Thank You, I Love You, You've Been a Wonderful Audience

(And exit, to cheers and applause).  This is my last post at CreditSlips--or, more precisely, this was.  It remains only to express my apprection to the whole crew for letting me noodle with the equipment while the grownups were away, and to have a chance to move some stuff off my desk into a good home -- and for directing an impressive bunch of new readers to Underbelly, the primo blog for issues of attention surplus disorder.  Oh, and not at all least, to Bob Lawless for that cool introduction, which left some of my nearest and dearest in a state of gobsmacked astonishment.

Meanwhile, don't be a stranger.  Come visit us often, and in particular, come now: you are just in time for The Bucies.

An Assignment for Somebody Else

Here's a research agenda for somebody else. I would like to know how much of our consumer lending is "asset-building," and how much is merely to cover expenses.

Best way I can tell, there isn't a lot of data on this topic. And there serious problems of definition (see below). But it makes a difference, and we could think more clearly about lending issues if we knew more.   

 The basic point is straightforward enough, well understood by accountants. If you spend $100 for current expenses, then you debit the "expense" column in the profit and loss account. If you spend $100 to buy a widget, then you credit your cash assert account, but you debit the widget asset account; it's "asset for asset" and you are no poorer than you were before.   

So here. Seems to me it is one thing if you use your credit card to buy groceries;* another if you use it to buy a washing machine. You were going to do the washing anyway (I hope!), and paying for the machine cancels out the cost of all those trips to the Laundromat (and all that pesky search for change).

I concede there are analytical difficulties. Under standard accounting rules, you "expense" costs of research—send them straight to the profit and loss. In a narrow sense, this is wrong: good research can be an investment, just as much as buying a fork-lift truck. But if we let people capitalize the cost of research, then every costly dumb idea would show up on the balance sheet as an asset.   

At the other end of the continuum, I can see the problem with real estate. In my day, we used to say: buy real estate—you’ll get out of paying rent, and then at least you’ll have your home. These days, when the residential real estate market has turned into a casino, I can see that things are a little different. Still, it seems to me it is one thing to borrow for a roof over your head, something else to borrow to pay last month's hospital bill.

An extra difficult case would be that matter of in human capital. Buying a law degree certainly ought to count as an investment, again just like the forklift truck. On the other hand, a lot of what passes for "education" (with student loans) appears at least as dumb as, well at least as dumb as corporate research (are there really "promising new careers in video game design?"). Historical note: a lot of our ancestors came here as "indentured servants"—contract labor. It's commonly thought of as a mean and undignified beginning, but we know for a fact that a lot of those indentured servants worked off their contracts and used the opportunity as a way to make a new start.      

As I say, I don't think we have supporting evidence on this issue. We can, of course, break out real estate lending, which is at least asset-related, if not always asset-creating. With respect to other consumer lending, I'm not sure we have so much as a good start. So get with it,  somebody.  Meanwhile, I am off to the wine shop to invest in good taste. 

*Full disclosure: actually, I do use my credit card to buy groceries. I always feel like I should explain to the clerk—hey! I pay in 30 days! I'm only doing this to get the miles!

The Uncle Tom's Cabin of Commercial Law

In an earlier post, I offered a few acerb thoughts about William Dean Howells and what I might perhaps have called the Jimmy Stewartization of bankruptcy. I could have generalized here: one of the great themes of 19^th Century American is what you might call the Response to Commerce—together with a theme I did not mention before, namely the relationship between the marketplace and women.

For my money, there are two great sources here—one, George Santayana in his seminal Genteel Tradition essays (link),  and the other, more directly relevant, Ann Douglas’ classic The Feminization of American Culture (1977) (link).

Douglas catches the essence of her own work in this discussion of the first great domestic potboiler, the Uncle Tom's Cabin of commercial law-- The Wide, Wide World (link), by Susan Warner:  

The story apparently turns on the unwillingness of the old-fashioned little girl, Ellen Montgomery, to participate in the ‘wide, wide world’ of masculine competition and business into which a cruel fate thrust her. All Ellen’s miseries begin when her father is clumsy enough to lose a vital lawsuit, and with it, his income. Mr.Montgomery’s surly incompetence and insecure aggressiveness threaten the idyll of feminine sensibility shared by his wife and daughter. Ellen makes a rather unfilial point of evading her father, but she cannot long escape the forces which he represents. When her ailing mother ends her off alone on her first adult mission to select some material at a store, a rude and busy clerk cheats, humiliates, and dismisses her because she is unused to the chicanery of commerce, because she is a child and a girl. Although a benevolent elderly gentleman indignantly intervenes and Ellen accomplishes her errand, Warner has made her point.

Douglas, at least, has no doubt as to what that point is: 

Ellen is completely dislocated from her economic past; those who control the production of her apparel are utterly foreign to her. It is Ellen’s distinction that she must be rescued from the world. She never requests or wishes in any way actually to function within her society. Brewing consolatory cups of tea for her several beloved and diseased lady friends is the full extent of her productive effort. Her undeclared hostility to her culture’s competitive forces is too enormous to allow her to contribute to its economic life. The Bible and those who love it are Ellen’s only business.

Douglas embroiders this sketch into a larger theme: a more general conspiracy of (otherwise powerless) women and clergymen into a general posture of clucking disapproval over the heart of American economic life.   

It would be fascinating but, lucky for me, beyond the scope of this blog entry, to trace the cultural history that links the feminization of culture to the feminization of bankruptcy.

Personal Aside: my mother and her siblings were orphaned in childhood, in the respect that their father was carried off in a bout of pneumonia, not litigation.

Their mother held the family together in a prodigy of heroism and good luck that I can only begin to fathom. The sisters—there were five of them—cut their literary teeth on The Wide Wide World. Years later in adulthood, they had come to recognize that it was trash. Yet the old appeal remained, and they could reduce themselves to rueful hysterics by remembering its mawkish energy.

Lander on Adjuncts

If a vanload of commercial law profs rolled off a cliff, would they replace us?

David Lander is well known to many readers of CreditSlips as a skilled business/commercial lawyer who retains an enduring interest in issues of consumer credit and consumer protection. David also does some teaching, and (like many of us) he has concerns about the place of the commercial law curriculum in the law school passage—in particular, the (apparent) growth of the use of adjuncts to teach "regular" classes (um, we do think they are regular, do we not?). He’s working on a paper to explore some of the implications. In the hope of expanding the discussion, David has kindly allowed me to post a (highly preliminary) draft here. Reader comments invited.  Here's the link:

Download lander_on_adjuncts.DOC

How Henry Made it Somebody Else's Problem

Since we are (I am) on the subject of literary bankruptcy, I can't resist a reprint of a passage from John Dos Passos' USA, which, for my money, really is the great American novel. Dos Passos interweaves his fictional trilogy with semi-documentary historical vignettes. Here, in "Tin Lizzie," from 1919 (the second volume), he tells how Henry Ford survived the collapse that followed World War I:

…In 1918 [Ford] had borrowed on notes to buy out his minority stockholders for the picayune sum of seventyfive million dollars.

In February, 1920, he needed cash to pay off some of those notes that were coming due. A banker is supposed to have called him and offered him every facility if the bankers' representative could be made a member of the board of directors. Henry Ford handed the banker his hat, and went about raising money his own way:

he shipped every car and part he had in his plant to his dealers and demanded immediate cash payment. Let the other fellow do the borrowing had always been a cardinal principle. He shut down production and canceled all orders from the supplyfirms. Many dealers were ruined, many supplyfirms failed, but when he reopened his plant, he owned it absolutely, the way a man owns an unmortgaged farm with the taxes paid up.

…in 1922 Henry Ford had sold one million three hundred and thirty-two thousand two hundred and nine tin lizzies; he was the richest man in the world.   

My dad managed credit bureaus back in the 30s and 40s, when it was still a small-town drugstore counter kind of business. I remember him telling me the story of how Henry solved his own problem by making it somebody else’s problem. I don't think my dad ever read Dos Passos; maybe he saw it at first hand.

Novak on Defoe on 'Trade-Murther'

Bankruptcy scholars mostly know that Daniel Defoe, author of Robinson Crusoe, was himself a merchant, sometimes a bankrupt, and a commentator on bankruptcy law. It  seems to me that most literary students of Defoe miss this point; they don’t understand it, or they simply aren’t interested.

