173 posts categorized "Comparative & Int'l Perspectives"

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." »

Keeping it In-House

posted by Stephen Lubben

Rather than risk a Dubai World chapter 11 case, Dubai is apparently doing a quickie revamp of its bankruptcy code. Of course, the code itself is only half, or less, of the issue -- you also need the structures to properly implement the code (see China, People's Republic of). I suspect many international creditors would still prefer a New York or Delaware bankruptcy court, but it may not be their choice to make.

Dubai World

posted by Stephen Lubben

Over the long holiday weekend, we have been treated to a series of increasingly breathless stories about Dubai World's decision to seek a six-month moratorium on some $60 to 80 billion of debt. How Dubai World, a corporation owed by the government of Dubai, will resolve its debt issues has been the subject of much speculation, and little hard fact. Indeed, I believe I saw one story that said Dubai was going to trade Clay Buchholz for Roy Halladay at the Winter Meetings -- but maybe I'm getting my rumor-filled stories mixed up.

One option that has yet to be mentioned is a Dubai World chapter 11 filing. Foreign companies file chapter 11 all the time. Sure the automatic stay is unlikely to have much effect on local creditors in the UAE, but such a filing would prevent any creditor will "minimum contacts" with the United States from taking any of the debtor's assets. That would cover most financial institutions, including many hedge funds, and might allow Dubai World sufficient time to resolve its problems -- and even impose a compulsory workout plan on the same group of creditors. The key question is whether the government of Dubai wants to expose its key asset to an American bankruptcy process.

The Australian Interchange Experience

posted by Adam Levitin

The New York Times ran a story on the impact of interchange regulation in Australia.  Calling it interchange regulation is somewhat of a misnomer.  The Reserve Bank of Australia in fact acted to bust up anticompetitive private regulation of interchange.  Payments are an area with intense regulation, but that regulation is often private self-regulation.  Thus, what occurred is better thought of as interchange deregulation. 

Guess what?  Interchange regulation is working exactly as one would have predicted.  Consumers who want rewards have to pay for them directly now.  They can't free-ride off of other consumers (using cash, debit, or non-rewards credit cards) to finance their frequent flier miles, etc.  Not surprisingly, annual fees have gone up for rewards cards.  This has also pushed consumers toward greater debit card usage, which is often a healthy thing.  (To be fair, there is a similar move to debit in the US without interchange deregulation, so the causation in Australia is questionable.)

A predictable problem has arisen in Australia, however.  Some merchants are now imposing credit card surcharges that are greater than the cost of accepting credit card transactions.  This isn't good for consumers.  But it isn't a problem with interchange regulation.  This is just a symptom of less than perfectly competitive markets in other areas of the economy.  Excessive surcharging is most likely to appear in the least competitive areas of the economy. 

Continue reading "The Australian Interchange Experience" »

Bogus Statistics: The Banking Industry's Go-To Lobbying Tool

posted by Adam Levitin

Fake statistics have been a central feature of the banking industry's lobbying strategy on every major consumer credit issue since the 2005 bankruptcy amendments. 

In 2005, there was the phantom $400 bankruptcy tax used to push through the BAPCPA.  Then there was the Mortgage Bankers Association's 200 basis point interest rate increase claim about cramdown.  For credit cards, there was no fake statistic, but a pseudo-academic study funded by the American Bankers Association.  (In retrospect, lack of a scare number was a major strategic mistake for the industry.) 

Now we have the latest installment in the parade of phony numbers:  an American Bankers Association-funded study about the likely impact of the Consumer Financial Protection Agency (CFPA) on consumer credit cost and availability and economic growth.  The study is by David Evans of LECG and Joshua Wright of George Mason Law School (Wright may be familiar to some Credit Slips readers from his blog comments in the past). 

There's a lot of tendentious claims in Evans and Wright's study, but the heart of it are some very precise claims as to the impact of the CFPA on the cost of consumer credit (160 basis points), the demand for consumer credit (2.1% decrease), and the net job creation (4.3% slower).

How, you might ask, did anyone possibly arrive at such precise predictions based on legislation that does not create any substantive regulation of the credit industry, but would merely transfer largely existing powers to a new agency? 

The short answer:  just make up the numbers.  I kid you not.  Evans and Wright selectively chose a study on the impact of a different regulation (interstate banking restrictions) on credit cost.  They briefly argue it is analogous to the CFPA Act, which they claim will have double the impact.  (Why double?  Why not?)   Then they take that number and multiply it by an elasticity metric for the demand impact.  And for the coup-de-grace, they take a misleading number on net job creation and conjecture with no basis that it would be reduced by 5%.  These numbers are presented as "plausible, yet conservative" assumptions. 

There's a lot of room for good faith disagreement about methodology, but Evans and Wright's numbers don't come close to passing the straight-faced test.  (Even the Mortgage Bankers Association had some facially plausible basis for their cramdown claim.)  I am still shocked that two serious scholars would attach their names to this study. My short critique of their study is here

Lehman Fees

posted by Stephen Lubben

The FT has a front page story today about the total fees incurred by the debtor's professionals in the London part of the Lehman case. So far the accountants (who play the lead role in the UK) and the attorneys are due about $363 million. This got me thinking about a recent WSJ article, which noted that the US part of the case had topped $400 million, further noting that "[f]ee experts have estimated that the bankruptcy could cost between $800 million and $1.4 billion."  The Journal does not say who these unnamed experts are, but I suspect they might be myself and Lynn LoPucki, since the numbers are very close to those we estimated at the outset of the case.

But I estimated total Lehman fees based on its most recent pre-bankruptcy 10-K, and I expect Professor LoPucki did something similar. That means that the London assets were likely included in the estimate (to the extent they were Lehman assets and not trust assets for customers), since the 10-K reports a consolidated balance sheet. That means the "$800 million and $1.4 billion" includes at least part of the UK case, albeit probably with a substantial margin of error, because we are treating the thing as one big chapter 11 case. I know I've never done any testing to see how my model performs on a foreign bankruptcy case.

At this point, the careful reader is probably saying, "wait a second --  once I sum up the total fees in the two jurisdictions, we are already at your estimate.  And the case is not over yet."  True enough, but at least with regard to my fee estimate, this illustrates the simplified nature of the media stories on this issue.

Continue reading "Lehman Fees" »

Unresolved Access Issues

posted by Stephanie Ben-Ishai

Yesterday’s post on means-measuring versus means-testing offered a positive perspective on the Canadian bankruptcy reforms.  The focus was on debtors who are currently able to access the bankruptcy system and how this will change with the enactment of the reforms.  Unlike the American system, the Canadian surplus payment requirements do not impose additional front-end administrative and financial burdens that in themselves will prevent the poorest of potential bankrupts from accessing the bankruptcy system. However, a number of obstacles hinder access to the bankruptcy process for the poorest debtors.  In particular, such debtors will have difficulty paying the approximately $1800 in costs associated with the administration of a bankruptcy.  The reforms go some way to address this concern by providing a mechanism for the bankrupt to reach an agreement with the trustee to continue paying for bankruptcy services after the bankruptcy period. 

Professor Saul Schwartz of Carleton University and I have been working on issues around debt, low-income households and insolvency remedies for some time now.  Jason Kilborn blogged about our 2007 article at: http://www.creditslips.org/creditslips/2007/04/bankruptcy_for_.html.  In that article, we pointed out that, for two reasons, the conventional wisdom is that the poor are not likely to have needed the insolvency system. First, creditors are reluctant to extend credit to the poor because the risks of non-payment are high. Not having been able to borrow, the poor are not over-indebted and are therefore not in need of bankruptcy protection. Second, some poor debtors - lone parents on social assistance for example - are judgment-proof meaning that judgments for money recoveries obtained by their creditors are of no effect because these debtors do not have sufficient non-exempt property or income to satisfy the judgment.

