102 posts categorized "Economic Perspectives"

Oh, Just Stop!

posted by Stephen Lubben

Many have chided the financial press for the need to write entirely speculative articles about the prior day's market movements. But at least the financial press can be (somewhat) forgiven for their sins on the basis of tradition. What would the FT do with that big space on the back of the first section if it were otherwise?

But now the Washington crowd is getting in on the act and it must be stopped. The Hill's On the Money blog manages to commit two sins of casual empiricism within the first three paragraphs of their piece on the market's reaction to the President's jobs speech. First they say the markets "plummeted" in reaction to the speech, and then, conceding that there might have been other factors at work (say, maybe this), they conclude that "Obama’s speech had little countervailing effect."

So either they are doing a very sophisticated event study here, or they are just making stuff up. How precisely, do we know that the markets did not go down less than they would have without the speech?

Grrr.

Debating Madoff

posted by Stephen Lubben

Andrew Ross Sorkin and I debate the Madoff/Divorce/Paul Weiss thing in the comments to this post over at Dealbook.

BTW, I do agree with Andrew about the pro bono point that Felix Salmon brought up -- this is not really pro bono work, rather a benefit that all employees of big firms get (even the associates, to some degree:  for example, coop closing are done by "in house" people.). Of course, one might wonder how much family law experience the folks at Paul Weiss actually have . . . 

Understanding the Dollar

posted by Stephen Lubben

A very good discussion over at the Economist about why political (and water cooler) discussions of the USD are so often just wrong.

Perceptions of Income Inequality

posted by Bob Lawless

A friend alerted me to "Building a Better America -- One Wealth Quintile at a Time," an article by Michael Norton of the Harvard Business School and Dan Ariely of Duke University and that appears in the current issue of Perspectives on Psychological Science. Although a discussion of the paper kicked around in the blogosphere last fall, I missed it. Credit Slips readers might find the paper interesting but, if you're like me, might not otherwise see it. Here is the abstract:

Disagreements about the optimal level of wealth inequality underlie policy debates ranging from taxation to welfare. We attempt to insert the desires of “regular” Americans into these debates, by asking a nationally representative online panel to estimate the current distribution of wealth in the United States and to “build a better America” by constructing distributions with their ideal level of inequality. First, respondents dramatically underestimated the current level of wealth inequality. Second, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Most important from a policy perspective, we observed a surprising level of consensus: All demographic groups – even those not usually associated with wealth redistribution such as Republicans and the wealthy – desired a more equal distribution of wealth than the status quo.

A full version of the paper can be found on Professor Norton's web site.

Expanding Chapter 9

posted by Stephen Lubben

I wade into the "states in bankruptcy" debate over at Dealbook.

Modern Redlining in Historical Context

posted by Ethan Cohen-Cole

A paper that I wrote while an employee of the Federal Reserve System a couple years back documents the presence of ‘redlining’ in the issue of credit cards. Credit Slips picked it up here (link).

(To ensure there are no misunderstandings, this paper did not and does not represent the views of the Federal Reserve Bank of Boston or the Federal Reserve System; in fact, both entities did their utmost to prevent its release) ... continue…

To be more specific: I find that credit issuers use the racial composition of a neighborhood in determining how much credit to give to individuals that live in it. I use the term ‘redlining’ with historical reference: this idea is that particular areas have been identified as high risk. What I find is that the ‘high risk’ areas are highly correlated with the presence of minorities.

I’ll be clear, I cannot definitely prove that lenders use race—I’m an economist, not a lawyer! Regardless, I’ll present the point that the practice is still redlining even if lenders never use race, but use location-based information that is correlated with race.

Continue reading "Modern Redlining in Historical Context" »

Mad About Debt

posted by Alan White

Exit polls tell us that the economy was forefront in the minds of yesterday's voters, but also that the national debt was high on the list of concerns.  The deep personal anxiety about the national debt surely is not just civic worry about Uncle Sam's credit rating.  Americans are in some measure projecting their own debt anxieties onto the government.  While one in three voter's family has experienced a job loss, household debt is affecting nearly everyone.