One honorable exception is Maximillian A. Novak, whose Daniel Defoe: Master of Fictions (2001) gives respectful attention to the bankruptcy issues. In particular, he addresses role in the runup to the "Statute of Anne," the progenitor of all modern bankruptcy law. In 1705-6, Novak writes, "Defoe had been supporting a new bill to regulate the laws of bankruptcy. He devoted a month and a half of the Review [his personal proto-weblog—ed.] to the subject…and eventually published a pamphlet on the subject …"  This pamphlet, he continues:

was mainly devoted to arguing the irrationality of a system that imjprisoned the debtor in a way that made paying back the creditors impossible. … [He also] drew attention to the horror of prison conditions and the families ruined. In addition he maintained that the nation itself loses by driving the bankrupt, with his potential skills, abroad, thereby forfeiting the wealth that might accrue to the nation by his and his family's consumption of goods. Defoe argued for a bill to force all the creditors to agree to the decision of the committees of bankruptcy. 'Otherwise, the bankrupt becomes a victim of a 'sort of Trade-Murther. He is driven to despair, flees, commmits suicide, or joins the army and dies that way.'  … 

As to the particular legislation Defoe

wondered if the law would do any good at all. In his pamphlet on this subject…he regretted that the bill did not reform the worst parts of the system. The bankrupt might still be sent to jail, to perpetual imprisonment; this meant that he would struggle to avoid punishment and be forced to desparate measures. Defoe concluded 'That to make men desperate was the way to make them Knaves; and as there never was any law but some way or other might be evaded or avoided, this would put Men’s Inventions upon the rack for new Methods to defraud their Creditors.' At least the new bill allowed the bankrupt 5 percent of his holdings to try to start anew. Defoe allowed himself some irony over the resulting loss of jobs among gaolers and those involved in arresting debtors, and 'As to the Attorneys, Sollicitors, etc., they may turn their Hands to the more Laudable practice of picking pockets, according to the letter of it, and then in time may meet with the reward of their former Merit, by a way they have often deserv'd it'. In short, he hoped they would be hanged.

Defoe had, of course, his personal experience with debtor distress: he went bankrupt twice and spent most of his adult life in the toils of creditor pressure. He shows amazing resilience, repeatedly coming up with new schemes and devices to make himself prosperous. Only in his final months does he appear "old, sick, and perhaps for the first time in his life in a state of despair." He died at last "of a lethargy," still in hiding from his creditors.

--Quotes from Maximillian E. Novak, Daniel Defoe: Master of Fictions (2001).

The Rise and Fall and Rise of Yerkes/Cowperwood

Whether or not there really is an American bankruptcy Balzac (cf. this discussion), still one contender who deserves a respectful mention is Theodore Dreiser—in particular, the Dreiser who wrote the Trilogy of Desire, a fictional chronicle that closely tracks the real-life career of Charles Yerkes, financier and scoundrel. A possible complaint about Dickens’ “commercial” writing is that he really doesn’t understand the details all that well: the sentiments are clear enough but the events leading up to the comedy are left pretty vague. A possible complaint about Dreiser is that he understands them to well. In the supposed fictionalization of Yerkes, he sometimes veers dangerously close to straight biography. One has to care about this sort of thing (although the chances of finding an audience are perhaps greater among readers of this website than in the general population).    

The real Yerkes made a fortune in Philadelphia in and after the Civil War, failed, went to prison—and then set off to Chicago, where he made a second fortune, and thence to London where he began anew. All this is convenient for a novelist who wants to turn his life into a three-parter.  Dreiser’s hero, Frank A. Cowperwood, performs the same trajectory. For sheer story-telling, the best of the three novels is probably the first, The Financier, available in print for purchase, but also free for download at Project Gutenberg (link). A manuscript search of the Gutenberg text will make it clear that Dreiser has plenty to say about bankruptcy, much of it in detail. “In these days also, he [was] constantly to be met with in courts of law, for he was constantly being reexamined in some petition in bankruptcy.” “His worst anxiety was that if he were sent to the penitentiary, or adjudged a bankrupt, or both, he would probably lose the privilege of a seat on 'change…” “[H]e hit upon the idea that in order to forfend against the event of his being put into prison or thrown into bankruptcy, or both, he ought to form a subsidiary silent partnership with some man who was or would be well liked on 'change, and whom he could use as a cat's-paw and a dummy.” 

And so forth.  But perhaps the most interesting thing about Dreiser’s account is the way he shows Cowperwood using bankruptcy as a business planning technique:

The suspension of the banking house of Frank A. Cowperwood & Co. created a great stir on 'change and in Philadelphia generally. It was so unexpected, and the amount involved was comparatively so large. Actually he failed for one million two hundred and fifty thousand dollars; and his assets, under the depressed condition of stock values, barely totaled seven hundred and fifty thousand dollars. There had been considerable work done on the matter of his balance-sheet before it was finally given to the public; but when it was, stocks dropped an additional three points generally, and the papers the next day devoted notable headlines to it. Cowperwood had no idea of failing permanently; he merely wished to suspend temporarily, and later, if possible, to persuade his creditors to allow him to resume. There were only two things which stood in the way of this: the matter of the five hundred thousand dollars borrowed from the city treasury at a ridiculously low rate of interest, which showed plainer than words what had been going on, and the other, the matter of the sixty-thousand-dollar check. His financial wit had told him there were ways to assign his holdings in favor of his largest creditors, which would tend to help him later to resume; and he had been swift to act. Indeed, Harper Steger had drawn up documents which named Jay Cooke & Co., Edward Clark & Co., Drexel & Co., and others as preferred. He knew that even though dissatisfied holders of smaller shares in his company brought suit and compelled readjustment or bankruptcy later, the intention shown to prefer some of his most influential aids was important. They would like it, and might help him later when all this was over. Besides, suits in plenty are an excellent way of tiding over a crisis of this kind until stocks and common sense are restored, and he was for many suits. Harper Steger smiled once rather grimly, even in the whirl of the financial chaos where smiles were few, as they were figuring it out.   

"Frank," he said, "you're a wonder. You'll have a network of suits spread here shortly, which no one can break through. They'll all be suing each other."

In fact, things don’t work out quite that way—there wouldn’t be enough novel if it did. But Dreiser does seem to have a feel for a certain kind of dealer in a certain kind of deal.

"It's Over for the Little Guy!"

I get my Sopranos fix only in DVD, so just now got round to Episoide #73, where Patsy and Burt find that big corporate is ruining the collection business. The kid at the upscale coffee store tells them that there is no slippage because Seattle counts every bean and anyway, they won’t care about vandalism—to the store, or to him.  Later, the boys find that Jamba Juice has just bought the building  that houses Caputo’s poultry store (from Tony!).  “It’s over for the little guy,” laments Patsy. "What the f$#% is happening to this neighborhood?"

 It occurs to me that my friend Michael the collection lawyer has the same problem. “Used to be,” says Michael, “that there was a little hardware store in every town. They were always past due to somebody, and you could always kick them around a little. These days, it’s all Wal-Mart. One, Wal-Mart pays and two, if they don’t what are you going to do about it?”

Memories: Back during the Carter inflation, Sears decided they were getting killed on interest costs, so they notified all their suppliers they would no longer pay in 30 days but would pay in. Thank you and have a nice day. This was good for the business of bankrupting small Sears suppliers, I can tell you, sort of like what happens when the old lady swings onto the expressway and 28 miles an hour.

More Sopranos: Come to think of it, there is a good deal of collection law in the Sopranos. Setting aside the routine savage beatings, I recall Episode #72, where credit card pretty much pushes Artie over the brink.  I guess the best bankruptcy/Sopranos tie-in since Episode #23, where the merry pranksters take over Davey Scatino’s sporting goods store to use it as a bust-out joint. As Tony told Davey when he tried to join the executive poker game, "this game isn't for you." Am I forgetting anything?

Still More Sopranos:  For some general thoughts on how the Sopranos has lost its Mojo, see Underbelly.

Bankruptcy Postscript:  I think this is one more piece of the puzzle.    Teaser--the headline reads: "Bankruptcy Work Falls, but Megacases Still Provide Hefty Fees."

More Yiddish, and Remembering Conrad Duberstein

Judge Conrad Duberstein died back in 2005 at the age of 90, having long since established himself as the grand old man of the bankruptcy bench. I first met him when he was about 70. The best way to capture the experience is to say that he is about the only garrulous old coot that my wife ever found charming—he delighted her as he delighted so many people, and now that I am 70, I try to profit from his example.

Responding to my earlier post, Alan Halperin has favored me with a copy of a one-page typescript where Judge Duberstein tried to introduce the neophytes to the subtleties of the alte language. It's a fascinating read, not least because it suggests just how much of what we once thought of as specialized trade-talk has passed into common speech. Does Nudge count as Yiddish any more (if ever it did?—what about noodge?). Maven (Mayven?)—it doesn't even sound exotic, does it? Others are perhaps borderline: Speakers know these terms are "special," somehow, even if they are a little hazy on just how. I would include Chutzpah, Kvetch,  Megillah,, Nebbish (but perhaps mainstreamed by the late Herb Gardner, whose father, if I remember right, ran a tavern on Canal Street), Nudnick, Schlemiehl, and Shtick—oh, and nu, as in so, nu? And I confess I never realized cackamaymee (many alternate spellings) was Yiddish at all; evidently it is.

