169 posts categorized "Comparative & Int'l Perspectives"

Debtors' Prison in the West?

posted by Jason Kilborn

DebtorprisonI've been corresponding with an analyst in a country that still jails people for unpaid general debts. The question posed to me, and which I pose to Credit Slips readers, is "can I find statistics of similar imprisonment for debt in Western countries like the US, Canada, and Europe?"

Now we're not looking for accounts of imprisonment for failure to pay specific debts like child support, or for contempt for failure to respond to a judgment debtor examination bench warrant--this is a related but different problem, which has been the subject of a great FTC report. And we're not looking for stories of indigent inmates being re-imprisoned for unpaid criminal fines and "user fees," another problem which has also been the subject of several shocking ACLU reports. And we're not looking for references to rogue judges who violate their citizens' constitutional rights to freedom from imprisonment for debt, though again, we know such problems exist in the US and elsewhere.

The question concerns only standard imprisonment for general debt. My strong sense is that no such statistics exist because no Western country does such things any longer. I hope no one can point out that I'm wrong, but if so, please do let me know in the comments.

On a related note, if anyone knows of statistics on revocation/suspension of driver's licenses (and the like) for failure to pay general debt (again, not for specific debts, like child support, parking or speeding fines), I'd love to hear about that, as well.

Thanks!

Imprisonment photo courtesy of Shutterstock

Banks Fighting New Irish Insolvency Service Before It Starts

posted by Jason Kilborn

ISI_logo_FinalOn Monday, the new Insolvency Service of Ireland will begin taking applications from overindebted Irish consumers seeking relief under the new debt relief law. Already, Irish banks, who received a huge government bailout, are scurrying to deploy scare tactics to deter consumers from seeking relief. According to one report, a major Irish bank has sent letters to distressed customers warning that relief under the new law requires "continuous review and any increase in income would be included under the [relief] scheme." Also, debtors seeking relief under the new law are "subject to the ISI [expense] guidelines, which are quite severe. ... These place restrictions on all spending, ban a second car and holidays, and only allow private healthcare in exceptional circumstances." In fact, anyone familiar with "means testing" and other budgeting practices in world consumer bankruptcy laws would be quite impressed with the Insolvency Service's new expense guidelines, which are sensitive, flexible, and reasonable.

The banks' scare tactics are particularly odious in ligth of the fact that the banks, predictably, have opposed all efforts to implement reasonable concessions voluntarily to turn around the horrible mortgage mess the country is in. The Central Bank has all but ordered the major Irish mortgage banks to implement long-term solutions, rather than simple stop-gap measures of interest reductions and temporary payment holidays, but the banks are not budging. Where have we heard this before (here, here, and especially here)? Will regulators never learn?

The Central Bank may have the last say here, as it is reportedly threatening to force banks to make special provisions (beefed up loss reserves?) to respond to the continuing risks related to distressed mortgage debt remaining on the banks' books. This seems like the sort of incentive that might "nudge" the banks in the right direction--do a deal that implements relief, or set aside special reserves if you refuse to do so, but acknowledge and deal with the problem one way or another. Color me skeptical that the threat will materialize or, if it does, that the banks won't figure some clever way to evade any thoughtful and effective solution.

Update:  In case there was any lingering doubt, the CEO of Bank of Ireland (a private bank) recently told the Irish legislature that engaging with distressed mortgagors to strike debt adjustment deals is “not a policy of the bank.” Falling back on the same, tired old excuse, he claimed that any debt forgiveness deal would impose costs on the bank. The now well-established notion that these losses are already baked into the cake is either lost on people like the BofI chief, or they're playing a rhetorical game with legislators.

Buying Hope

posted by Melissa Jacoby

NumbersThose interested in The Stakes of Design back in April may appreciate Why We Keep Playing The Lottery. Thanks to The Morning News for alerting readers to the article, and thanks to author Rosecrans Baldwin for co-founding The Morning News, and . . . that's enough.

Numbers image courtesy of Shutterstock

Earlier discharge for German debtors ... but not many

posted by Jason Kilborn

PiggybankemptyAfter years of wrangling about the details, the German legislature has finally approved a reform of the consumer provisions of the Insolvency Act (InsO). The only notable change is a reduction in the so-called "good behavior period"--that is, the time during which the debtor is supposed to be devoting all disposable income to creditors (or looking for work). It started in 1999 at 7 years, reduced in 2001 to 6 years, and as of 1 July 2014, it will be halved in some cases to 3 years.

But not so fast! The only debtors who can get out of jail in three years are those who can (i) pay all of the adminstrative costs of their insolvency case, and (ii) pay creditors a minimum dividend of 35% of their claims. This minimum dividend was 25% for most of the discussion period of the reform bill, but it was increased to 35% at the eleventh hour.

Continue reading "Earlier discharge for German debtors ... but not many" »

Russian Courts Battling For Authority Over Consumer Bankruptcy

posted by Jason Kilborn

Polar_bear_brawlIn Russia, a debate is raging over which courts should administer consumer bankruptcy cases, the specialized commercial courts or the courts of general jurisdiction. The Russian commercial courts (Arbitrage courts) currently exercise jurisdiction over bankruptcies of individual small business people, as well as over cases involving artificial legal entities like corporations. Logically, then, in the current bill that would finally expand the Russian bankruptcy system to provide relief to consumers, the Arbitrage courts would handle such cases.

Oddly, President Putin in March issued an edict strongly suggesting that the bill be amended to assign jurisdiction to the general courts. The Supreme Court had already come down solidly on the side of the generalist courts, and in April, it threw its support behind Putin’s edict by introducing a bill into the legislature to amend the Code of Civil Procedure to preemptively assign consumer bankruptcy jurisdiction to the general courts, if and when a consumer bankruptcy bill ever becomes law. The explanatory notes to this bill make what seems to be a rather superficial and formalistic argument about consumer contracts “not bearing an economic character,” since they relate only to personal consumption, and noting that consumer cases will raise all manner of non-economic issues, such as family, housing, and labor, which the Arbitrage courts are ill-situated (if not constitutionally forbidden) to address. The next thing you know, they’ll introduce a distinction between “core” and “non-core” matters—that will really fire things up!

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Don't Fancy Games (For Your Kids' Financial Education)? How About The Theatre?

posted by Melissa Jacoby

MoneyTree"Make it fun and they will come," Lauren Willis discussed in the instructive post that evaluated the pros and cons of "The Gamification of Financial Education." Meanwhile, in London, a live show has been designed for children as young as five to teach them about the financial system. Interesting story on the show in The Guardian here. Tickets to "Bank On It" (running through the 14th of July) and other information here.   

Money tree image courtesy of Shutterstock 

Cries for Relief from the Hungarian Financial Crisis

posted by Jason Kilborn

ForintNo, not that Hungarian financial crisis. Now that the country seems to have more or less righted itself, its citizens are still struggling with their own debts. Reuters reports that the Managing Director of the National Bank of Hungary has called for the country to adopt a personal insolvency law, much as Ireland just did in the midst of its own crisis. The Director seems to envision an approach along the lines of an emerging European standard, a clean slate after a 4- to 5-year payment plan. The IMF agrees, noting in its latest annual report on Hungary (see p 15, para  25) that establishing a personal insolvency system would help the banking sector to clear out its portfolio of non-performing loans and get Hungarian productivity back on track.