Nearly four years into the crisis (formerly called the subprime mortgage crisis) we are still suffering a massive hangover from the debt binge of the last decade.  In ten years household debt exploded from five and a half trillion to nearly fourteen trillion dollars.  From the onset of the crisis in 2007 through June 2010 mortgage debt and all the rest (credit cards, student loans) has inched down painfully slowly.  It would take thirty years at the present rate to bring household debt back to something like its 2000 levels.  Folks seeking mortgage workouts, over a million of them, are paying an average of 80% of gross income for debt service.  Students are graduating college with six-figure debt.

Continue reading "Mad About Debt" »

Foreclosure Crisis Update

posted by Alan White

Screen shot 2010-09-03 at 4.03.35 PM New numbers are out for the second quarter from the Mortgage Bankers Association’s National Delinquency Survey and HOPE NOW.  After three years, the ramp-up phase of the foreclosure crisis seems to be ending, as the rate of mortgages in default or foreclosure has leveled off, albeit at historically unprecedented and appalling levels.  The bad news is that new (30- and 60-day) delinquencies are still high, although down just a bit from their early 2009 peak, so that the foreclosure pipeline will remain primed for many months to come.   Equally problematic are the huge numbers of very-overdue loans not yet in foreclosure, still at five times their normal level, and portending continued high foreclosure inventory and sale rates for the foreseeable future.

Continue reading "Foreclosure Crisis Update" »

End User Exemptions

posted by Stephen Lubben

I've been talking with Mike at Rortybomb about derivatives and bankruptcy, and the pending financial reform legislation. But being a professor, I of course have more to say about the ongoing debate about exempting certain "end users" of derivatives from the proposed rule that all derivative trades go through a central clearing process and trade on an exchange.

The key complaint that "end users" have is this new trading and clearing structure will require collateral to be posted to ensure the "out of the money" party's ability to perform on the deal.  For railroads, manufacturers, and others who use derivatives as hedges, this means that cash or other cash-like stuff will be parked somewhere, unavailable for use. And their ability to use derivatives will be limited by their ability to post collateral.

First, I'm beginning to wonder about how you define "end user," which is why I've been using the obnoxious quotes up to this point. A hedge fund is an end user of derivatives. Really anyone who has an unbalanced position in derivatives could be considered an end user. Congress has to be really careful on this slippery slope.

Second, if the "end users" of the world think that getting out of clearing and exchange trading gets them out of posting collateral, they might want to think about that some more. There is nothing in the new law that would prevent a big bank from demanding both mark to market and "additional" collateral in connection with an OTC trade. Indeed, since these banks are going to be under increased regulation, they may be required to get collateral from big customers. So if the end users get their exemption, what have they achieved? Exposure to the risk that the big bank will fail, taking their collateral with it.

The Financial Reform Legislation

posted by Stephen Lubben

Having been involved at the edges of the financial reform legislation for the past few weeks, a few observations to date:

  • Warren Buffett apparently supports derivative regulation, so long as it does not apply to him. "Me too" say Goldman, JP Morgan, Morgan Stanley, several dozen hedge funds, GM, Union Pacific, . . .:
  • ISDA and friends have a new argument for why derivatives should get special treatment under the Bankruptcy Code:  collateral.  "If regulators want everyone to use collateral to back up derivative trades, we need special treatment."  Why they can't be treated like every other secured creditor under the Code remains unexplained.
  • Another argument in favor of retaining special treatment, even made by those who work for the financial regulators, is that the move to central clearing requires special treatment. Unaddressed is the problem that many derivatives are still not centrally cleared, and won't be for a long time. And I worry that without the incentives that come from facing real bankruptcy risk, central clearing authorities will become little more than a kind of Central Services, routing paper (or electrons) between the relevant parties, and not performing the kind of counterparty risk assessment that clearing is supposed to bring.

Resolution Authority: Voting Rules

posted by Stephen Lubben

Presently both the new Financial Stability Oversight Counsel and the Federal Reserve Board must each vote to recommend action under the resolution authority, and each must do so by a 2/3 vote. More over, the Secretary then must decide if a petition actually will be filed.

This structure seems overly cumbersome, and essentially means that all three actors must agree before the resolution authority can be invoked. This might create problems in the future – for example, imagine a Secretary that objected to ever invoking the resolution authority.

Solution: Make the “and” into an “or” with regard to recommending action:  either the Counsel or the Board can recommend action by a 2/3 vote. And allow the two acting in unison to override the Secretary and file a petition with the Panel. The Secretary can have standing to object in front of the Panel.