Tzimmes which Judge Duberstein defines as "a creditors' meeting," probably does belong on the bankruptcy list, narrowly defined. I would have defined it more generally as "hullabaloo," (which, I think, is not Yiddish). But Google it and you find that most of the hits trace it to its beginnings as a "vegetable stew"—a pretty good suggestion that all these terms arise in a rich cultural stew, belonging as much to Isaac Bashevis Singer, or Cynthia Ozick, or Bernard Malamud (or, perhaps best, the Contract with God graphics of Will Eisner) as it does to bankruptcy. Still, it's a world of which Judge Duberstein was a living monument and I am grateful to Alan for renewing the memory.

I'll try to post Judge D's paper here (it's a one-page Adobe file) but I'm not sure I know how.  Anyway, this may be the link:

Download yiddish_for_bankruptcy_lawyers.pdf

History for Bankruptcy Scholars

A few years ago, there wasn’t much of any good bankruptcy history. Now we have David Skeel and Bruce Mann—a big improvement. But there is still plenty to be done. And in particular, bankruptcy doesn’t seem to have worked its way into mainstream historical writing just yet. Skim the table of contents to standard histories and you will find little or nothing that addresses debt problem sin any substantial way. 

One distinguished exception is Charles Sellers’ The Market Revolution: Jacksonian America, 1815-1846.(1991). Sellers writes the history of Jacksonian America in what you might call “the Karl Polanyi mode”—as a history of creatures coming to understand themselves as commodities, part of emerging dominant pattern of commerce in the young Republic.   

Sellers is a professor at Berkeley (emeritus), and the book is apparently still in print, but best way I can tell, it is perhaps a bit of an orphan in history circles—perhaps too old-fashioned in both subject and style. Apparently it was commissioned to be part of a multi-volume Oxford History of the United   States—the series in process for nearly half a century now, still only half done (link). It is said that editor found it “too economic,” though a saucy backstory says he “was put off by some pages on public panic about masturbation” (the topic does not appear in the index—but see p. 255).   

 In any event, Sellers might well remain the history of choice for inquirers with a bankruptcy bent. Here are some of his thoughts on Sturges v. Crowninshield:

The Constitution’s contract clause struck down state laws passed in the 1780s easing creditor pressure on small debtors. In some places, a third of the householders were still being hauled into court as defaulting debtors every year; and for those who could not pay, the penalty was jail. Although imprisonment for debt was alleviated by prison-bound laws releasing debtors during the day to follow their occupations, and although most were held only briefly, thousands were still being arrested, often for small sums. … The Constitution’s framers demonstrated their class bias most clearly by coupling the contract clause’s inflexibility toward small debtors with a bankruptcy clause mandating relief for large debtors. … In Sturgis v. Crowninshield … a New Yorklaw was challenged, on the double grounds that the Constitution gave Congress the exclusive right to pass bankruptcy laws and that such laws by the states impaired “the obligation of contracts.”   

Marshall obtained a unanimous judgment against the New York law only by surrendering his own view that the bankruptcy clause preempted the field and prevented any state action on the subject even if Congress failed to exercise its bankruptcy powers. He also had to concede that he states could abolish imprisonment for debt.  Thus he induced several justices to agree that the New York law impaired the obligation of contracts. Even then several justices remained convinced that states could pass laws relieving debts contracted subsequent to the legislation. The opinion the Chief Justice drafted for an ostensibly unanimous Court was ambiguous on the point, but it clearly forbade states to relieve debts already contracted. (87-89)   

 Sellers does a nice job of putting bankruptcy in the context of the larger debates over economic law and constitutional doctrine. Thus he points out that Sturges succeed by just a few weeks the decision in Dartmouth College v. Woodward, and preceded McCulloch v. Maryland.  Thus within six weeks, Sellers points out, the court “forbade the states to interfere with the chartered privileges of corporations, to relieve existing debts, or to impede in any fashion the constitutional functions or instrumentalities of the federal government.” (89)

[Afterthought: with my record, it will turn out that Bob already has this guy signed up as a guest blogger...]

The Great American Bankruptcy Novel, Maybe

I guess you would have to say there is one great American bankruptcy novel. That would be William Dean Howells, The Rise of Silas Lapham (1885). I’m hesitant because I find it unreadable: it’s too much high-minded Victorian social critic for me. Worse, perhaps, with Howells as with Dickens, I think he doesn’t understand the capitalist economy he is trying to criticize. Dickens saved himself with cyclonic energy and inventiveness. With Howells, a more telling comparison is Trollope—perhaps no more inventive or energetic a writer than Howells, but far better attuned to his subject matter. Howells’ Indian Summer (lately resuscitated in the New York Review of Books Classics (link)) is a gentle romantic comedy that shows his skills to better advantage.

The “Rise” of the title is, of course, a heavy-handed irony: Lapham falls when he rises and rises as he falls, just as Oedipus can see only when he is blind--perhaps this is the case also with Balzac’s grandeur et de la décadence de César Birotteau,, although the point is less stressed there. About the best Howells can do with it is the conventional good-man-in-a-bad-business model (the script cries out for Jimmy Stewart):

Perhaps because the process of his ruin had been so gradual, perhaps because the excitement of preceding events had exhausted their capacity for emotion, the actual consummation of his bankruptcy brought a relief, a repose to Lapham and his family, rather than a fresh sensation of calamity. In the shadow of his disaster they returned to something like their old, united life; they were at least all together again; and it will be intelligible to those whom life has blessed with vicissitude, that Lapham should come home the evening after he had given up everything, to his creditors, and should sit down to his supper so cheerful that Penelope could joke him in the old way, and tell him that she thought from his looks they had concluded to pay him a hundred cents on every dollar he owed them. . . . 

All those who were concerned in his affairs said he behaved well, and even more than well, when it came to the worst. The prudence, the good sense, which he had shown in the first years of his success, and of which his great prosperity seemed to have bereft him, came back, and these qualities, used in his own behalf, commended him as much to his creditors as the anxiety he showed that no one should suffer by him; this even made some of them doubtful of his sincerity. They gave him time, and there would have been no trouble in his resuming on the old basis, if the ground had not been cut from under him by the competition of the West Virginia company. He saw himself that it was useless to try to go on in the old way, and he preferred to go back and begin the world anew where he had first begun it, in the hills at Lapham.

 

--W. D. Howells, The Rise of Silas Lapham 351-2 (Penguin Paperback ed. Reprinted 1985)

(Re)introducing David A. Moss

Allow me to showcase a book here that deserves more attention than it gets from bankruptcy scholars. It came out back in 2002 but for whatever reason, it passed more or less unnoticed in our corner of academe. The book is When All Else Fails by David A. Moss.  The subtitle is: Government as the Ultimate Risk Manager. It's a fascinating study of what Moss calls "a potent and pervasive form of public policy in the United States." Moss discusses obvious risk management devices like worker's insurance and social security, but also others you might not think of at first blush like products liability law and management of the money supply.

I emailed Moss last year while I was resident scholar at the American Bankruptcy Institute, inviting him to join us for one of our podcast interviews. He politely begged off. Too bad: it would have been fun to introduce him to the bankruptcy sodality. In any event, for our purposes, the most directly relevant chapters of his book are one on the history of the bankruptcy discharge, bracketed in parallel with another on the rise of the limited liability company. Moss shows how 19th-century public policy debate treated both bankruptcy and limited liability as protection for entrepreneurs (duh!)--but how the arguments were never really the same.

Students of the recent uproar over bankruptcy reform might be intersted in Moss's long view of the matter (which, concededly, long preceded the 2005 Amendments to the Bankruptcy Code).

Even before the enactment of the first federal bankrautpcy statutes in 1800 and 1841, Americans had long displayed a penchant for forgiving or otherwise relieving distressed debtors, particulaly in the midst of economic crisis. Although the motivations and mechanisms of debtor protection have evolved considerably over the years, the American tradition of shifting default risk away from borrowers has exceptionally deep roots. Indeed, the United States has long distinguished itself as a nation with a special fondness for debtors. (126)

I always tell my students that I have lived through at least nine of the last four recessions.  As a regular reader of the Housing Bubble Blog, it often occurs to me to wonder whether our current (relatively) severe view of debtor protection will survive the day when the economy gets thrown under a bus.

Here's a book link.

