My Worlds Collide

I am obsessively interested in two things -- bankruptcy and Formula One auto racing. I feed the first interest through this blog. The second interest is tended to by watching way, way too much Formula One on television. Indeed, the best way to wind me up is to ask me if Formula One is the same as Nascar.

This weekend, my worlds collided when two Formula 1 teams -- Caterham and Marussia (shown to the right) --were placed in administration in the U.K., a procedure akin to chapter 11. I was going to resist doing a post, but now that Pat Fitzgerald over at Bankruptcy Beat has posted a story, I feel enabled.

Hoping in Vain for Secured Creditors to Cede Control

Initial results of the bargaining process in the new Irish personal insolvency system have been unsurprisingly disappointing. This is particularly true with respect to the most pressing problem for which the system was designed: bargaining with secured creditors over distressed home loans. The new system provides a framework for debtors and their secured creditors to negotiate a so-called Personal Insolvency Arrangement, or PIA, to reduce and/or otherwise restructure home loans and other secured (and unsecured) debt. Someone by the initials JK colorfully predicted in April 2012 that the new "PIA is DOA." I was wrong about this, but not too far off the mark.

Forget Argentina: How Do You Collect from Russia?

Never let it be said that the wheels of international justice spin quickly, but, with the pace of a Siberian jail sentence, the Permanent Court of Arbitration finally handed down its merits award in the Yukos litigation.  (For those of you not in the know, Yukos was dismantled by the Russian government, nominally as seizure for back taxes -- some levied ex post -- purportedly as an attempt to stymie the political aspirations of its principal, Mikhail Khodorkovsky.)  The decision is a doozy: a unanimous and stinging denunciation of the Russian government in this series of transactions, with such zingers as "calculated expropriation" and accusations that the governmental scheme was "devious."  The award of a cool $50 billion was far less than the plaintiffs wanted but was a record-setter for the Court.

Russia, of course, is vowing "appeal" (not quite sure to where -- strongly worded letter?), but this really means the fight now enters the collection phase.  Maybe Russia has some frigates to grab?

Here's a link to the ruling.

Who Knew Google Was a Credit Reporting Agency?

You thought that Google was just a search engine.  It turns out that Google is also a credit reporting agency.  The octopus has a 9th tentacle.  Didn't see that coming. (I guess that makes it a Googlepus...) That's the implication of the European Court of Justice's ruling ordering Google to take down links to the advertisements to a foreclosure sale from 16 years ago.  

The commentary on the ECJ's Google ruling has focused on the ECJ classifying Google as a data processor, but I think the credit reporting part of the decision may be just as significant. The ruling looks a lot less radical when understood from the credit reporting perspective, although it remains a problematic ruling because it is not limited to such a context.  

The Latest Amendment of Spanish Insolvency Law (2 and Farewell to Spanish Guestblogging)

This post will be my last one, and I would like to start it thanking Bob and the rest of the Credit Slips team for inviting me again to guest blog. I felt flattered and excited to share my experiences with Spanish insolvency law the first time, and the feeling remained throughout my second blogging stint. The experience has been so interesting (and a bit challenging) that I would not mind returning for a third time in the future.

My previous post covered the basics of the recent amendment of the Spanish Insolvency Law regarding refinancing and restructuring agreements. I left for this final post the analysis of two specific issues: judicial authorization and promotion of debt for equity agreements. The changes introduced by this amendment are, for sure, of great importance.

The Latest Amendment of Spanish Insolvency Law (1), or a Guide to Run Away From Insolvency Procedures

As I mentioned in my previous post, in the final two posts in my stint as guest blogger detailing the latest amendment of the Spanish Insolvency Law, I’ll take a break from discussing personal insolvency to focus on another current issue in Spain that very recently led to a partial amendment to the Insolvency Law: out of court refinancing and restructuring agreements. I have a personal interest in sharing the situation here in Spain because I am deeply interested in hearing comments on the main issues I identify as regards the amendment. To begin, I will briefly outline the amendment’s main features. I’ll then identify four main issues with the amendment – two in this post and two in my final post.

