26 posts from March 2020

CARES ACT student loan relief

posted by Alan White

The CARES Act signed into law last week suspends payments and eliminates interest accrual for all federally-held student loans for six months, through September 30. These measures exclude private loans, privately-held FFEL loans and Perkins loans. The other five subsections of section 3513 mandate important additional relief. Under subsection (c) the six suspended payments (April to September) are treated as paid for purposes of “any loan forgiveness program or loan rehabilitation program” under HEA title IV. In addition to PSLF, this would include loan cancellation at the end of the 20- or 25- year periods for income-dependent repayment. Loan rehabilitation is a vital tool for borrowers to get out of default status (with accompanying collection fees, wage garnishments, tax refund intercepts, and ineligibility for Pell grants) by making nine affordable monthly payments. This subsection seems to offer a path for six of those nine payments to be zero payments during the crisis suspension period.

Subsection (d) protects credit records by having suspended payments reported to credit bureaus as having been made. Subsection (e) suspends all collection on defaulted loans, including wage garnishments, federal tax refund offsets and federal benefit offsets.

Finally, and importantly, subsection (g) requires USED to notify all borrowers by April 11 that payments, interest and collections are suspended temporarily, and then beginning in August, to notify borrowers when payments will restart, and that borrowers can switch to income-driven repayment. This last provision attempts to avert the wave of default experienced after prior crises (hurricanes, etc.) when, after borrowers in affected areas had been automatically put into administrative forbearance, the forbearance period ended and borrowers continued missing payments. Whether the “not less than 6 notices by postal mail, telephone or electronic communication” will actually solve the payment restart problem will depend a great deal not only on the notices but also the capacity of USED servicers to handle the surge of borrower calls and emails. At present servicers are struggling with handling borrower requests because many employees are in lockdown or quarantine.

How to Treat Post-Petition Attorneys' Fees

posted by Adam Levitin

This is a hyper-technical bankruptcy question that's been bothering me for a while: what happens with post-petition attorneys' fees for undersecured/unsecured creditors after the Supreme Court's 2007 decision in Travellers v. PG&E? Specifically, assuming that the post-petition attorneys' fees fees are allowed as an unsecured claim, are they credited against a collateral cushion before or after post-petition interest?  

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PSLF in the time of Coronavirus

posted by Alan White

The rules for student loan borrowers hoping for Public Service Loan Forgiveness are changing rapidly, and information even on Education Department and CFPB web sites is confusing and rapidly outdated. The CARES Act, section 3513, signed into law on March 27, requires the Secretary of Education to “suspend all payments due” for federally-held student loans until September 30. The same section provides that interest shall not accrue on any loan for which payments are suspended. The law supersedes the prior Education Department administrative action suspending interest for 60 days. Of special relevance to PSLF, the third subsection provides that “The Secretary shall deem each month for which a loan payment was suspended under this section as if the borrower of the loan had made a payment for the purpose of any loan forgiveness program or loan rehabilitation program.”

The most important advice for borrowers is still to 1) be sure you are in a federal direct loan, using a direct consolidation loan if necessary to get out of FFEL, 2) get on an income-dependent repayment plan and 3) apply to have your IDR monthly payment recalculated now, not next year, if you have any job loss or drop in income.

“Suspending” payments is unfortunate language because it is not an existing repayment status. USED will probably interpret this to mean “forbearance,” rather than “deferment” but no announcement has yet been made. The third possibility is to treat all borrowers as if they were in income-dependent repayment (IDR) with a zero payment. The law also mandates zero interest for the next 6 months, and borrowers report that they are already seeing their interest rate changed to 0% on line. As a practical matter, forbearance with zero interest is similar to deferment or IDR with zero payment. However, months in forbearance would normally not count towards the 120 months required to get PSLF forgiveness, nor for that matter for the 20 or 25 years of payments required for forgiveness at for borrowers in income-dependent payment plans. Because the CARES act mandates that months in “suspension” count, the effect should be more like IDR with zero payment.

The good news is that 3513(c) effectively supersedes the 15-day rule, so early and late payments won't matter for the next 6 months.

The bad news is that a monthly payment does not count towards the 120 required unless the borrower is employed full-time during that month. The CARES Act language could be read to supersede that requirement. Unfortunately my guess is that USED will read 3513(c) to suspend the payment requirement but not the full-time employment requirement. As a practical matter, borrowers just need their employer to certify that they were a full-time employee during the relevant time period, which should include at least paid sick leave. Public servants on unpaid leave may be left out in the cold, as far as PSLF payment counting. USED does have the power under the prior pandemic legislation to waive statutory and regulatory requirements, and we’ll see how generously they choose to interpret this provision.

Borrowers in IDR payment plans are entitled to have their servicer recalculate their monthly payment based on current income if they lose a job or have reduced income. Payment “suspension” for those borrowers could create additional problems. If all federal loans are placed into administrative forbearance, borrowers whose IDR payment is based on job income may not act promptly to have their IDR payment recalculated based on current income.

If this advice is wrong or you have better information or ideas for PSLF borrowers, please comment.

Boer Bonds and the Doctrine of War Debts

posted by Mitu Gulati

Concentrating on just about anything during these days of the coronavirus, let alone academic writing, has been a trifle difficult.  A splendid new paper on Boer Bonds by Kim Oosterlinck and Marie Van Gansbeke (here) did, however, get me focused (for a bit).  And that’s in part because their paper has potentially turned upside down what I thought was an established part of customary international law.  That is, the law of “War Debts.”

The international law of state succession, standard treatises will tell you, is strict.  New states (and new governments) inherit the debt of predecessor states (and governments), regardless or changes in political philosophies.  One of the only exceptions to this strict rule is the doctrine of War Debts.  This doctrine, that I thought was implemented by the British Crown in 1900, in the wake of Boer War, says that debts incurred during hostilities by the losing party do not need to be taken on by the victor.  The refusal of the United States to take responsibility for the debts incurred by the Confederacy during the Civil War is another example.