So what's the holdup? "Resistance from the banks." Where have we NOT heard that before!? Of course the banks resist, because they want to continue to maintain the illusion that their non-performing loans are actually worth more than a few fillér on the forint (if not zero). A Hungarian economics ministry secretary reports in the Reuters story that they're in talks with the banks about a potential personal insolvency law, but it is "unlikely to be launched this year," as "there should be sufficient time to prepare for it." Time!? A full-blown and well-developed proposal for a new personal insolvency law was floated and commented on by, among others, me, beginning in the fall of  ... 2008!  Is five years not "sufficient time" for these banks? And why did the 2008-09 proposal fail?  "Resistance from the banks." Someone over there in Hungary needs to stand up to the banks and stop allowing the time-honored cry of "we need more time" to delay reasonable relief that complies with an international standard that has developed throughout Europe during the past 30 years.

Forint photo courtesy of Shutterstock.

New Study on Consumer Protection and Financial Distress

posted by Jason Kilborn

Shutterstock_115002976The European Commission's Financial Services Users Group has published an impressive report and a position paper on financial distress and consumer protection, written by a Euro-think tank called London Economics. The title is a real mouthful: Study on means to protect consumers in financial difficulty: Personal bankruptcy, datio in solutum of mortgages, and restrictions on debt collection abusive practices. The paper does an admirable job of surveying the legal landscape of 18 European countries, concluding with some well-considered "best practices." This paper is a nice addition to the already impressive body of work in Europe analyzing existing legal regimes for treating consumer financial distress and identifying strenghts and weaknesses in their varying approaches. It is highly recommended reading for anyone interested in consumer policy, especially with respect to appropriate solutions to financial distress.

European Union image courtesy of Shutterstock.

Lessons Not Learned in Designing a Consumer Insolvency Regime

posted by Jason Kilborn

PennilessJudging by an Irish Times report today, the designers of the new Irish consumer insolvency system seem to be falling into two old familiar traps.

First, the focus of the story is on rumors that the proposed income guidelines for the new regime will make payment plans too parsimonious. Pressing debtors too hard in the name of "responsibility" is a recipe for disaster, as administrators of the French system learned decades ago. A discharge is a nice incentive to get debtors to really exert themselves for the benefit of creditors, but five or six years on an overly repressive budget will produce plan failure, all but guaranteed. Paul Joyce, Senior Policy Researcher at the Irish Free Legal Advice Centres (and an absolute prince of a guy) pointed out this danger in his fine policy analysis of the new regime. It will be a shame if the soon-to-be-released guidelines fail to heed Paul's and others' warnings.

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Creeping Privatization of Justice

posted by Jason Kilborn

Shutterstock_99036074Lauren's and Bob's recent posts brought to mind a theme that keeps cropping up in my teaching and research: public authorities increasingly offloading responsibility for important justice-related issues, especially consumer justice, to the private sector.

On the teaching side, I teach Civil Procedure, and that world is all abuzz with talk of a slew of recent Supreme Court and Court of Appeals opinions that have prioritized private arbitration over public adjudication of disputes (see, e.g., here and here). And this movement is afoot not only in the classic context of complex business disputes, where arbitration makes some sense; rather, it has taken hold in David-and-Goliath situations involving important rights like employment contracts and consumer sales and service contracts of a variety of kinds. In the big case that started the latest round of hoopla, AT&T Mobility v. Concepción, Justice Scalia acknowledges that "the times in which consumer contracts were anything other than adhesive are long past," yet he and the majority proceed to bend over backwards to ensure that clever company counsel can relegate disputes over such contracts to arbitration, effectively ensuring no suits will be brought in many cases, where the stakes are too low without aggregate (class) litigation, as in Concepción.  

On the research side, virtually every discussion around the world of consumer insolvency reform begins from the premise that out-of-court workouts are to be preferred, and court-sanctioned payment plans and coercive discharge should be a last resort. Many world consumer insolvency regimes require consumers to engage in an informal workout negotiation as a mandatory prerequisite to seeking formal relief. The notion of private workouts in this context is like Communism: it sounds great in theory, but it just doesn't work out in practice. In the highly morally charged context of consumer workouts, creditors consistently refuse to offer any kind of relief from the inflated principal debt, and only limited relief from spiraling interest (sound familiar?).

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Consumer Bankruptcy Around the World (Bank)

posted by Jason Kilborn

Thanks so much to Bob and everyone else at Credit Slips for inviting me to join on a more consistent basis! I'm absolutely thrilled to have this unique platform to share my observations on the world of bankruptcy, literally. With some early inspiration from my hero, Jay Westbrook, I've spent my entire academic career focused primarily on why and how countries beyond the United States have extended relief from overindebtedness to ordinary people, including "consumers" not engaged in significant business activity. The pace of development in this area has been mind-blowing over the past three decades, and for my inaugural Occasional post, I'd like to draw attention to a World Bank report that draws together much of this development and marks the extremely satisfying culmination of my own work in the area. 

A working group of the World Bank decided a couple of years ago that financial distress and overindebtedness among individuals represented a structural drag on world economies and economic development. The group decided that the time was ripe to go beyond its focus on business insolvency and to undertake a survey of the state of law and policy around the world for treating the ills of insolvency among individual "natural persons" (a catch-all term designed to encompass human beings of all kinds, regardless of the source of their income and debt distress). A small drafting group was charged with recording our observations on the variety of evolving approaches to treating insolvency, noting particular attitudes and provisions that seemed either particularly successful or problematic in some sense. Other expert groups had undertaken this kind of survey in the past, but this was the first by an organization with the convening power and persuasive authority of the World Bank. In part for this reason, the project strictly avoided offering recommendations, instead confining itself to objective observations, both positive and sometimes critical.

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The Meaning of Bankrupt

posted by Katie Porter

Every so often in the United States, I come across a discusion of the choice of the word "cramdown" (cram down, cram-down) to describe either stripping down liens or confirming a repayment plan without creditor consent. The basic thrust of these articles--the best of which is probably this treatment by William Safire--is that the word itself conveys a great deal about the cultural view of the legal action. In the context of cramdown, I think the word choice reflects the fact the U.S. legal regime generally protects the collection rights of secured creditors in bankruptcy.

At a recent World Bank event, a provocative discussion emerged on the choice of what to call people who file bankruptcy. The Working Group report notes an international trend in the law away from calling people "bankrupt" toward the term "debtor." Judge Wisit Wisitsora-at from Thailand offered a slightly different flavor on the problem--that whatever the word chosen, the literal translation, and cultural meaning, of of such a word can vary tremenedously. He reported that the current word in Thai for a person who files consumer bankrutpcy literally translated means "worse than a failure." Even a quick run of the word "bankrupt" through Google translate in several languages produces some words that are a far cry from the dominant U.S. perspective (at least among academics) of the Fragile Middle Class. Here's a sampling: beggar, penniless, upset, defeated, fallen down on the ground, and unsound.

You've sunk my battleship! And seized my carrier...

posted by Mark Weidemaier

There is a widely-held view that sovereign bonds don't contain the optimal terms but are slow to incorporate better ones. Right or wrong, that view has prompted many government-sponsored initiatives to reform bond contracts, such as the current plan to mandate the use of standardized collective action clauses in all euro area government bonds. These reform initiatives often fail, and the view persists that sovereign bond contracts could use some improvement.

