6 posts from February 2022

The "American Default" of 1933 and Some Possible Sanctions

posted by Mitu Gulati

Last week, my International Debt class was fortunate last week to have the opportunity to talk to Sebastian Edwards about his wonderful book “American Default”.  The book tells the astonishing (to me at least) story of the abrogation of gold clauses in US corporate and government bonds in 1933 and how that abrogation is then upheld by at 5-4 vote of the US Supreme Court in 1935.  Equally astonishing, as Sebastian’s book describes, the spillover effects in terms of costs to US future government borrowing, were near zero.  If anything, USG bonds were oversubscribed.

Our class session with Sebastian was last Wednesday and the world has witnessed some remarkable and disturbing events since then in Ukraine.  In the wake of our discussion of FDR’s 1933 abrogation of the gold clauses though, I found myself wondering about the following hypothetical for purposes of class discussion.

A large country, Bearland, brags that it has $630 billion of international reserves, the largest portion of which is held in the form of US Treasury bonds. 

Tomorrow afternoon the US Congress passes the following law:

Commencing at 12:00 noon EST on February 26, 2022, holders of US Government debt securities will be required, in order to redeem those instruments at maturity, to certify that neither they nor any predecessor in title to the securities has ever invaded the Republic of Ukraine.   Securities owned by any holder who cannot make this certification will be redeemed at maturity and the proceeds deposited in a blocked account at the Federal Reserve Bank of New York.  

Context: Acme Capital, a New York based hedge fund, has acquired $1 billion of US Treasury bonds previously owned by Bearland.  Acme sues to declare the law unconstitutional and unenforceable. You are a law clerk to Justice Gelpern on the US Supreme Court.   She has asked you this question:  Don’t the Gold Clause cases from 1935 control this issue?   After all, Acme is getting its money so they are not harmed in that sense.  Acme just doesn’t like the fact that the money is blocked at the Fed”.

The foregoing strikes me as example of a situation in which the justices (and law clerks) must not only consider the legal correctness of the advice, but also its real world consequences.  In other words, very much the situation in 1935.

In the Bearland example, the legal question is whether the Bearland legislation imposes an ex post interference with contract or unconstitutional taking of Acme’s property by requiring the no-invasion certification.   

Advising that the measure is kosher, however, potentially puts all USG debt at risk of political interference. To see this, just change the words “invade Ukraine” in the Bearland certification to “invade Taiwan”.  Would any foreign state be prepared to buy US Treasury bonds knowing that they could be weaponized at any moment?  How much would that add to the interest rate on those bonds? Anything?

I wonder whether folks at the UST are considering strategies along these lines.  Maybe?

Bye, Bye, ABI

posted by Jason Kilborn

I have been an American Bankruptcy Institute member since June 1999, but I have finally made the difficult decision to allow my membership to lapse after 22 years at the end of next month. 

I've been thinking about this for some time. Academic friends had been suggesting to me for years that they were uncomfortable with some of ABI's practices, and I was shocked when ABI sharply raised my membership dues for the first time in two decades a few years ago. I've been thinking since then about the value proposition of my membership, and I had begun to notice that I seemed to be getting very little value for my increased dues ... and then I received the first of several renewal notice emails.

When I reviewed the renewal webpage, I recalled my friends' concerns about ABI's objectionable practices as I saw what seemed to me to be a troublesome new practice. For years, I have simply renewed and paid electronically, with no "gotcha" commitments. This year, for the first time, I noticed that I had to select a box indicating that I agreed to have my membership auto-renewed and my credit card auto-charged for future dues. Perhaps it's irrational, but this really stuck in my craw. I envisioned one of those misleading commercials for leggings or bamboo socks that suck you into an auto-renewal scheme, and more importantly, I recalled the FTC's concerns about the abusive auto-renewal trend that seems to have popped up in recent years. States have begun to pass anti-auto-renewal laws to curb this abusive practice. I understand, of course, that auto-renewal is convenient and desirable for many people, and the checkbox on ABI's renewal page would be unobjectionable if it were optional. But forcing members to "agree"--again, for the first time ever--to auto-renew and auto-pay in the following years (or navigate back into the electronic membership labyrinth and manage to figure out how to cancel this auto-renewal in time to avoid it) is a shocking practice for an organization that purports to stand for (among other things) protecting consumers. Unseemly at the very least.