Resolution Authority: Missing an Umpire

posted by Stephen Lubben

The current draft of the Dodd bill does not provide for a anyone comparable to the bankruptcy judge in a chapter 11 case. Instead, the proposed legislation allows parties to seek review of the receiver’s decision to allow or disallow a claim in the district court “for the district within which the principal place of business of the covered financial company is located (and such court shall have jurisdiction to hear such claim).”

First note that this means that case will start in Delaware with the Panel, but will likely end up in the Southern District of New York for claims resolution. Moreover, the court seems to be limited to hearing claims disputes – whereas it arguably might be better to have a general “referee” for all disputes. But most importantly, I doubt that the district court in the SDNY is the right place to resolve these matters. The SDNY district court is widely perceived to be slow in acting on bankruptcy appeals, and is often weighed down with a lengthy docket of criminal cases that understandably has priority on the judges’ time. Bankruptcy judges – particularly those that routinely handle large chapter 11 cases – are more accustomed to acting with the kind of speed that is required for these matters. Otherwise the FDIC will face the prospect of some district judge ruling against its treatment of a claim years after everyone thought the case was fully administered.

Solution: When picking the members of the Panel (see my last post), pick a fourth judge who will act as trial judge to resolve these issues.

Resolution Authority: The New Court

posted by Stephen Lubben

Under the Dodd bill, petitions to invoke the resolution authority are to be presented to a new Liquidation Authority Panel. Under section 202 of the bill, the Panel is to be comprised of three Delaware bankruptcy judges, selected by the Chief Judge. Presently there are seven bankruptcy judges in Delaware, including the Chief.

This seems like too small of a pool to select the judges from, and Wilmington seems like an unlikely place to hold the kind of secret hearings contemplated in this legislation. Moreover, most of the key governmental, legal, and financial actors in these matters are based in New York.

Solution:  Create a nationwide court, based in New York, utilizing the best bankruptcy judges from around the country. Having a bigger pool also provides a source for alternate members if a particular member is unavailable when the Panel is called. The Panel can share infrastructure with the SDNY bankruptcy court. Since the Panel’s role is essentially administrative, you might even consider having a non-judge on the Panel (e.g., a legal or finance academic). Finally, perhaps there should be annual education requirements for panel members so they stay up to date with the latest developments.

Resolution Authority: Safe Harbors

posted by Stephen Lubben

This is the first of a series of posts commenting on the resolution authority as it currently appears in the Dodd bill.

The present draft of the bill includes “safe harbors” that excuse derivatives from the normal operation of the resolution authority – with a vague suggestion that the safe harbors might be suspended for five days while the receiver tries to transfer assets to a buyer, although no indication if termination provisions can be enforced once the derivatives are in the hands of the buyer. And the draft does not address the safe harbors already in the Bankruptcy Code, even though the resolution authority contemplates that all but the largest institutions will proceed under the Code.

Every legal academic that has considered the “safe harbors” that excuse derivatives from the normal operation of the Bankruptcy Code has determined that these provisions increase systemic risk. In a recent paper I show how the intersection of derivatives and insolvency could be better addressed with narrowly targeted amendments to the Code, rather than safe harbors.

Safe harbors are typically justified in terms of systemic risk. The systemic risk argument for the safe harbors is based on the belief that the inability to close out a derivative position because of the automatic stay would cause a daisy chain of failure amongst financial institutions. The problem with this argument is that it fails to consider the risks created by the rush to close out positions and demand collateral from distressed firms. Not only does this contribute to the failure of an already weakened financial firm, by fostering a run on the firm, but it also has consequent effects on the markets generally, as parties rush to sell trades with the debtor and buy corresponding positions with new counterparties.

Solution:  Safe harbor provisions should be removed from the bill and from the Bankruptcy Code. These statutes can be slightly modified to account for the reality of derivatives in modern finance (e.g., allow “mark to market” collateral adjustments to continue until the derivative is assumed or rejected).

The President on Financial Reform

posted by Stephen Lubben

I had the honor of being invited to the President's speech on financial reform this morning at Cooper IMG_0717 Union. The speech was somewhat general, but that is probably to be expected when talking for a short time about a complex issue and a massive chunk of legislation.