The historical materials that I looked at in my prior work were lacking in clarity, to put in mildly.  And my sources – old treatises and cases -- were all secondary.  In a paper from over a decade ago, here is what my co authors (Lee Buchheit and Bob Thompson) and I conjectured that the doctrine of War Debts was (full paper is here):

The British Government did not at the time articulate the rationale for this policy. Perhaps it believed the justification to be obvious. Paying the debts of a former adversary is one thing, particularly when victory brings sovereignty over the disputed territory and resources. But paying off the very loans that both delayed and added to the cost of that victory is quite another thing.

Moreover, anyone lending to a belligerent power after hostilities have begun is placing an obvious bet—an all-or-nothing bet—on the outcome of the war. This aspect of the war-debt limitation to the doctrine of state succession is significant because it introduces into the debate the reasonable expectations of the creditor when extending the loan.

Kim Oosterlinck and Marie Van Gansbeke, both financial historians, look beyond the secondary sources to primary sources – the debates among the legal advisers to the British Crown, the archival records of the investment banks, and most importantly, the prices of the Boer bonds issuer prior to and after the hostilities with the British began. The story they conclude with is different from the one than what my co authors and I conjectured a decade ago (being careful historians, they couch their bottom line with caveats about the need for further research).

Continue reading "Boer Bonds and the Doctrine of War Debts" »

ECB + CACs: Fig Leaf Aflutter

posted by Anna Gelpern

Further to Mitu's post about the European Central Bank's bond-buying bellyache, let us linger on the rationale for the 33.33% limit on the central bank's holdings of a euro area sovereign bond series. 

In the middle of the Greek sovereign debt crisis, euro area policy makers agreed to adopt functionally identical collective action clauses (CACs) in member state sovereign bonds, with two amendment options for important financial terms: (1) series-by-series voting or (2) aggregated voting, pooling two or more series. In a series-by series vote, two-thirds of the principal amount outstanding can override opposition by a third. In an aggregated vote, amendment requires at least two-thirds of the total principal amount outstanding in the voting pool plus at least half of each series in the pool.* 

The ECB has taken the position that "in the context of a restructuring subject to CACs, it will always vote against a full or partial waiver of its claims" to comply with the European treaty framework. This means that, if the ECB held more than one-third of a bond series, it would single-handedly block a single-series restructuring. If the ECB held more than half of a series, it could force it to drop out of an aggregated restructuring as well. To avoid being the holdout, the ECB adopted the 33.33% bond purchase limit in 2015 (see Article 5 of this and this excellent piece by Sebastian Grund). Of course, no matter how little sovereign debt it holds, the ECB makes life easier for other holdouts with its pre-commitment to vote against restructuring -- the others need to buy that much less to free ride.

It is unclear whether the 33.33% series limit was motivated by the mere possibility that a government would restructure its debt by written consent* using series-by-series CACs--or a view that this approach was most likely, or even required. Perhaps 33.33% was the the lowest plausible limit, since it is hard to predict how pooling and aggregated voting would work in any given case. Who knows? The only certainty is that in 2015, the ECB voluntarily subjected itself to some oddly-reasoned bond buying caps, and that today, these could knee-cap Italy.

The limit makes even less sense in light of the 2018-2019 commitments by euro area policy makers to adopt so-called "single limb" aggregated stock-wide voting.  Under the latest market standard (due to take effect in the euro area in 2022), a government need not even poll individual series. Now add the likelihood that a country like Italy would restructure using domestic statutes, rather than CACs, as explained in Mitu's post and his article with Ugo Panizza, and 33.33% begins to look mighty random. 

To be sure, it is politically and maybe legally awkward to say that a government would ignore CACs and use domestic law in a restructuring after pushing those clauses as the be-all for years.  It would be more awkward still to say that a government would ignore contracts, statutes, and any other law that might get in its way in an emergency, because aside from peacetime liability management operations, most sovereign debt restructurings could make out a pretty decent case for emergency/necessity rule.

But even if you assume that all euro area sovereign bonds have CACs (they do not) and that they would use them in the unlikely event of a restructuring (they would not), a 33.33% ex ante purchase cap makes little sense. It does not prevent the ECB from helping holdouts, or even from being the main holdout. It does not protect the ECB from losses in the event it is outvoted or suffers a default. It looks like a skimpy formalistic fig leaf covering up for real problems in the underlying treaty framework and short-sighted pre-commitments, at the cost of potentially impeding the ECB's monetary policy efforts at a critical time. The central bank (and the world) would be better off if it were disenfranchised altogether or at least confined to a separate voting pool. Besides, disenfranchisement and confinement are so au courant.

 

*The thresholds are different for votes taken in a meeting (25%+) and by written consent (33.33%+).

Mitch McConnell Is Robbing Taxpayers to Bailout the Rich

posted by Adam Levitin

There’s a lot of moving parts of the economic Rube Goldberg machine that is the latest McConnell bailout bill, but if you step back and look at the big picture, what becomes clear is that the bill is robbing taxpayers to bail out the rich. Everything in the bill is ultimately taxpayer funded. Yet the benefits of the bill are going disproportionately to the wealthiest households, which are precisely the ones which do not need assistance at this time.   

This massive handout for the wealthy is disguised because it involves the interaction of provisions in two separate titles of the bill, specifically the unemployment insurance provisions in title II and the $425 general billion bailout fund in title IV.  Because the government is picking up the tab for workers under title II and not requiring maintenance of employment by firms that receive the $425 billion under title IV, it is quite possible that the much of the $425 billion will just be used as a slush fund enrich corporate executives and shareholders, who happen to be overwhelmingly the wealthiest households in the country. 

[Update:  The $425 billion might actually be $4.25 trillion by the time the Fed gets done with it. The $425 billion might be a guaranty for an equity tranche that can be leveraged perhaps 10x.]