Yiddish for Bankruptcy Lawyers

In a previous post I discussed "blivik" which I understood, perhaps erroneously, to be Yiddish.  The discussion triggered memories of all sorts of specialized argot I got familiar with only in the bankruptcy court.  Yiddish words or phrases were still fairly common around there when I showed up in the 70s.  I was a latecomer: I didn't grow up with this stuff and I found it highly entertaining to try to learn to deal with it.  Some of it was hardly specific to bankruptcy, and some barely even Yiddish any more:  schmuck, for example, is more or less universal (but what of "guarantor"= "schmuck with a fountain pen"--?).   Schnorrer and gonif may not be universal, but we wouldn't want to claim them. And what of

Rachmunis, as in "writ of rachmunis," as in "judge, we got nothin', and we are throwing ourselves on your mercy."

Schmatta, rag, as in "the schmatta business," aka "the rag trade," textiles--the industry in which (in the lower east side of Manhattan) so much of old Chapter XI was crafted (aka, perhaps, The Pajama Game?).

Schlepperman, for the hewer of wood or drawer of water who did the hard work while somebody else got the big bucks, as in "we sent our schlepperman over to clean out the warehouse."  Not a made guy, only a connected guy (yeh, sorry, wrong argot).

Chazeri, as in one of the things that drove me out of law practice back to teaching--all that stuff on my desk that I never seemed to get to the bottom of, all those phone messages, all those screwed-up orders, all those headaches, all those--oy, I'm thinking of them all over again.

Are there other candidates?

Blivik

Re the K Street theory, our good friend Bruce (well known to all at CreditSlips) weighs in:

You used the word "blivik;" didn't you mean "blivit"?  For what it's worth, the OED 2d defines blivit as:

Blivit:  [Etym. unkn.; cf. BLIP n., WIDGET, and phonosymbolic force of bl- with repeated minimal vowel to indicate inconsequence, rejection, etc.]

A pseudo-term for something useless, unnecessary, annoying, etc.; hence, = THINGAMAJIG (see quots.).

1967 WENTWORTH & FLEXNER Dict. Amer. Slang Suppl. 673/2 Blivit, n., anything unnecessary, confused, or annoying. Lit. defined as ‘10 pounds of shit in a 5-pound bag’. Orig. W.W. II Army use. The word is seldom heard except when the speaker uses it in order to define it; hence the word is actually a joke. 1980 Aviation Week & Space Technol. 15 Sept. 61 Refueling of helicopters..surfaced as an alternative to air dropping fuel blivits. 1981 N.Y. Times 27 Mar. C25/1 The main ingredient of this charm is a facility for saying it before you can, for calling ‘Palm Sunday’ a ‘blivet’ before you can call it a piece of junk. 1981 Sci. Amer. Dec. 28/2 This little book for grade school psychologists and philosophers presents a few dozen of these interesting but less familiar illusions, along with the arrow lengths, outline cubes, Eschers and three-pronged blivits of the standard optical-illusion list. 1982 Industr. Robots Internat. 22 Mar. 8 ‘Single station machines for assembly’, he says, ‘are blivets. Anybody who wants a definition can call me up.’ 1983 Washington Post 26 Aug. D1 For such tasks, you obviously need a magic tool that lets you get 10 pounds into a five-pound bag. Such a heaven-sent, makeshift magic part is called a ‘blivit’.

Response: every syllable of that is wonderful, but I meant "blivik," a word I learned in bankruptcy practice as denoting that thing I give to the other party in a negotiation which he thinks of great value but which I know is really worthless (an economist would say we simply have different utility functions).  I had assumed it was Yiddish; I first learned it from the renowned kabbalist, Alan Pedlar of the California bankruptcy bar.   Google did not confirm, although I guess it will now, and it did recognize Phillippe de Blivek, who sounds like he must have had a walk-on part in a Mel Brooks movie.

A K Street Theory of Bankruptcy Reform

Reading stuff like this prompts me to showcase an idea I was noodling around with last year; nobody much paid attention then, so I am delighted to get another shot. Specifically: we talk about bankruptcy “reform” as the credit “industry” versus the poor, beleaguered debtor. But if Professor Warren is reading the data right, then the industry is no better off now than it was before 2005.

How can this be? Here’s a thought: maybe the true proponent of bankruptcy “reform” was never the credit industry per se, but rather the lobbying industry. Lobbying is a business that lives on hope and fear. No lobbyist makes any money by saying “no matter what we do, things will stay pretty much the same.” You make money by finding a problem and undertaking to solve it—or, if you can’t find one, then manufacture one, as in: you are being ripped off by Federal bankruptcy law. We can help.   

 This 900-pound gorilla was in the bedroom through all the years of the runup to BAPCPA: Creditors losing a gazillion in bankruptcy! Forget about any other problems with the data (how much is a gazillion, anyway?). Dawson Debtor owes Carlotta Creditor $1,000. Carlotta isn’t getting paid; Dawson goes bankrupt. Did the bankruptcy cause the loss? So far, there is no evidence that it did. We only know that Dawson isn’t paying; we have no reason to assume that he would have been able to pay had bankruptcy not intervened.   

 Granted, this is the point of the “means test”: the premise that there are debtors who do have “the means” to pay and would pay but for bankruptcy. There was a fair amount of contention over the question whether and to what extent there were such debtors. Early data seems to suggest that the current means test isn’t capturing many debtors. But it is not clear what inference to draw from this fact. It may be that debtors with “means” are just staying home—in which case, we would have to say that “the means test” accomplished its express purpose. It could be that creditors knew full well that the means test as drafted wouldn’t catch very many debtors, but that they wanted to get their snout into the trough to establish the principle leaving details for later. It could be that creditors just made “a mistake” and miscalculated how much it would yield.

Or it could be—and here is my point—that lobbyists sold their clients a blivik: got big fees for delivering, well, nothing at all. In a simple world, you might expect creditors to get shirty about this sort of betrayal and extract some kind of penalty later. Maybe, but that’s then and this is now: by the time the betrayal shows up, you’ll have a new set of lobbyists (or at least a new sign on the door) and, come to that, a new set of loan officers, who may not remember what the fuss was all about in the first place.   

 Meanwhile, it may be that the creditors (and their lobbyists?) have pushed us into a lose-lose situation where (a) creditors are working harder, spending money to (b) collect no more debt than they were collecting all along.

Postscript:  After drafting this, I ran across a fascinting post at Daniel Shaviro's blog, summarizing and quoting an otherwise-unavailable (to me) paper Edward Glaeser on "The political economy of warfare." From Shaviro, quoting Glaeser:

"This paper ... presents a model of warfare where leaders benefit from conflict even though the population as a whole loses. Warfare creates domestic political advantages, both for insecure incumbents like Napoleon III and flr long-shot challengers, like Islamic extremists in the Middle East, even though it is costly to the nation as a whole. Self-destructive wars can be seen as an agency cost problem where politicians hurt the nation but increase their probability of political success. This problem becomes more severe if the population can be falsely persuaded that another country is a threat."

Do with it what you will.

Meanwhile, On the Other Side of the Planet

We tend to think of the United States as the bankruptcy capital of the galaxy.  Here's a story from the Korea Times reporting that bankruptcy petitions hit 380,000 in Korea in 2005.

Do the math.  Korea has a population of about 48 million.  That's a petitions/population ratio of about 0.79 percent.  Figure the pre-BAPCPA United States rate at 1.6 million to 300 million.  That's about 0.53 percent.  So Korea is about 50 percent ahead of the pre-BAPCPA United States.  Apparently the Koreans have had their own bout with “bankruptcy reform:”

Last year’s figure is 90 times that of 2002, the year the system was adopted.

The bankruptcy system allows people to get their debt written off by the court. The number of those who filed for bankruptcy has increased year by year, especially since 2003, when many people accumulated credit card debt.

Fn:  I had a couple of Korean grad students a few years back, who described themselves as “bankruptcy judges.”  Nice kids, spoken English not so hot, writing just fine.  One of them gave me a weird mask which still presides over my office.  Neither one, I suspect, had reached his 30^th birthday.  I wonder if they are presiding over this revolution?

Technical Meta-Fn: Doesn't it make your head spin when you type "United States population" into the Firefox subject line and get bopped right over to the Census bureau poulation calculator?

Shakespeare on Bankruptcy Reform

Sir, I am a true labourer: I earn that I eat, get
that I wear, owe no man hate, envy no man's
happiness, glad of other men's good, content
with my harm, and the greatest of my pride
is to see my ewes graze and my lambs suck.

Every law professor believes that every other subject is a subset of his own. I agree: there is a bankruptcy angle to everything.

Example:  I’ve been spending some happy hours with James Shapiro’s A Year in the Life of William Shakespeare (link), in particular Shapiro's instructive discussion of Shakespeare's As You Like It. Readers (and viewers) will remember this play as the one in which the boys and girls all go to the woods and discover the equivocal ironies of the pastoral life. But as Wood makes clear, there is a not-so-gentle back-story rooted in Shakespeare’s own past, and in the world around him.

