fraudulent transfer action to get back a donation it paid Yale of $6 million to endow a chair and earn naming rights of certain on-campus buildings at its School of Management.

(If someone can find a link, please post.)

This academic of course thinks summary dismissal is warranted for the suggestion that they might not have received REV for the honor of having their name used in connection with a prestigious professorship!

Financial Consumer Protection--The Last Thing We Need Is Federal Banking Regulator Oversight

posted by Bob Lawless

Yesterday, I was talking with former Credit Slips guest blogger Pat McCoy about perhaps reprising that role for us. McCoy is a law professor at the University of Connecticut and, along with her co-author Kathleen Engel, was writing about Wall Street's role in financing predatory home loans before anyone else wanted to talk about it. Unfortunately, some upcoming professional travel is going to prevent Pat from joining us until later in the spring.

We started talking about the Dodd financial regulation bill announced yesterday. While we were talking, Pat was explaining to me that the proposed Bureau of Consumer Financial Protection would not be as independent as advertised. It was a point that I had not fully appreciated--it is a 1,300 page bill, after all. Even as she prepared to travel, Pat kindly agreed to write up a few a paragraphs on her thoughts about the issue so I could post them here:

Continue reading "Financial Consumer Protection--The Last Thing We Need Is Federal Banking Regulator Oversight" »

Thank You Anna Gelpern

posted by Adam Levitin

We've enjoyed having Anna Gelpern as a guest blogger for the past couple weeks.  (Is there anyone who can write, much less say, "fortnight" any more?).  Anna's saucy and erudite posts have provided a real education in some very timely sovereign debt issues.  Thank you Anna!

Debt and the People, Part II: The Hot ... and Concluding Disquietudes

posted by Anna Gelpern

This last post is about old news that I have been avoiding.  Even so, it would be malpractice to omit Ecuador from even this partial snapshot of the sovereign debt landscape circa 2010.  So on with its latest debt default, and all that it has dredged up. 

In a nutshell, Ecuador announced in late 2008 that it would stop servicing two of its foreign bonds; six moths later, it bought most of them back for cash at about 35 cents on the dollar, effecting substantial debt relief.  Three things about the episode bear emphasis.  First, Ecuador specifically refused to claim that its debt was unsustainable by IMF metrics conventionally used as a threshold for sovereign debt relief in the absence of a formal bankruptcy regime.  Second, on the eve of the default, a Presidentially-appointed audit commission deemed the debts irregular and illegitimate.  However, not all the debts condemned by the commission were then formally renounced by the government.  Third, instead of walking away from the debt, Ecuador ended up reverting to market mechanisms to buy it back at a discount.

Continue reading "Debt and the People, Part II: The Hot ... and Concluding Disquietudes" »

Of Cyborgs and Repo Men

posted by Angie Littwin

The New York Times may have thought it had the scoop on the repo man of the future, but the new movie Repo Men has it beat by several hundred years. Jude Law and Forrest Whitaker star as space-age repossession agents who track down debtors and retake their collateral. The twist is that the collateral in question is transplanted body parts. So if, for example, you fall behind on the payments for your new kidney, Law and Whitaker will hunt you down and take it off your hands. Early in the preview – the movie opens later this week – we see the two scalpel-toting contract enforcers taking the Article 9 “breach of the peace” standard to whole new levels and saying over beers that a job is just a job. But, not surprisingly, Law has change of heart, one that appears to be spurred by a literal change of heart, and suddenly . . . the repo man becomes the debtor. (That’s credit-speak for “the hunter becomes the hunted.”)

Judging from the preview, Repo Men looks like your typical sci-fi dystopia flick where good-looking people fight a seemingly losing battle against a behemoth government or corporation that controls every aspect of human life. What’s interesting is that the credit industry has a starring role as the Big Brother. The movie takes two of the worst miseries of the current credit system – overwhelming medical debt and rampant foreclosure – and twists them into one debt nightmare. I never thought the line, "We could come up with a plan that fits your [budget]" could sound so menacing. Does a movie like this mean that there’s enough anger at lenders to, say, get us a Consumer Financial Protection Agency with teeth? I don’t know. But it does suggest that this is our big chance. We may never get an action-movie moment again.

Thank you to UT student Jennifer Carter for the tip!

De-Detour: CDS Nudity on the Exotic Fringe

posted by Anna Gelpern

A recent FT Editorial implicates a topic IImage1 -- basis risk in emerging markets (EM) credit derivatives.  The problem is this:  If you want to buy protection against default by a big U.S. firm--say, GM--you buy a CDS contract on a GM bond.  But even in the leading emerging markets, it is often difficult to buy protection on major corporate credits, especially if you want to hedge against default on local-currency or other non-dollar/euro/yen obligations.  This is because local financial markets are relatively thin.  Your choice then is to buy a liquid standardized instrument, such as a CDS on foreign-currency sovereign debt, or to negotiate an expensive bespoke contract with a party willing to take the precise local risk off your hands.  If you opt for the liquid standardized sovereign CDS, you get partial protection.  This means that if your borrower defaults but the government is still servicing its dollar-denominated foreign bond, you cannot collect.  Herein the basis risk.  Note that even if you were able to arrange bespoke protection, you could be taking on more counterparty risk, since the only people willing to insure illiquid local instruments might be local institutions more exposed to measures such as capital controls ... or risk-hungry fringe elements that might flake out on you.