Continue reading "Mitch McConnell Is Robbing Taxpayers to Bailout the Rich" »

Do CACs Constrain the ECB From Buying Even More Bonds?

posted by Mitu Gulati

Answer: No

(This post borrows heavily from the ideas of my co author, Ugo Panizza, of the international economics department of the Graduate Institute in Geneva).

Press accounts of last Wednesday’s emergency ECB Governing Council meeting report that some of the hawks on the Council are resistant to the ECB buying more Euro area sovereign bonds.  The concern being that such purchases might take the ECB’s holdings of particular bond issues to more than a third. If this happens, the ECB would have a blocking minority in any future debt restructuring negotiations where the sovereign is seeking to use its Collective Action Clauses (CACs) to engineer that restructuring.  And (some claim) because voting for a restructuring would amount to monetary financing, the ECB would be forced to vote no and block the restructuring.   Hence, no buying above 33.33% of a bond issue should be done.

This is nuts. Let’s first state the obvious: large ECB interventions will reduce the likelihood that a restructuring will be needed. The reactions of sovereign spreads to President Lagarde’s botched comment that the ECB is “not here to close spreads” and to the successive ECB announcements make this clear.

But let us assume that, even with vigorous ECB intervention, a restructuring is needed and let us take the case of Italy which is what everyone is really talking about.  Close to 99% of Italian sovereign debt is governed by Italian local law. That gives Italy the so-called “local law advantage” (here we focus on Italy, but the local law advantage applies to most bonds issued by euro area sovereigns except Greece and Cyprus).  Translated, it means that Italy has a wide variety of strategies it could use to restructure its debts. 

The collective action clause or CAC mechanism – one where the debt can be restructured in a fashion that is binding on dissenting creditors if a super majority of creditors votes in favor of the restructuring -- is but one of many options that Italy could use to restructure its debt (we describe these options here; see also Weidemaier (2019), here). CACs may be the most market friendly of the various restructuring options, since it requires the approval of a super majority of creditors to work. But it is neither the easiest nor the cleanest restructuring technique for a country that enjoys the local law advantage.  More important, to answer those hawks on the ECB governing council, the restructuring could occur without the need for the ECB to vote one way or the other.

Continue reading "Do CACs Constrain the ECB From Buying Even More Bonds?" »

Bailout Oversight Lessons from 2008

posted by Adam Levitin

Damon Silvers, the AFL-CIO's Policy Director and former Vice-Chair of the Congressional Oversight Panel, has a really important column about the oversight lessons from the 2008 bailout. It was a struggle to get the Obama administration to be forthcoming about what it was doing with the bailout. It will be a much bigger challenge in the current political environment. Read Damon's column here.

How to Help Small Businesses...Fast

posted by Adam Levitin

A debt collection moratorium operates as float, which is needed to buy time until the relief checks start flowing. In other words, a debt collection moratorium is a form of stimulus. My New York Times op-ed explaining this is here.  

Student loan relief for public service workers: repeal the 15-day rule

posted by Alan White

More than one million public servants – nurses, soldiers, first responders, teachers—should be eligible now or soon for student loan cancellation under existing law – the Public Service Loan Forgiveness program. Congress and the Administration can accelerate this process now.

The Education Department and its servicer FedLoan have notoriously rejected 98% of PSLF loan cancellation requests. One of the reasons is a pointless and unhelpful regulation that was not part of the Congressional legislation, but was added by the Education Department – the 15-day rule. The PSLF law calls for public servants to have their loans cancelled after 10 years of repayment. The Department’s regulation defined 10 years of repayment as 120 payments, each made within 15 days of the due date. In real life borrowers make payments early and they make payment late. During the present crisis they cannot be expected to meet this rule.

Congress is already considering a bill that would give the Education Secretary broad authority to waive regulations. The 15-day rule should be the first to go. The Department and servicer FedLoan should work together to clear away ALL regulatory obstacles to full PSLF implementation.

Summary of the McConnell Bailout Bill

posted by Adam Levitin

The McConnell Bailout Bill (a/k/a HR 748 or the CARES Act), weighs in at just shy of 600 pages. I've taken the liberty of summarizing it in a powerpoint deck for teaching (syllabus be damned) and thought it might be helpful to make generally available. Here it is. (11:00 3/23 updated/corrected version).

I only warrant it as best efforts (meaning I might have misread or just missed something in this monster bill) and I have made no attempt to summarize the details of the social insurance program (UI, Medicare, Medicaid) interventions because they are outside my expertise. You'll have to read the bill itself (Part I and Part II) for that.  

I'll note quickly two things for Slips aficionados: there's no bankruptcy piece anywhere within the bill. There might end up being some very minor bankruptcy changes, but bankruptcy really isn't where the action is right now. 

You might consider how the airline bailout package in the bill compared with GM/Chrysler. That ought to be the benchmark for direct government rescue lending to real economy firms.  

From the Vault: Lee Buchheit on "How to Restructure Greek Debt" Videos

posted by Mitu Gulati

My sovereign debt class is discussing the March 2012 Greek debt restructuring on Tuesday afternoon.  The magic here was in significant part the product of Lee Buchheit's genius. That said, I do not wish to discount the contributions of his star studded team, which had debt gurus like Andrew Shutter and Andres de la Cruz who played invaluable roles.  

In class, we are thinking a lot about how Lee used the "local law advantage" in Greece. The reason being that we are (to put it mildly) somewhat focused on strategies that could be used to get Italy significant debt relief in the midst of this current crisis -- especially if the ECB drops the ball in terms of providing adequate financial assistance.  Lee just announced his retirement, a few months ago. I'm hoping that he comes back out of it. (Hopefully, we can get him to answer questions via zoom on Tuesday).

From the vault, here are some amazing videos of Lee from both before and after the March 2012 restructuring. They are amazing because they give us a sense of how his thinking evolved as his strategy moved from a hypothetical thought experiment that had no chance of being implemented to the one plausible strategy left on the table.