Why do I mention this? My last post discussed how the sovereign immunity waiver in its bonds got Argentina into trouble, allowing jilted bondholders to convince a court in Ghana to help them seize an Argentine navy ship. Perhaps this was consistent with what Argentina agreed to in the bond, but the country predictably objected when the seizure occurred. The ensuing diplomatic kerfuffle highlights why enforcing jurisdictions (like Ghana, in this case) might be better off forbidding their courts to help private creditors seize a foreign country's military assets.

Below the jump, you'll find two figures showing how sovereign bonds have addressed the subject of sovereign immunity over the past two decades. As you'll see, Argentina is no outlier; plenty of bonds include waivers that are just as broadly-written.

Continue reading "You've sunk my battleship! And seized my carrier..." »

"A rifle doesn't scare me. But we expected the Argentines to act professionally..."

posted by Mark Weidemaier

In my last post, I said that the US Court of Appeals for the Second Circuit had interpreted the pari passu clause in Argentina's bonds as a promise to forego a century's worth of restructuring practices. The district judge still needs to clarify the injunction enforcing that promise. While we wait for that very large shoe to drop, I want to talk about the other major enforcement ruckus involving Argentina and ... NML Capital. This one already has people reaching for their weapons.

The Libertad, an Argentine naval vessel, remains in port in Ghana after a court there ordered its seizure and potential sale to satisfy a judgment held by NML Capital. Military property is typically immune from this kind of thing, but the court held that Argentina had waived its immunity in the bond. The case is odd, for reasons I'll explain here. But this post also lays some groundwork for future posts, which will share some evidence about general market practices with respect to immunity waivers.

Continue reading ""A rifle doesn't scare me. But we expected the Argentines to act professionally..."" »

Japanese Resturcturing

posted by Stephen Lubben

Interesting story in today's FT about a case now pending in Tokyo -- although some of the concerns expressed should sound very familiar to US chapter 11 types.

Some Advice from the IMF: Cramdown Mortgages in Bankruptcy

posted by Jean Braucher

The International Monetary Fund has focused its critical gaze on us. Just in time for the holiday marking the end of our colonial period, the IMF has completed its "Mission to the United States of America."  See here.  The IMF has held up its neocolonial mirror and found us problematic: "The U.S. recovery remains tepid."  Anyone disagree? Annoying to have outsiders tell us the truth.

There are many recommendations about how we could reinvigorate our economy. Notably, at number 10, there is this:  "Consideration should also be given to allowing mortgages on principal residences to be modified in personal bankruptcy without secured creditors’ consent (cram-downs)."

Happy Independence Day!

Overspending in India

posted by Bob Lawless

Check out this story in the New York Times about free-wheeling consumer credit in India. Much of the article focuses on how Indians are using consumer credit to pay for cosmetic surgery. At one point, I had a collection of online advertisements offering Americans easy credit for different types of cosmetic surgery, but that was several universities ago. One of today's disappointments was discovering that file has disappeared.

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Bankruptcy Immigrants

posted by Adam Levitin

Fascinating story in the Guardian about Irish debtors temporarily moving to the UK in order to gain access to more favorable bankruptcy law.  I guess the Brit's have a more lenient version of 522(b)(3) or a looser good faith filing doctrine/plan approval/discharge requirement.  I wonder how long this sort of international loophole will remain open within the EU.  I wouldn't be surprised to see a lot of Spanish immigrants to the UK between more favorable bankruptcy law (although Spain recently liberalized its bankruptcy law) and the Spanish economy.    

Platform, Infrastructure, Utility?

posted by Bill Maurer & Stephen Rea

While we’ve been blogging, Stevie has begun his dissertation fieldwork in Korea. He emailed Bill the other day: “Yesterday I opened a bank account here in Seoul, and conducted the entire interaction in Korean. For some reason, I don't get an ATM card, which is really strange. But in all likelihood I had no idea what the teller was trying to say to me, so I might end up getting a card in the mail next week or something. As ‘technophiliac’ as this culture seems to be, cash is still king; outside of the large department stores and global restaurant chains, I don't see any POS terminals.”

There’s hype, there’s reality, and there’s possibility around all the cashlessness claims that follow on the heels of mobile and other digital payment platforms. We want to conclude our guest blogging with a gesture toward some of the possibilities of mobile money--and a challenge for the Credit Slips community.

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Cash as Social Infrastructure

posted by Bill Maurer & Stephen Rea

Sticker in San Francisco: "Of course it's cash-only, it's the Mission."

Overheard: "Oooh, yeah, no, we don't take cards. Because the coffee is, like, local?" (both items courtesy Lana Swartz)

The word “cash” derives from Latinate words referring to “a chest or box for storing money,” not the money itself. The term originally meant the practices of storing, and the objects used to store items of value – not just money -- as well as the act of going to those storage devices to receive money (to “cash” a bill of exchange,, meant to go to the specific box where the money was). Cash as we know it today is more than a store of value and a medium of exchange; it has symbolic, pragmatic and artistic functions. In the US, even before Durbin, small merchants placed an extra surcharge on credit or offered discounts if customers used cash. Research being conducted at the Institute for Money, Technology and Financial Inclusion (IMTFI) is bringing to light a host of social, ritual and religious uses of cash and coin beyond their economic functions. What's their relationship to, say, mobile money? For us, they are design challenges more than anything else (see, e.g., the Royal Canadian Mint's MintChip, or discussions among developers about Google Wallet). Building an infrastructure for digital payments, especially in places that have been cash-only, entails some connection to the existing social infrastructures of cash.

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Cash: Killing It, or Building Bridges to It?

posted by Bill Maurer & Stephen Rea

Much has been written about the inherent riskiness of cash. It is dangerous because it can be lost, stolen, eaten, destroyed, etc. It is dangerous because it is difficult to track, thereby helping to facilitate crime. Many a potboiler plot hinges on a cache of unmarked bills. Anyone remember Trixie Belden? “‘That governess of yours won’t argue when I tell her to leave a fat roll of unmarked bills under a stone at the Autoville entrance tonight. She won’t notify the police either.’ He reached up a grimy hand and touched one of Honey’s shoulder-length curls. ‘Not when I send her a lock of your pretty hair with the note, eh?’” (Julie Campbell, Trixie Belden and the Red Trailer Mystery, New York: Random House Children’s Books, 1950, p.180).

In the comments on our last post, we can clearly see two poles of the cash debate: cash is for criminals, but digital payment will welcome Big Brother into our wallets. Why so stark a choice? Last year, the Fletcher School held a conference titled, “Killing Cash.” It was framed explicitly in terms of the possibility that “mobile money”—mobile phone enabled payment and money transfer services, like Safaricom Kenya’s much vaunted M-PESA—heralds the possible end of cash and coin. Most of these services work on a prepaid model via the mobile telecommunications network – basically like prepaid airtime minutes for a top-up (not subscription) phone (nice article here on e-money in Central Africa by Andrew Zerzan; short piece here on mobile money regulation). I put cash into the system by visiting an agent. The agent sells me “e-money” in exchange for my cash, and gets a commission. I can now send e-money to another client on the network, who goes to another agent to cash it out (usually without a commission). Or, I leave the value in my mobile wallet, for a little while or for a long time. This is not an “end of cash” scenario, however. It’s an addition of e-money to what had been—for the poor, without access to financial services and digital financial platforms—a cash-only world.

Continue reading "Cash: Killing It, or Building Bridges to It?" »

Toward Cashlessness?

posted by Bill Maurer & Stephen Rea

One of my students came across a humorous blog post from February, 2012. Titled, “What your payment method reveals about you,” the author listed a series of unlikely payment actions and a line on the presumed personal characteristics of the payer. The humor appeals to… well, us, anyway, and probably you, too.