(N.B.  I'm writing this up before looking at any of the press coverage so I can present my impressions "untainted" by the conventional wisdom.)

Two important points that I was glad to hear. First, he noted that resolution authority could be paid for ex ante or ex post, and people could legitimately disagree over which was better, but you needed to find a way to make sure the financial industry paid for its own resolution. I think this is right, and reflects the realistic options. I know some suggest we can simply put the big financial firms into bankruptcy without doing anything more, but if Paulson and Bush couldn't stomach that (after one attempt), I don't know who could. The broader consequences of that intellectually pure approach will never be politically palatable.

Second, he refused to demonize derivatives, which would have been the easy political move. He explained that there are legitimate uses for derivatives, but the real issue was bringing transparency to the market, so it would be clear to all if somebody like AIG went off the deep end in terms of counterparty risk and exposure.

The one thing I would have liked to have seen was some support for the safe harbor reforms now percolating through Congress, such as Senator Bill Nelson's proposal. This amendment is not perfect, and I've explained what I think works as a compromise position, but amendments of this sort are a big step in the right direction, and get the issue on the table.

Some Thoughts on Central Clearing

posted by Stephen Lubben

As the financial reform legislation moves forward, central clearing of derivatives has become a key topic of interest, along with the related, but distinct issue of exchange trading of derivatives. Central clearing refers to having a party that acts as the "hub" in derivatives transactions, so that a bilateral contract actually becomes two bilateral contracts, with the clearing agency in the center. This should generally increase transparency, including with regard to conterparty risk.

Most of the focus has been on the counterparties, and which sorts of counterparties should be required to transaction through a central clearing house. But I do worry that not enough focus is being placed on rules to govern the central clearing agency. As I have argued in some recent papers, the central clearing agency must have robust margin requirements for its members, as well as an ability to draw liquidity from at least the larger members in times of crisis. Otherwise the central clearing agency itself will become a "too big to fail" entity in need of a bailout.

I also continue to believe that repeal of the special treatment of derivatives in bankruptcy (and in the resolution authority, as proposed in the Dodd bill) is needed to give the central clearing party the appropriate incentives to monitor its exposure to counterparties.

On the issue of clearing itself, I think we need to take some of the uproar with a grain of salt. The big players -- banks, large hedge funds and the like -- are already moving toward clearing and posting collateral with third-parties. I suspect that sooner or later they are also going to figure out that they are much better off dealing with a single entity in the corporate chain, or at least entities that are all in a single jurisdiction, to avoid the problems seen in Lehman. Thus, putting all derivative trading into a single sub will make sense anyway.

Why then are some of these same parties so vocal in their opposition? Well, some of it surely has to do with the sale of derivatives to parties who might not be ready to take these steps, and a fear that these parties will simply reduce their derivatives purchases rather than take the steps to comply with the new rules. They might also replace more complex swaps with simpler contracts like futures. Neither is clearly bad or inefficient from a societal perspective, but you can understand why the banks might not like it.

That said, I'm going to challenge the conventional reformist wisdom by wondering aloud if its really necessary to centrally clear everything. Some flexibility might be good. Of course, there needs to be a cost to taking that option, since it could impose a cost on the rest of us -- most obviously, the collateral posting requirements could be substantially higher for trades that are not cleared. Perhaps a multiple of margin required for a cleared trade?

UPDATE:  Risk magazine has more.

Collateral and Derivatives

posted by Stephen Lubben

One of the arguments I've been seeing a lot of lately is that industry X needs an exemption from the financial reform legislation, because the new requirements that most swaps be collateralized -- that is, backed up with collateral to support the "out of the money" party's ability to perform -- would drain capital out of said industry.

But never mentioned is the simple fact that many of these industries did not transact under derivative agreements until after the 2005 amendments to the Bankruptcy Code massively expanded the safe harbors that exempt derivatives from key provisions of the Code. After 2005, many ordinary commodity supply agreements suddenly became swaps. Warehouse loans to mortgage originators suddenly became repo agreements. The economic terms of the deals were essentially the same as before, but now the agreements were exempt from the automatic stay and the normal rule that you can't terminate a contract simply because the other side is in bankruptcy.