Videos:

Lee – Plan B (June 21, 2010) (Pre Greek Restructuring) – start watching at 20 minute point in:

https://www.youtube.com/watch?v=w8Zvfn3DjdY

 

Lee -- The Options Now (in the wake of the Greek debt restructuring) (Nov. 6, 2012)

https://www.youtube.com/watch?v=Q6G14SF4-sQ

 

The Options Now (Part II) (Q&A)

https://www.youtube.com/watch?v=e8bBWbKCdT8&t=26s

 

Lee, with an introduction by Ugo Panizza -- European debt restructuring/Greece (and some talk of Argentina) (Nov. 26, 2013) 

https://www.youtube.com/watch?v=nLZrTzvNBT0

The Bailout Cronyism and Corruption Have Already Begun

posted by Adam Levitin

We need to bail out the economy, and it's not going to be cheap. The government is going to have to carry the economy for 18-24 months. There's no way of avoiding that. But we don't need to be stupid or corrupt about the way we do it. And stupidity and corruption is unfortunately so hardwired into the Trump administration's DNA that it is being reflected in virtually every proposal out of the administration. 

Start with Treasury's ill-advised proposal to send checks out to every man, woman, and child in the United States. Beside being operationally difficult and misdirecting much of the aid, it is first and foremost a political move. These are serious times. They call for serious responses, not political maneuvers.  

And now, we learn that Treasury Secretary Steven Mnuchin is proposing turning to Goldman Sachs executives to provide assistance in administering the bailout. It's hard to think of anything more politically tone-deaf other than perhaps delegating the bailout to Wells Fargo.

More importantly, Goldman is objectively not the right institution to help. Goldman does virtually no small business lending, and their consumer lending is a small portfolio of loans to affluent individuals. It’s not even at the top of the bracket in commercial lending generally. Goldman is primarily an investment bank that does M&A and securities underwriting; they're not known as commercial bankers. The challenges in the bailout response are restructuring and commercial banking issues, including a lot of operational problems. That's just not where Goldman's strengths lie. So why Goldman? Just more cronyism.

This should be a bright flag to ever member of Congress that Steven Mnuchin cannot be trusted to lead the bailout efforts. If he does, we're looking at something a lot worse than HAMP 2.0. A key part of any bailout is going to be its governance. There's inevitably going to be a fair amount of discretion involved in the bailout efforts. We need the bailout to be led by serious people. Sadly, there are not many serious people in any position of authority in the Trump administration. That suggests that Congress needs to come up with a governance structure for any bailout funds that is new and independent of the Trump administration.

I don't mean by this that it needs to be a bunch of people who share my political views. There are plenty of competent and serious people from both parties who aren't in the Trump administration. Hopefully this is a time that Senator McConnell recognizes that he can't turn the keys over the Trumpists; the effectiveness of a bailout is going to depend on whether Congress gets the governance structure right. We need to take a serious problem serious and not see it as an opportunity for self-enrichment and political gain. 

 

Puerto Rican Debt and Force Majeure

posted by Mitu Gulati

Among other things, the Coronavirus and the near global shutdown, has gotten contracting parties scrambling to read their force majeure clauses.  But what about if the parties in question didn’t explicitly contract for an “act of god” clause that covered unexpected pandemics? The question, as we’ve discussed on this blog before, would become one of whether such a clause was implicit in the contract (here).  That, in turn, will in part be a function of the contract’s governing law (here).  Puerto Rico, already mired in a debt crisis, is going to need even more relief now.  Question is: Does the fact that its debt contracts are almost all governed by local Puerto Rican civil law embed a source of temporary relief for it?

My casual impression is that the leading common law jurisdictions for contract law, such as New York and England, would be reluctant to find an implied force majeure term in contracts among sophisticated parties.  By contrast, civil law jurisdictions such as France, the Netherlands and Spain, sometimes have such a clause baked into the civil law and also appear more willing to find such a provision implicit (for discussions of the common law v. civil law approaches, see these memos from White & Case and Cleary Gottlieb memos, here and here).

Particularly intriguing in the context of a sovereign or quasi sovereign debt, is the possibility that an implication of the civil law jurisdiction in question having force majeure as part of the civil code means that the relevant government can, through legislation, make it clear that a particular event (Coronavirus) satisfies the conditions for force majeure (here).  China has apparently done just that, even issuing force majeure certificates in some cases (here and here).

A reason I’ve been thinking about implied force majeure clauses is that my seminar with Guy Charles has been discussing Puerto Rico’s debt crisis.  (Two of our recent guests to the seminar were David Skeel and Sam Erman, both of whom had fascinating papers on the topic of Puerto Rico).  Puerto Rico is, unlike most of the US,  a civil law jurisdiction.  Better still, almost all of its debt is under local Puerto Rican law (now, in the case of anything redone under PROMESA, with an overlay of that federal law). 

One has to concede up front that the Puerto Rican debt crisis is not the product of some exogenous event such as a hurricane or the coronavirus.  But surely everyone would agree that the virus has the potential to push Puerto Rico (back) over the financial brink, just as its seems to be getting back its sea legs (see here). And, so the question is, does Puerto Rico, as part of the implicit terms of any debt contract made locally, have the right to temporary relief from having to perform as a result of the enormous economic slowdown that the virus is already causing.  I haven’t been able to track down anything specific in the Puerto Rican civil code, but the Puerto Rican code has its origins in the Spanish civil code. And the Spanish code has force majeure baked in (for discussions, see here and here).

Hmmm . . . Some years ago, a wonderful group of students did find some promising avenues for Puerto Rican debt relief buried deep in its civil code (here).