Shakespeare calls his locale “The Forest of Arden.” It’s fictional, but in fact, Shakespeare himself grew up in “The Forest of Arden,”—more precisely, Shakespeare's mother was an “Arden,” and he spent a good deal of his own spare time trying to traffick in his distinguished family connections. Shapiro expands on the point:

Writing about [Arden] in As You Like It must have stirred conflicting feelings in Shakespeare, for the play, in its disorienting shifts between woodland and pastoral landscapes, juxtaposes the romanticized Arden that stirred his imagination as a child with the realistic Arden that Shakespeare, sharp observer of land and people, witnessed as an adult. This helps explain the radically different Arden settings in the play. Four scenes in the play are set in the woods … the forest of ancient oak, streams, caves, and herds of deer, of men dressed as outlaws and “the old Robin Hood of England” (I.1.112). Twelve other scenes set in the Forest of Arden offer an alternative landscape, a world of enclosure, of sheep and shepherds, landlords and farmers, landed peasants and the less fortunate wage-earners, where “green cornfield” and “acres of the rye” are now established (5.3.17, 21)

Consider Corin the shepherd, above. As Shapiro says, Shakespeare “could have represented [him as] a successful tenant farmer who made a living tending to his landlord’s sheep and tilling the land adjoining his rented cottage. What we get instead is the grim fate, unexpected in a comedy, of a character so impoverished that he can’t even feed or lodge his guests.

But I am shepherd to another man
And do not shear the fleeces that I graze:
My master is of churlish disposition
And little recks to find the way to heaven
By doing deeds of hospitality...

But the master, aside from being “churlish,” has his own problems:

Besides, his cote, his flocks and bounds of feed
Are now on sale, and at our sheepcote now,
By reason of his absence, there is nothing
That you will feed on...

Indeed, the offer of another character “to buy the farm and mend Corin’s wages is the all that stands between him and the highway.”

Granted, this is not, strictly speaking, a bankruptcy story—bankruptcy, for all practical purposes, not yet having been invented. Still, Shapiro continues:

Shakespeare knew that there were more Corins around than ever before, left, as the historian Victor Skipp puts it, “with no alternative but to take to the road and ultimately to die on it.”

No flippancy here: another character faced with “vagrancy and hunger,” asks:

What, wouldst thou have me go and beg my food?
Or with a base and boist’rous sword enforce
A thievish living on the common road?

Fortunately, this is a comedy, so the fates are not so severe.

While You Were Watching Consumer Debt

Look what happened to investor margin debt (from the WSJ--link):

Hungry Investors Boost Margin Debt
By GASTON F. CERON

A rising stock market encouraged investors to go into debt to trade stocks, leading to an increase in the level of so-called margin debt in 2006.

Such debt is accumulated by investors who trade "on margin" with funds borrowed from their brokers. As tracked by the New York Stock Exchange, margin debt rose to $270.52 billion in November from $221.66 billion at the end of 2005, the first time in more than six years that margin debt has topped $270 billion. December numbers will be available later this month.

That 22% increase left margin debt not far from the record of $278.53 billion, reached in March 2000 as the Nasdaq Composite Index was setting a record high. Last year's rise in margin debt occurred against a bullish backdrop for stocks, with widely followed market indexes notching double-digit percentage gains.

Market analysts track margin-debt activity as an indication of investors' appetite for speculative trading.

A potential pitfall for those trading on margin is a sharp decline in stock prices, which can expose investors to margin calls, requiring them to post additional collateral or see their brokers sell their securities. Some market watchers consider high levels of margin debt worrisome because a wave of margin calls triggered by a sharp market decline could exacerbate the selling pressure on stocks.

Hat tip: Daniel Gross.

What to Be Proud Of as a Bankruptcy Lawyer

I know nothing except what I see in the newspapers about the Diocese of Spokane settlement (link), but let me offer one passing thought: this is the sort of thing bankruptcy courts (and good bankruptcy lawyers) are supposed to be good at—wading into a complex and polycentric mess, getting everyone to simmer down, and finding a cost-effective global solution. Sometimes it’s the judge; sometimes it’s the debtor's lawyer; more often than people might guess, it is the bank’s lawyer (“there is nobody more reasonable,” the great Jack Stutman used to say, “than an undersecured bank”).  One of my own mentors succinctly explained to me the logic of bankruptcy practice: if everybody is looking at 20 cents on the dollar and you find a way to get 25, they may leave a penny or two on the table for you. Ron Gilson and Bob Mnookin made this sort of thing famous as “what business lawyers do.” See Gilson and Mnookin, Business Lawyers and Value Creation for Clients, 74 Or. L. Rev. 1 (1995), and other stuff there cited. I would amend: it is what business lawyers might do, and sometimes do, and could their heads high when they do do.

I scarcely know Greg Zive (=the judge who superintended the settlement), and I’ve never appeared before him (nor do I expect to) but I do know he has had a top-of-the-chart rep as a judge since the day he hit the bench. With publicity like this, it may be tough to keep him in Palookaville. I wonder what he knows about Shi’ites and Sunnis?

You Want Inflation? I'll Show You Inflation

Followup on yesterday (link)--you want inflation? I’ll show you inflation. Here’s a piece I put together a few months back to introduce inflation to some law students:

==

The Thomas Mann story I mentioned this morning is “Disorder and Early Sorrow,” published in 1925, situated in the great German Hyperinflation that peaked in 1923. The story revolves around Professor Cornelius and his family, particularly his new-age children. The first two sentences are: 

The principal dish at dinner had been croquettes made of turnip greens. So there follows a trifle concocted out of one of those dessert powders we use nowadays, that taste like almond soap.

Not the kind of life a senior professor wants to lead, I can assure you.  Later we get this sketch of domestic life as the family organizes a party:

Many people had to give up their telephones the last time the price rose, but so far the Corneliuses have been able to keep theirs, just as they have kept their villa, which was built before the wear, by dint of the salary Cornelius draws as a professor history—a million marks, and more or less adequate to the changes and conditions of post-war life. The house is comfortable, even elegant, though sadly in need of repairs that cannot be made for lack of materials, and at present disfigured by iron stoves with long pipes. Even so, it is still the proper setting of the upper middle class, though they themselves look odd enough in it, with their worn and turned clothing and altered way of life. The children, of course, know nothing else; to them it is normal and regular, they belong by birth to the ‘villa proletariat.’ The problem of clothing troubles them not at all. They and their like have evolved a costume to fit the time, by poverty and out of taste for innovation: in summer it consists of scarcely more than a belted linen smock and sandals. The middle-class parents find things rather more difficult.

Later still, Frau Cornelius   

 speaks of what is uppermost in her mind: the eggs, they simply must be bought today. Six thousand marks apiece they are, and just so many are to be had on this one day of the week at one single shop fifteen minute’s journey away. Whatever else they do, the big folks must go and fetch them immediately after luncheon; and Xavier Kleinsgutl [the house-servant] will don civilian garb and attend his young master and mistress. For no single household is allowed more than five eggs a week; therefore the young people will enter the shop singly, one after another, under assumed names, and thus wring twenty eggs from the shopkeeper for the Cornelius family. This enterprise is the sporting event of the week…

 

Let’s do some computation here. Eggs cost six thousand marks, so 20 eggs cost 120,000 marks. The professor gets a slary of a million marks a month. So 20 eggs cost 12 percent of his monthly salary. In our world, 20 eggs cost—what, maybe $3, give or take. If eggs cost 12 percent of your salary, you’d be earning $25 a week…

Finally, here’s a good non-technical non-fiction account of the German experience (link).
And here’s a neat little graph of the German hyperinflation (link). Note that it is “log scale,” which means that each horizontal line represents a number ten times the last horizontal line.

Postscript:  Taxmom, a premium-content subscriber to Buce/Underbelly, asks:

On the subject of literature and insolvency, what do you think of Arthur R. G. Solmssen? I came across his book "A Princess in Berlin" about a year ago. While it's not deathless prose (somewhat contrived plot) his description of the inflation in Berlin in the 20's is awesome. I just googled him and come to find he is a Philadelphia lawyer.

That can be easily answered: never heard of either one. Looks like one more item for the inbox, and near the top, too. Thanks again, Taxmom.

Eeuw, This Won't Help Our Standing in the League Tables

It wasn’t all that long ago when every corporate failure was followed, sure as the sun rises over Flatbush, by a lawsuit against the accountants.

Clinton securities “reform” and a hard-hearted Supreme Court put a stop to that, and not such a bad thing, either: not every bad guess should lead to the penalty box.