What Happened to Mortgage Debtors?

In my first post I advanced some basic ideas on the situation of Spanish mortgage debtors. The Spanish situation following the housing crisis may be familiar to readers because it shares many of the same characteristics of problems in European countries. The U.S. media has covered these stories, for example here.

For different reasons, seemingly sociological, the situation of these debtors was a center of the Spanish discussion about the effect of the crisis on households and individuals (leaving aside unemployment, of course). Therefore, different legislative measures were adopted during these years trying to offer specific solutions to mortgage debtors. In this post I will try to outline, in a more detailed way, the present situation. 

Plain Meaning and Chapter 15

I’m on my way to the Choice of Law in Cross-Border Bankruptcy Cases symposium at Brooklyn Law School that Susan Block-Lieb mentioned in her post earlier this week, so I have Chapter 15 on the brain.

I posted earlier about a Second Circuit case that held that a debtor’s center of main interests is to be determined as of the time it files a Chapter 15 petition, instead of the time at which it sought bankruptcy relief abroad. That decision effectively opens the door for forum shopping in a way inconsistent with the Model Law.

Another recent Second Circuit decision applied a plain meaning analysis to reach a conclusion that is likewise out of sync with the purpose of Chapter 15, a decision that is likely of great interest to foreign representatives and their counsel.

Discharge, Yes...But, How Much?

In this post I will explain the extent of the discharge given to insolvent individuals under the new Spanish insolvency law. Different problems arise from the way it has been introduced, ranging from its extent to the differences depending on the nature of the debtor. As in other provisions, looking at the newly introduced discharge one receives the impression of some sloppiness in the amendment or, worse, window dressing. It is hardly believable that the discharge given could be a useful tool for individuals in difficulties, engaged in business activities or not. Some debts that should reasonably be excluded are included while others that should be rationally excluded are included.

If discharge is given, because it is the most effective way to achieve the rehabilitation of the debtor, which is the main purpose of any insolvency system for individuals (or, at least, one of the main purposes, see World Bank Report, par. 359), it should be one of its more carefully thought and drafted parts. I do not dare to decide whether it is the consequence of sloppiness or of window dressing, but the results are clearly inconvenient, in my opinion (and this opinion is shared by others, once again see CUENA, 2013).

In the Western Sky

A grand tour of several percolating global restructuring issues, including Greece, the Ukraine, TXU, and, Mark and Anna's favorite, Argentina. Over at Dealb%k.

Eligibility Conditions for Discharge Under the New Spanish Personal Insolvency Regime

My previous post announced my intention to focus on the new Spanish Insolvency Law’s differences between individual debtors with or without business activities. As I mentioned, the new model clearly differentiates between these two categories of debtors in terms of discharge, offering a more
extended debt remission to debtors engaged in business activities. I will explain in a later post the extent of the difference. In this post, I will focus on the eligibility requirements for discharge that, once again, might lead to differing treatment among insolvent individuals.

To understand the difference, it is important to remember that the extent of the discharge varies depending on whether pre-insolvency mediation has been sought or not. Recall also that eligibility for pre-insolvency mediation is limited to individuals with business activity. Considering that the access to this mediation procedure is, in its turn, conditioned to certain requirements, the net effect is that the terms of eligibility result in a difference in the discharges individual debtors receive.

Cooperation and Tolerance in Chapter 15

Chapter 15’s modified universalism structure requires cooperation between courts in different countries as well as tolerance for outcome differences under different bankruptcy laws. While in general it’s fair to say U.S. courts have been cooperative and tolerant, for some reason the issue of intellectual property licenses in bankruptcy brings out the worst in us.

In the appeal of Jaffe v. Samsung (the appeal of a case called In re Qimonda in the courts below), the Fourth Circuit recently held that a U.S. bankruptcy court can require a German court overseeing the liquidation of a German company to apply U.S. law when dealing with licenses of U.S. patents.