*Note (in response to the first few email comments - that I'm most grateful for):  The question of what precise law the new agreements are governed by is thorny.  Best I can tell, it seems to be PROMESA and, to the extent not inconsistent with PROMESA, Puerto Rican law. But what in the world does that mean with respect to what we care about: force majeure for pandemics such as coronavirus?  I don't think there is any federal contract law on that matter; and, if so, that strikes me as pointing to Puerto Rican local law, which in turn might point us to the Spanish civil code. But maybe there is an argument there about how federal law has something to say about force majeure in the context of a pandemic that is escaping me. The actual language of the new governing law clauses is fascinating if you are as obsessed with governing law provisions as Mark W and I have been as of late.  John Coyle of UNC is the leading scholar of governing law clauses in the whole wide world (see here). And he is a contracts guru as well.  Maybe I can get him to opine.  I will try to do so and report back.

COVID-19 Response: The Need for Speed

posted by Adam Levitin

While Congress struggles to figure out the best way to respond to the coronavirus pandemic, it is very apparent that immediate relief measures are necessary, if only to buy time for a more comprehensive approach. Layoffs are already happening and with they continue, it will result in more economic disruption from diminished consumption.

1. Sending out checks isn't fast enough (and can't happen in two weeks)

There is, fortunately, some recognition of that speed is imperative, but there's a right way and a wrong way to do it. The wrong way is what the Trump administration is proposing, namely sending everyone a check. Besides being poorly tailored—$1,000 isn't enough for those who really need help and is wasted on many other folks—the problem is it just cannot happen fast enough. No one is being honest about the operational problems. Treasury Secretary Steven Mnuchin is going around saying that he wants to get checks for $1,000 to every American within two weeks. That's just not possible, and Mnuchin should stop overpromising. 

Here's why it won't work fast enough: for Treasury to send everyone a check, it would need to know where to send the checks. It doesn't. Treasury knows where to send checks to individuals who are receiving Social Security and Disability Insurance (actually, it would be electronic transfers in almost all such cases). But what about everyone else? Treasury doesn't know (a) who is still alive, and (b) where they live. The first problem might mean sending out some checks that shouldn't happen, but the second problem is more serious, as it means that checks won't get where they need to go. Treasury is able to send me a tax refund because I give an address with my tax return. At best Treasury has year-old information, which will be wrong for many people. Those people who most need the money are the people who are most likely to have moved in the last year—economically insecure renters (see Matthew Desmond's Evicted on this). Sending everyone a check really isn't a very good solution. 

2. Foreclosure/eviction moratoria are equivalent to an immediate cash injection to the economy.

Fortunately, there's a better solution:  an immediate national moratorium on foreclosures, evictions, repossessions, utility disconnects, garnishments, default judgments, and negative credit reporting for all consumers and small businesses. The point of a national collection action moratorium is not to be nice to debtors. A national collection moratorium is a stimulus measure:  it has the effect of immediately injecting cash into the economy in that it allows people and businesses to shift funds from debt service obligations to other consumption. It's basically a giant forced loan from creditors to debtors. And it happens immediately, without any administrative apparatus. There's nothing else that will have such a big effect so immediately. Congress should move on moratorium legislation asap as a stand-alone bill to buy itself some more time for a longer-term fix.  

Now let's be clear—what I am talking about is not debt forgiveness. It is forced forbearance. The debts will still be owed and may accrue interest and late fees (there may be ways to limit those, but that's another matter). That's important because it substantially reduces the argument that the delay constitutes a Taking—government is always free to change how remedies operate, such as changing foreclosure timelines, etc. without the changes being a Taking.

This is exactly what a moratorium would be doing. A number of states and localities have already undertaken such moratoria, and FHFA and HUD have done so for federally or GSE insured or guarantied loans. But we've got a national crisis, so this should be done uniformly on the federal level using the Interstate Commerce power for the entire consumer and small business debt market. Given that all collection actions involve the mails or wires and that debt markets are national, this seems squarely within the scope of federal power. 

Now a collection moratorium is not a permanent fix and will cause some dislocations itself. Consumers/small businesses will eventually need to come current on their obligations, and they may need assistance to do so, but that's something that we can work on later when we're not in free fall. But right now what we need more than anything is time, and a collection moratorium can buy us some time more broadly and more immediately than any other possible step. 

Subordinating Holdouts in a Lebanese Restructuring

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

Our prior post expressed frustration with the drafting of Lebanon’s fiscal agency agreement, and particularly the collective action clause. The CAC both lacks the aggregation features that are now standard in the market and potentially blocks the use of exit consents. Creditors with a 25% stake in a Lebanese bond issuance would therefore have the whip hand in restructuring negotiations. We noted that this was not the necessary reading of the FAA, but it was certainly plausible given the contract’s idiosyncratic drafting.

But there are other unusual attributes of the FAA that work in the government’s favor, including one that seems to give the government power to subordinate holdout creditors to restructuring participants and other favored creditors.

The oddity appears in the pari passu clause in the Lebanese FAA. This is the same clause, of course, that gave Argentina so much trouble between 2012-2016. Oversimplified, the clause is a relatively ambiguous promise that creditors will be treated equally with other similarly-situated creditors. In Argentina’s case, federal courts in New York interpreted the clause to prohibit the government from legally subordinating one set of bondholders (holdouts) to another (restructuring participants). Argentina violated that prohibition by, among other things, enacting a law in 2005 that forbade the government to pay or negotiate with holdouts. Six years later, the courts ruled that Argentina had violated the clause and issued an injunction that forbade the country to service its restructured debt unless it also paid holdouts in full. (More details here and here.)

Lebanon’s pari passu clause is pretty much the polar opposite of Argentina’s.

Continue reading "Subordinating Holdouts in a Lebanese Restructuring " »

Do Italian Sovereign Bonds Have an Implicit Force Majeure Clause?

posted by Mitu Gulati

"Are There Force Majeure Clauses in Italian Sovereign Bonds?"

That’s a question one of the students in my sovereign debt class asked a couple of days ago. After reading about some of Christine Lagarde’s recent statements, she was worried about the possibility that the European authorities might not adequately support the Italian authorities in dealing with Covid19 with financial assistance needed to tackle the crisis (for discussions, here and here).  And, if not, she asked:  Could Italy use the force majeure clauses in its bonds to delay payment on its bonds until the crisis was handled?