But some should. And nostalgia buffs will feel a ripple of remembrance when they read about John Haukland, 57, (former?) KPMG partner “sentenced to 30 days … for negligent accounting in one of this country’s worst bankruptcies…” (link) “This country” is "Norway” where Haukland was auditor of something called Finance Credit, which went bankrupt to the tune of $242 million in 2003.

I know what you are thinking: insert “fraud in  Norway ?” joke here. Evidently the Norwegians are not amused. Commentators discussed the case, among others, in a Norwegian “Country report” produced by Transparency International, the ratings agency that regularly ranks Norway as one of the least corrupt countries in the world (link). The report said: 

Cases like these have been characterized in the Norwegian media as symptoms of a business community that has lost its virtue This is a new phenomenon in Norway and the public debate has been as lively as it has been mixed. Most have welcomed the new focus on corruption, the media revelations and the enhanced debate about ethics and corporate responsibility. But shallow and rosy declarations about zero tolerance, and a lack of public recognition of corruption in everyday practice do not make for a convincing anti-corruption strategy or promote genuine corporate progress. While companies recognise the need to strengthen protective measures and internal controls, they have yet to acquire the knowledge and tools to implement effective anti-corruption policies.

Haukland has the opportunity to appeal. But he has apparently already given up something more pricey than 30 days’ freedom: his license to practice his profession.

There is a wonderful tag end to the story.  We are told that

The court said a mitigating circumstance in sentencing Haukland was that ''[the principals of the company] both verbally and in other ways had skills that few other criminals possess.''

 Man, I would love to know how that one sounds in Norwegian. There’s an old saw that criminals are stupid. Wrong: stupid criminals are stupid. The real danger to society are the guys that learn to work in the white space around the letter of the law while getting other poor sods to pick up their doggy doo. I used to dine out with a psychiatrist. I would tell him some of my bankruptcy war stories (he was more reticent). “I think you know more psychopaths than I do,” my friend said, “but you know the successes. I only see the failures.”

Oh, and PS : KPMG was acquitted.

My God How the Money Rolls In...

Couple of interesting followups from correspondents re the capital slosh.  One, here's a former student who works as a money manager:

One little-known (or little-appreciated) fact about private equity is that a huge chunk of the capital which PE funds use for LBOs comes from public pension plans.  Oregon had $640M invested in KKR's funds by 1988!  Oregon and Washington both committed $1B-plus to KKR's 2004 vintage.  ... From the very start of big-time private equity it's been as much about pension money as it's been about rich-guy money.  If anything the pension money has created a lot of rich guys...

And this, from a bankruptcy judge:

You (or Palley) left out of #6 the advent of Securitization of accounts receivable in credit cards and both car and home mortgages from the mid-90's forward, largely unregulated by Congress -- at least intentionally:  the securities laws apply, but they weren't written to apply specifically to this new form of "asset-based financing."

"Too Much Capital (Again?)?"

I guess I have been one of those pushing the meme that there is just “too much” capital sloshing around out there, chasing too few deals, and with no completely obvious reason (aliens?). I am therefore happy to introduce Thomas Palley, proprietor of “Economics for Democratic and Open Societies,” who offers no fewer than eight alternate explanations for asset price levels. The whole piece is superb reading, a marvel of concision and exposition (link). But here are the takeaway points: 

Factor #1: increased income inequality. ...

Factor #2: increased profit shares. …

Factor #3: taxation policy. … [B]etween 1978 and 1999 top marginal tax rates fell significantly in every OECD country for which statistics are available. …

Factor #4: export-led growth. It is now widely recognized that China and much of East Asia have adopted export-led growth, a key ingredient of which is undervalued exchange rates. To keep their exchange rates under-valued, East Asian governments have been accumulating U.S.  and European bonds, resulting in lower interest rates that have in turn fostered higher equity and real estate prices.

Factor #5: lower central bank interest rates.  … 

Factor #6: credit market innovations. The last twenty years have also witnessed tremendous credit market innovation. In the corporate sector, the 1980s saw the introduction of junk bonds, and such financing is now the favored vehicle of leveraged buyouts that bid up asset prices. Additionally, the emergence of private-equity funds allows the super-rich to pool their funds and leverage them. …

Household credit markets have also changed as evidenced by home equity loans and the advent of interest-only mortgages. These innovations have liquefied homes and increased the volume of money chasing real estate assets.

Factor #7: demographic trends. Another widely recognized development is the aging of the baby boom generation, which is now in the second half of its work life. That places baby boomers in their period of heaviest saving for retirement, which has increased asset demand.  …

Factor #8: mania.…

(Hat tip:  Economist’s View, your one-stop shopping site for good econ reading (link))

Is There an Inflation Lobby?

Here’s one that is way above my pay grade but this has never stopped me before. I write about the inflation lobby, if there is one. 

Anybody out there old enough to remember when Adlai Stevenson was president? Okay, how about Jimmy Carter? Remember the great kidney stone of a year, 1980, when the inflation rate veered toward 14 percent per year? Not exactly Germany 1923, but enough to inflict a lot of pain: -“people on fixed incomes,” we were told, and it was true—if inflation went to 14 percent while your monthly social security check stayed just the same, you just had a 14-percent pay cut. It was throw an awful lot of small (and some big) businesses under the bus: try keeping up with a your monthly revolving when your (floating) rate goes up by a factor of, say, three.

But where you stand depends on where you sit. If you are not on a fixed income—if your paycheck goes up—and if your debt is fixed—then congratulations, bucky, you just got yourself a big chunk of relief. From your point of view, the more inflation the better.

In the 70s and 80s, we saw the inflation lobby hard at work—no, strike that, not hard at work, but sitting on the furnace eating chocolates while the pensioners and others did the work. In particular, I’m thinking of all the people who bought their homes on 30-year fixed mortgages in, say, 1967, just in time to enjoy the jolts and disruptions of the next two decades.

Clearly, there are political implications here. If we truly have a nation full of people with fixed-rate debt (and floating incomes), then there is no incentive to control inflation. Quite the contrary: you want all the inflation you can. Ironically, this is true even if the subjects don’t see it that way themselves: way I remember it, some of the loudest grousing about inflation came from people who were its biggest beneficiaries.

This is the point where you would expect me to write about how the inflation is coming back again, with the inflation lobby in tow. In truth, I believe the first part of that proposition. I’m one of those who believes that we are behaving like Donald Duck in the cartoon, suspended in mid-air, having run off the diving board and not yet having noticed that he’s ready for a fall. But what about the inflation lobby? Recall what I said before: “if your debt is fixed.” Back then, the mainstay of the loan market was the fixed-rate loan. Consumer installment loans were fixed-rate. So also credit card debt (if you had any). And the system thrived on the 20-year (or 30-year) fixed rate real estate loan.

You can see where I am going with this one.  I’m not smart enough or well informed enough to say anything conclusive about the loan market today.  But I do know that a lot  of our debt is floating-rate. Translated, that means we have shifted the risk of rate fluctuation from lenders (where it lay in the 70s/80s, and since time immemorial) to borrowers. If I’m right, then inflation may be far more painful for the mass of borrowers next time than it was last. Indeed, this may be one reason why there hasn’t been as much worry about the risk of inflation as you might expect—it may be that the people most like to suffer from it belong to a class that has no memory of any such pain. Keep this in mind  as you try to figure out what will happen when payday comes on all the borrowing and spending of the last few years.

It's All One Guy!

I'm a little shaky on just how the issue of income inequality comes to fall into the brief of this weblog, but the precedent seems to be established, so perhaps readers will be amused by this just in from Dan Walters at the Sacramento Bee (link--and thanks again, Joel, who gets up earlier than I do):

When California's personal income tax revenues took a sudden jump last year, those who chart the state's fiscal affairs wondered why -- and it turned out to be mostly due to a payment by one very high-income taxpayer.

State tax officials, citing tax confidentiality laws, are very reluctant to provide any information about the person who sent in about $200 million in unpaid taxes, even the taxpayer's profession or business. It could be a Silicon Valley tycoon, a Hollywood entertainer, an athlete -- or someone else entirely.

The payment was in response to a state amnesty program aimed at settling outstanding tax disputes, but its sheer immensity implies that the income involved must have been about $2 billion. It indicates that amnesty has been a success, but more than anything, it underscores a tax system that makes it increasingly difficult for the state to balance its books because of its utter dependence on a relative handful of high-income taxpayers.

State and local governments, including schools, rely on three major taxes to finance their operations: property taxes, sales taxes and personal income taxes. But the three-legged stool of public finance has become unstable.

Property taxes are limited by Proposition 13, which voters passed in 1978, while taxable retail sales have flattened out due to demographic changes -- especially the aging of the state's economically dominant white population.