How is any of this relevant to the current debate on regulating "naked" CDS, or credit protection not matched by exposure to the underlying credit (aka fire insurance on your neighbor's house)?  It goes to the difficulty of defining the subject.  A CDS that might appear naked at first blush could in fact be partially clothed; and instead of encouraging better hedging, we might end up eliminating what partial protection is available in less liquid markets (damage insurance on your block?).  Not to say that EM basis risk should even remotely drive the discussion, but the example does expose the challenge of figuring out not just the legal terms of the regulated instruments, but the often less-than-intuitive ways in which they are used.

Debt and the People, Part I: The Cold

posted by Anna Gelpern

In earlier posts, I considered two trends:  first, the eroding boundary between chronically defaulting sovereign and risk-free government debt; and second, the comfy symbiosis among feckless rules, fudged government accounts and basic financial engineering.  I also considered the politics of erosion and symbiosis.  In this post and the next, I move to a third trend, perhaps the most overtly political of the lot: the resurgence of popular input in national debt matters.  The latest exhibit in this trend is Iceland, whose money troubles gave Michael Lewis the opening to set Beverly Hillbillies in Lake Wobegon.  The immediate predicate for this post is last weekend's referendum, where over 93% of the voters rejected a plan for Iceland’s government to guarantee payments to the United Kingdom and the Netherlands, compensating them for compensating their nationals who lost money in Icelandic internet bank accounts.  Curious referendum factoids include that (a) the deal voted on had long been superseded, and (b) “yes” votes came in third after empty ballots.  But the back-story is serious, complicated and revealing.

Continue reading "Debt and the People, Part I: The Cold" »

Avoid Chapter 11 at All Cost!!!

posted by Stephen Lubben

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

posted by Stephen Lubben

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.
  • Early Thoughts on Milavetz

    posted by Bob Lawless
    This morning, the Supreme Court issued its decision in Milavetz on prebankruptcy attorney-client counseling and bankruptcy attorney disclosures. I've got to get to a meeting so I don't have time for an extended post. The early reporting has been technically correct but misleading, e.g., Reuters, "US top court upholds lawyer bankruptcy advice law." The decision upheld the law but construed its most troubling provision--section 526(a)(4)--in a very narrow way, eliminating almost all concerns about the statute. It appears to come out about the way I expected.

    Half-Empty or Half-Full: The February Bankruptcy Figures

    posted by Bob Lawless

    Pick which blog post you want to read:

    The year-over-year increase in bankruptcy filings for February hit its lowest mark since the trough in filings after the 2005 changes to the bankruptcy. February saw only 6,170 filings per business day which was a 13.3% increase over February 2009. The rate of increase in bankruptcies is leveling off, possibly indicating a brightening financial picture for the middle class. The February figures continue a trend that has been developing over the past several months, as discussed in the blog post discussing the January figures and its accompanying graph.

    Or, if you would prefer:

    The daily bankruptcy filings in February (6,170) hit its second-highest point since the 2005 changes to the bankruptcy law. February daily bankruptcy filing rate was a 14.2% increase over January. If the trend continues, 2010 will be a record year for bankruptcy filings, possibly even eclipsing the aberrational year of 2005 when people filed in a rush to beat changes to the bankruptcy law. These figures show a deteriorating financial picture for the middle class.

    The figures in both paragraphs are accurate. It's all in how you pitch it, and if you read the blog regularly, you will remember me bemoaning the often hyped-up presentation of the bankruptcy figures just to create sensational headlines. To get a balanced sense of what the bankruptcy filing figures are telling us, there are a few key points always to keep in mind.

    Continue reading "Half-Empty or Half-Full: The February Bankruptcy Figures" »

    Foreclosures: What About the States?

    posted by Adam Levitin
    Here's something that's puzzled me:  no state has yet to enact any serious foreclosure moratorium.  In the 1930s, these moratoria sprouted up all around the country, and foreclosure rates (but not default rates), were much lower than today.   California imposed a 90 day moratorium, but that's not going to do much.  Why haven't Nevada or Arizona enacted a more serious foreclosure moratorium?  What's the political economy story in those states?  Any thoughts?

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

    posted by Stephen Lubben

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

    The Ban on "Universal Default"

    posted by Katie Porter

     Did Congress' effort to protect you from your card company with the Credit CARD Act inspire you to pore over the new Cardmember "Agreement" that probably arrived in your mailbox this week? I actually read at least part of mine, looking in particular at the implementation of the Credit CARD Act. (I am apparently one of the "consumer advocates" that Ronald Mann thinks has the time to "scrutinize the agreements and bring attention to provisions sufficiently onerous that they would not bear public scrutiny.") 