My first response was that I was optimistic that the EU would provide Italy with any necessary assistance.  And my second response was that Lagarde and the ECB have walked back/clarified the statement in question. Plus, if memory serves, there is a mechanism for emergency financing to be provided via the ESM for adverse shocks beyond the particular country’s control.  Further, the ECB could probably do even more bond buying of Italian bonds in these circumstances.  That said, this is an event that is impacting multiple countries at the same time and it is perhaps worth it for individual countries to consider what they can do on their own if external help is not adequate.

To start with, it isn’t exactly clear what a force majeure clause is.  I’m no expert, but I believe that this is a French concept that is often referred to as an “act of god” provision.  That, on its face is not exactly a helpful description if you, like me, are unclear on what exactly acts of god are.  The basic idea is that the clause helps allocate the risk of contractual non performance when big cataclysmic events occur that are not the fault of one or the other of the parties and make performance extremely difficult. (for a helpful memo from Shearman & Sterling, see here)  The presence of such a clause in the contract, especially if it addressed the risk of Covid19, would help because it would show where the parties wanted that risk allocated. But, of course, no one knew about Covid19 until quite recently.

In the Italian case, best I know, none of their bonds say anything about which side bears the risk of a big unexpected cataclysmic event (here, the covid19 pandemic).  They are, in other words, no force majeure clauses.  Further, my casual examination of a few dozen bonds today suggests that these clauses are absent from sovereign bonds generally. So, the question is one of filling the silence in the contract.

Continue reading "Do Italian Sovereign Bonds Have an Implicit Force Majeure Clause?" »

The Small Business Reorganization Act of 2019 and COVID-19

posted by Bob Lawless

Professor Ted Janger of Brooklyn Law School sent me a proposal for a small change to the Bankruptcy Code that might significantly help small businesses affected by the COVID-19 pandemic. His idea merits consideration. In Ted’s words:

Obviously, it is too early to tell how all of this will play out, but the U.S. bankruptcy system will inevitably play an important role in whether small businesses hurt by COVID-19 ultimately survive. Chapter 11 was built to help sound businesses that experience a sudden shock, but it is often too cumbersome for even medium-sized businesses. In a law that took effect in February, Congress made it easier for small businesses to benefit from chapter 11. That law is only available, however, to businesses with less than $2.7 million in debt. It will, therefore, apply to only 42% of the businesses that file. In the wake of COVID-19, Congress should raise the debt ceiling to $10 million to help more small businesses and soften the inevitable fallout that will come from COVID-19 related business disruptions.

Continue reading "The Small Business Reorganization Act of 2019 and COVID-19" »

The Choice of Advisers for the Lebanese Restructuring

posted by Mitu Gulati

An article from a couple of days ago in L'Orient-Le Jour (here) provides a rare window into the process by which financial and legal advisers are chosen for a sovereign restructuring deal. This is the sort of stuff that people talk about quietly in back rooms -- e.g., about how there were shenanigans in the choice of advisers by the sovereign (someone's nephew getting special treatment or something else like that).  But this is the first detailed press account that I've seen.

What I was hoping for, that I didn't get from the piece though, is a sense of what restructuring strategies the different teams offered to provide the Lebanese government when they made their respective pitches. The article suggests that the different teams provided their CVs and the cost of their services.  But the article says nothing about the plans that they proffered. I'd think that if strategy A from Lazard provides for savings of $40 billion with minimal risk of litigation and only a small penalty for future borrowing and strategy B from Rothschild gets you $50 billion in savings, but a high risk of litigation and a 10 basis point higher cost to future borrowing for a couple of years, the way in which the Lebanese high command made the comparison would be the most interesting bit of the saga.  It would give us a window into what calculations the government is making about the future (and they haven't exactly covered themselves in glory on this front during the run up to this crisis).

Alas, there was no mention of the proffered strategies. Instead, the article suggests that all that these various teams brought to the table were their CVs and billing rates. Surely, that cannot be all. These are highly sophisticated lawyers and bankers and they must have planned out strategies ahead of time.

Maybe the folks at L'Orient-Le Jour will do a follow up piece.  And yes, I'm being selfish, because being able to compare the plans in class would be a wonderful learning exercise.

COVID-19's Impact on Higher Education's Finances

posted by Adam Levitin

There's a lot to say about the economic dislocation from the coronavirus and the economic policy response. But I want to focus for a moment about its impact on higher education.  Lots of schools have gone to virtual classrooms either temporarily or for the rest of the semester. It's not ideal pedagogically (and it really unsuitable for certain types of classes), but it works as a stop gap measure, especially for courses which have already been going for several weeks, in which some rapport has developed between faculty and students.  

But there's no reason to think that this disruption will be over by the end of the semester. What happens with summer courses? And most importantly, what happens in the fall? Will schools be able to enroll new cohorts of students? I suppose it's possible to teach 2Ls and 3Ls virtually all the time. But can that be done for 1Ls? Or for college freshmen? And even if it is possible to do generally, what about enrolling foreign students? To be sure, University of Phoenix and other on-line schools do this all the time, but they offer a very different kind of educational experience. Will students seek to defer for a year or simply not enroll?

This matters hugely for universities as businesses.

Continue reading "COVID-19's Impact on Higher Education's Finances" »

Making (Non)Sense of The Lebanese Fiscal Agency Agreement

posted by Mark Weidemaier

Mark Weidemaier & Mitu Gulati

After trying but failing to locate the fiscal agency agreements underlying Lebanese bond issues, we finally managed to get our hands on this one. We had hoped that the FAA would clarify the respective legal positions of the Lebanese government and its investors. Nope. Our review of the FAA leaves us scratching our heads. The original contract dates from 1999—this is the 3d amended version from 2010—and was one of the first post-Brady-era bonds issued under New York law to include a collective action clause. We were eager to see it and had even heard it had been carefully designed to minimize the risk of holdouts in the event of a restructuring. Certainly the government has reason to fear holdouts, such as London-based hedge fund Ashmore.