Slinging your card down: You've definitely shoved a dog's face away from you because "move."
Slinging cash down: You've consumed alcohol that's involved whipped cream in the past week.
Using your Hello Kitty-themed card: You have many other credit cards.
Handing a bag of nickels and dimes, uncounted: You are nine.

Around the same time, the United States Agency for International Development launched an initiative to replace the use of cash in aid efforts with electronic forms of value transfer:

"If you care about reducing poverty, then you must also care about reducing the reliance on physical cash. We begin a movement to do just that.  USAID Administrator Rajiv Shah is announcing a broad set of reforms [in order to] reduce the development industry’s dependence on cash.  This includes integrating new language into USAID contracts and grants to encourage the use of electronic and mobile payments and launching new programs in 10 countries designed to catalyze the scale of innovative payments platforms."

The USAID “Better Than Cash” program was the culmination of at least a year’s discussion internally and with major donor agencies over the costs of cash for the poor--the heightened risk of theft associated with physical currency, the anonymity of cash, the difficulty in transporting and storing cash for those without access to formal financial institutions. Our own work has been enlisted in this effort, yet we are a bit more circumspect: although there are  very real problems associated with cash, there are also virtues. One of these virtues is that cash is publicly issued, not privately enclosed and tolled like most electronic forms of value transfer, and almost always accepted at par value. We’ll return to this topic as we examine some mobile phone-enabled money transfer and payment systems in the developing world, and regulatory responses to them, that might provide useful models. Over the course of the week, we will look closely at cash and how the debate over cashlessness—at times downright silly—is getting more serious, as at least some major actors shift from “the evils of cash” to “the benefits of an agnostic digital payment platform.” We think this is a consequential shift.

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It's Not Just the Economy Stupid!

posted by Philomila Tsoukala

“Greeks are protesting new austerity measures” is a common headline these days. It definitely captures some of what protesting Greeks are doing, but certainly leaves a whole lot out of the picture. Many Greeks are protesting not only the deterioration of their standard of living, but equally importantly, what they experience as a political disenfranchisement that has been orchestrated by the government, with the collaboration of the European heads of state. The situation in Greece is going to get much worse not only because of the economy, but also because of the repressive politics that are threatening to ignite Greek society.

To understand the Greek political cauldron you need to put yourself in the shoes of the average salaried Greek and what she has experienced these past two years. Picture this:

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Greek Family and Welfare Provision

posted by Philomila Tsoukala

I have argued previously (here) that the EU/IMF/ECB insistence on “flexibilizing” labor law in Greece overlooked the basic structure of the Greek private market, which consists overwhelmingly of small, family owned and operated businesses, with ultra –flexible wage arrangements (a wife’s labor, especially, is often unremunerated). Add de facto non-enforcement of labor law even in the tiny segment it applied to and the massive informal sector and you end up with one of the most flexible markets, labor cost-wise, in Europe. Moreover, despite the infamous Greek welfare “drones” in the media, Greece does not have a welfare regime comparable to the rest of Europe. In fact, much like in the US, the Greek family internalizes most of the cost of basic services such as education, healthcare, housing. State employment and pensions have for a long time played the role of a substitute for the lack of such a welfare regime, for those of course who could access these jobs, usually on the basis of clientelist relations. The basic structure of state employment included jobs distributed widely among the client base of the governing party, with wages too low as remuneration and too high as welfare, along with privileged wages and perks for a narrow elite group within the public sector. Average wage and pension levels remained well below European levels before the crisis, while consumer prices had skyrocketed and remain among the highest in Europe even today.

All this may help clarify the compounded impact of the austerity measures on the average Greek. Dramatic wage cuts in both the public and the private sector, along with a largely successful program of taxation mainly targeting the salaried and small businesses transformed private sector workers and the average public sector worker into a newly struggling lower middle class or the newly poor-depending where they started from. The tax campaign also led to the closure of tens of thousands of businesses, while consumer prices remained steadily high. During all this, the family has been providing basic welfare except with less capacity to absorb the cost as unemployment skyrockets and the wages of those who have jobs are slashed. According to a friend, the new trend in one small city in northern Greece is for families to take in elderly relations, aunts, uncles, in return for their pension. People in their mid thirties, who had barely made it out of the parental household before the crisis are now moving back in. In Athens, which has been hit the worst, new forms of solidarity are being invented everyday (such as the “social kitchen” advertised here), but redistribution within the family still remains the main shock absorber. Overall capacity for shock absorption, however, may be busting at the seams as can be seen from Sunday’s events.

The Value(s) of Foreclosure Law Reform?

posted by Melissa Jacoby

As Alan White reported recently, the Uniform Law Commission in the U.S. has named a committee to consider the need for and feasibility of proposing a uniform foreclosure act and to report back to the ULC by early 2012. A letter from the ULC president includes a list of questions that the committee is charged to consider. But what principles will guide their analysis of these questions?

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Financial Stability Board Calls for Effective Consumer Finance Protection

posted by Jean Braucher
The Financial Stability Board, an international organization operating under the auspices of the G20 countries, this week issued its Report on Consumer Finance Protection. http://www.financialstabilityboard.org/publications/r_111026a.pdf FSB emphasizes the link between international financial stability and consumer protection, particularly in the mortgage markets. It calls for regulation to assure assessment of borrowers’ ability to pay and to police credit product features that increase risk. The report engages in some comparative analysis and identifies national regulatory architecture that has been particularly effective, such as that of Australia. The report is part of an initiative to stimulate more international discussion of effective means of consumer protection, particularly concerning credit. FSB increasingly sees consumer protection as part of its mission to assess and address vulnerabilities in the international financial system. The report is worthy and sensible. Of course, implementation, primarily by domestic regulation of financial institutions, is a huge challenge.

First to File--Patent Thoughts

posted by Adam Levitin

Congress just passed a bill overhauling the US patent system.  The most significant change appears to be shift from a first-to-invent to a first-to-file system.  Now, I am not a patent scholar and am wading into unfamiliar waters by opinining in any way on this shift, but it's rather fascinating to consider from a comparative perspective with security interests in personalty and realty, where first-to-file is generally the rule (with important exceptions like relation back for purchase money security interests and priority by possession or control).  

So, as I understand it, a key problem with first-to-invent was that it was rather time-consuming to determine who actually invented something first. Administratively, that seems like a cumbersome system, even if it does help protect original thinking. 

At first glance, first-to-file seems like a much easier system administratively, which will speed up the patent process and create more certainty in property rights--and certainty is the major goal of any property title system. It should eliminate litigation over priority of invention.  (Put differently, we're going to a pure race system, not even race-notice.) But I suspect that first-to-file will just put more weight on the question of whether A's filing covers the same property as B's filing. If A and B have filed for patents on separate ideas, then there's no competition in rights and no problem. The danger, it would seem, is that first-to-file might encourage prophylactic filings. I'm not sure how easy that is to do, but encouraging a race could undercut the efficiency gains by not having to adjudicate who was first to invent.  

Saab in New York?

posted by Stephen Lubben

So the Swedish court's decision to deny Saab's reorganization petition gets me wondering if the company might not decide to file a US chapter 11 case. The only problem is that, best I can tell, Sweden has no provision for recognizing a foreign insolvency proceeding domestically. Thus, like most of these foreign chapter 11 cases, the proceedings would only bind international creditors (i.e., financial institutions) and that may not be enough to solve Saab's problems.

