postings by Adam Levitin

Trump's Personal Guaranties and Liquidity

posted by Adam Levitin

The revelations about Donald Trump's taxes might hold in them an explanation for why he didn't divest from his businesses when he became President, despite the obvious political problems that was going to create:  he couldn't afford divesting.  

Trump seems to have personally guarantied hundreds of millions of dollars of corporate borrowing. That's not uncommon for someone in his position, but I would imagine that at least some of those personal guaranties have key man provisions that require him to remain involved with the business. If he doesn't, the loan (and guaranty) might be in default and callable. And there are surely cross-default clauses in some of the borrowings, so it wouldn't be just one loan that could come due, but a bunch of them. It's pretty clear that in 2016 Trump didn't have the liquidity (and perhaps not even the assets) to deal with that sort of situation. 

Now let's be clear. There might have been other motivations for Trump to retain control over his businesses. But to that list, we should add the possibility that he had boxed himself in and couldn't divest even if he had wanted to without ending up broke. 

Congressional testimony on Small Business Lending regulation

posted by Adam Levitin

I am testifying later today (virtually) before the House Small Business Committee on "Transparency in Small Business Lending."  My written testimony is here.

Here's the background: consumer credit is governed by an extensive regulatory regime, starting with disclosure regulation, but extending to some substantive term regulation, and regular supervision (inspections) of lenders. There is no equivalent system for business lending.

The lack of protections for businesses is because they are presumed to be more sophisticated entities, but the range of financial and legal sophistication among businesses varies considerably. In particular, small businesses are often much more similar to consumers, and in fact their borrowing is often based on the owner's personal credit and guarantied by the owner and collateralized by the owner's personal property.

This leaves small businesses vulnerable to abusive practices that were prohibited in the consumer credit markets in the 1960s, 70s, and 80s:  disclosure of credit costs in non-standardized and misleading terms (e.g., quoting daily interest rates, rather than annual percentage rates, as required for consumer credit by the Truth in Lending Act), and confessions of judgment (prohibited for consumers by the FTC Credit Practices Rule). 

The Committee's chairwoman, Rep. Nydia Velázquez, has proposed a bill that would extend some consumer credit protections to loans for under $2.5 million made to small businesses, as well as create a system for regulating brokers of small business loans. The bill is an important step forward. While there are some tweaks I'd like to see to it, I very much hope it advances and becomes law. 

 

OCC Suggests "Fair Access" Rulemaking to Require Banks to Finance the Oil and Gas Industry

posted by Adam Levitin

Just when you think it can't get more ridiculous... The Office of Comptroller of the Currency, which hasn't taken racially discriminatory lending seriously, is concerned about banks' discriminatory refusal to serve the oil and gas industry. In fact, the OCC is so concerned that it is suggesting legal theories so farfetched that would be laughed out of a courtroom if it actually tried to act on them. 

The underlying issue here is that banks seem have gotten cold feet about financing fossil fuels. Why? Any number of reasons, including that their investors don't like it (ESG), that global warming threatens their own balance sheets, that oil and gas prices right now are so low that investment in the sector might not be a good business move, and that there's huge risk to fossil fuel projects' value based on the 2020 election outcome. But Senator Dan Sullivan of Alaska wants to drill in the Arctic and has expressed concern about banks' unwillingness to fund global warming to the OCC.

In response, the Acting Comptroller of the Currency, Brian Brooks, wrote a letter to Senator Sullivan that can only be described as verging on legal malpractice in the service of political expediency while pushing a vision of economic regulation that looks like communist China. 

Acting Comptroller Brooks argues that 12 U.S.C. § 1(a):

requires the OCC to ensure that banks provide "fair access" to financial services. Decisions by major banks to deny the oil and gas sector, among other targeted industries, access to financial services may violate that statute. Accordingly, the OCC will examine the possibility of issuing regulations defining fair access to provide clarity to banks and customers alike.

Let's take a look at 12 U.S.C. § 1. The relevant section states:  

There is established in the Department of the Treasury a bureau to be known as the “Office of the Comptroller of the Currency” which is charged with assuring the safety and soundness of, and compliance with laws and regulations, fair access to financial services, and fair treatment of customers by, the institutions and other persons subject to its jurisdiction.

12 USC 1 is a general expressive statement of the general purposes of the OCC. It's not even a "be excellent to each other" sort of exhortation. It is not by any stretch a provision creating any substantive rights or obligations. If OCC tried to use this as the basis for a "fair access" rulemaking, as Brooks suggests, the rulemaking would get thrown out by a court on an APA challenge in a hot minute. 12 USC 1 authorizes the OCC to do precisely nothing. 