Over the last quarter-century, and especially in the last decade, personal income taxes have become, by far, the most important revenue source, and because California has a steeply progressive income tax system, the bulk of those revenues come from a relative handful of high-income taxpayers.

Roughly half of personal income taxes are collected from those reporting incomes of $200,000 a year or more, while they file just 3 percent of state tax returns. The roughly 3,000 (out of 14 million) California tax returns with incomes over $5 million a year pay a whopping 10 percent of all personal income taxes.

From a populist standpoint, that's all to the good, but there's a downside that should bother everyone: Wealthy taxpayers tend to receive much of their income from capital gains, business profits and other non-salary sources.

Simply put, California's fiscal health -- its ability to pay for schools, colleges, medical care and other programs -- is very dependent on how well a few people do with their personal investments, and that's bothersome for several reasons.

First, the wealthy are mobile. Many could simply relocate their residences, at least for tax purposes, to Nevada or some other income tax-free venue. Second, they have at least some flexibility in the timing and other aspects of their income streams. Finally, their incomes are in large measure dependent on how well the stock market is doing.

It is, in practical effect, a triple whammy. Increasingly, revenues depend on a narrow base of taxpayers whose incomes are increasingly volatile while at the same time, the spending side of the public ledger is increasingly rigid, thanks to decrees by voters and politicians, and unable to adjust to the system's inevitable peaks and valleys.

That's why we developed a state budget deficit in the first place seven years ago and why, fiscal forecasters believe, it will continue as a chronic headache even if the economy continues to expand -- which is not at all certain.

Gov. Arnold Schwarzenegger and lawmakers have voiced all sorts of grandiose schemes they want to pursue this year. Their first priority, however, should be to address the state's dangerous fiscal predicament, whatever that may take. And it will take much more than getting a few rich scofflaws to cough up.

 

Uh oh Again

This AALS stuff is becoming a permanent feature of my participation here. 

Anyway--I had said that "Douglas Baird" was speaking on sales of receivables, Thurs aft at the AALS.    In fact, he is one of four.  Here is the whole listing:

Moderator: Carl S. Bjerre, University of Oregon School of Law

Speakers:

Douglas G. Baird, University of Chicago

Leianne Crittenden, Chief Counsel, Oracle Corp.

Bruce Markell, Bankruptcy Judge, Las Vegas

William H. Widen, University of Miami School of Law

That would be 4:00 - 5:45 p.m. Thurs in the Harding room, Mezzanine Level, Marriott Wardman Park Hotel, head to head against the AALS Scholarly Paper Presentation by Rashmi Dyal-Chand down the hall in the Hoover room.   In my haste, I had misread it as one speaker and three commentators.  My bad, and apologies to the three non-Bairds. 

Followup on Ownit

More on Ownit (cf. last night's post), from a former student who knows this stuff far more intimately than I do (though not directly involved in the Ownit BK, I am advised):

These days, what happens is that the   lender makes a loan, packages with a lot of other loans and sells the  package  to Wall Street.   But, the sale has a put back for   "EPDs" (early payment defaults) and "FPDs" (first payment   defaults).   All the sub prime lenders are getting squeezed   because what Wall Street will pay them for the loans isn't enough over what   it cost them to book the loan (competition is fierce).   Then   they get hit with their repurchase obligations and they are all losing   money big time.  Sometimes its bad underwriting but often it is just   plain old garden variety fraud by brokers, sponsors, appraisers   and/or  borrowers.  Going to take some time before the industry   can right itself.  As for the borrowers, when the mortgage company   sell the loans the servicing rights (which are worth a lot of money) are   transferred to a different, often unrelated, entity.   I would   suspect that the Ownit borrowers will see no interruption in receipt of   that monthly payment statement.

My correspondent calls attention to a hobbyhorse of mine: who owns the assigned intangibles?  While I admit it can get dicy in detail, I've always harped on the point that the "owner" is the one who bears the risk of decline in value.   The point can be critical in a bankruptcy, on the issue of who owns the incoming payment stream--does the trustee get it for distribution pro rata, or do the individual components go to individual assignees? Cf. Bear v. CoBen, 829 F.2d 705 (9th Cir. 1986), All these "putbacks" seem to make a pretty clear case that the loss remains with the transferor Ownit (i.e., or his trustee) in this case.  Congress may have mooted the point by all those special-interest rules for securitizations: perhaps I should hop on a plane and pop over to Washington, so I can listen to Douglas Baird's presentation at the AALS tomorrow.   

Micawber on Insolvency

For lawyers, the big Dickens novel is supposed to be Bleak House, but for bankruptcy lawyers, I think the choice should be Little Dorrit. You will remember: that is the one about William Dorrit, the “Father of the Marshelsea,” famous for being famous, in debtor’s prison for longer than anyone can remember.

But in fact, debt was a recurrent theme for Dickens; it pops up throughout his novels. Indeed, perhaps the most famous Dickensian debtor is not William Dorrit but Mr. Micawber, great friend of the eponymous author of David Copperfield.  Even people who have never cracked a Dickens novel will remember W. C. Fields saying   

Annual income twenty pounds,

annual expenditure

nineteen nineteen six,

result happiness.

Annual income twenty pounds,

annual expenditure

twenty pounds ought and six,

result misery.

 

It’s an imperishable scene and a priceless bit of character comedy but it overlooks a hard fact: Micawber is a calamity. He’s a drifter and a dreamer. He has a wife to support, and a disastrous knack for fathering children. David, first their tenant, becomes their protector, adult before his time. Micawber is always waiting for something to turn up. For the most part, nothing does turn up; Micawber winds up in debtor’s prison, and the best thing he can find to do with his time is to compose “a petition to the House of Commons, praying for an alteration in the law of imprisonment for debt.” Copperfield explains:      

There was a club in the prison, in which Mr. Micawber, as a gentleman, was a great authority. Mr. Micawber had stated his idea of this petition to the club, and the club had strongly approved of the same. Wherefore Mr. Micawber (who was a thoroughly good-natured man, and as active a creature about everything but his own affairs as ever existed, and never so happy as when he was busy about something that could never be of any profit to him) set to work at the petition, invented it, engrossed it on an immense sheet of paper, spread it out on a table., and appointed a time for all the club, and all within the walls if they chose, to come up to his room and sign it. 

Dickens readers apparently find this all touching and loveable: apparently the book remains about the best-selling of all Dickens novels. It is not entirely clear just what Dickens himself thinks. It is he who sketches out all this sunny innocence; yet it is he who lays out the evidence that Micawber, for those around him, is pretty much of a train wreck. Dickens does also mention “the boot-maker” who

had declared in open court that he bore [Micawber] no malice, but that when money was owing to him he liked to be paid. He said he thought it was human nature. 

Human nature indeed. Compare with Micawber’s human nature at work as he undertakes to discharge an obligation to his young friend Traddles:

'One thing more I have to do, before this separation is complete, and that is to perform an act of justice. My friend Mr. Thomas Traddles has, on two several occasions, ‘put his name,’ if I may use a common expression, to bills of exchange for my accommodation. On the first occasion Mr. Thomas Traddles was left—let me say, in short, in the lurch. The fulfillment of the second has not yet arrived. The amount of the first obligation,’ here Mr. Micawber carefully referred to papers, ‘was, I believe, twenty-three, four, nine and a half; of the second, according to my entry of that transactions, eighteen, six, two. These sums, united, make a total, if my calculation is correct, amounting to forty-one, ten, eleven and a half. My friend Copperfield will perhaps do me the favour to check that total?’

I did so and found it correct. 

‘To leave this metropolis,’ said Mr. Micawber, ‘and my friend Mr. Thomas Traddles, and I now hold in my hand, a document, which accomplishes the desired object.  I beg to hand to my friend Mr. Thomas Traddles my I O U for forty-one, ten, eleven and a half, and I am happy to recover my moral dignity, and to know that I can once more walk erect before my fellow man!’ 

With this introduction (which greatly affected him), Mr. Micawber placed his I O U in the hands of Traddles, and said he wished him will in every relation of life. I am persuaded, not only that this was quite the same to Mr. Micawber as paying the money, but that Traddles himself hardly knew the difference until he had time to think about it. 

 It’s something to reflect that Micawber’s cheerful, calamitous innocence who has more to do with public attitudes towards debt than any other character in literature.

Fn.: Dickens never was much good at endings. After carrying him through one scrape after another, there wasn’t much to do with Micawber, so (in desperation?) Dickens sent him to the antipodes and made him a judge. The reader is left to draw whatever moral he sees fit.

Pity the Poor Mortgagee

“I’m tired of worry about my debts,” goes the old story, “now you worry about them.” 