They should have never given up on those hatchbacks.

Foreclosure Crisis in Europe vs US

posted by Alan White

While European markets have seen increases in mortgage foreclosures, more robust regulatory intervention seems to have kept defaults and foreclosures to much lower levels than we are experiencing in the United States.  At the peak of the crisis a year ago, Screen shot 2011-08-24 at 10.52.26 AMabout 9% of US mortgages were in serious default (90 days or more past due or in foreclosure.)  The United Kingdom and Spain had default rates of less than 3%, which they still regard as a crisis.  The only EU country with mortgage defaults exceeding US levels is Latvia.  Detailed information on European foreclosure rates and prevention measures are available at the EU web site on the new mortgage credit legislation.  The report containing the table on the right is available here.

 European banks argue that the lower default rates are a result of less reckless lending prior to the crisis, compared to the US subprime market, and that may be true.  It is also clear from the EU Commission summaries that most European countries have actively required or strongly encouraged lenders to work out as many troubled mortgage loans as possible, and have introduced delays and procedural hurdles in the foreclosure process to further stimulate workouts. 

The UK launched two subsidy programs at about the same time that the US Administration launched HAMP in 2009.  The Homeowner Mortgage Support allowed borrowers with a temporary income loss to defer payments for up to two years, with the government providing the lender a guarantee in the event the borrower defaults in repaying the deferred interest.  It expired in April 2011.  The Mortgage Rescue Scheme provided government support for shared equity and right to rent programs, and the Support for Mortgage Interest program subsidizes interest payments for homeowners receiving income support benefits.

In 2009 there were about one million completed foreclosure sales in the US (out of about 60 million mortgages outstanding.)  In the UK there were 54,000 (out of about 15 million mortgages.)

Culture, Attitudes, and Debt

posted by Bob Lawless

Rather than a post with a lot of (supposed) answers, today I have a post with a lot of questions. My goal is to start a discussion that I hope our insightful readership will take up in the comments.

Lately, I have been thinking a lot about cultural attitudes toward debt. I am not really sure what I mean by "cultural attitudes." The idea is that Bob Lawless, sitting here in Champaign, Illinois, has certain beliefs toward debt--when it is appropriate to use debt, when borrowing is irresponsible, and so forth. These beliefs about debt might differ from someone who had different life experiences because of different socioeconomic circumstances, because of experiences in another country, or because of other differences that broadly travel under the rubric of "culture." There is empirical evidence that, with "culture" defined in this broad way, differences in cultural attitudes toward debt exist.

Continue reading "Culture, Attitudes, and Debt" »

Responsible Lending as an Emerging International Norm

posted by Jean Braucher

The International Association of Consumer Law, with participants present from six continents, has been meeting at Brunel University in West London the last few days, hearing presentations from regulators, industry representatives, consumer advocates, and academics.   http://qwww.brunel.ac.uk/bls/research/events/ne_41734   Not surprisingly, regulation of consumer credit has been a prime focus, giving some perspective on US struggles to achieve more effective consumer financial protection. 

Professor Iain Ramsay of the University of Kent in the UK reported on initiatives for international cooperation to enhance consumer financial protection.   The G20, World Bank, Financial Stability Board, and Organization for Economic Co-operation and Development are all on board with this goal, seeing it as an essential part of a program to ensure that the international financial system is safe and sound.  The OECD is expected to issue draft principles of consumer financial protection soon, and comments will be invited.  Given the primarily prudential role of these organizations, balance from other sectors will be important.

Ramsay raised an underlying and overlooked question:   what is the economic and social value of consumer credit?

Continue reading "Responsible Lending as an Emerging International Norm" »

India’s Microfinance Industry Fuels Suicides

posted by Nathalie Martin

Most of us remember Muhammad Yunus’s 2006 Nobel peace prize for microfinance, small loans to start businesses, with extremely low default rates. Now it looks like this industry has done what many American financiers have done, lent more than people can ever pay back, in order to make greater profits. In India and other parts of Asia, however, cultural factors mean that over indebtedness causes more than just sadness and bankruptcy. This lending without regard to ability to repay has causes suicide on the part of borrowers. This is particularly insidious, given that- unlike home loans or payday loans in the U.S. -  the whole point of microfinance is to help the poor start businesses.

Continue reading "India’s Microfinance Industry Fuels Suicides" »

Market Governance Is About People (And How They Think)

posted by Annelise Riles

Hello everyone and thank you so much to Bob and Adam for bringing me into this exciting conversation. This week I want to raise with you a few thoughts about the way forward on financial regulation that have come out of interviewing and observing regulators in their interactions with market participants over ten years. My research has been mainly in Japan but involves some US components as well.

Continue reading "Market Governance Is About People (And How They Think)" »

Welcome to New York; the Bankruptcy Court is Below the Museum

posted by Stephen Lubben

While most of the recent focus in the reorganization area has been on a handful of “mega” cases that played key and controversial roles in the financial crisis, the bankruptcy court in Manhattan has quietly become the international center for corporate reorganization. And I’m not just talking about chapter 15 cases, like those recently filed by Mexicana Airlines, and a boatload of English reinsurance companies, that simply ask the US court to help enforce a foreign bankruptcy proceeding.

Continue reading "Welcome to New York; the Bankruptcy Court is Below the Museum" »

The Mother of All Cross-Border Bankruptcies?

posted by Jason Kilborn

No, not Lehman.  Though  much smaller in monetary terms (probably), a filing by BP would likely be the biggest international insolvency case in engaging the U.S. public interest, and probably its ire.  And what of a BP filing in its jurisdiction of registry?  A BP filing in the U.K. seems sure to create a cross-the-Pond furor not seen since the late 1700s, or so this BusinessWeek article suggests.  One line from that article particularly intrigued me:  "No doubt London courts would deliver an outcome more favorable to BP. And they’re apt to be less generous when it comes to paying damages to folks three times removed from directly affected claimants."  No doubt, eh???  This is, of course, the primary concern in cross-border cases, generally, but I think this worry is overblown (sensationalist journalism from BW--go figure!).

First, British reorg/rescue law still remains less debtor-friendly (and decidedly less management-friendly) than the U.S. Chapter 11 system (see, e.g., this very useful comparison), and management decides where to file.  While a U.S. DIP might well be able to maneuver the proceedings to low-ball Gulf-area claimants, I doubt a U.K. administrator would be willing to face the international backlash of such a tactic, especially since the adminsitrator would not be biased by his or her own participation in the creation of the catastrophe (unlike the DIP) and would have no reputational "sunk costs" to attempt to salvage (again, unlike a DIP).

Second, to the (unlikely) extent that the Businessweek article is making the sophisticated suggestion that British law would be chosen to control matters of claims administration and distribution, this is probably just wrong.  Cross-border insolvency law doesn't deal with such matters, and Jay Westbrook has written some very thoughtful analyses of the sticky choice-of-law issues in this context (I couldn't find any public hyperlinks, but see especially 23 Penn State Int'l L. Rev. 625 (2005); 33 Texas Int'l L.J. 27 (1998); and 65 American Bankruptcy L.J. 457 (1991)).  Any reasonable choice of law analysis would lead to application of U.S. law to the Gulf disaster, and a U.K. judge would be very hard-pressed to "deliver an outcome more favorable to BP" if that meant doing anything that remotely resembled flouting the governing law.