Continue reading "Unresolved Access Issues" »

Means-Measuring versus Means-Testing

posted by Stephanie Ben-Ishai
As readers of the Credit Slips blog are well aware, a central feature of BAPCPA was means-testing.  Means-testing requires all debtors to calculate their estimated ability to pay (according to complex formulae) and to file these calculations with their Chapter 7 petitions.  A failure to do so results in automatic dismissal of their petition.  In contrast, the Canadian approach is to focus on means-measurement.  That is, for liquidation bankruptcies, the bankruptcy trustee on the basis of regulations set by the Office of the Superintendent in Bankruptcy (OSB) sets the amount debtors are required to pay (if any) during the bankruptcy period.  For debtors who are required to pay under the current means-measurement tests, the reforms will increase the period of repayment.  The reforms do not seek to introduce means-testing into the Canadian system.

Functionally, the key difference between means-testing and means-measurement is that means-testing, as put into place in the United States, creates a hurdle at the front end for all debtors filing for liquidation bankruptcies.  The means-testing calculation results in a more complex and time-consuming bankruptcy process, which in turn drives up the fees of filing for bankruptcy, even for those bankrupts who clearly meet the test.  The result is that an increasing number of debtors are not able to afford bankruptcy.  At the ideological level, means-testing operates on a presumption of abuse.

I have asserted that Canada’s resistance to adopting the American means-testing model is a laudable feature of the reforms.  I argue that the Canadian means-measurement approach, while not without its own flaws, is more effective than the American model at putting into practise the objectives articulated by proponents of means-testing in the United States.  See “The Canadian Consumer Bankruptcy Discharge” in Stephanie Ben-Ishai and Tony Duggan, eds. Canadian Bankruptcy and Insolvency Law: Bill C-55, Statute C.47 and Beyond (Toronto: LexisNexis Canada Inc., 2007).

Continue reading "Means-Measuring versus Means-Testing" »

The Deviant Canadian Debtor

posted by Stephanie Ben-Ishai
The reforms we’ve discussed so far signal that a paradigm shift with respect to consumer bankruptcy in Canada is well under way.  A key component of consumer bankruptcy in Canada has, since 1919, been the non-waivable or mandatory consumer bankruptcy discharge.  In a similar, but more mediated fashion than our American neighbors, bankruptcy’s discharge of past debts that cannot be contracted out of has in recent times been regarded as part of economic rehabilitation, which is equated with a “fresh start.” However, the 1997 amendments attempted to effect a move from rehabilitation of the debtor to asking debtors to rehabilitate their debts by making payments out of surplus income.  The 1997 amendments required trustees to assess whether bankrupts could have made a viable consumer proposal and whether they cooperated with the trustee by meeting any surplus income requirements.

Despite the underlying assumption that many bankrupts have an ability to make repayments to creditors, in practice these amendments had a limited impact on the majority of bankrupts who could not make a proposal because they did not have surplus income.  Over a decade later, the current reforms will take the 1997 amendments further, as these reforms impact bankrupts with surplus income and also expand the group included in the paradigm shift to include certain debtors who do not have surplus income but owe tax debt or student loan debt to the government.  While the 1997 BIA amendments had limited practical impact, they signaled a return to the “deviant debtor” construct, which positions bankruptcy law as a response to deviant behavior.  The current reforms hold the potential to further entrench this construct in Canada’s consumer bankruptcy system.  The following are three examples.

Continue reading "The Deviant Canadian Debtor" »

Key Canadian Consumer Bankruptcy Reforms

posted by Stephanie Ben-Ishai
Today’s post is a summary of the key Canadian consumer bankruptcy reforms.  The most significant aspects of the consumer reforms touch on the following nine issues:

1.    Automatic Discharge
2.    Creditors’ Participation and Pay Out
3.    Bankrupts with High Income Tax Debt
4.    Bankrupts with Student Loans
5.    Treatment of RRSPs and RRIFs (tax sheltered retirement savings accounts)
6.    Tax Refunds
7.    Consumer Proposals
8.    Ipso Facto Clauses
9.    Trustee Fees

Below is more detail on each of these reforms.  I also have a short annotated book out on the reforms if you are interested in reading about them in more detail:

Stephanie Ben-Ishai, Bankruptcy Reforms 2008 (Toronto: Carswell, 2008): http://www.carswell.com/description.asp?DocID=5574

Continue reading "Key Canadian Consumer Bankruptcy Reforms" »

Introduction to the Canadian Bankruptcy Reforms

posted by Stephanie Ben-Ishai

Thank you for the introduction Bob.  I am delighted to have the opportunity to Guest Blog this week about the Canadian bankruptcy reforms. 

On Friday September 18, 2009, the remaining amendments contained in Chapter 36 of the Statutes of Canada, 2007, and Chapter 47 of the Statutes of Canada, 2005 (c.36 and c.47) came into force:  http://www.gazette.gc.ca/rp-pr/p2/2009/2009-08-19/html/si-tr68-eng.html.  The coming into force of these amendments to the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) brings to a close a long, frustrating, and confusing reform process.  While there are a number of promising components in the reforms, there is still much that could have been done.  Hopefully we (academics) won’t lose steam in pushing for future reforms and the regulators won’t feel that their work is done.  In today’s post, I’ll restrict my comments to background on the reforms and the process.  In the next post, I’ll briefly highlight the key consumer bankruptcy reforms.  For the last three posts I’ll offer a critical analysis of the consumer bankruptcy reforms.  Outside of the references to the commercial reforms in this post I will not focus on them this week, as time does not permit me to do a thorough job on both consumer and commercial reforms.  That being said there are significant commercial reforms that will have an impact on consumers, in particular the labour reforms.

Continue reading "Introduction to the Canadian Bankruptcy Reforms" »

Exporting Chapter 11

posted by Stephen Lubben

FT has a great, and extensive, article today about the push to adopt chapter 11-like procedures in Europe. One thing missing from the article is any discussion of the relative size of the respective jurisdictions. My sense is that chapter 11 works best for the very largest American firms, especially since the 2005 amendments to the Code made chapter 11 a very inhospitable place for small businesses. The U.S. has a sufficiently large number of big and mid-sized debtors to warrant a system like chapter 11, but I wonder if any individual European jurisdiction, even the U.K., can justify implementing a system that best serves a handful of debtors each year. What they really need is a chapter 11 process, with a dedicated court system, at the EU level, but I think we can agree that is unlikely.

Highly Questionable Medical Bankruptcy Figures from Fraser Institute

posted by Bob Lawless

US Banrkuptcy Rate per 1000 Population The National Center for Policy Analysis (NCPA) is flogging a study from the Fraser Institute in Canada that purports to show U.S. medical bankruptcies are a "myth" because the Canadian bankruptcy rate is higher than in the United States. Reuters and BusinessWire have run the NCPA's press release as a story on their news services. Before anyone takes this study seriously, a few important facts are needed to place the Fraser Institute findings in context. To be as charitable as possible, the study's use of the bankruptcy data is extremely selective.