Whatever 12 USC 1 is, it is not a roving commission for the OCC to undertake rulemakings about "fair access" and "fair treatment", etc. It is not a free-standing authorization to undertake any sort of rulemaking. It is very plainly not a delegation by Congress. Furthermore, the suggestion that "Decisions by major banks to deny the oil and gas sector ... access to financial services may violate that statute" is risible. 12 USC 1 is at most an obligation on the OCC, not on banks. It's embarrassing to see the OCC put forth such a legal argument.  

Note that what Brooks is proposing is the flip-side of the allegations made against Operation Chokepoint, namely that regulators were discouraging banks from lending to certain disfavored industries. Now Brooks is talking about forcing banks to lend to certain favored industries. That sounds like ... communist China. It makes my head spin. 

(btw, where are the conservatives who bitch about affordable housing goals and the CRA? Aren't they up in arms that a financial regulator is talking about forcing banks to lend to someone?)  

But let's say that I'm wrong and Brooks is right. Consider the implications. Imagine what a Comptroller with a different political tinge might have with provisions such as "fair treatment of customers" and "fair access to financial services". Who needs UDAAP when you've got "fair treatment"? Who needs CRA, when you've got "fair access"? If Brooks wants to weaponize 12 USC 1, he might want to first recognize that "fair" is a word that progressives can do a lot more with than he can.  

No More Bailouts

posted by Adam Levitin

I have a new white paper out from the Roosevelt Institute's Great Democracy Initiative. The paper, which is co-authored with Lindsay Owens and Ganesh Sitaraman, proposes a standing emergency economic stabilization authority to provide an off-the-shelf immediately available response to common problems that recur in national economic crises.

The motivation for the white paper is that in the past dozen years we've been through two rounds of massive ad hoc bailouts. We shouldn't be doing this on the fly. Instead, we need to have a suite of programs ready to go. Think of this as an "in case of emergency, break glass" approach.

Continue reading "No More Bailouts" »

Seila Law v CFPB: Winners and Losers

posted by Adam Levitin

The Supreme Court's long-awaited decision about the CFPB's constitutionality is out. It's a tricky opinion to parse politically. The Court, in a 5-4 partisan decision, held that the CFPB's structure violates the separation of powers because of the for-cause only removal provision for the CFPB Director in conjunction with the Bureau's other features. Accordingly, the Court found that the Director must be removable at will. Here's my attempt to lay out the winners and losers. As you'll see, they do not track with the headlines of the CFPB losing—the CFPB was actually the winner here for most purposes.  

Continue reading "Seila Law v CFPB: Winners and Losers" »

Best Interest Blog

posted by Adam Levitin

There's a new bankruptcy blog around:  the Best Interest Blog.  Welcome to the blogosphere!  

I'm delighted that the blog features a great post by my former student and research assistant Mitchell Mengden about the "J. Screwed" maneuver of stripping out collateral from the restricted group and then pledging it to other creditors. While the maneuver has been going on for a while, as Mitchell explains, it's interesting how infrequently underwriter's counsel has insisted on J. Crew provisions in bond indentures, although the use seems to be picking up in junk indentures. 

How to Start Closing the Racial Wealth Gap

posted by Adam Levitin

I have an article out in The American Prospect about How to Start Closing the Racial Wealth Gap. Unlike a lot of writing bemoaning the racial wealth gap, this piece has a concrete reform that could be undertaken on day 1 of a Biden administration without any need for legislation or even notice-and-comment rulemaking. The article  points the disparate impact of an obscure, but enormous indirect fee on mortgage borrowers that the Federal Housing Finance Agency has required Fannie Mae and Freddie Mac to charge since 2007. The fee is structured in a way that disadvantages borrowers with fewer resources and lower credit scores, which has a disparate impact on borrowers of color. (I'm not saying it's an ECOA violation--that's a different analytical matter.) The fee was adopted in response to a competitive environment in 2007 that doesn't exist today; there's really no good reason for the fee to exist any more. 

The Great American Housing Bubble

posted by Adam Levitin

My new book, The Great American Housing Bubble:  What Went Wrong and How We Can Protect Ourselves in the Future was just released by Harvard University Press. The book is co-authored with my long-time collaborator, Wharton real estate economist Susan Wachter. It's the culmination of over a decade's worth of work on housing finance that began in the scramble of fall 2008 to come up with ways of assisting hard-pressed homeowners.

Continue reading "The Great American Housing Bubble" »

Why Is Anyone Paying Retention Bonuses in Today's Economy?

posted by Adam Levitin

Wall Street Journal today has a story about Hertz having paid out $16 million in retention bonuses before filing for bankruptcy. It seems that several other firms have done the same recently.

