6 posts from March 2021

Human Rights Watch on Imprisonment for Debt

posted by Jason Kilborn

What happens in countries where no consumer bankruptcy regime exists as a safety valve to assuage the worst consequences of unpayable debt? A report this week from Human Rights Watch ("We Lost Everything": Debt Imprisonment in Jordan) offers one heart-wrenching answer. The following excerpt captures the essence:

Jordan is one of the few countries in the world that still allows debt imprisonment. Failure to repay even small debts is a crime that carries a penalty of up to 90 days in prison per debt, and up to one year for a bounced check; courts routinely sentence people without even holding a hearing. The law does not make an exception for lack of income, or other factors that impede borrowers’ ability to repay, and the debt remains even after serving the sentence. Over a quarter-million Jordanians face complaints of debt delinquency and around 2,630 people, about 16 percent of Jordan’s prison population, were locked up for nonpayment of loans and bounced checks in 2019.

The response from the Jordanian Ministry of Justice is well worth reading, and it concludes by offering some hope: "A committee is reviewing the Execution Law in such a way to ensure justice and account for the interests of both parties (borrower and creditor)." Let us hope that this review concludes as it has in many, many countries around the world in recent years--with a proposal for the adoption of a personal bankruptcy law, following the guidance of the World Bank and other international organizations.

Greensill "Secured" Lending

posted by Stephen Lubben

Slips readers will be interested in Matt Levine's column today, which takes a deep dive into the recently failed Greensill's lending against “prospective receivables,” which is kind of like lending against my prospective estate in Scotland. Both look a lot like unsecured lending.

Book Recommendation: Caesars Palace Coup

posted by Jason Kilborn

A fun new book applies a revealing Law & Order analysis to the multi-billion-dollar, knock-down-drag-out reorganization of Caesar's Palace. In The Caesars Palace Coup, Financial Times editor, Sujeet Indap, and Fitch news team leader, Max Frumes, open with a detailed examination of the personalities and transactions that preceded the Caesars bankruptcy case, leading to the second (and, for me, more interesting) part of the book, tracking step-by-step the harrowing negotiations, court proceedings, and examiner report that led to the ultimate reorganization.

There is so much to like in this book. Its primary strength is its Law & Order backstory, peeling back the onion of every major player, revealing how they got to where they were in their careers in big business management, high finance, or law, and revealing their thoughts and motivations as the deals and legal maneuvers played out. Four years of painstaking personal interviews have paid off handsomely in this fascinating account of the inner workings of big money and big law reorganization practice. On a personal note, I was treated to a bit of nostalgia, as the book opens with and later features Jim Millstein, an absolute gem of a person who taught me about EBITDA when my path fortunately crossed with his at Cleary Gottlieb in New York City in the late 1990s. It also features the Chicago bankruptcy court in my backyard, which seldom hosts such mega cases as Caesars', and the story in the second half of this book reveals part of the reason why. Cameo appearances include some of my favorite academics, such as Nancy Rapoport, as fee examiner, and Slipster, Adam Levitin, as defender of the Trust Indenture Act. On that latter point, the book alludes to (but does not particularly carefully explain) the key role of the Marblegate rulings on the TIA, which is described in a bit more depth in a vintage Credit Slips post. Again, the book's most valuable contribution is a behind-the-scenes look at the motivations and machinations behind a salient instance of collateral stripping, adding to the literature on this (disturbing) trend.

For would-be, currently-are, or has-been (like me) business managers, investment bankers, hedge fund managers, and reorganization lawyers, this book is a fascinating under-the-hood analysis of every stage of a financial business restructuring (not much about the operational side). For anyone interested in the thoughts and motivations of the Masters of the Universe who control so much of our world and its most famous companies, this book offers a brutally honest peek at how the sausage is made. It's not always pretty, but it is both entertaining and enlightening.