First, the Fraser Institute study begins by observing that advocates of a single-payor U.S. health care system use the assumption that such a system would prevent many U.S. bankruptcies because of the medical debt found among many U.S. consumers filing for bankruptcy. The study states, "We should expect to observe a lower rate of bankruptcy in Canada compared to the United States, all else being equal." First, I'm not sure that is an assumption made by advocates of a single-payor system (and I don't count myself as one of them). Second, the qualifier "all else being equal" is the whole point. There is a lot that is not equal between the U.S. and Canada, and there is no reason to expect bankruptcy rates to be precisely similar. Even on its own terms, however, the Frasier Institute study is highly suspect because of the narrow window it uses for its bankruptcy data.

The Fraser Institute study, which is really just a three-page report of existing data from government sources, used bankruptcy filing data for the calendar years 2006 and 2007 as the "most recent data." Both the Office of the Superintendent of Bankruptcy Canada and the U.S. courts have 2008 data available. For a report that carries a July 2009 date, the years 2006 and 2007 would not seem to be the most recent data available. Authors have to prepare publications in advance of their appearance, but the U.S. data were available in a press release dated March 5, 2009, and the Canadian data appear on a web page that states "modified March 11, 2009." There was surely plenty of time to use the 2008 data for a 3-page paper that has fewer data than this blog post. By limiting the data to 2006 and 2007, however, the report is able to support that the anti-health care reform agenda that the NCPA and the Fraser Institute seem to further.


Continue reading "Highly Questionable Medical Bankruptcy Figures from Fraser Institute" »

Transnational Bankruptcy

posted by Stephen Lubben

At the final day of the INSOL conference in Vancouver, I attended a fascinating panel on the issues that arise when a multinational corporate group seeks to reorganize. The panel was staffed by judges from Canada, the UK, Korea, and Germany -- and  Downtown vancouverdeftly chaired by a U.S. judge who managed to resist drawing the discussion back to the U.S. For those of us from the U.S., I think the discourse was particularly enlightening. While the panel began with lots of optimism about the new tools for cross-border coordination, by the end it became plain that only Canada would consider a joint reorganization case. In the other jurisdictions, it was clear that the vision of a cross-border case was actually a series of parallel cases within the several jurisdictions, aimed at reaching a common point.

The distinction is important, and a point that is often lost in the good-feeling surrounding the adoption of chapter-15-like procedures. In a joint reorganization case, creditors are apt to be treated equally, based on the value of the unified enterprise. In the case of parallel proceedings, creditors in those jurisdictions that happen to have readily "realizable" assets are going to have significant holdup power, especially if the assets remain "local" as part of a separate bankruptcy proceeding. For local secured creditors, that may be a fair result, but for unsecured creditors who likely relied on the value of the overall enterprise, this sort of jurisdictional fragmentation is likely to produce very arbitrary (and likely inefficient) results.

GM & Opel

posted by Stephen Lubben

On the day GM filed, the Times ran a story noting that GM's European division – Opel/Vauxhall – had been “spared” going into bankruptcy by the deal with Magna and some Russian investors.

Are we so certain they were spared?  Sure in the short term European employees and others who rely on GM will avoid some pain, but what about the long term?  The domestic part of GM is talking about dropping over 2,000 dealers, rewriting its labor contracts, massively reducing its debt load and shuttering several plants, all in about a month.  Will Opel’s new owners be able to achieve a similar degree of restructuring in anything close to that timeframe?  It may be my American chauvinism, but my impression is that it will be even harder to obtain a comprehensive restructuring of Opel outside of a bankruptcy process, as the European jurisdictions have much stricter laws regarding the termination of employees, shuttering plants, etc.

As GM and its stakeholders are now learning, sometimes avoiding bankruptcy simply makes the pain worse when it comes.  GM's chapter 11 case would have been much simpler (relatively) two years ago, when the credit markets were open and people where still buying cars.

(I invite the European readers to comment or correct me in the comments or via email.)

Consumer Overindebtedness Around the World

posted by Bob Lawless

My plan for the evening is to go in search of a giant sculpted head of Karl Marx. Fortunately, I'm in Chemnitz, Germany, where such a monument is a feature of the town square, a holdover from the days when the city was known as Karl-Marx-Stadt. Dr. Wolfram Backart has organized a wonderful conference at the Technische Universtät Chemnitz. The conference is entitled "Overindebtedness: Everyday Risk in Modern Societies? Theoretical Aspects and Empirical Findings in International Perspective" and has brought together scholars from Germany, China, Portugal, Japan, Sweden, South Africa, Finland, Canada, the United States, the United Kingdom, and Austria. Two themes have been emerging

Continue reading "Consumer Overindebtedness Around the World" »

Austrian Banks, East European Subprime, and Hungarian Consumer Bankruptcy

posted by Jason Kilborn

Change the names, and you don't even have to read the rest of the story any more. Europe and the United States are on parallel tracks to hell in a handbasket. Today's Washington Post has a fascinating story on the woes of Austrian bankers, whose drive to conquer emerging East European credit markets is now coming back to haunt them. Substitute Wells Fargo and Citigroup for Erste Bank and Raiffeisen Bank, and mention California, Nevada, and Florida instead of Hungary, Romania, and Ukraine, and any U.S. reader of popular news can see what's coming. Austrian banks for years ignored warning signs that these fast-growing markets were overheating, and the banks expanded faster than regulators could keep up--sound familiar? The big problem in Eastern Europe was banks would lend Euros or Swiss Francs to, say, Hungarians, at lower interest rates than similar loans denominated in local currency (e.g., Hungarian forints). While it's probably overkill to call these "subprime" loans (and the borrowers were generally creditworthy), these loans were subject to a different but still substantial risk; i.e., a potential upside-down position for borrowers if currency markets shifted, which is exactly what happened a few months ago. Imagine earning your pay in Russian rubles but having to repay in U.S. dollars, especially after the exchange rate of the former heads south.  Not good.

Continue reading "Austrian Banks, East European Subprime, and Hungarian Consumer Bankruptcy" »

Party Time in the Netherlands?

posted by Jason Kilborn

A comment from the Netherlands reminded me to post about an intriguing statistic I've been exploring. While consumer insolvency filing rates have been up around the world this past year (at least in the last quarter of 2008, as mentioned here and here), the Netherlands represents a serious anomaly. Total admitted consumer cases there plummted 38% in 2008, including a 42% drop in Q4 2008 as compared to Q4 2007, and a 1% decline from Q3 to Q4 of 2008. This is seriously surprising and somewhat troubling.

On the one hand, it might be that Dutch debtors are just way better off than their neighbors, and consumer financial distress is low in that corner of Europe . . . but I doubt this very much. The Raad voor Rechtsbijstand, which follows developments on the Dutch consumer insolvency law (known by its acronym, WSNP) has also expressed confused anxiety about the source of this drop in admissions (see here and here, in Dutch, noting among other things a 67% drop in admitted cases in Haarlem and a 54% drop in Rotterdam in the first half of 2008). The Raad speculated that perhaps improvements in the out-of-court workout process had led to less need for formal, coercive relief, but my own quick review of the results of that system and remarks from a friend in the Netherlands suggest that a slight uptick in consensual out-of-court arrangements does't begin to explain a 38% drop in admitted formal cases.