    The first place I looked in the Cardmember Agreement was the paragraph labeled "Default/Collection."  I was looking for the much-touted restrictions on universal default. Here is what I read, to my initial surprise: "Your account may be in default if any of the following applies:  . . . we obtain information that causes us to believe that you may be unwilling or unable to pay your debts to us or to others on time."  Wait a minute. . .  That sounds like my default (or purported default) on my debts to someone else is a default to JPMorgan Chase. Isn't that what "universal default" is?

    Actually, no, at least not as defined in the legislation. The Credit CARD Act prohibits raising "any annual percentage rate, fee, or finance charge applicable to any outstanding balance" with a few exceptions.  Notably absent from the list of exceptions is the ability to increase those charges based on a cardholder's default to other creditors. But of course that is not what the JPMorgan Chase agreement permits. Rather, it says that I can be in "default" for being unwilling or unable to pay debts due to others, not that my charges can be increased. Under the Cardholder Agreement, a default permits JPMorgan Chase to close my account without notice and require me to pay my unpaid balance immediately. That is pretty grim result for a late payment to another creditor, even if it is not "universal default."

    Do Not Miss

    posted by Anna Gelpern

    William White has a rocking op-ed in the FT arguing that debt overhang, notably in the U.S. household sector, makes fiscal and monetary policy ineffective.  White is one of the early pre-pre-pre-crisis proponents of macroprudential regulation, and always worth tuning in for.  Amen and testify.  (I am biased, as have been sympathetic to across-the board debt reduction in crisis.)

    Gary Gensler uses the Greek controversy (and AIG) to argue the CFTC regulation brief, notably clearing houses.  He is a smart and complicated guy, and his argument is more nuanced than the demonization din.  He says that Greece might not have done the "Euroliar loan" swaps had the proposed reforms been in effect, because it would have had to post collateral, which would have made the transactions either useless or prohibitively expensive.  I leave the unpacking to the experts, but I suspect that it depends on some key factors in both the law and the swaps.  Nevertheless, a more productive framing for the conversation.

    Half a (Rotten) Loaf is Worse Than None at All: The Fate of the CFPA

    posted by Adam Levitin

    As political wrangling over financial services reform continues, the creation of an independent CFPA remains a major bone of contention.  A number of compromise proposals have been bruited:  creating an independent bureau in Treasury, vesting the power in the Fed, vesting the power in the FDIC, or vesting the power in the FTC.  Some proponents for stronger consumer protection in financial view a compromise as acceptable on the theory that half a loaf is a better than none at all. 

    It's not.  Better not to have a consumer protection agency at all than to have one placed in a prudential regulator.

    Continue reading "Half a (Rotten) Loaf is Worse Than None at All: The Fate of the CFPA" »

    It's All Greek to Me FAQ, Part II: Euroliar Loans

    posted by Anna Gelpern

    While they hold some allure for the pointy-headed company I normally keep, the old fixing-floating-IMF-bailout handwringing detailed in my last post is nothing to the titillation of the Goldman-CDS angle on the Greek drama.  FAQ series continues with a focus on lying.

    Who lied, to whom, about what?

    Continue reading "It's All Greek to Me FAQ, Part II: Euroliar Loans" »

    It's All Greek to Me FAQ, Part I: Power of Commitment

    posted by Anna Gelpern

    This follows on Stephen's post earlier in an effort to help sort through the Greece-Goldman-Germany love triangle and the deafening din surrounding its implosion.  This post sets out the background for the Greek crisis, mulls law as a macro commitment device, and the relative merits of EU and IMF bailouts.  The next one goes into more depth on Goldman and derivatives.

    Why is everyone talking about Greece?

    It’s the Olympics! (Did You See the Inflatable Beavers?)  And because Greece needs to come up with Euro 20 billion (about $27 billion) by April-May to roll over maturing debt.  Greece is having trouble borrowing the money because its debt stock is pushing levels that help poor developing countries qualify for official debt relief, with little prospect of going down.  As a result, Greece may have to pay a 4% premium over Germany, if it can borrow at all.

    So what?  What happens if Greece defaults?

    Continue reading "It's All Greek to Me FAQ, Part I: Power of Commitment" »

    Thank You to Jim Hawkins

    posted by Bob Lawless
    On behalf of the Credit Slips bloggers, I want to thank Jim Hawkins from the University of Houston Law Center for joining us the past couple of weeks. Jim has been a new voice on consumer debt issues and has been pushing against the legal academy's conventional wisdom on these issues for being too . . . . well, conventional. Jim's commentary on financial distress, for example, is a good example. We talk a lot about "financial distress" but rarely give the term the precise meaning it deserves. Jim's posts the past few weeks have given Credit Slips readers a sense of his work, and we have enjoyed having him offer his new perspective to the topics we discuss every day.


    Current Guests

    Follow Us On Twitter

    Like Us on Facebook

    • Like Us on Facebook

      By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

    News Feed



    • 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.