In normal times, a retention bonus isn't a crazy idea--there are downsides to remaining employed at a bankrupt company, particularly the uncertainty about the company's future--will it survive, in what form, and under what management? An employee might reasonable look at other employment options if bankruptcy looms. 

But in today's economy, I have trouble seeing a justification for paying retention bonuses for executives. With real unemployment at nearly 25% and few firms hiring (and certainly not rental car companies), the alternative to sticking with the bankrupt company is likely unemployment, not a similar position at another firm. The bonuses just look like corporate waste (and perhaps self-dealing). But if I had to guess, given their size, they'll go unchallenged, whether because of terms of the carve-out for the official committee in the DIP financing or because of a release in the plan.  

The Brown M&M Theory of Telltale Minor Regulatory Violations or What's Wrong with "Earn a savings rate 5X the national average"?

posted by Adam Levitin

A CapitalOne savings account ad has got me thinking about whether Van Halen has anything to teach regulators. Van Halen is famous for its use of a contract that requires provision of M&Ms for the band, but expressly prohibits provision of any brown M&Ms. It's not that they taste different, of course, but that if a concert promoter fails to adhere to the brown M&M term in the contract, it's a red flag that there might be other more serious problems, so the band will undertake a safety check of the stage and equipment. 

IMG_5469So what does this have to do with CapOne?  I'm one of the few folks in the world who bothers to teach the Truth in Savings Act, so I'm probably more inclined to pay attention to deposit account advertising than most folks. I was about to throw out an early May issue of The Economist (yes, my tastes run distinctly to middle brow), when a CapitalOne ad caught my eye.

The ad, which I've posted to the right says, "Why settle for average?  Earn a savings rate 5X the national average."  In smaller, less bold font it then says "Open a new savings account in about 5 minutes and earn 5X the national average." Under that, in smaller, but bold, "This is Banking Reimagined®." Faint, fine print on the bottom says "ONLY NEW ACCOUNTS FOR CONSUMERS. RATE COMPARISON BASED ON FDIC NATIONAL RATE FOR SAVINGS BALANCE < $100,000. OFFERED BY CAPITAL ONE, N.A. MEMBER FDIC © 2019 CAPITAL ONE" Above this is a photo featuring some random dude (or celebrity I don't recognize) with a croissant and coffee and faux casual outfit (jeans and a t-shirt, but a jacket with a pocket square) inviting the reader to join him. Breakfast and banking perhaps? But in the background, over his shoulder is a sign that says "Savings Rate 5X National Average" (its hard to read in the original, and doesn't come across in my photo, unfortunately).

So what's the problem here?

Continue reading "The Brown M&M Theory of Telltale Minor Regulatory Violations or What's Wrong with "Earn a savings rate 5X the national average"?" »

Corona Cash and Refund Anticipation Checks

posted by Adam Levitin

Vijay Raghavan, who will be joining the Brooklyn Law School faculty this summer shared a troubling observation about the payment of the recovery rebates ("Corona Cash" or "Mnuchin Mnoney") through direct deposit to taxpayers. It seems that the payments for around 15% of individual tax filings might be going to bank accounts that are closed or not controlled by the taxpayers. That 15% is surely a much larger percentage of households eligible for Corona Cash. I wouldn't be surprised if close to a quarter of eligible households are affected.

Raghavan writes:

Recovery rebates (stimulus payments) under the CARES Act are supposed
to go out this week. A number of people have noted that the payments
will be delayed for unbanked consumers and the funds are at risk of
being swept by lenders or debt collectors. What has received less
attention is the fact that many banked or underbanked taxpayers may
not receive their rebates because they financed tax preparation with a
refund anticipation check (“RAC”). [AJL: a RAC is distinct from a refund anticipation loan, when the preparer advances the taxpayer part of the anticipated tax refund.]

RACs allow taxpayers to defer the cost of tax preparation and finance
preparation out of their refund. The refund is deposited in a
temporary bank account that the tax preparer arranges to have opened.
The taxpayer may never be made aware that the temporary account
exists. The refund is then distributed to the taxpayer minus
preparation fees and ancillary fees via check, direct deposit, or
using some other payment instrument.

The conventional wisdom is RACs are primarily used by unbanked
consumers. But many banked or underbanked taxpayers may also use RACs.
Smaller tax prep chains and individual tax prep stores rely on RAC
financing for at least two reasons. First, the intermediaries these
tax preparers use to process the returns charge numerous
per-transaction fees, which are easier to pay for out of a taxpayer’s
refund since the cash-strapped taxpayer can’t afford to pay for the
intermediaries’ services up-front. Second, financing may serve to
conceal inordinately high tax preparation fees. As a result, it is not
uncommon to find tax preparation stores in low-income neighborhoods
that refuse to accept up-front payment and only process RAC-financed
returns. In the 2018 tax year, approximately 21 million returns were
financed with RACs. [AJL: for context, there were around 150 million individual returns filed in 2018.]