Continue reading "Bye, Bye, ABI" »

Harmony or Mismatch? A virtual event on mass torts and bankruptcy on February 28

posted by Melissa Jacoby

Just wanted to make sure Credit Slips readers were aware of this virtual event at noon Eastern/3 Pacific on February 28. Bonus: a link to a masterful analysis of the topic by Professor Elizabeth Gibson that the Federal Judicial Center published in 2005. (click here for information and registration)

Event

Annotated Bibliography of Histories of Debt and Bankruptcy

posted by Jason Kilborn

I just read a really fabulous annotated bibliography of books (alas, articles by such luminaries as Emily Kadens are excluded) on the history of credit, debt, and bankruptcy in the United States. Many of my favorites are on here, along with a few new entrants with which I was, embarrassingly, unfamiliar. This is a great resource for new lawyers and law professors, in particular, but also for anyone interested in this fascinating history and/or looking for something to help while away the cold, blizzard-bound winter hours. Enjoy! 

Law School Rankings: How Much do They Really Matter?

posted by Mitu Gulati

I've long assumed that law school rankings are very important to law student choices regarding where to attend school. After all, why else would law schools themselves care so much about the rankings -- sometimes even hiring and firing deans based on this single variable (my assumption here is the most in the academy don't see there to be much of substance in the rankings -- but I may be wrong).

A wonderful new study from Albert Yoon and Jesse Rothstein, "Choice as Revelation" two of my favorite empiricists in the academy (I loved their prior paper about mismatch), challenges the conventional wisdom.  As I understand the core finding, students don't attach much difference to small differences in rankings. They care about other things in these choices among close competitors.  Strikes me that this is an important finding.

This is not to say that students don't care at all about rankings; they do -- especially at the very top (Harvard, Stanford, Yale).  After that though, not so much.  

The abstract reads:

Education is a credence good. While the virtues of education are widely embraced, its qualities are difficult to discern, even among its consumers. The sizeable and increasing cost of tuition – as in the case of U.S. law schools – only add to the stakes. In response, law school rankings have emerged, with the purported goal to help students make more informed choices. While these rankings have generated both interest and debate, an important question has remained unanswered: how do prospective law students perceive these schools? Drawing upon data provided by the Law School Admissions Council (LSAC), we analyze the universe of law school applications for the period 1989 through 2017, creating a revealed preference ranking of law schools based solely on where applicants choose to matriculate given their offers of admission. We find that applicants strongly prefer Yale, Stanford, and Harvard, and to a lesser extent other schools in the top 20, but do not draw such sharp distinctions outside of these schools. For all but the very top schools, we cannot rule out that schools adjacent in the rankings are equally preferred by admitted students. We also separately analyze the application, admission, and matriculation stages of the law school matching process. Applicants apply broadly, we find, but that admissions and matriculation decisions hew closely to academic indicators. Our revealed preference rankings are similar those of the U.S. News law rankings at the top but bear little resemblance for the remaining schools. Our rankings offer a compelling alternative to commercial rankings, which are opaque and highly manipulatable. Our analyses also highlight the limitations of ordinal rankings, which by themselves can suggest meaningful differences amongst alternatives where they do not exist.

What Happens If a Cryptocurrency Exchange Files for Bankruptcy?

posted by Adam Levitin

Exchanges play a key role in the cryptocurrency ecosystem, but no one seems to have given any consideration to so far is what happens when a cryptocurrency exchange that provides custodial services for its customers ends up in bankruptcy. We’ve never had such a crypto-exchange bankruptcy in the US—Mt. Gox, for example, filed in Japan—but it’s certainly a possibility.  These exchanges are not banks, so they are eligible for Chapter 11 if they have any US assets or incorporation, and they face substantial risks from hacking and their own proprietary trading in extreme volatile assets.

So what happens to a customer if an exchange files for bankruptcy?  I think it ends very badly for the customers, as explained below the break. I do not think customers understand the legal nature of the custodial relationships, and exchanges have no incentive to make the legal treatment clear to customers. In fact, the exchanges are lulling the consumers with language claiming that the consumer "owns" the coins, when in fact the legal treatment is quite likely to be different in bankruptcy. In bankruptcy, it is likely to be treated as a debtor-creditor relationship, not a custodial (bailment) relationship. That means that customers are taking on real credit risk with the exchanges, which is a particular problem because of the opacity of the exchanges and their lack of regulation.

Continue reading "What Happens If a Cryptocurrency Exchange Files for Bankruptcy?" »

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