Congress is considering amending Chapter 15 to mandate a similar  result through the proposed Innovation Act, which would add the following language to Section 1522:

Bernie Madoff, Haven Jurisdiction, and the End of COMI?

The liquidation of the largest Madoff feeder fund, Fairfield Sentry, recently made a major mark on Chapter 15 of the Bankruptcy Code. The lynchpin of Chapter 15 (and the Model Law on Cross-Border Insolvency) is the ability to locate a debtor’s center of main interests (COMI). If a debtor files for bankruptcy in the location of its COMI, then it is entitled to certain automatic protections from ancillary proceedings in other countries, e.g., the imposition of the automatic stay to bar all collection activities.

Fairfield Sentry is being liquidated in the British Virgin Islands, its place of incorporation. Prior to its liquidation, its day-to-day operations were conducted in New York. When the Madoff scheme imploded, Fairfield's shareholders commenced a liquidation proceeding in the BVI and all operations in New York ceased. Roughly a year later, the BVI liquidators filed a Chapter 15 petition in the New York bankruptcy court, arguing that the debtor’s COMI was in the BVI.

About four years ago, I predicted that following the Bear Stearns decision, courts would no longer find a debtor’s COMI to be in a haven jurisdiction.  Haven incorporated companies do not conduct business there, and thus in no way could they be said to have a center of main interests there based solely on their place of incorporation. The Second Circuit's recent decision in In re Fairfield Sentry Ltd.,  however, proves that prediction flat wrong.

Chapter 11 in the UK

So Business of Fashion points to a story on the Independent's web page, wherein a fashion designer calls for the adoption of something like chapter 11 in the UK. While chapter 11 debtor advocates are few and far between in the US, the motivation in this case comes from the designer having lost control of his business when his lender took control and sold the operation to a private equity fund.

My knowledge of British fashion pretty much starts and ends with Turnbull & Asser, so click on the links above if you want the juicy details.

My question is whether chapter 11 would have achieved what the designer thinks it would have.  I have doubts.

Namely, because chapter 11 as practiced today is so heavily controlled by senior lenders, I'm not sure he would have had too much more time to get his house in order here in the U.S. either. You basically have to work with the senior lender – who often becomes the DIP lender – or else. And the story suggests an inability to do that.

Debtor, What Debtor?

The recent World Bank Report on the Treatment of the Insolvency of Natural Persons  highlighted in its first pages (13 and ff.) the alternatives regarding which debtors to be include in this special regime. Although the solutions to this question are not the same among different countries, the problem is identical: whether to include persons without any business activity—that is, “pure” consumers—or to limit its particular provisions to individuals engaged in business activity.

Although it has different grounds, the discussion reminds me of the classic insolvency/bankruptcy problem of limiting these proceedings only to businesses. As many of the readers know, this was a classical question when the old insolvency and bankruptcy procedures were part of a special set of

Nr. of personal insolvencies and debtor condition. Spain

norms for businesses (for instance, the mandatory accounting or a special public register). Seeing this question arise again in the context of personal insolvency brings back memories of the good ol’ times when I started studying our old quiebra and the discussions on the nature of the debtor and his eligibility for that procedure (a problem usually present in the old spanish suspensión de pagos). To avoid nostalgia for those times, and for the sake of our readers, I’ll turn my eyes to the present. How has the amendment of the Spanish Insolvency Law dealt with the problem of the nature of the debtors?

Spain, Six Years Later

First of all, I would like to thank the Credit Slips team and, in particular, Bob, for hosting me here again. I guess that after six years, memory is weak, and it is easier to believe that I could have something interesting to share with their readers. I hope that, at least, my posts will help to understand the present situation of Spanish Insolvency Law as regards personal bankruptcy. The latest amendments are said to be a dramatic change in our system. My personal view, however, is not so optimistic, as it looks more like window dressing.