RACs present a few problems for stimulus distribution. If returns were
already filed and processed, the temporary banks accounts may be
closed, which will delay distribution of the rebate. If the temporary
account is still open, the rebate may sit in the account without being
distributed. There should be less problems if returns have not been
filed or are still pending. But if refunds are initially distributed
to the tax preparer as opposed to the taxpayer (which happens in some
cases), there is some risk tax preparer may take the CARES Act money.

The good news is large chains like H&R Block and tax software
companies should have bank account information for the returns they
processed. They could turn this data over to the Treasury but the
CARES Act may limit the Treasury's ability to disburse payments. The
CARES Act seems to only allow electronic disbursement to accounts the
taxpayer has previously authorized. Taxpayers who regularly financed
tax prep with RACs likely have not authorized disbursement to their
own bank account or may not maintain an open bank account in regular
use. Treasury probably has to lean on preparers and software companies
to ensure that payments to RAC-financed returns are disbursed to the
taxpayer bank accounts.

The problems in doing a quick disbursal of Corona Cash highlight some deficiencies in the US payment and banking system. The House counterproposal to the CARES Act had in it a provision for the creation of FedAccounts--giving every consumer a bank account held at the Fed. It's kind of late in the game to try and set up such a system to deal with the corona virus crisis, but the crisis is exposing areas that need to be shored up going forward. 

How to Treat Post-Petition Attorneys' Fees

posted by Adam Levitin

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

Continue reading "How to Treat Post-Petition Attorneys' Fees" »

Mitch McConnell Is Robbing Taxpayers to Bailout the Rich

posted by Adam Levitin

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

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

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

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

Bailout Oversight Lessons from 2008

posted by Adam Levitin

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

How to Help Small Businesses...Fast

posted by Adam Levitin

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

Summary of the McConnell Bailout Bill

posted by Adam Levitin

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

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

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

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

The Bailout Cronyism and Corruption Have Already Begun

posted by Adam Levitin

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

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

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

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

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

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

 

COVID-19 Response: The Need for Speed

posted by Adam Levitin

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

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

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

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

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

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

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

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

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

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

posted by Adam Levitin

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

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

This matters hugely for universities as businesses.

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

Federal Reserve Emergency Lending as a Coronavirus Response

posted by Adam Levitin

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

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

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

Mallinckrodt Pharmaceuticals Bankruptcy and Channeling Injunction Puzzle

posted by Adam Levitin

The outline of Mallinckrodt Pharmaceutical’s chapter 11 proposal (no filing yet) puzzles me.  Mallinckrodt is looking to put its US speciality generic subs in the chapter to slough off opioid liability, while keeping the parent and other subs out of bankruptcy.  The proposal would have Mallinckrodt fund a trust with $1.6 billion (face value) of cash payments and warrants for the purchase of 19.99% of Mallinckrodt parent’s common stock at a strike price that’s currently in the money.  The bankruptcy court would be asked to enter a channeling injunction along with third-party releases that would direct all opioid creditors to look solely to the trust for recovery, freeing Mallinckrodt parent and its speciality generic subs from the uncertainty opioid liability overhang.  

Here’s what puzzles me. The channeling injunction and third party releases being sought would be entered under section 105(a).  The only express channeling injunction and third party release procedure in the Bankruptcy Code, section 524(g), is solely for asbestos cases. While we’ve seen channeling injunctions and third party releases entered in a range of contexts beside asbestos under section 105, it seems problematic to me for a court to authorize either under section 105(a) on a less strict basis than is required under section 524(g). If a court could just go with judicially-crafted section 105(a) requirements in lieu of section 524(g), it would render section 524(g) requirements meaningless in the asbestos context.  

Continue reading "Mallinckrodt Pharmaceuticals Bankruptcy and Channeling Injunction Puzzle" »

Boy Scouts of America:  Venue Demerit Badge

posted by Adam Levitin

Boy Scouts of America’s bankruptcy filing is among the most flagrant abuse of the venue statute ever. It’s an illustration of just how broken the bankruptcy venue system is. But it might not be too late to do something about it. 

Here’s the quick background (some of which is also covered in Pamela Foohey's post). Boy Scouts of America (BSA) is a defendant along with its local councils (essentially franchises) in myriad sex abuse suits. BSA is a federally chartered entity, headquartered in Texas. In July 2019, roughly 210 days ago, BSA incorporated its only subsidiary, Delaware BSA, LLC, a Delaware limited liability company, of which BSA is the sole member.