Alternatively, it could be that a reform implemented on 1 January 2008 drove down the admission rate, though I doubt this tells the whole story, either. The reform generally made the system simpler and more predictable, which should have made it more attractive to filers. While it made small changes in the admissions criteria (article 288 of the WSNP), I can't imagine that any of these seemingly minor changes would explain the drop. My Dutch colleague suggested that courts might be much more restrictive now in admitting cases for debtors whose problems are viewed as predominantly "social" rather than "financial" (e.g., drug addiction, compulsive disorders, inability to control spending [sic!]), so these needy cases may not be making their way into the system after 1/1/2008. I don't see anything in the paper record to support this view, but I'm still looking, as this disturbing approach to consumer relief would signal a very significant shift in perspective. As anyone who has dealt with consumer cases knows, MOST consumer insolvency clients have some substantial problem that might be categorized as "social" rather than "financial," and there's a strong causal connection between the two . . . but that certainly doesn't mean that these folks don't need (or wouldn't benefit greatly from) debt relief.

Hoping for Failure!?

posted by Jason Kilborn

As if negotiating a confirmable reorganization plan weren't difficult enough already, apparently credit default swaps (CDS) are making it even more difficult. The March 7th issue of the Economist has a great sidebar article, aptly entitled "Burning down the house." The author helpfully analogizes CDS to fire insurance--if a corporate borrower defaults (i.e., the house burns down), the CDS seller pays the buyer for the loss. That seems like an acceptable hedge if the buyer of a CDS is the lender, but what if high-risk investors (speculators?) buy CDS, banking on a corporation's default (akin to "naked short selling" of a company's stock, a tactic also under attack of late).

This explosive situation comes to a head if the borrower company attempts a reorganization. Now you've got very dedicated and often aggressive investors hoping for your failure! If they have enough riding on the CDS paying out, one can easily imagine a CDS holder offering to buy a blocking position (34%) of the unsecured debt of a company attempting reorganization--which the CDS holder can probably do for a song in light of the pending reorganization (and the payout on the CDS will almost inevitably be more than a plan promises to unsecureds). I've heard lots of grousing among judges wanting to know how certain "creditors" voting unsecured claims came to own those claims--now I understand why these judges want that info and what scary info they might find if the question is answered. I presume the "not in good faith" votes of CDS holders voting down a reasonable reorg plan could be equitably subordinated or classified (rejected). What a nightmare for debtor's counsel! All that work to then have your plan fail because investors with no real skin in your game tank your deal so they can collect the equivalent of hazard insurance on your failure. 

It gets worse when national borders are involved. The Economist article mentions the Chapter 11 case of LyondellBasell, initiated in early January. Apparently, some CDS holders want to force the debtor's European parent to default, bringing in the complications of a cross-border reorganization. That would so complicate the case that the chance of a total meltdown--and a payout on the CDS--would spike, so DIP lenders have ponied up just to avoid that eventuality. The strategies of securing plan support are FAR more complex today in the CDS-influenced and cross-border complicated world of reorganization. I guess that's why the bankruptcy lawyers get the big bucks.

We're in the Money!(?)

posted by Jason Kilborn

Here in the U.S., lawyers in other areas must be eyeing their bankruptcy counterparts with envy, as our sector enjoys (if we can use that word without multi-directional guilt!) rapid growth while others areas are contracting. In England, this U.S.-bankruptcy-lawyer envy is doubly powerful, as even bankruptcy lawyers there are not as high-profile as in the U.S. As this TimesOnline story reminds us, reorganization ("administration") in the U.K. is not a lawyer-driven process, as is the Chapter 11 process in the U.S. Rather, it is an administrative process run mainly by accountants, who exercise significant business discretion with much less court oversight, and therefore much less need for lawyers. As more global businesses run into trouble, insolvency professionals from these two great nations separated by a common language will come into contact more frequently. When this happens, we U.S. lawyers need to remember that our U.K. colleagues are situated quite differently, and the reorganization process there is administered in a very different way. Just ask Richard Gitlin, who could regale us endlessly with stories about liaising (perhaps "doing battle" would be more apt?) with PriceWaterhouse in the Maxwell bankruptcy in the early 1990s (CreditSlips blogger John Pottow, among many, many others, has written about the case here). When these cross-cultural encounters among lawyers occur, let us U.S. bankruptcy lawyers try not to be too smug (for the humor impaired, yes, this is a little joke!).

Rising Pain in the Heart of Europe

posted by Jason Kilborn

Apparently, statistical agencies all over the world are finally releasing their 2008 bankruptcy data. The AOUSC released its CY 2008 report yesterday, and today, the German agency (DeStatis) released the report for December and CY 2008. As it usually does, DeStatis tried to paint a rosey picture--the headline is "7.1% fewer consumer bankruptcies in CY 2008." This seems to contrast quite nicely with the 31% rise in U.S. bankruptcy filings. But the DeStatis report reveals that business filings rose 13% from a year earlier, and non-business filings rose 12.3% in December 2008 over December 2007, nearly 13% for "pure" consumers (as opposed to former small-business people). The Q4 filings, especially December, show a rapid and troubling spike, and one suspects this will continue in force well into 2009. Hang on!

Consumer Insolvency Filing Pattern Variations

posted by Jason Kilborn

The latest figures for insolvency filings in Sweden are now out.  Somewhat contrary to Bob's observations on U.S. filing patterns in the last quarter of the year, Sweden saw a 21.5% increase in filings in Q4 2008 over Q3 (and a 21.7% increase in filings in Q4 2008 over Q4 2007). Total filings for 2008 were slightly down from 2007 (6528 in 2008, 6831 in 2007, in a country with about 9 million total residents), but 2007 was Sweden's equivalent (actually, opposite) of 2005 in the U.S.--a huge rush of filings occurred in Q1 2007 after the implementation of a reform to make the system simpler and more widely accessible.  The biggest difference between 2007 and 2008 was thus the rate at which the administrative structure made its way through the huge backlog of new cases. The number of orders opening insolvency proceedings rose steadily through 2007 and 2008 and then spiked over 63% from Q3 to Q4 of last year in what appears to have been a major push to clear out old filings. Luckily for Swedish debtors, while the successful admission rate has returned to its historical level of about 55% of filings, the filing rate per 1000 residents has spiked to around 0.75 since the 2007 reform, so nearly 70% more debtors are being successfully admitted to the system now in comparison to two years ago. Unfortunately, very little empirical data exists on the content of the relief granted to these people, but the 2007 amendents have made some form of relief much more widely available and substantially more predictable. This is a trend that has swept over Europe in recent years, quite the opposite of what we've seen here in the U.S. It's tought to make accurate and meaningful comparisons between Europe and the U.S. in these complex systems, but the contrast in direction of reform policy is striking.

The Father of Consumer Bankruptcy in Continental Europe?

posted by Jason Kilborn

I hope some kind CreditSlips reader can confirm (or at least not disprove) what I believe to be my recent exciting discovery. For nearly a decade, I've searched for the stone that caused the very first ripple that became the wave of consumer bankruptcy (i.e., discharge) laws across continental Europe in the 1980s and 1990s, and I think I've found it. Thanks to extraordinary help from Ulrik Rammeskow Bang-Pedersen at the University of Copenhagen, I've identified what I believe to be the first published suggestion that a continental European nation should adopt a specific regime of coercive debt reduction (discharge) for consumers. The comment appeared in a Danish law journal in January 1972, and it was written by a barrister named Frederik Bang Olsen (father of Peter Bang-Olsen, a current lawyer at what formerly was the Bang-Olsen firm, now Ret&RådAdvokater--thanks, Peter, for the background info!). One can clearly trace the development from this comment into a private law reform initiative and report that led to the adoption of the Danish debt adjustment act in May 1984 (the first consumer insolvency law in continental Europe--influenced, but not very powerfully, by the earlier laws in England and the United States).