Might BP avoid punitive damages and other uniquely U.S. craziness by filing in the U.K.?  Probably, but my sense is BP would not face such emotion-driven madness in U.S. Bankruptcy Court, either.  State court tort trials get big headlines, but the bankruptcy cases that bring those damage awards back down to earth seldom catch the public's attention.  A long line of cases beginning with Maxwell suggests that U.K. and U.S. bankruptcy judges are more or less of one mind, so the only remaining questions concern choice of adminitration and choice of law.  The former strongly favors a U.S. filing (if any), and the latter should be indifferent to the choice of forum (no, I'm not being Pollyanna-ish here, I really do believe the choice of law would work out the same on either side of the Pond).  So, John Conyers, put down that silly bill to prohibit U.S. cooperation with a U.K. filing by BP, and focus on helping to clean up the mess down in the Gulf! 

What's Wrong with PIGS?

posted by Jason Kilborn

The financial and economic woes of the Southern European bloc of Greece, Italy, Portugal, and Spain have been constantly in the headlines recently (just this morning, the ABI's quite useful Global Insolvency daily headlines included just such a story).  Indeed, I learned that the cognoscenti call this group by an acronym:  PIGS (PIIGS if you add also struggling Ireland).  What do these countries have in common that might bear some causal relationship (forward or backward) with their money trouble?  I now have proof positive that I am a certifed weirdo, because the first thing that popped into my head when I saw these countries grouped together was that they are unique in Europe in not having a consumer insolvency system (or at least any reasonably functioning system).  For a long time, these countries had no robust consumer borrowing that might lead to consumer insolvency, but lots of data (no hyperlinks come readily to mind) indicate that those days are over, and it's high time for PIGS to respond to a growing incidence of consumer financial distress. The NYT story linked above suggests that geography, culture, religion, and history might tie these countries together and distinguish them from the rest of Europe.  Now I'm really intrigued by the causation-correlation issue here:  I suspect the lack of an effective consumer bankruptcy system is a result of unique cultural, religious, etc., characteristics of PIGS (and PIIGS), but I can't help wondering if there might be a causal effect the other direction, or at least that the conspicious absence of a serious effort to deal with consumer financial distress is a canary in the coal mine revealing the pernicious effects of certain other, otherwise unobjectionable cultural tendencies.  Hmmmmmm . . .

New Reorganization Law Imminent in United Arab Emirates

posted by Jason Kilborn

The key word in the title to this post is "reorganization," as opposed to what one generally finds in the context of laws on business failure--liquidation or "bankruptcy" laws.  The U.A.E.'s current bankruptcy law is a relic of the (British influenced) past, clearly designed more to punish debtors than to protect creditors (yes, I do mean to suggest that these goals have virtually no cause-and-effect relationship, despite constant unsupported rhetoric to the contrary among some commentators).  For several months now, U.A.E. authorities have been promising a new reorganization law to deal with recent spectactular financial collapses in what may well be the Arab world's most advanced and diversified economy.  Along with an advanced economy, they have implicity acknowledged, goes advanced failure, and a safety valve for treating that failure is a must for disciplining creditors and investors at both the investment and the recovery stages.  Even the insolvency law in the Dubai International Financial Center is not particularly forward-thinking, so even though reports are that the new U.A.E. law will not be as reorg-friendly as U.S. law, I hope the drafters drew their inspiration from sources other than British law (no "anti-British" sentiment is intended here).

Islamic Finance v. Islamic Bankruptcy

posted by Jason Kilborn

As Bob mentioned in his introduction, I have spent many hours over the past year-and-a-half studying Arabic as a prelude to exploring the Islamic and Modern Middle Eastern law of financial distress--by far the most intense intellectual challenge of my life.  I've only begun to scratch the surface (the language alone is fiendishly difficult), but this promises to be a very interesting and productive project.

While most Credit Slips readers have heard of or, indeed, know some of the detail of the modern movement known as Islamic finance, I suspect virtually none of us knows anything about the way in which Islamic law deals with financial distress and bankruptcy.  The only non-Arabic source on this subject I have found is an early 1900s doctoral disssertation from the University of Paris, and it is largely a French summary of the bankruptcy law of Morocco at the time (heavily influence by Hanafi Islamic doctrine).  We've probably also all read the stories of ex-pats leaving their cars at the Dubai airport, fleeing to avoid imprisonment for debt, but even in places like Saudi Arabia, where shari'a is supposed to be the law of the land (and where a kind of nascent debt settlement system is developing, albeit slowly), I haven't see any evidence of serious engagement with the notion of bankruptcy as it appears in the primary Islamic law sources.

And appear it does!  One rather famous verse of the Qur'an, 2:280, directs (liberally translated) "If [he, the debtor] is in a difficult situation, let there be a postponement until easier times [and he is able to repay,] and if you were to remit [forgive] the debt [as charity,] it would be better for you, if you only knew."  And in the other major source of Islamic law, the sunna (tradition) of the Prophet (pbuh), one finds at least one story where a creditor is ordered to forgive half of his claim against a distressed debtor.  There are other similar stories in the sunna, and I very much look forward to sifting through the scholarly commentary on this issue, a process that I've begun with halting success.  If any Credit Slips readers are familiar with what Hanifa or Shafi'i or Hanbal or Malik or Ja'far or any other authoritative commentator has to say about this specific issue, any input would be welcome.  My greatest point of curiosity is why we don't see any serious treatment of bankruptcy in modern Middle Eastern law, despite its treatment in Islamic doctrine.  This is one of many interesting facets of my longer-term project.  As I've said before, we in "the West" have so much to learn, both about and from, "the Rest" of the world.

The Forum Shopping Debate Heats Up for In-Bound Cross-Border Cases?

posted by Jason Kilborn

Thanks so much to Bob and the rest of the Credit Slips crew for having me back!  For my first post, I thought I'd draw some attention to what seems to be the latest in the forum shopping (corruption?) wars in the U.S. Bankruptcy Courts (which also ties in my new Arabic study a bit).  Many people, including myself, have written on the seemingly foreign-insolvency unfriendly decisions out of the Southern District of New York involving the Bear Stearns and Basis Yield collapsed hedge funds.  Relatively few people seem to have picked up the latest, a decision from traditionally more friendly Delaware in a case involving a Saudi-owned, Cayman-registered hedge fund called Saad Investments Finance Co. (No. 5) Ltd. (Case No. 09-13985) ("SIFCO").  Ironically, SIFCO's name (sa'd) means, in Arabic, “good luck” or “good fortune.”  As it turns out, the liquidators’ choice of the District of Delaware to seek cooperation in this cross-boder bankruptcy case was, indeed, fortunate.  Not only did the Delaware court not go out of its way sua sponte to find reasons to reject SIFCO's liquidators' petition for recognition (as the New York court had done), it seems to have almost glibly concluded that SIFCO's "center of main interests" was in the Cayman Islands, despite circumstantial evidence to the contrary (as discussed in the Bear Stearns and Basis Yield cases) and without citing either the controlling law or any particular fact that supported this crucial finding (see p. 2, finding "I").  This decision, in stark contrast to the New York holdings, seems rather transparently based on public policy and comity, rather than (and perhaps in derogation of) the new governing statute, Chapter 15 of the U.S. Bankruptcy Code.  While a few commentators have tried to rationalize this case by contrasting SIFCO with the Bears Stearns and Basis Yield hedge funds, the only explanation that seems at all persuasive to me is that the Delaware court has once again positioned itself as the "debtor-friendly" (or now, foreign-representative-of-the-debtor friendly) forum for U.S. bankruptcy proceedings.  I'll leave it to those who are both more expert (see also here and here) and much braver than I to conclude whether this is in fact the meaning of the latest Delaware decision and, if so, whether that represents a good or not-so-good development for U.S. cross-border bankruptcy policy.  I'll have more to say about this decision in the next issue of the Cayman Financial Review, for which I have been invited to write a bankruptcy column this year (thanks so much to Andy Morriss for the invitation).  Thanks once again to Credit Slips for having me back!