Delaware BSA, LLC has less than $50,000 in assets (and possibly zero), consisting primarily (or perhaps solely) of a bank account in Delaware. It carries on no business and has no real employees. In short Delaware BSA, LLC, is a pure corporate shell. Its sole purpose appears to be to enable BSA to have proper venue for a bankruptcy filing in Delaware.  That’s because the bankruptcy venue statute allows a firm to file for bankruptcy where it is incorporated, where its principal place of business or assets are, or where a bankruptcy of an affiliate is pending.  BSA utilized this last provision to get Delaware venue:  it had its subsidiary Delaware BSA, LLC, file for bankruptcy in Delaware first and then it bootstrapped its way in by virtue of its affiliate having a case pending in Delaware. 

It’s hard to conceive of a more blatant abuse of the venue statute. (Ok, there's Winn-Dixie, which formed its affiliate 12 days before the filing, rather than outside of the 180 days required by the venue statute.) But I think there is a solution in this case, if you bear to the end of a long post.  

Continue reading "Boy Scouts of America:  Venue Demerit Badge" »

The Milken Pardon and the Trump Connection?

posted by Adam Levitin

There's something really surreal about Donald Trump's pardon of Michael Milken. Trump and Milken were (with Ivan Boesky) the leading symbols of the excesses of capitalism in the 1980s. And here we are today. 

It seems that whatever Trump does, there's always a previous Trump tweet or quotation, and this time doesn't disappoint. Here's what a certain Donald J. Trump was quoted in 1990 in the NY Times regarding Milken's jail sentence:

"It's a very tough sentence. When you see that muggers and murders don't get as hard a sentence, it seems very tough. It may serve as a deterrent. If it does, then it will be a wise sentence."

In fairness to Trump, it's hard to see Milken's prosecution as having served as a much of a deterrent. But then, Milken went to jail for the wrong thing. He ended up pleading guilty to some (relatively minor) securities law infractions involving inaccurate securities filings in a case brought by the US Attorney Rudolf Guiliani (!). Milken was never prosecuted for his much more serious and complicated wrong-doing.

Continue reading "The Milken Pardon and the Trump Connection? " »

The Big Lie Lives On

posted by Adam Levitin

The Big Lie just won’t die. The Big Lie, of course, is The Government Made Me Do It theory of the financial crisis, that the housing bubble whose collapse set off the crisis was the product of government policies encouraging affordable home mortgage credit.

A video emerged recently of presidential candidate Mike Bloomberg espousing the Big Lie, and incredibly, the New York Times is running an op-ed that defends the Big Lie. Most of the op-ed comes verbatim from a new book by Christopher Caldwell. Caldwell has written a remarkably misleading piece about government affordable housing policy. It misrepresents that actual legal requirements, gets the relationship between the GSEs and private securitization market entirely backwards, wrongly implies support from scholarship that is saying something altogether different, and relies on outdated scholarship. I get that Caldwell isn't a housing finance expert, and his book is a trade book on the welfare state, but this is exactly the sort of silliness that happens from drive-by analysis. I'm pretty sure that the Times wouldn't run unsourced climate denial claptrap, but this is the housing finance equivalent. Let me highlight several examples.  

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Mick Mulvaney's South Carolina Land Shenanigans All Under Seal

posted by Adam Levitin

Last year the Washington Post covered Mick Mulvaney's South Carolina land deal gone sour. It was a pretty amazing case that is fantastic for teaching purposes. Mick's moves would have made some of the most sophisticated distressed debt funds (not to mention a real estate developer president) blush with shame (or green with envy).

I've got an update on the case that appears quite troubling: it seems that the South Carolina court has put everything except the docket entry list under seal, including previously public available documents. If I am correct, this is really disturbing because would indicate a willingness by the South Carolina court system to accommodate Mick's desire to shield keep his business dealings from any public scrutiny, even though there is no legitimate reason that I can see for the court to turn seal all the documents in a public judicial proceeding about a commercial real estate foreclosure action. 

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"Middle Class Faux"?

posted by Adam Levitin

I did some digging into Joe Biden's previously unexplored roll call vote on floor amendments to BAPCPA. They were ugly then and have not improved with age. My full take is in The American Prospect

Elizabeth Warren's Work in the CMC Heartland Case

posted by Adam Levitin

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

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

Trump Administration Declares Open Season on Consumers for Subprime Lenders

posted by Adam Levitin
The Trump administration has just proposed a rule that declares open season on consumers for subprime lenders. The Office of Comptroller of the Currency and the Federal Deposit Insurance Corporation (on whose board the CFPB Director serves) have released parallel proposed rulemakings that will effectively allowing subprime consumer lending that is not subject to any interest rate regulation, including by unlicensed lenders.