In trying to understand the plight of borrowers in any prospective subprime lender meltdown, we may have failed to focus on the fact that for every unpaid loan, there is an unpaid lender. Evidence of this point comes from the apparent collapse of Ownit Mortgage Solutions Inc. which filed for Chapter 11 in Van Nuys last Friday. The LA Times says:

Ownit grew rapidly over the last few years, becoming a top 20 lender nationally in the sub-prime niche, but the closely held company turned unprofitable as interest rates and homes prices rose and competition for a shrinking customer base intensified.

Interest rates? Competition? I wonder if somebody got spun here. Much deeper in the story, the reporter adds that “by far the biggest portion of the debt resulted from soured mortgages,” which sounds to me like “we made a lot of lunatic loans that we never should have made in the first place.”

In any event, is fascinating to speculate on what, if anything will be the implications of a failure like this for the harassed borrower. It used to be that for the debtor, news of your lender’s bankruptcy was the best you could hope for: you’d be dealing with a trustee with a limited warchest; records would get misplaced or simply forgotten; and in any event, during a general unravelling, the last thing the creditor wanted was to take the property back.

 I haven’t any idea whether this is what is happening here; it may be a different story altogether, or it may be that I am just fighting the last war –our mantra these days seems to be that securitization has rewritten the rule book, and this may be the place where we find out what the new rules look like.

 Paranoid further thought: now I am really getting beyond myself, but bear with me. Deep in the story, we are also told that, in addition to sour mortgages,  “glitches in recording payments and other technical problems also played a role.” Hello, technical problems?  Glitches? Glitches? I am old enough to remember any number of mortgage-lender meltdowns that came unmasked as outright Ponzi schemes, riven with fraud from top to bottom. Yes, yes, I am getting way beyond the evidence here, but I am wondering if this might turn out to be a case that only a lawyer could love. 

Elsewhere In The Blogosphere...

I feel the urge to showcase a `couple of blogs that may not have surfaced  so far on the radar of CreditSlips readers.

 I mostly bypass the specialized bankruptcy blogs: there are so many and it is kind of like counting bees—you never know which ones you have already counted.. Most readers will have their own views on specific items among the proliferation of commercial marketing blogs created by law firms and others, many of which are mediocre and some of which are butt awful. One difficulty that particularly seems to affect the good ones is that the proprietors seem to be discovering that it is a lot of work. Thus the ABI BAPCPA blog started strong but hasn’t surfaced a new post October. The same fate may be overtaking the Bankruptcy Litigation Blog, or maybe he is just taking a long holiday.  One apparent survivor that perhaps does deserve mention is The Bankruptcy Lawyers Blog (no apostrophe?), if only because it succeeded in getting the phrase “Illinois … Professor” into the headline of two separate posts, for two separate professors (Lawless and Tabb).  BLB does mostly consumer BAPCPA. For business BK, there is straightforward stuff at In the (Red).

But further afield--how many readers have ventured far enough afield to find The Housing Bubble Blog? As one who has lived through nine of the last four recessions, I find it riveting: of course if the market ever does turn up, these guys will be perhaps the last to know.  Absolutely do not overlook the slide show. 

Or, if that isn’t enough, allow me to introduce The Payday Loan Industry Watch—not quite a blog, but they’ve got an RSS news feed and Podcasts, along with a direct link for your payday borrowing needs.  And finally, if none of this provides life in tooth and claw, try I Am Facing Foreclosure (good news: his Bible reading is up to 138 chapters, but no word on whether this includes Chapter 11).

Belated Christmas Special

This link has been around the barn a couple of times, but it is too good not to be showcased here (I got it from my former student Kenrick, now plying the bankruptcy trade in LA).  The particular BK tie is that Sam-the-grave-dancer Zell is the crown prince of vulture investing.

For extra credit, readers of CreditSlips are invited to explain why, if we are aslosh in capital, still consumer interest rates remain about where they were in the Carter administration.  For your convenience, you'll find an inflatable calculator under your chair.

Uh oh

The convention scheduler's lot is not a happy one.  Having hyped Rashmi Dyal-Chand's AALS paper (link), I am now informed that the presentation conflicts head-to-head with the AALS Section on Commercial and Related Consumer Law -- scheduled for the Harding Room, Mezzanine Level, Marriott Wardman Park Hotel.  Agenda for the day is the estimable Douglas Baird on "Sales of Receivables: Concept and Reality."  People!  Time to polish your transubstantiation skills!

It Comes, It Goes...

Alistair Cooke on one facet of the New England economy during the Second World War:

"Up in Springfield, Connecticut, the federal bankruptcy court closed down for lack of business."

--Alistair Cooke, American Homefront 1941 to 1942 at 282

Thanks, Joel.

Rashmi Dyal-Chand on Human Capital

Some readers of Credit Slips will be at the convention of the Association of American Law Schools in Washington ( I will not). Those who are will be well requited to drop by and give an ear to Professor Rashmi Dyal-Chand (Northeastern) as she presents her paper, “Human Worth as Collateral,” the winner of this year’s scholarly papers competition. Students of mine will tell you the topic has become something of a hobby-horse of mine (although I may not have anything useful to say about it). Professor Dyal-Chand makes an ambitious foray into the field, examining “two modern examples…at geographical, economic and cultural extremes”—middle-class First  World consumer lending and Third World micro-lending. I have a lot of concerns about this paper which aren’t well enough thought out yet for prime time—suffice to say I think she may be conflating human-capital lending with character lending, and perhaps underrating the extent to which lenders understand what they were doing in this area.  But no matter; it is a brave beginning on a topic whose time is, perhaps, overdue. I’m sorry I won’t be around to listen to the discussion. Professor Dyal-Chand will present Thursday (January 4) from 4 to 545p, in the Hoover Room on the Mezzanine Level of the Marriott  Wardman Park.

Bankruptcy's Balzac

Well, hey.  thanks for the intro.    Now this:

I’ve always argued that bankruptcy law needs its Balzac, except that it has its Balzac, and his name is Balzac. In a broad sense, you could say that everything he wrote is about bankruptcy—or at least about commerce, and usury, and rapacity, and greed, and wild speculation, and all the things that made him Marx’s favorite novelist. He had first-hand experience—it is said that he equipped his house with a special back door, for the escape from creditors (he also took a mistress more than 20 years his senior who was the mother of nine children, go figure). He did write one explicit “bankruptcy” novel, Histoire de la grandeur et de la décadence de César Birotteau, about a guileless parfumiere, undone by an unworthy servant, but particular references are scattered through any number of other novels. One of the best bits may be the passage in Eugénie Grandet, where the Old Grandet, the miserly cooper, undertakes to de-besmirch the name of his late brother, the speculator and suicide:

Presently des Grasssins called a meeting of creditors, who unanimously appointerd the Saumur banker and François Keller, the head of a large business firm and one of the principal creditors, as joint trustees; and empowered them to do anything they thought necessary to prevent any doubt being cast on the good name of the family, or the bills. The credit Grandet of Saumur enjoyed, the hopes des Grassins roused in the hearts of the creditors as his agent, made this go smoothly. There was not a single dissident voice among the creditors. Nobody dreamed of passing his bills to his profit and loss account, and each man said to himself, ‘Grandet of Saumur will pay!’

Six months went by. The Parisians had withdrawn the bills from circulation, and had put them away underneath all their other business papers. This was the first result the cooper was looking for. Nine months after the first meeting the two trustees distributed forty-seven per cent of the amount owing to each creditor. This sum had been raised by the sale of valuables, property, goods and chattels belonging to the late Guillaume Grandet, a sale made with most scrupulous honesty. The delighted creditors acknowledged the undeniable and admirable integrity of the Grandet brothers. Having praised them and circulated their praises for a suitably decorous length of time, the creditors began to ask when the remainder of their money would be forthcoming. It became necessary to write a collective letter to Grandet.

‘Now we’re getting somewhere,’ said the old cooper, throwing the letter into the fire.  ‘Have patience, my little friends.’

In reply to the propositions put forward in the letter, Grandet of Saumur asked that all the documents involving claims against his late brother’s estate should be deposited with a notary, together with receipts for payments already made, in order, so he said, that the accounts might be audited and to establish correctly just how much money was owed by the estate.

This all goes on for another page or so.  Then:

Twenty-three months after Guillaume Grandet’s death, many of the merchants, in the rush of business life in Paris, had forgotten their claims against his estate, or thought of them only to say,

‘I’m beginning to think that the forty-seven percent is all I’ll see of that debt.’

And so it goes.  Earlier, young Eugénie had asked the old cooper:  ‘What is a bankrupt, father?’

‘A bankrupt,’ answered her father, ‘has committed the most dishonorable deed that a man can dishonour his name by being guilty of. … A bankrupt,’ he went on, ‘is a thief that the law unfortunately takes under its protection.’

--Balzac, Eugénie Grandet (
Marion Ayton Crawford trans. 1955)