Debt and the People, Part II: The Hot ... and Concluding Disquietudes

posted by Anna Gelpern

This last post is about old news that I have been avoiding.  Even so, it would be malpractice to omit Ecuador from even this partial snapshot of the sovereign debt landscape circa 2010.  So on with its latest debt default, and all that it has dredged up. 

In a nutshell, Ecuador announced in late 2008 that it would stop servicing two of its foreign bonds; six moths later, it bought most of them back for cash at about 35 cents on the dollar, effecting substantial debt relief.  Three things about the episode bear emphasis.  First, Ecuador specifically refused to claim that its debt was unsustainable by IMF metrics conventionally used as a threshold for sovereign debt relief in the absence of a formal bankruptcy regime.  Second, on the eve of the default, a Presidentially-appointed audit commission deemed the debts irregular and illegitimate.  However, not all the debts condemned by the commission were then formally renounced by the government.  Third, instead of walking away from the debt, Ecuador ended up reverting to market mechanisms to buy it back at a discount.

Continue reading "Debt and the People, Part II: The Hot ... and Concluding Disquietudes" »

De-Detour: CDS Nudity on the Exotic Fringe

posted by Anna Gelpern

A recent FT Editorial implicates a topic IImage1 -- basis risk in emerging markets (EM) credit derivatives.  The problem is this:  If you want to buy protection against default by a big U.S. firm--say, GM--you buy a CDS contract on a GM bond.  But even in the leading emerging markets, it is often difficult to buy protection on major corporate credits, especially if you want to hedge against default on local-currency or other non-dollar/euro/yen obligations.  This is because local financial markets are relatively thin.  Your choice then is to buy a liquid standardized instrument, such as a CDS on foreign-currency sovereign debt, or to negotiate an expensive bespoke contract with a party willing to take the precise local risk off your hands.  If you opt for the liquid standardized sovereign CDS, you get partial protection.  This means that if your borrower defaults but the government is still servicing its dollar-denominated foreign bond, you cannot collect.  Herein the basis risk.  Note that even if you were able to arrange bespoke protection, you could be taking on more counterparty risk, since the only people willing to insure illiquid local instruments might be local institutions more exposed to measures such as capital controls ... or risk-hungry fringe elements that might flake out on you.

How is any of this relevant to the current debate on regulating "naked" CDS, or credit protection not matched by exposure to the underlying credit (aka fire insurance on your neighbor's house)?  It goes to the difficulty of defining the subject.  A CDS that might appear naked at first blush could in fact be partially clothed; and instead of encouraging better hedging, we might end up eliminating what partial protection is available in less liquid markets (damage insurance on your block?).  Not to say that EM basis risk should even remotely drive the discussion, but the example does expose the challenge of figuring out not just the legal terms of the regulated instruments, but the often less-than-intuitive ways in which they are used.

Debt and the People, Part I: The Cold

posted by Anna Gelpern

In earlier posts, I considered two trends:  first, the eroding boundary between chronically defaulting sovereign and risk-free government debt; and second, the comfy symbiosis among feckless rules, fudged government accounts and basic financial engineering.  I also considered the politics of erosion and symbiosis.  In this post and the next, I move to a third trend, perhaps the most overtly political of the lot: the resurgence of popular input in national debt matters.  The latest exhibit in this trend is Iceland, whose money troubles gave Michael Lewis the opening to set Beverly Hillbillies in Lake Wobegon.  The immediate predicate for this post is last weekend's referendum, where over 93% of the voters rejected a plan for Iceland’s government to guarantee payments to the United Kingdom and the Netherlands, compensating them for compensating their nationals who lost money in Icelandic internet bank accounts.  Curious referendum factoids include that (a) the deal voted on had long been superseded, and (b) “yes” votes came in third after empty ballots.  But the back-story is serious, complicated and revealing.

Continue reading "Debt and the People, Part I: The Cold" »

Do Not Miss

posted by Anna Gelpern

William White has a rocking op-ed in the FT arguing that debt overhang, notably in the U.S. household sector, makes fiscal and monetary policy ineffective.  White is one of the early pre-pre-pre-crisis proponents of macroprudential regulation, and always worth tuning in for.  Amen and testify.  (I am biased, as have been sympathetic to across-the board debt reduction in crisis.)

Gary Gensler uses the Greek controversy (and AIG) to argue the CFTC regulation brief, notably clearing houses.  He is a smart and complicated guy, and his argument is more nuanced than the demonization din.  He says that Greece might not have done the "Euroliar loan" swaps had the proposed reforms been in effect, because it would have had to post collateral, which would have made the transactions either useless or prohibitively expensive.  I leave the unpacking to the experts, but I suspect that it depends on some key factors in both the law and the swaps.  Nevertheless, a more productive framing for the conversation.

It's All Greek to Me FAQ, Part II: Euroliar Loans

posted by Anna Gelpern

While they hold some allure for the pointy-headed company I normally keep, the old fixing-floating-IMF-bailout handwringing detailed in my last post is nothing to the titillation of the Goldman-CDS angle on the Greek drama.  FAQ series continues with a focus on lying.

Who lied, to whom, about what?

Continue reading "It's All Greek to Me FAQ, Part II: Euroliar Loans" »

It's All Greek to Me FAQ, Part I: Power of Commitment

posted by Anna Gelpern

This follows on Stephen's post earlier in an effort to help sort through the Greece-Goldman-Germany love triangle and the deafening din surrounding its implosion.  This post sets out the background for the Greek crisis, mulls law as a macro commitment device, and the relative merits of EU and IMF bailouts.  The next one goes into more depth on Goldman and derivatives.

Why is everyone talking about Greece?

It’s the Olympics! (Did You See the Inflatable Beavers?)  And because Greece needs to come up with Euro 20 billion (about $27 billion) by April-May to roll over maturing debt.  Greece is having trouble borrowing the money because its debt stock is pushing levels that help poor developing countries qualify for official debt relief, with little prospect of going down.  As a result, Greece may have to pay a 4% premium over Germany, if it can borrow at all.

So what?  What happens if Greece defaults?

Continue reading "It's All Greek to Me FAQ, Part I: Power of Commitment" »

What? Sovereign Debt Edition

posted by Stephen Lubben

I'm sure our current guest blogger will have more to say about the current state of the sovereign debt markets, but I could not resist commenting on this rather confusing and odd article in today's FT about Goldman and Greece. Turns out part of the problem is that the article uncritically rehashes this letter from Representative Maloney, which is itself confusing and odd.

The key quote from both is this: "The increase in demand for insurance on government debt through credit default swaps harkens back to the activities that brought down American International Group." I'm not sure quite what this means, but the apparent analogy is flawed for several reasons. First, AIG was selling CDS with no real risk management, whereas Goldman is now buying CDS. Greece is neither buying nor selling CDS, although the article and letter might leave you with that impression. Second, while I've certainly argued that corporate CDS can generate perverse incentives to push a company into bankruptcy, I've also warned against the unthinking importation of corporate bankruptcy concepts into the sovereign debt world, and this analogy seems to be headed in that direction. Sovereigns -- at least at the national and state level -- can't be pushed into bankruptcy involuntarily, indeed they can't file for bankruptcy at all. That's an important difference that is often lost in the breathless commentary that the CDS markets will lead to a Greek/Icelandic/Portuguese/Californian "bankruptcy." Finally, I'm not sure why the "increase in demand" for sovereign CDS is itself anything to be concerned about -- other than what it suggests about the underlying problems with sovereign borrowers.