This may be the weirdest CAC ever. Taken as a whole, the FAA also includes just about the weakest set of anti-holdout tools we have seen. The Lebanese government may have to get creative to restructure.

Let’s start with the CAC. For background, Ashmore is rumored to hold over 25% in aggregate principal amount of multiple Lebanese bond issues (here). That’s enough to block a restructuring vote in most first-generation CACs (i.e., those that first took hold in the NY market around 2003). Lebanon’s CACs are even older; it adopted them at a time when CACs virtually never appeared in NY-law bonds.

For reasons not obvious to us, Lebanon’s lawyers were New York specialists but operated out of London. For reasons that are also not entirely clear, they designated New York law to govern but then bolted on modification provisions (the CAC) derived from the template then in use in the English law market. The end result is confounding.

Continue reading "Making (Non)Sense of The Lebanese Fiscal Agency Agreement" »

Paper Dragons

posted by Mitu Gulati

Last Saturday evening the Prime Minister of Lebanon announced that the country would not be paying a $1.2 billion Eurobond scheduled to mature today, March 9. As recently as six weeks ago the March 9 bond was trading at 90 cents on the dollar. Today, Lebanon's foreign bonds are deep in the toilet at 18-19 cents.

The London-based hedge fund Ashmore is reported to have bet heavily that the Lebanese authorities would in the end capitulate and pay the bond in full rather than risk a default that could quickly ripple through the country's stock of external debt. Ashmore is said to have admonished the authorities about the deeply unpleasant consequences of such a default, a position that reportedly incurred the wrath of some of the country's other creditors.

This is the second time inside the past few months that a large international investor has played a game of chicken with a sovereign or sub-sovereign bond issuer. In February, the Province of Buenos Aires sought the consent of holders of bond maturing in 2021 bond to delay a $277 million payment due on January 26 for just four months. The justification? Insufficient funds.

When the holders balked, the Province sweetened the offer by proposing to pay 30 percent of the principal of the instrument in addition to the coupon due on January 26. Most holders seemed to disposed to accept that offer but one large institution, Fidelity, held out (here and here). And because Fidelity held a blocking position in the bond, the Province's consent solicitation failed.

The worst outcome in a sovereign debt restructuring is for the issuer to plead poverty, announce the urgent and inescapable need for a debt rearrangement, and then pay the debt in full if the creditors balk at agreeing to the deal. That, however, is exactly what the Province of BA wound up doing. The lasting impression in the market is that the Province's bluff was decisively called. Fidelity, at risk of being perceived as a maverick breaking faith with its fellow lenders, ended up in the position of an equestrian Saint George with its lance deeply embedded in the scales of a paper dragon.

Fidelity won its game of chicken in Argentina; Ashmore apparently did not fare as well in Lebanon. Damage control in Argentina must now take the form of convincing the external creditors of the Republic of Argentina -- who are owed around $100 billion -- that while the Province of BA may have been caught bluffing, the Republic won't be when it announces the terms of its debt restructuring sometime in the next 10 days.

What, I wonder, will damage control look like at Ashmore? If, as widely reported, Ashmore controls more than 25 percent of the outstanding principal of one or more series of Republic of Lebanon bonds, the firm is presumably in a position single-handedly to call for an acceleration of those series. Here is where pride and credibility may play a part. If Lebanon's default on March 9 is NOT followed by the terrible swift sword of creditor enforcement actions, Ashmore's dire warnings to the Lebanese authorities may also take on the character of a paper dragon. I'm betting that Ashmore can't, or won't, let that happen.

At the end of the day, as Lebanese debt guru Anna Szymanski put it in her report on Reuters Breaking Views a few hours ago (here), it will all boil down to what Lebanon’s contracts say and how strong the legal rights of holdouts are.  And, if anyone could actually manage to understand the contractual terms (these are some of the most opaque contracts I’ve ever come across), I think that they will discover that Ashmore has the ability to draw a considerable amount of blood.  

More on the contracts over the next few days, if I can manage to read more than a paragraph of that gibberish without getting a headache. On the other hand, the ACC tournament is starting tomorrow.

Figuring Out the Terms in the Lebanese Bonds (and Why Do the Agents in Sovereign Bonds Suck?)

posted by Mitu Gulati

My students have been valiantly trying to track down the Fiscal Agency Agreements (FAA) for Lebanon that tie in to the offering documents. Those are crucial for anyone trying to figure out a restructuring strategy for the government, which is one of our projects for the term.  And, although I am optimistic that my students will figure out a way to get them, they have so far been met by a brick wall.  None of the various parties who have the documents, such as the Fiscal Agent or the Ministry of Finance or the various advisers to the Lebanese government will do the least bit to help my students.  At the end of last week, some of my students even called the FA's offices to say that they were willing to take a little side trip from their spring break visit to Europe this week to go over to the FA's offices in Luxembourg to copy this precious document in person. The response: The person on the other end hung up. Really?  Is the government really so confident in the restructuring plan that it can afford to have its agent hang up on people willing to delve through the fine print of these documents for free to see if they can come up with helpful suggestions? Maybe Lebanon already has a kickass plan from its expensive advisers and does not need any help. Wait, I forgot that they have no plan.

Continue reading "Figuring Out the Terms in the Lebanese Bonds (and Why Do the Agents in Sovereign Bonds Suck?)" »

Skeel on the Puerto Rico Oversight (NOT Control) Board

posted by Mitu Gulati

I have long been a fan of both David Skeel's research and him as a person. Not only was his book Debt's Dominion key to some of the earliest research I did on Collective Action Clauses, but he was always willing to answer my stupid questions about basic concepts (something that fancy tenured professors at Ivy League schools do not often do).  Over the years, as he has gotten fancier and fancier, I have continued to burden him with my stupid questions about bankruptcy and restructuring matters and he has never ceased to be generous; the proverbial gift that keeps on giving and never ever taking.

