4 posts from December 2019

Elizabeth Warren's Work in the CMC Heartland Case

posted by Adam Levitin

Elizabeth Warren’s bankruptcy work continues to be in the news, now with a Washington Post article on her work in the CMC Heartland case. Unfortunately, the Washington Post completely misses the point about why Elizabeth decided to work on this case. Let me correct the record about Elizabeth’s (very limited) role in the CMC Heartland case.

Continue reading "Elizabeth Warren's Work in the CMC Heartland Case" »

The end of the UFCA?

posted by Stephen Lubben

Governor Cuomo has signed into law New York's version of the Uniform Voidable Transactions Act (UVTA). Does this mean I don't have to talk about the UFCA in my bankruptcy classes anymore?

It also means that both California and NY are on the UVTA, which may be the beginning of the end for the UFTA.

Sovereign Gold Bonds in 2019: Really?

posted by Mark Weidemaier

Mark Weidemaier and Mitu Gulati

For a while now, we have been meaning to write about “sovereign gold bonds,” or “SGBs,” which the Indian government has been marketing under domestic law to residents of the country since November 2015. Gold bonds were supposed to have been a thing of the past. We’ve written previously about the U.S. government’s abrogation of gold clauses in both public and private debt in the 1930s. Last seen (to our knowledge) in government and corporate debt around that time, these clauses obliged the borrower to repay in either gold or currency at the option of the holder. (For detailed treatments, see here, here and here.) The point was to protect investors against currency devaluation. Thus, the famous case of Perry v. United States concerned U.S. government bonds that provided for payment of principal and interest “in United States gold coin of the present standard of value.” As the U.S. Supreme Court recognized, the promise sought “to assure one who lent his money to the government and took its bond that he would not suffer loss through depreciation in the medium of payment.” (An investor also would not benefit from an appreciation in the value of the currency, for payment was tied to gold coin of the “present standard of value.”)

The bonds in Perry were “Liberty” bonds issued to finance the 1st World War. The government therefore marketed the bonds as patriotic investments, although then, as now, marketers favored subtlety over heavy-handed appeals to emotion.

Liberty Bond photo

Regrettably for investors, it also turned out to be their patriotic duty to accept less than full payment.

Continue reading "Sovereign Gold Bonds in 2019: Really?" »

Dysfunctional Sovereign Debt Politics in Lebanon, Italy, and [Your Country Here]

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

Debt, like the full moon, is known to make politicians act strangely. There have been some good examples over the last few weeks, most recently in Lebanon and Italy.

Let’s begin with Lebanon. The country has a huge foreign currency debt stock, dwindling capital reserves, and one of the highest debt/GDP ratios in the world (here, here and here). Investors are concerned, and this is reflected in yields on Lebanese bonds and in the prices of CDS contracts, which reflect an estimated 5-year default risk of around 80%. Last week, Lebanon made a large principal payment on a $1.5 billion bond that had matured, and then turned around and borrowed more, issuing two new dollar bonds with a total principal amount of around $3 billion. These moves bought time, but at the cost of further straining the country’s scarce foreign currency reserves and adding to its debt burden. Why not instead simply ask for an extension of maturities on the existing bonds, buying time to devote resources to something other than debt service?

This head-in-the-sand approach is pretty typical. Politicians often delay debt restructuring far longer than they should. No award goes to the politician who recognizes and addresses a debt problem early, when it is still manageable. A politician who utters the word “default” is likely to get tossed out of office before the benefits of timely action become clear. And while in an ideal world, international financial institutions like the IMF might help produce better decisions, that rarely happens.

But it’s not just that the Lebanese government won’t acknowledge the problem. For some years, the government has delayed obvious reforms to its bond contracts that would have made a restructuring easier to manage.

Continue reading "Dysfunctional Sovereign Debt Politics in Lebanon, Italy, and [Your Country Here]" »

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