I have found discussions of debt relief and discharge in other European countries beginning in the 1980s and later, but never anything as early as 1972. France adopted the second consumer debt relief law on the continent on December 31, 1989, but it contained no general discharge provision (yet), and I have not found any evidence that discussions of that law began before the early 1980s. This would explain my fascination (obsession?) with European consumer bankruptcy, as both it and I were born in 1972.

So, three cheers for the father of European consumer bankruptcy, Frederik Bang Olsen! What an amazing story of grass-roots initiative that finally moved past a centuries-old rule (pacta sunt servanda) and changed the world for the better for countless others to follow. Inspiring!

U.S. Banks Are Not Alone in Feeling the Pain

posted by Jason Kilborn

In yet another instance of "it's a small world," Royal Bank of Scotland yesterday posted the largest annual net loss in British banking history--£24 thousand million (US$34 billion). Like many U.S. megabanks, RBS (1) suffered from extreme investments in complex financial instruments, especially with its acquisiton of part of the Dutch bank ABN Amro, (2) lent heavily to consumers all over Europe in what I have heard are shoot-for-the-moon risk-fests similar to what we've seen from Citi and other U.S. consumer-heavy lenders, and (3) has already received a partial nationalizing investment (68%) and might be on its way to a full nationalization, all on the heels of impressive profits in 2007 (apparently, Citibank will likely remain only half-way nationalized). Notice that, while the U.S. discussion has focused nearly exclusively on the fallout from bad security investments (CMBS, CDS, CDO, etc.), RBS appears to suggest that significant losses will stem from "consumer loans." This makes me wonder how much pain from poor consumer lending (e.g., credit cards) big banks like Citi are managing to conceal behind the complexities of this financal crisis.

One line in the linked story particularly caught my eye: "The restructuring will leave the bank centered on Britain, with smaller, more focused global operations." This seems to be the approach du jour in many areas--abandoning wild-frontier global expansion and concentrating on familiar markets with more predictable risks (at least ostensibly more predictable). Is the world now no longer shrinking, but indeed expanding again?

Hat tip: Global Insolvency Daily News from ABI

New English Bankruptcy History Archive on SSRN

posted by Jason Kilborn

Actually, it's not really an archive per se, but the long list of collected works by John Paul Tribe, KPMG Lecturer in Restructuring at Kingston University (London) School of Law, is impressive enough to merit its own subject heading in a library collection (also, check out the intriguing ancient bankruptcy images at the Muir Hunter Museum of Bankruptcy, of which Prof. Tribe is the curator). Tribe's work was uploaded to SSRN in January and February, so many may not know of its existence yet--this is a resource not to be missed. Most of the work is historical, a great resource for those of us looking for citations (for academic or persuasive rhetorical purposes) on the earliest history and development of bankruptcy and insolvency in England, including its ever-famous death-penalty roots. Not all of the papers are downloadable (the one entitled Discharge in Bankruptcy: A Comparative Examination of Personal Insolvency Relief is particularly enticing to me, but the full-text paper is not available), but other attractive titles are free for the taking, such as A Definitive Bankruptcy and Related Subject Bibliography: From the Earliest Times to 1899 in Chronological Order and Bacon in Debt: The Insolvency Judgments of Francis, Lord Verulam. Check them out--and Prof. Tribe, if you're reading, please upload the missing papers and share the extraordinary wealth!

United Arab Meltdown & Bailout

posted by Jason Kilborn

It's often shocking how stories emerge from the other side of the globe that seem almost perfectly to echo the U.S. experience. Take, for example, this story, from the front page of the W$J today:

"The cash infusion from the [federal government] comes as [the country]'s once-soaring real-estate market comes crashing down. Falling prices, some down by 50% or more, have burned speculators who never intended to hold on to properties in the first place. Sales have plummeted, crimping cash flow for developers -- which are now scrambling to shed employees, cancel or postpone billions of dollars worth of projects and extend installment plans to avoid missed payments."

This story is not about real estate woes in California or Florida and a Washington bailout, it's about real estate in Dubai and a bailout from the federal capital of the United Arab Emirates, Abu Dhabi, in the form of a $10 billion bond purchase (i.e., a distressed loan!). I have found more than once in recent research that Middle Eastern governments have often resorted to bailouts in response to private sector distress, easing the pressure on the legal system to provide an effective bankruptcy-like remedy.

This latest round of crises (and a decline in oil prices) may well push the region more forcefully toward effective insolvency systems instead. Dubai adopted its own new insolvency law in 2004, modeled on British law. Perhaps due to the rising market and government proclivity for bailouts, the Dubai law saw its first winding-up hearing only in September 2007, and I have found no evidence of its use as of yet for a company voluntary arrangement. This may be on the horizon, though, as the largest Dubai developer recently sought Chapter 11 relief for its U.S. arm. The W$J article linked above mentions a surprising increase in debt collections actions in Dubai, which may well increase pressure for a collective and broad-based legislative mechanism for relief, perhaps even for individuals.

The farther away you go, the more things seem like home!

Financial Distress Has No Borders

posted by Jason Kilborn

The Swedish word designating a corporation is aktiebolag (lit., "stock company"), abbreviated "A/B." This A/B represents the last two letters in the name of one of Sweden's most beloved companies, Saab (Svenska Aeroplan A/B, Swedish Airplane Co.), which took a nose dive into bankruptcy by filing a request for reorganization today, which was approved by the Vänersborg district court in southwestern Sweden. Though the plan seems to be to consolidate company operations in Sweden, I strongly suspect that Saab has assets (and creditors) in a variety of countries, including the U.S. How will the Swedish bankrutpcy filing affect assets and creditors' efforts to grab those assets outside Sweden?

This kind of question involving the cross-border effects of bankruptcies by multinational businesses has become more common in recent years, and specific legislation and/or judicial practice has been evolving quickly in the area of international bankruptcy. As for the effect of the Swedish case in the U.S., for example, perhaps the only good news from the 2005 amendments to U.S. law was the inclusion of a new Chapter 15 on harmonizing the cross-border aspects of international bankruptcies. I wonder if we'll see a Chapter 15 petition in Detroit, New York, or Delaware for recognition of the Swedish restructuring in the next days and weeks.

For a fabulous illustration and discussion of how such applications are analyzed, the new opinion In re Betcorp. by Judge Bruce Markell in the Bankruptcy Court for the District of Nevada is a must-read. Judge Markell clearly and convincingly analyzes whether Betcorp's Australian winding-up proceeding is a "foreign proceeding" within the terms of Chapter 15, and more importantly whether the Australian case is a deference-worthy "main proceeding" because Australia is Betcorp's "center of main interests" or COMI. These questions and the answers will surely arise in the U.S. with increasing frequency in the years to come, especially in this era of worldwide financial distress.

Shameless plug alert! About a year ago, Judge Markell kindly invited me to join him and another major world expert, Bob Wessels of the University of Leiden in the Netherlands, in co-authoring a book on the past, present, and future of cooperation in international bankruptcy cases. The invitation was an incredible honor for me, and writing this book was an absolute joy--I must say, I believe we've produced quite an engaging and useful resource. Our editors at Oxford University Press tell us that they sent the book to press this week for expected delivery in mid- to late-March. The table of contents is available here, on Bob's weblog (which itself is an invaluable resource for cross-border insolvency issues). You can get a taste of the book early by reading this excerpt from Chapter 3, as well.  Enjoy!