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The Rigged Game of Private Equity

posted by Adam Levitin
The Stop Wall Street Looting Act introduced by Senator Warren has the private equity industry's hackles up. They're going to get a chance to say their piece at a House Financial Services Committee hearing on Tuesday. The bill is a well-developed, major piece of legislation that takes a comprehensive belt-suspenders-and-elastic waist band to limit private equity abuses: it's got provisions on private equity firm liability for their portfolio company obligations, limitations on immediate looting capital distributions, protections for workers and consumers in bankruptcy, protections for investors in private equity funds, and of course a reform of private equity's favorable tax treatment. The bill shows that Senator Warren truly has the number of the private equity industry.
 
In this post I want to address the provision in the bill that seems to truly scare parts of the private equity industry: a targeted curtailment of limited liability for the general partners of private equity funds and their control persons. This provision terrifies some private equity firms because it requires private equity to put its money where its mouth is. The provision is essentially a challenge to private equity firms to show that they can make money off of the management expertise they claim, rather than by playing rigged game with loaded dice. 
 
Private equity claims to make money by buying bloated public companies, putting them on diets to make them lean and mean, and then selling the spiffed up company back to the public. The whole conceit is that private equity can recognize bloated firms and then has the management expertise to make them trim and competitive. If true, that's great. But as things currently stand, it's near impossible for a private equity general partner—that is the private equity firms themselves like Bain and KKR—to lose money, even if they have zero management expertise. That's because they're playing a rigged game. The game is rigged because there is a structural risk-reward imbalance in private equity investment. That's what the limited liability curtailment in the Stop Wall Street Looting Act corrects. Here's how the private equity game is rigged:  

Continue reading "The Rigged Game of Private Equity" »

Private Equity’s Chicken Little Dance

posted by Adam Levitin
The private equity industry is lashing out at Senator Warren’s Stop Wall Street Looting Act with some pretty outlandish claims that rise to Chicken Little level. According to an analysis by the US Chamber of Commerce's Center for Capital Market Competitiveness, the bill will result in the $3.4 trillion of investment provided through private equity over the past five years entirely disappearing from the economy, along with as much as 15% of the jobs in the US economy disappearing.    
 
I cannot sufficiently underscore how laughably amateurish this claim is. I’ve seen some risible financial services industry anti-regulatory claims before, but this one really takes the cake for extreme hand-waving. I expected better from the Masters-of-the-Universe.
 
Here’s why the private equity industry’s claims are utter bunkum.

Continue reading "Private Equity’s Chicken Little Dance" »

What a Local Traffic Snafu Teaches About Artificial Intelligence in Underwriting

posted by Adam Levitin

The DC suburbs are a case study in NIMBYism. Lots of communities try to limit through-traffic via all sorts of means:  speed bumps, one-way streets, speed cameras, red-light cameras, etc.  The interaction of one of these NIMBYist devices with GPS systems is a great lesson about the perils of artificial intelligence and machine learning in all sorts of contexts.  Bear with the local details because I think there's a really valuable lesson here.

Continue reading "What a Local Traffic Snafu Teaches About Artificial Intelligence in Underwriting" »

Coercive "Consent" to Paperless Statements

posted by Adam Levitin

If you've logged on to any sort of on-line financial account in the past few years, there's a very good chance that you've been asked to consent to receive your periodic statements electronically, rather than on paper. Financial institutions often pitch this to consumers as a matter of being eco-friendly (less paper, less transportation) or of convenience (for what Millennial wants to deal with paper other than hipsters with their Moleskines). While there is something to this, what's really motivating financial institutions first and foremost is of course the cost-savings of electronic statements. Electronic statements avoid the cost of paper, printing, and postage. If we figure a cost of $1 per statement and 12 statements per year, that's a lot of expense for an account that might only have a balance of $3,500—roughly 34 basis points annually.

I'm personally not comfortable with electronic statements for two reasons. First, I worry about the integrity of electronic records. I have no way of verifying the strength of a bank's data security, and I assume that no institution is hack proof. Indeed, messing around with our financial ownership record system would arguably be more disruptive to the United States than interference with our elections. FDIC insurance isn't very useful if there aren't records on which to base an insurance claim. Of course, the usefulness of a bank statement from two weeks ago for determining the balance in my account today is limited too, but if I can prove a balance at time X, perhaps the burden of proof is on the bank (or FDIC) to prove that it has changed subsequently. 