So I suspect that many of these industries that claim that they would be hurt by having so much money tied up in posted collateral could easily avoid this fate by simply returning to normal, non-derivative contracts. But then they'd have to give up their special bankruptcy exemption . . . of course, they shouldn't have that in the first place.

The Rhetoric of "Ending" Too Big To Fail

posted by Stephen Lubben

From both right and left the theme of the recent days has been the need to end too big to fail. The left seems to think this can be done by breaking up financial institutions, the right thinks it will be done by simply throwing financial institutions into chapter 11, Lehman style. They're both wrong.

Breaking up financial institutions does very little to solve the real problem of too big to fail, which is really too interconnected to fail. The horizontal relationships between financial firms make them unlike other firms, and it really does not matter how big these firms are. So unless we are going to regress to some sort of Jeffersonian paradise without financial firms, breaking them up is at best an indirect solution to the problem. Remember that Long Term Capital Management was not actually that big, compared to the likes of Lehman or AIG. 

On the other hand,the idea that we should simply allow financial firms to liquidate sounds good if you consider the firm in isolation, but really bad once you remember the firm is part of a larger economic system. Moreover, the argument seems to ignore recent history -- if the past administration was not able to commit to such a strategy, is it realistic to expect any politician to simply stand by while the economy unwinds?

In short, a more realistic option is to give politicians a system that provides for a soft landing - that is, the system can't be too harsh, because even though a harsh system may make sense from a philosophical perspective, it will never be used. But we also need a system that avoids what happens in AIG -- shareholders remaining in place, while taxpayers took on the risk of not getting repaid. Shareholders and creditors have to lose their position -- and management face the consequences -- just as they would in any other corporate bankruptcy. 

For this reason, I'm not totally opposed to the Dodd bill.  I do think a chapter 11 model makes more sense than an FDIC model, but the $50 billion fund actually makes some sense. Yes it shows that we're not going to stiff arm the financial firms, which might create moral hazard, but I really don't think the stiff arm threat is credible anyway.  And at least the fund makes the industry pay for the cost of cleaning up its own mess -- although the $150 billion the House proposes is a much better number if we really want to make sure taxpayer funds are not used.

My ideal? A chapter 11 system, where the regulators can file an involuntary petition, no safe harbors for at least a period of time, so the firm can be sold or recapitalized, and use the $150 billion fund to provide short term DIP financing.  And have real regulation, of all aspects of financial firms, not just the insured bits, ex ante to avoid problems.

The Fed as Distressed Investor

posted by Stephen Lubben

Fascinating article over at Bloomberg detailing all the distressed assets that the Fed took onto its balance sheet during the financial crisis. Among other things, it appears that the Fed will be a beneficiary of the recent moves at Ambac, since ISDA has decided that the Wisconsin partial-bankruptcy triggered Ambac CDS. But the article also suggests the Fed is now exposed to the commercial real estate market, which one of our co-bloggers has been warning might be the next big problem area.

Ambac & the Safe Harbors

posted by Stephen Lubben

Ambac, the former municipal bond insurer who decided it would be fun to write CDS on mortgage backed securities, has entered into an interesting arrangement in Wisconsin, that has some implications for those of us who think the safe harbors for derivatives in the Bankruptcy Code should be repealed, and replaced with more narrowly tailored provisions.

As I understand it, Ambac's insurance subsidiary has created a "segregated account" comprised mainly of its CDS contracts on collateralized debt obligations. Next that account has been placed into a rehabilitation proceeding by the Wisconsin insurance regulator, who has asked the State court for an injunction to prohibit the CDS counterparties from exercising their rights to terminate, etc. under the ipso facto provisions in the contracts. The State's brief pointedly notes that Wisconsin insurance law, unlike the federal Bankruptcy Code, contains no safe harbors for derivatives and that it will be impossible to unwind Ambac's contracts in a considered manner if the ipso facto provisions are enforceable. (The thud you just heard was ISDA's amicus brief arriving at the Wisconsin court).

I obviously share the concern that safe harbors make it near impossible to conduct an orderly reorganization or liquidation of a counterparty, and often increase the disruption to the financial markets as everyone rushes to close out and reestablish positions. But I have some concerns about the Ambac approach. For example, what is the legal basis for the "segregated account"? If it's a separate legal entity, do the CDS counterparties have an argument that their contract has been novated (i.e., assigned) without their consent? That could be a problem. If the segregated account is not a separate entity, how do you put part of a company into rehabilitation and keep the creditors from going after the part this is "out"?