Reorganization Is the Worst Option . . . Except For All Others

posted by Jason Kilborn

The tried and true criticisms of bankruptcy procedures that salvage jobs while forcing creditors to internalize losses are making the rounds again. People just don't understand. In England, in particular, the financial press is all over "pre-packs" that allegedly allow "debt dodgers to revel in return of the phoenix" as companies are sold in fast-track reorganization procedures. The problem with breathless criticisms of these procedures--now attracting legislative attention in Britain--is that they seem to be based on the false premise that the alternative would be superior. Ironically, Churchill's tongue-in-cheek appraisal of Democracy applies in like manner to the pre-pack procedure in particular, and reorganization generally.

I know I'm preaching to the choir in making this observation on CreditSlips, but I just don't understand how sophisticated financial reporters can miss the point so badly. The challenge repeated in the linked stories above is that the procedure for allowing troubled companies to be sold (often to private equity, often to investors already associated with the business) somehow allows the management of these businesses to evade personal responsibility and improperly externalize losses onto small businesses, in particular (the darling of all conservative, anti-bankruptcy rhetoricians). The "moral turpitude" bent of these criticisms is explicit, but morality must be based at least in part on reality, it seems to me. These stories seem to miss that (1) the sale proceeds must be distributed to creditors, unless I'm totally missing something with respect to U.K. and other pre-packaged reorg procedures, (2) since the middle of the 1800s, general corporation law has shielded management and shareholders from personal liability to creditors, bankruptcy or not, and (3) the result for small business creditors would be in probably every case worse without a pre-pack, since secured creditors and other large, institutional investors would eat up most of the value of the business in a bankruptcy distribution, especially since a piecemeal liquidation bankruptcy would tear apart the going concern value of the business--and European law often requires management to seek this liquidation bankruptcy as soon as it becomes clear that the company is insolvent! What is a "moral" manager supposed to do? Creditors are getting the value of the business (defined by a market sale mechanism, the result of new money, be it from old management or not), which is rather clearly enhanced by an honestly conducted pre-pack. If the challenge were that pre-packs were being administered improperly (by public authorities), that would be one thing, but the challenge seems to be, instead, that pre-packs are being used improperly, which totally misses the mark, it seems to me.

These commentators are not comparing apples to oranges, they're comparing apples to unicorns! Yes, the result for small business creditors in these cases may well be sour apples, but the alternative is not a magical ride on a unicorn--it's no apples at all.

U.S. No Longer "Most Liberal" Consumer Bankruptcy System?

posted by Jason Kilborn

Unlike Bob, I am not a statistics wizard, but like him, I like to follow consumer bankruptcy filing trends. Since 2005, I've been following these trends with an eye toward deciding where the U.S. stands among the "most liberal" consumer debt relief systems. Before the 1990s, only a handful of countries offered consumers any formal relief from debt, but since then, and especially in the past few years, consumers have flocked to a series of new and increasingly forgiving systems, especially in Europe.

Take, for example, France. The just-released 2008 filing figures for the French system of "consumer overindebtedness" (surendettement des particuliers) show that France passed an important landmark last year. In February 2004, the administrative commissions in charge of delivering relief to overburdened consumers in France started referring the most hopeless cases to a new track that is functionally equivalent to a U.S. Chapter 7--theoretical (but not practical) liquidation of valuable assets followed by immediate discharge. This new "procedure for personal re-establishment" (procédure de rétablissement personnel) got off to a slow start, with only about 11% of all fully administered cases in 2004 diverted to this more aggressive form of relief, but by 2008, that figure had almost doubled, surpassing the 20% mark for the first time (21% of the nearly 160,000 fully administered cases were diverted to the PRP last year).

Particularly disturbing for those who continue to insist that private ordering is the better approach, the percent of cases concluding with a consensual, creditor-accepted workout fell to 55% this past year, down from about 65% in 2006 and earlier years. Creditors, it seems, are increasingly happy to wait and see what the formal, coercive system brings, rather than agreeing to write down obviously uncollectible debts. This pattern has repeated itself in every major consumer debt relief system I've observed, and Nick Huls and Nadja Jungmann, in particular, have written some great stuff attempting to explain this phenomenon in the Netherlands (sorry--I couldn't find any internet examples for a link).

The ostensibly more rigorous European systems are offering relief to lots of people in exchange for no payment: about 80% of some 100,000 consumer insolvency cases in Germany, and about a third of some 2500 cases annually in Sweden, for example. With the corresponding figure rising in France annually, and especially in light of the headaches that the BAPCPA have caused in the U.S., it is no longer altogether clear that the U.S. offers the "most liberal" consumer debt relief today. More debts are nondischargeable in the U.S., and the budgets that the IRS guidelines allow are in many cases less "livable" than those offered by similar guidelines in Europe. This is a developing story, but we in the U.S. can no longer comfort ourselves after the latest round of backpeddling consumer bankruptcy reforms by saying "at least it's still easier to get relief here--look at those poor schmoes in Europe!"

Scandinavian Home Mortgage Lien Stripping

posted by Jason Kilborn

It seems increasingly likely that we'll see a reform of U.S. law to allow home mortgage loans to be stripped down (or crammed down, if you prefer) to the value of the home. I was surprised to learn recently that this issue had been debated in Scandinavia, and Nordic experience confirms that the factual predicate for such relief is present in the U.S. today.

In European consumer insolvency systems, secured debt is generally set entirely apart from the relief system. Debtors have two choices--pay secured debts as contracted (if, indeed, the debtor is allowed to make such payments within the confines of the plan for paying unsecured debts) or lose the collateral. When Danish reformers set out to amend their first-on-the-continent consumer insolvency system (adopted in 1984), the reform commission made what appeared to me to be a comparatively radical proposal--to allow the debtor to strip down home mortgage debt to the value of the home (as determined by court-appointed valuation experts). While Scandinavian reform commission proposals usually fly through government and then legislative approval, the mortgage stripping provision was removed immediately by the Justice Ministry from the bill that would become the Danish consumer bankruptcy reform of 2005 (yes, they had a 2005 reform, too!). Representatives of judges and lawyers supported the proposal, but finance and mortgage credit representatives strongly opposed it (surprise!), objecting that this measure failed to take sufficient account of lenders' interests and concentrated on them the risk of price deflation based on macro-economic forces beyond anyone's control. The Justice Ministry hesitated to embrace this proposal without a closer empirical examination of the problem (!), so the provision was removed in light of the fundamental position of secured creditors and the proper balance between debtors and creditors that lies at the base of the consumer insolvency system.

Oh, well, I thought--not surprising given that Nordic housing prices had not suffered the free-fall that we had expeienced in the U.S. Then I learned that Norway apparently has had a mortgage lien stripping provision in its consumer bankruptcy law for over a decade. This fascinating discussion among several Nordic lawyers notes the exceptional Norwegian provision and explains that it was adopted on the grounds of a dramatic fall in home prices in the early 1990s along with the fact that about 90% of Norwegian households own their own home. The Danish commentator observes that the corresponding figures in Denmark, especially for those who find themselves in the consumer insolvency system, are much smaller.

It seems to me that the U.S. is much more like Norway in this regard--we've suffered a dramatic decline in house prices, and a significant portion of households own their homes (I seem to recall that the Consumer Bankruptcy Project revealed that about 50% of consumer debtors in the U.S. bankruptcy system own their homes). The time appears ripe for the U.S. to reject the Danish bankers' position and join Norway in forcing a rational write-down of mortgage debt in bankruptcy. Even if it's not a U.S. innovation, it will be a welcome development.