Now, I recognize that not everyone is this paranoid about data integrity. Even if you aren't, however, paper can play an important role in forcing one to pay attention to one's financial accounts, and I think that's valuable.  I am much more likely to ignore an email than I am a paper letter in part because I know that the chance the paper letter is junk is lower because it costs more to send than the spam.  As a result, I look at my snail mail, but often let my e-mail pile up unread. And even when I read, I don't always click on the link, which is what would be in an electronic bank statement.  Getting the paper bank statement effectively forces me to look at my accounts periodically, whereas an emailed link to a statement wouldn't. And monitoring one's accounts is just generally a good thing--it helps with fraud detection and helps one know one's financial status.  

So here's where this is going:  I've got no issue if a consumer wants to freely opt-in to electronic statements.  But the way my financial institutions communicate with me when I go on-line involves really coercive choice architecture. One bank presents me with a pre-checked list of accounts to be taken paperless, such that to not go paperless I have to uncheck several boxes.  I am essentially opted-in to paperless. Another bank has a prominent "I agree" button without an equivalent "I decline" button-the only way to decline paperless is to find the small link labeled "close" to close the pop-up window. "Consent" in this circumstances strikes me as iffy. This strikes me as an area in which regulators (I'm looking at you CFPB) really ought to exercise some supervisory muscle and tell banks to cut it out. If folks want to go paperless, that's fine, but don't try and coerce them. Doing so is contrary to the spirit of the E-SIGN Act at the very least and might enter into UDAAP territory.

Continue reading "Coercive "Consent" to Paperless Statements" »

Bankruptcy Future Claims—Elizabeth Warren Edition

posted by Adam Levitin

Welcome to Credit Slips, the rarified world of “self-described bankruptcy nerds.” Today we’re looking at Future Claims—Elizabeth Warren Edition.

Now, it’s not every day that our humble group blog gets discussed in the New York Times. But as our former-co-blogger Elizabeth Warren continues to rise in the polls, the media and her opponents are taking a renewed interest in the bankruptcy consulting work she did when she was a law professor. Just recently, the New York Times ran a lengthy article on her past consulting workthat even referred our little “bankruptcy nerd” blog. (You might note that we now also offer sovereign debt, financial regulation, and side salads. Come for the bankruptcy, stay for the pie.)

The NY Times piece discussed several cases that Elizabeth worked on, but it failed to clearly articulate the core bankruptcy principle that Elizabeth was fighting for that runs throughout most of the cases highlighted in the article and how Elizabeth’s work was consistently about making the economy and the bankruptcy system work for employees of companies in distress, retirees, and folks injured by a company’s product. To suggest otherwise is ridiculous and fundamentally misunderstands how the bankruptcy system is supposed to work.  

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Purdue Pharma Examiner?

posted by Adam Levitin

The US Trustee should move for the appointment of an examiner in Purdue Pharma's bankruptcy. That's what Jonathan Lipson, Stephen Lubben, and I wrote in a letter to the US Trustee for Region 2 this week.

Purdue is a case that seems to cry out for an examiner.  There is unique public interest in the case because it is so central to the story of the opioid crisis—the major domestic public health challenge of the last decade. In particular, there are real questions about exactly what Purdue and its owners knew about the problems with opioids and when.  Was Purdue was deliberately pushing a product it knew to be harmful? Did its owners, the Sackler family, siphon off substantial funds that could go to remediate opioid harms through fraudulent transfers, as alleged? And can Purdue's current management or the Official Creditors Committee be relied upon to get to the bottom of these questions?  

An examiner--particularly one wielding subpoena power and the power to administer oaths--could go a long way to establishing just what went on at Purdue, and that will help set the stage for a resolution that will be more broadly accepted as legitimate because everyone will be operating on a common factual basis from the examiner's findings. Moreover, an examiner's report is in effect a public accounting of what happened at Purdue. Absent such a public accounting, bankruptcy can become a whitewash:  no trial, no public introduction of evidence, no finding of guilty or not guilty, just claims estimation, a plan and a vote, and then some cash being paid out. That's fine for your run-of-the-mill bankruptcy case. There's really no public interest in why Shloyme's 7th Avenue Garmento Emporium ended up in the chapter. But when a case involves a major public health issue like Purdue, it's reasonable to demand more from the bankruptcy system. Purdue (and possibly other constituencies) will surely object to an examiner motion, be it from the Trustee or from other parties in interest, but I have trouble thinking of a case for which an examiner would be more appropriate.  