Last week, to penalize him yet further for his kindness over the years to me, I asked him to please come to talk to the students in my debt class about his work on the Puerto Rico oversight board (e.g., here). In our class, we read his work and it occurred to me that although it was a long shot, it would be cool to be able to talk to David in person.  And he said yes -- and that was even though I warned him that some of our seminar questions would be a tad bit hostile, in terms of pressing him about all the things that the control board had done vis-a-vis pensions, the lack of accountability of the board, imperialism, insular cases, etc., etc.

The session was amazing. The students did not disappoint in terms of relentlessly asking him tough and incisive questions (I was so very proud of them).  And he answered them in the way only he can do: in a generous and candid fashion. Alas, I cannot repeat the details of what he said, since we promised him that we would not report on any of that.  But I can lay out what I think are some of the key questions that I hope David will address in the book that I hope he will write when this is all over.

First, why was the choice made to treat Puerto Rican debt as if it were domestic municipal debt instead of treating it more like sovereign debt?  The fact that Puerto Rican debt circa 2012, when the @#@# hit the fan first, was all under local law meant that Puerto Rico could have used the "local law" advantage that Lee Buchheit's team used in both Greece and Barbados (on the latter, see Andrew Shutter's cool new article in the Capital Markets Law Journal, here).  Yet, Puerto Rico and its advisers decided to go down the municipal bankruptcy route, only to get themselves tied up in expensive legal losses for years.  My guess is that there was some political reason for the choices that were made to try and pretend that Puerto Rican debt was more like state debt than sovereign debt.  But I want to know more.

Second, why was assistance from the IMF not used?  As I understand it, the Oversight Board basically does the kind of job that the IMF does when it goes in to help over indebted countries.  The IMF has developed a lot of expertise in this exercise over the years.  Why aren't there are bunch of ex IMF stalwarts on the Oversight Board, helping out David and his colleagues?  

Third, while I'm full of admiration for some of the aggressive moves that the Oversight Board took vis-a-vis the creditors in terms of, for example, questioning the validity of 2012 and 2014 issuances that were arguably done in violation of certain debt limits, what calculations were made about how much this strategy would impact Puerto Rico's future cost of borrowing?  After all, one of the key objectives of the Oversight Board is supposed to be to return Puerto Rico to the capital markets. Someday, I'd love to see that the report that the financial advisers provided on this. (It probably pointed to the research showing that the sovereign and municipal debt markets have a notoriously short memory).

Fourth, what is the world is happening with the Aurelius case? I thought that we'd have a decision on that, in terms of the legality of the Oversight Board under the Appointments Clause, months ago.  Does the delay mean that those of us who predicted -- based on what happened at oral argument -- that the court was going to rule quickly in favor of the Oversight Board were perhaps wrong? Maybe the delay means that the Court is indeed going to deal with the ugly legacy of the Insular cases, something that they did not seem to want to do in November at the argument? (Yes, I know that David does not have special insight into what the justices are thinking, but I'm curious anyway).

I can't wait for David's book to come out.  I'll assign it in class and ask him to come back to talk to us again!

Odd Lots Podcast on Iraq's Astonishing Debt Restructuring (Next: Ecuador's Dodgy Buyback?)

posted by Mitu Gulati

For sovereign debt fans, there is a very nice podcast from Bloomberg's Odd Lots that was put up a couple of days ago (here).  The title says it all: "How Iraq Pulled Off One of the Biggest Sovereign Debt Restructurings of All Time".  It is a pity that there has not been more writing about the Iraqi debt restructuring because this is one from which there are many lessons to be learned. Lessons that are relevant for Venezuela in particular.

Plus, it was so creative and there were so many colorful characters involved (I loved the podcast, but I wish that they had talked more about the cast of characters and some of the individual stories like those of the neo cons, the US President, LCB, the NGOs, Alexander Sack and so on).

The guest for the podcast was LSE Econ Historian, Simon Hinrichsen (especially impressive that the basis of the podcast is a chapter from his dissertation -- I cannot imagine anything that I wrote in grad school being worthy of much more than toilet paper).

So, I have a request to Joe Weisenthal and Tracy Alloway.  If you are listening, could you guys continue with your historical excavation series and do one on Ecuador's Dodgy Buyback from 2008-09? One of the themes in their discussion with Simon on Iraq was the decision taken ultimately (contrary, I have heard, to the preferences of the US President) to not use the Odious Debt defense.  That probably helped Iraq, but maybe hurt the international system in that that was a wonderful opportunity to change international law for the better.  But it is not the case that no country has run with that defense successfully.  Ecuador in 2008-09 is one. And China, with respect to its Imperial debt is another one.

In class in NY last week, we had some of the folks who worked on the post-buyback resuscitation of Ecuador's reputation in the international markets come and discuss how that had been engineered. It is an amazing story because Ecuador is now a regular and respectable issuer in the EM space. How the hell did that happen so quickly?  Unfortunately, I promised to keep mum about what was said in class last week.  But fabulous reporters like Joe and Tracy could unpack this on a podcast.  And then those of us who study this topic would benefit.

Federal Reserve Emergency Lending as a Coronavirus Response

posted by Adam Levitin

Senator Elizabeth Warren has put out a plan for mitigating the economic fallout from the coronavirus. Of particular note is that she is proposing having the Federal Reserve use its emergency lending power to support businesses affected by the coronavirus in order to ensure that they are able to provide paid health care leave to affected employees and avoid mass layoffs.  

This post addresses whether the Fed has the legal authority for such lending, what precedent exists, how it differs materially from the 2008 bailouts, and why it's a good idea. (Full disclosure: I consulted with the Warren campaign on this plan.)  

Continue reading "Federal Reserve Emergency Lending as a Coronavirus Response" »

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