Six, almost seven years ago, I wrote here:

The situation described above could change somehow, as the increment in individuals' indebtedness and the eventual problems faced in case of an economic downturn could push politicians to pass a law for consumer bankruptcy or a reform in the insolvency law. But if it were the case, the discussions will probably focus on mortgages, as it can be clearly seen in how trade unions or consumer associations speak about this question right now. That situation will undoubtedly be a test for the bank and credit industry power in our society.

What happened since then?

The New Irish Split Mortgage Solution for Underwater Homeowners

This just in from Ireland:  A large mortgage bank there, AIB, has agreed to a plan to split some mortgages into a "good" tranche, equal to 80% of the current market value of the home (forgiving the other 20% of that tranche) and another, "bad" tranche equal to the remaining, underwater portion of the mortgage loan. The first tranche will be serviced regularly, vastly reducing the monthly payments of eligible borrowers. The second tranche will be "warehoused," not serviced at all and lying dormant, interest-free, for some period of years. There are provisions for offering homeowners incentives to pay down the remaining balances quickly, especially if their financial situations improve unexpectedly.

Sounds like just the type of creative solution the world has been looking for. Alan and other experts on these issues may see some hidden traps that I don't (perhaps strict eilgibility requirements, which are not reported in the story I saw), but this struck me as quite good news on the "actually looking for solutions" front.

Evaluating the First Official Irish Debt Settlement Arrangement (DSA)

A headline about Ireland's new personal insolvency relief system crows, "Most of borrower's debt written off in first deal under new insolvency regime." I thought, "Great news!"  Both that the new system is up and running, and that creditors are already agreeing to relief, which I had thought earlier was extremely unlikely.

Then I read the details. "Most" is quite a relative term. It turns out that creditors agreed to write off 70% of a reported "unsecured debt for a six figure sum." In other words, the debtor had agreed to pay creditors a 30% dividend. As readers of this blog will know, that's an extraordinary dividend. Most consumer bankruptcies around the world offer creditors zero or close to it, and even payment plans tend to offer in the single-digit range.

Consumer Bankruptcy Law Poised to Circle the Globe

If the Russian Duma adopts the pending consumer bankruptcy bill, it will fill in the final (very large) link in an unbroken chain of countries circling the globe who have adopted a debt relief law. No country seems to have taken this step as an early planning measure. Only the impeding doom of a huge credit bubble or, more likely, the aftermath of the bursting of such a bubble has spurred lawmakers to action. Russia seems perfectly poised to follow that path.

First regional banks and credit reporting agencies and now the Central Bank have begun to sound alarm bells about the rapid rise of consumer (over)-indebtedness in Russia. According to a study of credit reports from summer 2013, the number of consumer borrowers with five or more loans increased to nearly 20% in 2012, with average debt mounting to over US$15,000 (average annual income in Russia is only US$7500). In only the first nine months of 2013, consumer lending rose nearly 40%, and about 8% of those loans are already non-performing (an increase of about 33% in NPLs from the beginning of 2013). Standard & Poor's expects Russian consumer credit to expand another 30% in 2014.

Debtors' Prison in the West?

I'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

On 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

Those 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

After 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.

Russian Courts Battling For Authority Over Consumer Bankruptcy

In 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!

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

"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

No, 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

The 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

Judging 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.

Creeping Privatization of Justice

Lauren'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?).

Consumer Bankruptcy Around the World (Bank)

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.

The Meaning of Bankrupt

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...

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.

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

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.

Japanese Resturcturing

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

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

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.

Bankruptcy Immigrants

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?

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.

Cash as Social Infrastructure

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.

Cash: Killing It, or Building Bridges to It?

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.

Toward Cashlessness?

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.

It's Not Just the Economy Stupid!

“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:

Greek Family and Welfare Provision

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?

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?

Financial Stability Board Calls for Effective Consumer Finance Protection

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

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?

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

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, about 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

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.

Responsible Lending as an Emerging International Norm

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?