Not Cool, Bank of America

posted by Adam Levitin

I used my phone to remotely deposit a check today at Bank of America. Before I was able to proceed with the transaction, however, Bank of America required me to agree to new terms and conditions for mobile deposits. The terms and conditions were presented to me on my smartphone (roughly a 4''x 2'' screen). I could have pressed "accept" before I scrolled through any of the terms, but I actually went and scrolled through.  It took several scrolls before I got to the end—these were not a short list of terms and conditions, and there was no indication of what had changed. I have no idea there was only a minor amendment or something substantial. More disturbingly, I was given no option of printing or emailing myself the new terms and conditions to which I agreed; I have no idea where (if anywhere) I can access those terms that I have supposedly "agreed" to.  

Continue reading "Not Cool, Bank of America" »

The Haitian Independence Debt

posted by Mark Weidemaier

Mark Weidemaier and Mitu Gulati

The Haitian Independence Debt of 1825 is perhaps the most odious in the history of sovereign debt. France agreed to grant recognition to the Haitian state in exchange for a massive indemnity payment, ostensibly intended to compensate French plantation owners for losses suffered during Haitian revolution. With French gunboats lurking in port and offshore, the French imposed a massive and unpayable debt burden equal to roughly 5 times the annual French budget.

Surprisingly, the literature on odious debt pays fairly little attention to this episode. Perhaps this because the doctrine of odious debt was developed with a view towards borrowing by a despot who is subsequently overthrown. Must the populace repay money borrowed to oppress it? Thus, when Haiti does show up in the odious debt literature, the question typically involves debts incurred by the despotic Duvalier regimes. The Independence Debt, by contrast was incurred in the context of a colony escaping the control of an imperial power, and the modern odious debt literature generally ignores this context. We discuss this in a recent Clauses and Controversies podcast with the wonderful Gregoire Mallard, that should be out soon.

This semester, we asked students in our international debt class what they would say if either the French or the Haitian governments came to them today, asking for advice on whether Haiti had a viable legal claim arising from these 1825 events.

Continue reading "The Haitian Independence Debt" »

A Heroes Jubilee

posted by Alan White

Millions of heroes of the pandemic--health care workers, law enforcement and first responders, National Guard troops, public school teachers, and social workers--are suffering needless financial hardship because of student loans. Years ago Congress passed, and president Bush signed into law the Public Service Loan Forgiveness program. After repaying student loans for ten years while working in public service, these workers are entitled to have their remaining debt canceled by the Education Secretary.  In a continual insult to these heroes, the Education Department and its contractor continue to reject 98% of PSLF applications, for absurd bureaucratic reasons I have elaborated on elsewhere.

Another act of Congress, the HEROES Act of 2003 gives Education Secretary Cardona clear legal authority to fix this failure and cancel hundreds of thousands of student loans now. The HEROES Act allows the Education Secretary to waive any regulation or even statute as necessary to ensure that no individual or class of people experiencing hardship because of a national emergency suffers financial harm because of the emergency. With a few simple waivers of unnecessary rules, the Education Department could implement PSLF loan cancellations for hundreds of thousands or even millions under existing legal authority.

A broad, one-time effort to extend PSLF relief to all those eligible could happen in a few simple steps. First, the federal loan servicing contractors could identify ALL borrowers who entered repayment more than ten years ago and who are not currently in default, and send every one of them an invitation to fill out a simple form asking if they have been working in public service. Second, the existing maze of paperwork created by the Department’s rules could be waived in favor of a simple one-page form. The PSLF applicant need only certify under penalty of law that they worked full–time for at least ten years and still work in a qualifying job. The form’s checklist of jobs should include the words of the statute: 

a full-time job in emergency management, government, ... military service, public safety, law enforcement, public health (including nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and health care support occupations...), public education, social work in a public child or family service agency, public interest law services (including prosecution or public defense or legal advocacy on behalf of low-income communities at a nonprofit organization), early childhood education (including licensed or regulated childcare, Head Start, and State funded prekindergarten), public service for individuals with disabilities, public service for the elderly, public library sciences, school-based library sciences and other school-based services, or [a job] at a [501(c)(3) tax exempt organization].

Any borrower signing and returning the form should immediately have all federal student loans cancelled. The Department should provide adequate funding to its contractors to fully administer this PSLF jubilee.

Continue reading "A Heroes Jubilee" »

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