Indeed, I don't really understand the basis for the argument, made in the New York Times this week, that sovereign CDS will somehow push Greece to default, although I note that the AIG quote from FT and the Congresswoman could be charitably described as a restatement of the second paragraph of the NYT article. The Times article itself suffers from the sovereign/corporate confusion I discuss above.

At heart, the FT article (along with the Congresswoman's letter) seems like a rather feeble effort to link the present problems regarding Greece to the new easy target for all financial reformers:  CDS.

Why Sovereign Is the New Black

posted by Anna Gelpern

I am grateful to Adam and the Credit Slips team for indulging this detour.  After years on the exotic fringe of the legal academy sustained by the entrepreneurial spirit of Mitu Gulati, sovereign debt has blown right past the sleepy mainstream into the screaming headines.  Before launching into the substance of today’s crises and controversies, it is worth pausing to ask why.

First, the new celebrity sovereign debt is qualitatively different from the old fringy sort.  Old sovereign debt was about poor and middle income countries.  It surged with petrodollar lending in the 1970s, imploded in 1982, and re-surged in the mid-1990s, when it became Emerging Markets (EM) sovereign debt.  Much theory and jurisprudence ensued, which keyed off the problem of sovereign default:  the debt was apparently unenforceable despite restrictive immunity, yet this did not seem to dissuade lenders from lending and borrowers from paying most of the time.  Law scholars used sovereign debt as a natural experiment in theories about corporate contracts and bankruptcy.  The theory and practice of this “sovereign debt” were worlds apart from “government debt.” The former had an aggregate outstanding stock of a few hundred billion dollars spread among a few dozen countries (J.P. Morgan's EMBI, give or take) and was all about currency mismatch, default and recovery values.  The latter was in the way trillions, risk-free and “information-insensitive.”  You could buy default protection on the former; it made no sense to write protection on the latter.

The latest crisis in the Euro area has helped collapse the distinction between little “them” and big “us”; now everyone is groping along a discomfiting continuum muttering about market confidence.  Emerging Markets analysts are manning mainstream desks, I read about Greece in EM dailies, erstwhile über-skeptic and real-law person Kim Krawiec blogs about it at Faculty Lounge, and the whole thing feels totally self-justified without being useful to corporate theory.

Continue reading "Why Sovereign Is the New Black" »

Welcome Back Anna Gelpern

posted by Adam Levitin

The Slips is pleased to welcome back Professor Anna Gelpern of American University's Washington College of Law for another guest bloggership.  Anna's written extensively on sovereign debt crises (see here, here, here, here, here, here, and here, among other papers), and we are thrilled to provide a platform for her to share her thoughts on Greece, Dubai, Ecuador, and any other sovereign (including California and Illinois).  (She's also written a great paper on mortgage-backed securities workouts, which have some of the same collective action problems as sovereign debt workouts....) 

The usual repast at the Slips is consumer and business credit in the United States, but we're always interested in credit more broadly, including comparative credit systems and sovereign debt.  Unfortunately, given US government budget deficits, we may all want to become a little better versed in sovereign debt issues. 

A very brief primer for our readers who are not familiar with sovereign debt issues.  Sovereign debt presents four critical differences from consumer or corporate debt.  First, it is very hard to collect if the sovereign doesn't pay; Argentina's creditors have been trying for years to lay their hands on Argentine state assets, but there are few outside of the Argentina.  Second, there is no bankruptcy option for a sovereign; there is no legal mechanism for discharging debt at less than 100 cents on the dollar.  Third, sovereign debt is intimately tied up in both domestic politics and the politics of international relations.   And fourth, sovereign debt is highly intertwined with currency markets.  These four factors are central in shaping sovereign debt crises.  Again, welcome back Professor Anna Gelpern. 

Monetary Policy and the Housing Bubble

posted by Adam Levitin

A popular explanation of the financial crisis lays the blame at the feet of the Federal Reserve for lax monetary policy.  In this story, the Fed dropped interest rates starting in 2001 and kept rates too low for too long.  Low rates induced an orgy of mortgage borrowing for leveraged home speculation. 

It's a nice story.  Only problem is it doesn't really hold up under inspection.  Low rates in 2001-2003 did fuel an amazing mortgage refinancing boom, but not a purchase boom, and the boom was mainly in conventional fixed-rate mortgages, not the exotic products later years.  Moreover, despite the refinancing boom, no housing bubble was emerging in this period. 

The Fed started to raise rates in mid 2004 and continued to do so until mid-2006.  It was during this period that the bubble emerged, when rates were going up.  (To be fair, some might argue for an earlier date to the bubble, even as far back as the late 1990s.)  If we date the bubble from 2004, it's not consistent with a rate-driven bubble story, although rates were still extremely low in absolute terms during this period. 

The monetary policy story, however, really falls apart when one compares the US and Canada, as the graph below does.  Canadian interest rates, and perhaps more importantly, Canadian mortgage rates, track US rates pretty closely.  Yet the US had a housing bubble, and Canada did not.   This means we have to look somewhere other than monetary policy to explain the housing bubble.  The answer, I believe, lies in method and regulation of housing finance. 

US Canadian Mortgage Comparison

Continue reading "Monetary Policy and the Housing Bubble" »

Lehman, Synthetic CDOs, Sapphires, etc.

posted by Stephen Lubben

The Lehman bankruptcy court is out with a new decision that has the financial community somewhat miffed, since it removes one more piece of their mistaken belief that they don't have to understand or deal with the Bankruptcy Code. The decision will also lead to some interesting discussions with members of the English bench, who reached a contrary decision with regard to the same issue and parties. I'm extending an open invitation to all the judges to join me for coffee and bagels at my apartment on the UES to sort things out.

I've represented the transaction in question, which involved the issuance of synthetic CDOs, in this simplified diagram. The key thing to understand is that under the terms of the deal, which contains an Slide2 English choice of law clause, the priority rights to the collateral switch if there is a Lehman default under the CDS contract. And Lehman Brothers Holding's chapter 11 filing in September 2008 constituted a default, since Holdings was a "credit support provider" under the terms of the CDS contract. The CDS buyer, LBSF, also filed a chapter 11 case of its own in October 2008, resulting in another default.

The other thing to understand is that there are reportedly about 1,000 similar Lehman transactions waiting in the wings.

The US bankruptcy court held that the collateral priority switch was an unenforceable ipso facto (bankruptcy termination) clause, and that the derivative "safe harbor" provisions in the Code did not apply.

The UK Court of Appeal, affirming a decision of the High Court of Justice, reached the exact opposite conclusion, holding that the deal did not violate the "anti-deprivation rule," which is essentially their rule against ipso facto clauses, based on a case from 1818.

(How we ended up with the pseudo Latin, when their rule is from 1818 and ours is from 1978, I don't know.)

My thoughts on the bankruptcy court decision, and the conflict with the prior decision from the UK, after the jump.

Continue reading "Lehman, Synthetic CDOs, Sapphires, etc." »

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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