 

How to Deal with a $3 Trillion Bully

posted by Adam Levitin

I don't like bullies.  And I just ran into a $3 trillion one.  JPMorgan Chase Bank, armed with six partners at two AmLaw 100 firms (Wilmer Hale and McGuire Woods) took the truly unusual step of filing an objection to an amicus curiae brief I filed in a 9th Circuit case called McShannock v. JPMorgan Chase Bank N.A. in support of neither partyChase objects because the brief is late (which it is) and supposedly irrelevant to the disposition of the case. So why is Chase spending thousands of dollars on attorneys fees to object to an irrelevant brief, particularly when it claims no prejudice from the late filing?

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Congratulations to Pamela Foohey!

posted by Adam Levitin

Congratulations to Pamela Foohey on being named to the American Bankruptcy Institute's 40 Under 40 list for 2019!  Pamela joins Credit Slips own Dalié Jiménez (class of 2018) as an honoree

And it's been a great news day for our former co-blogger Katie Porter, who was not only the subject of an American Banker article, but was put on a SCOTUS short list

The Clock Is Ticking for the Sacklers

posted by Adam Levitin

It's funny how what goes on in one bankruptcy case can sometimes point to looming issues in another. The PG&E plan exclusivity fight suggests an interesting dynamic looming in Purdue:  Purdue's own plan exclusivity could expire, which would completely upend the dynamic of negotiations with the Sackler family for a plan contribution in exchange for a non-consensual release of creditors' claims against them.  

As I see it, the Sacklers have no more than 18 months (and perhaps as few as 4 months) to cut their deal. If the Sacklers fail to reach a deal before plan exclusivity lapses, a state AG (or anyone else) could easily propose a plan that assigns all of the bankruptcy estate's litigation claims against the Sacklers to a trust for opioid victims or sells off the claims to a litigation vehicle.  The trust (or litigation vehicle) will then go and litigate against the Sacklers, and any recoveries will go to opioid victims. Critically, if this happens, the Sacklers will not be able to get a third-party release from Purdue's creditors.  They can still settle the fraudulent transfer claims of the bankruptcy estate, but they won't be shielded from creditors' direct claims.  

Now, I'm not sure how strong those direct claims really are, and thus how important a third-party release is for the Sacklers. They might decide that the asking price isn't worth paying. And the AGs might prefer to get half a loaf, rather than nothing; if so, they don't want plan exclusivity to lapse either--it's a great threat until it actually has to be played. Again we see the standard bankruptcy dynamic of one party threatening to push the other out the window, and the other party threatening to jump. Mutual defenestration.   

More generally, though, I wonder if Purdue will be able to get a pro forma extension of exclusivity given the enormous conflict of interest of its Sackler-controlled management. This seems like exactly the sort of case where plan exclusivity should not be extended because its main effect is to give the conflicted equity owners time to play for a lower settlement figure for their own liability.  In other words, plan exclusivity is benefitting the Sacklers personally, not necessarily the estate. That's akin to letting out-of-the-money equity sit around in bankruptcy and gamble on resurrection while burning up estate assets on administrative expenses. Yes, it's a mess of a case, but letting Purdue maintain plan exclusivity hardly seems like the right way to deal with that problem. A better outcome might require letting someone else be in the drivers' seat.

[Update: It seems that there actually is someone else in the drivers' seat already. Purdue's board of directors has been transformed over the past year. It now has a majority of independent directors and they seem to have some degree of insulation from the Sacklers, who continue to be the majority shareholders. There's not a lot of visibility on this because it is a private company, but the "informational brief" filed by Purdue explains some of this--the two branches of the Sackler family each appoint up to two Class A or Class B directors, but that there are also four other directors chosen by jointly by Sackler family members. Critically, there is a Special Committee of the board (comprised of a star-studded cast of restructuring professionals). The Special Committee has no Class A or Class B directors on it, and the Special Committee handles all matters relating to the Sacklers. It seems from a Shareholder Agreement (which I do not believe is public) that the Sacklers lack the ability to get rid of the Special Committee or do things like bylaw amendments, etc. to keep control.

That said, what I cannot tell from the public documents is what sort of board vote would be needed to proceed with a bankruptcy plan. Is it a simple majority? Unanimous? Is it even a vote of the full board, or just the Special Committee? The Informational Brief does not indicate whether matters encompassing more than to the Sacklers are solely the purview of the Special Committee. All of which is to say that from the public documents I have seen, I can't tell if the Sacklers have been totally pushed out of any management influence or if it is just that their influence has been substantially diminished. In any event, to the extent there's new management in charge, the case for terminating exclusivity is much weaker. Additionally, the case for a creditors' committee bringing fraudulent transfer actions derivatively looks a lot weaker.]

Speaking of which, why haven't we seen a motion to dismiss for cause filed at this point?  My guess is because it doesn't obviously help any one.  

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