Islamic Bankruptcy?

posted by Jason Kilborn

Thanks so much, Bob, for the extremely gracious introduction.  I wish my knowledge of bankruptcy law were as capacious as Bob suggests. I'm working hard to live up to Bob's description in the narrower realm of consumer debt relief, but for comparative business bankruptcy (in the broad sense, including reorganization), I turn to Philip Wood, whose work I recommend heartily to CreditSlips readers.

One area where even Wood finds his knowledge limited is in the treatment of financial distress in the Islamic world. That gap and the important task of filling it has really peaked my interest in recent months. As I mentioned at my primary blog home, I have spent some time recently with some great work on Islamic law, business, and finance. At the same time, I have begun slowly to make headway in the specific (and underexplored) area of debt relief. Where better to begin to look, I thought, than the font and principal steward of Islam today, Saudi Arabia. Much to my surprise, I found that even in light of the strict Islamic finance law prohibitions on interest (riba), even The Kingdom has acknolwedged a need for debt relief for small business people as an alterative to liquidation bankruptcy. Already in 1996, Royal Decree No. M/16 of 4/9/1416H introduced a system to encourage debtors to seek collective settlements with creditors through the intermediation of a special organ in the Jeddah Chamber of Commerce, the Bankruptcy-Avoidance Ombudsman (diwaan al-maDHalim). On paper (or so my Google translation of the Decree suggests), the process resembles a European-style "accord" process, where the debtor remains in possession, and dissenting creditors can have a majority-approved plan (even one including a discharge of debt) crammed down on them! My sense is that this radical innovation has not met with a warm reception, as creditors continue to rely on the powerful lever of imprisonment for debt, and even the adminstrative authorities have moved slowly to implement the new process. The Ministry of Trade and Industry put in place the regulatory framework only in 2004, with decree no. 12 of 14/7/1425H, and the first conciliation commission was nominated only in May 2007. The Jeddah Chamber of Commerce chariman explained that the new procedure represented official acknowledgement of the fact that financial distress in the modern world emanates not from laziness or stupidity by debtors, but from inevitable external risks associated with more intense global economic competition. This from one of the most tradition bound nations in the world!

The world of bankruptcy/insolvency is changing, and an eye for comparative developments makes that eminently clear. As the U.S. whittles away at the protections and effectiveness of bankruptcy/reorganization, much of the rest of the world embraces the advantages of such protections. I, for one, hope that a new U.S. administration and legislature will move U.S. law back to its rightful leadership position in this area.

Financial Summitry

posted by Anna Gelpern

The G-20 Summit to Save the World and Reinvent Finance produced a surprisingly meaty declaration and action plan.  At least one specific mention of bankruptcy: 

* National and regional authorities should review resolution regimes and bankruptcy laws in light of recent experience to ensure that they permit an orderly wind-down of large complex cross-border financial institutions. *

In general, the most interesting parts deal with regulatory reform.   

Continue reading "Financial Summitry" »

Contracts in Crisis: Variations in Z and S

posted by Anna Gelpern

Luigi Zingales of Chicago GSB put out a mortgage modification proposal about a month ago that got a bit of attention, but deserves more even if it has no political prayer.  It is one of a genre -- advocating across-the-board contract change in response to a macro shock -- that has at least two other prominent exponents, Randall Kroszner and Joseph Stiglitz.  I am noodling this literature for a U. Conn. symposium paper.

Zingales proposes legislation to allow homeowners to reduce the loan principal in line with the drop in home prices in their zip code from the time of purchase (as measured by Case-Shiller).  Creditors would get an equity kicker TBD.

Continue reading "Contracts in Crisis: Variations in Z and S" »

T.A.R.P. R.I.P.: Illiquency Watch

posted by Anna Gelpern

TARP's third incarnation as a consumer lending catalyst goes straight to my pet crisis peeve.  I am endlessly flummoxed at the authorities' insistence on throwing liquidity at a solvency problem -- with TARP I, AIG, and now, the consumers.

I have ranted elsewhere about the perils of drawing a sharp line between illiquidity and insolvency in a financial and macroeconomic crisis.  While the bankruptcy world has moved beyond the distinction in important ways, it still dominates the crisis policy response.

Continue reading "T.A.R.P. R.I.P.: Illiquency Watch" »

International Financial Architecture: Dumb Chills and Opportunities

posted by Anna Gelpern

I am grateful to Adam, Bob and Credit Slips for scheduling this guest stint on the eve of what is billed as the Grand Global Rethink of All Things Finance. This Saturday, November 15, the leaders of the Group of Twenty rich and developing economies will meet in Washington to talk about crisis and reform. Regrettably, the organizers’ absurd pretensions to the legacy of Bretton Woods have diverted public attention away from the substance of what is surely an important international effort at coordinating economic, financial and regulatory policy.

Why should legal academics and debtor-creditor folk care?

Continue reading "International Financial Architecture: Dumb Chills and Opportunities" »

Super-Priority for Canadian Workers

posted by John Pottow

After years of kerfuffle that at times made BAPCPA's debates seem easy, the Canadians finally passed their revisions to the Bankruptcy and Insolvency Act (and, for junkies, the CCAA) this summer.  Here's a link to the Superintendent's site for the curious to get started.

What I thought was one of the more interesting amendments was the elevation of priority for employee wages to super-priority above secured liens (up to cap of $2K per employee, and, interestingly, not on equipment liens).  There is also an unlimited super-priority for unpaid or unremitted pension obligations (but not for the traditional "underfunded" pension plan).  Finally, to add a good ol' socialist kicker, an administrative beast called the Wage Earner Protection Program will come into being to ensure, among other things, payment of workers'  claims and then enjoy subrogation to the bankruptcy claims (thus taking the risk of debtor-employer inability to pay the super-claim).

The interesting lobbying game is the lender lobby: yes, they've been rending some garments, begrudging the "unfairness" of not giving secured lenders their bargained-for rights through the danger of such an unexpected ex post lien (although, ironically, one law-firm communique I saw gave its lender-clients advice on how to prepare, including encouraging oversight of debtors to have competent payroll services that remit pension obligations -- which looks like signs of an adjusting market to me).  But they haven't wanted to make too big a stink ("No, we're against workers' priorities!").  The rearguard grumbling they've had is how it would have been better to have such employees covered by the general taxpayers.

Will secured credit dry up in Canada as we know it?  Seems to have done pretty well notwithstanding the insolvency horror of a priming lien down here.  I reckon it'll chug along just fine north of the border too.  We'll see!

What Would a Fannie/Freddie Conservatorship Look Like?

posted by Adam Levitin
[Updated 9.8.08. Since I wrote this post, federal law has changed, as a banking law practitioner was kind enough to point out to me. Section 1367 of the Housing and Economic Recovery Act of 2008, Pub. L. 110-289, which became law on July 30, 2008, changes the GSE conservatorship provisions to ones that very closely track the bank conservatorship provisions of the Federal Deposit Insurance Act. In light of these (very needed) changes, the concerns I expressed in the post are no longer an issue.]

One of the possible rescue options for Fannie Mae and Freddie Mac is a conservatorship.  But what would this look like?  The New York Times relates that "Officials said that [Treasury Secretary] Paulson wanted to convey the message that...a conservator would have to prepare a plan to restore the company to financial health, much like a company in Chapter 11 bankruptcy proceedings." 

That's the general idea, but the devil is very much in the details, as explained below the break.

Continue reading "What Would a Fannie/Freddie Conservatorship Look Like?" »

Quadruple Filers

posted by John Pottow

I thought in light of the recent long weekend (by which I mean Canada Day), readers with an interest in international matters might enjoy this article from some friends at a respected Canadian law firm on Mr. Thomas Bouvin, who found himself recently filing for his fourth bankruptcy.   Perhaps my homeland needs BAPCPA to settle out these abusive debtors?  After all, with a colorful anecdote like this, what further data would one need to justify legislative intervention?

Where Do All the Corporate Debtors Go During Reform Time?

posted by Mechele Dickerson

Dr. Terrence Halliday, a sociologist at the American Bar Foundation, shifted us back to corporate insolvencies. His paper, Missing Debtors: National Lawmaking and Global Norm-Making of Corporate Bankruptcy Regimes, discusses the systems that are created to regulate corporate debt and corporate debtors. He notes that some debtors who have a keen interest in corporate bankruptcy regimes are missing from the table when those regimes are being discussed at UNCITRAL meetings, in World Bank or IMF discussions. Why are they absent?

Continue reading "Where Do All the Corporate Debtors Go During Reform Time?" »

The Very Big Men Who Sort Out Debt

posted by Mechele Dickerson

During the last session this morning, Professor Stephen Lea (University of Exeter) provided a psychological perspective on debt in poor households in Britain. He initially listed the people he believes to be the cast of characters involved in debt. First, there are consumers, and their friends and families. On the creditor side, he made a distinction between business creditors (like utilities) and credit businesses (banks, debt collection agencies – whom he labels "the very big men who are left to sort out the mess"). Because of England’s long tradition of credit counseling, he also included credit counselors in the cast.

Continue reading "The Very Big Men Who Sort Out Debt" »

Online International Bankruptcy Course

posted by Bob Lawless

My friend, Professor David Epstein at Southern Methodist University, was telling me about an innovative course in International Bankruptcy. The course is offered at NYU, but through distance learning technology, law students at other schools can participate. I asked David if he would write up a few paragraphs about his experience with the course that I could share with Credit Slips readers. Here is what David wrote back.

I have often thought that students who are considering a transaction practice would benefit from a course in International Bankruptcy. The problem always has been that very few law schools have faculty members (or adjuncts) willing and/or prepared to teach such a course. I have been working with the American College of Bankruptcy (ACB) to address this need.

Continue reading "Online International Bankruptcy Course" »

Payment Cards Continue Global Growth

posted by Katie Porter

While Americans continue to lead the world in credit card spending, other forms of plastic payment such as debit cards continue to have an edge in other nations. Overall, Ronald Mann reports that global spending on credit and debit cards has quadrupled in the last ten years to $5.2 billion. In 2006, card spending represented 11 percent of global GDP. In a new piece for Foreign Policy, Mann provides a quick look at the available data on trends in plastic payment around the world, updating the findings on global card spending that he presents in his book, Charging Ahead. As additional encouragement to check it out, let me report that the Foreign Policy piece is loaded with really fun graphics; my favorite is the little figure carrying a huge credit card on his back in Atlas-like fashion.

Prof. Mann's piece reminded me of an interesting story on NPR's Marketplace a few months ago about the role of credit cards in China. Scott Tong reported that many younger Chinese consumers are eager to get a credit card; like their American counterparts on college campuses they like the T-shirts, toasters, or other freebies that are offered in return for signing up for a card. But the growth in actual card use remains slower than banks are used to seeing in American customers. While credit cards are increasingly a global phenomenon, there remain important differences in their use that reflect historical trends in payment systems, the cultural norms of consumers, and macroeconomic conditions.

Forget Credit Cards: Blame Hookers, Strippers, and Porn

posted by John Pottow

The UK Insolvency Helpline recently reported that a quarter of its users admitted to having paid money for sex/porn in getting into financial distress.  Here's a British article on the report here.  I'm just going to let that sink in on its own.  It does, however, make me wonder about the applicability of the adjective "sub-prime" in this context.

Treatment and the European Perspective: Why Don't We Ask Whether US Debtors in Bankruptcy Have Other Social Problems?

posted by Jean Braucher

European debt adjustment systems have built in an assumption that people with debt problems also have higher incidence of other social problems—substance abuse, family dysfunction, weak impulse control, and perhaps also mental health problems such as depression and anxiety.  Social work has long been part of their systems for addressing problems of debtors, before and after European countries adopted laws beginning in the late 1980s to give debtors a discharge, generally after completion of rather long repayment plans (to show rehabilitation into more moral ways of behaving, while living at a subsistence level).  The European view has been that other problems drive overindebtedness, which in turn makes those problems worse.

In the US, we don’t seem to be giving much attention to these questions.  Is anyone aware of studies of US debtors in bankruptcy to see if they have higher incidence of other social problems such as those listed above?   And have Europeans empirically studied their theory that deviance drives debt?

Continue reading "Treatment and the European Perspective: Why Don't We Ask Whether US Debtors in Bankruptcy Have Other Social Problems?" »

Credit Card Rewards Down Under

posted by Adam Levitin

The Sydney Morning Herald (Australia) was kind enough to feature my article about the social costs of credit card merchant restraints. (Sorry for the shameless self-plug...)

It's worth noting that when the Reserve Bank of Australia forced credit card networks to lower interchange rates and allow merchants to surcharge, the card networks had to cut back on their rewards programs (which are funded from merchant fees). That reduces the incentive to use cards simply for transacting, which means that fewer Australians are likely to end up paying interest and fees because of overestimating the likelihood that they'll make their card payments on time (because of everything from carelessness to changed financial circumstances).

Good Government (Under Threat) Down Under

posted by Jean Braucher

Australia has a bankruptcy system worth studying. Among other merits, it collects and publishes more facts about its system on line than any other.  http://www.itsa.gov.au/dir228/itsaweb.nsf/docindex/about+us-%3Epublications-%3Epublications?opendocument

Prior to 1996, Australia probably had the most sensible bankruptcy system in the world. Bankruptcy is simple enough there that people can file without paid professionals to help them. Rather than means testing that adds costs and thus bars destitute debtors at the threshold, Australia imposes a "surplus income" payment requirement on debtors who file in bankruptcy and have income above a relatively low threshold. Last year, just over 15 percent of Australian debtors had to pay something to get a discharge, while the rest of debtors weren’t burdened with a complicated "means test" to get into bankruptcy.

There is only one problem with this story; it was too good to be true. In 1996, Australia amended its law to create a "debt agreement" option. It sounded great; family members and neighbors would pitch in to help debtors negotiate with creditors to work out their debts and avoid the "stigma" of bankruptcy. But commercial debt administrators revved up operations to promote this option, and within a few years, they were charging hefty fees and getting a lot of poor people to use it. Well over half of those who proposed debt agreements failed either to get their proposals approved or to complete their plans. Sound familiar?

Continue reading "Good Government (Under Threat) Down Under" »

Buce Is the World

posted by Bob Lawless

Our correspondent, Buce over at Underbelly, wonders exactly how does one say "adjustable-rate mortgage" in Czech. Don't kid yourself that consumer indebtedness is uniquely American.

On a different note, Buce also describes the similarities he sees between today's mortgage crisis and the fraud fandango of the early 1970s. It's not that Buce was around to see that, but he's heard others talk of it. Buce's post is worth reading. It reminds us that the fundamentals of our problems are not new, just the same dynamic with with different labels. Everything old is new again, especially when we're talking about creative ways used to convince someone to part with his money.

Contributors

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • 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.

OTHER STUFF

Powered by TypePad