I know insurance insolvency is different from bankruptcy, but the more I think about this, the more questions I have.

Consumer Protection & Bank Soundness

posted by Stephen Lubben

To date I've left the issue of the "Consumer Financial Products Safety Commission," or whatever name it ultimately ends up with, to my co-bloggers, who are much more versed in matters consumer. But then today I read that Senator Shelby had this to say at the American Bankers Association:

Safety and soundness trumps everything," Shelby said to loud applause. "It trumps the consumer finance whatever."

Although the bankers apparently ate this up, they should really run from this argument as if it were the swine flu.The argument only makes sense if the nation's banks are so horribly undercapitalized that they depend on the extra margin they get from confusing their customers and getting them to make poor choices regarding their finances. Under the Senator's argument, banks need to conduct "unfair, deceptive, or abusive" advertising and write their documents in "unplain" English in order to maintain their soundness.

Wow.

This has to be his argument, otherwise the argument makes no sense. In every other respect, the new consumer protection agency should help bankers and their ilk by improving their reputation among consumers and protecting them from class-action lawsuits whenever they foul up. Wouldn't the latter increase their soundness in direct proportion to their decreased insurance premiums? How does consumer protection threaten bank soundness? Did toaster companies go out of business when the Consumer Product Safety Commission stopped letting them sell exploding toasters? I guess the ones who couldn't make it selling legitimate toasters did -- but the Senator can't really be saying that America's banking industry is like a shoddy toaster company, can he?

If the Senator (or, more realistically, a member of his staff) would like to explain what he really meant, I'm available -- feel free to contact me offline.

The Financial Stability Oversight Counsel

posted by Stephen Lubben

I want to pick up on yesterday's post by Bob and friend and expand upon it a bit. Under section 111 of Chairman Dodd's proposed bill, the new Financial Stability Oversight Counsel will be made up of

  • the Treasury Secretary, who would serve as chair
  • the Federal Reserve Chairman
  • the Comptroller of the Currency
  • the Director of the new Bureau of Consumer Financial Protection
  • the Chairman of the SEC
  • the Chairman of the FDIC
  • the Chairman of the CFTC
  • the Director of the Federal Housing Finance Agency
  • and an independent member, who must have an insurance background, and would serve a 6 year term

This is a banking heavy group. Especially given that all the key votes by the Counsel require a two-thirds majority.

Felix Salmon noted in a recent post that "[o]ne of the problems with giving lots of supervisory authority to the Fed is that the Fed is run by economists who care primarily about setting monetary policy, as opposed to being run by bankers who care primarily about bank regulation and systemic risk."

Although this is on track, to my mind it does not go far enough. And from my lawyer's perspective, the distinction between economists and bankers is kind of like the difference between policemen and constables. Treasury, the Fed, and the rest of the crew are stacked with economists, bankers, and lawyers focused on banking law.

But one of the obvious lessons of the past two years is that there really is no such think as a unique universe of "banking" or banking law in a world where GMAC and E-Trade are offering home loans, people in the Netherlands have passbook accounts in Reykjavik, and seemingly simple online banks have $26 billion derivatives portfolios (table 1, here).

Continue reading "The Financial Stability Oversight Counsel" »

Avoid Chapter 11 at All Cost!!!

posted by Stephen Lubben

One thing that I think we all agreed on in yesterday's panel on "too big to fail" was that many of the plans for a separate resolution authority are being driven toward a FDIC model by Treasury and the Fed, both are whom are more familiar with that approach, rarely talk to restructuring or chapter 11 people, and continue to have an unbridled fear of chapter 11.

More of that can be seen in yesterday's TARP COP report on GMAC, which really seems like the little sister to AIG. I believe both GMAC and AIG would have been better handled in a government-supported chapter 11 process, that would have provided a legal framework for driving a hard bargain with the firms' counterparties and showing shareholders and bondholders that failure has real consequences.

In Case You Didn't Feel Like Showing Up

posted by Stephen Lubben

I'm on a panel tomorrow at the Dow Jones Restructuring and Turnaround Summit about how the government should address "too big to fail" and the collapse of systemically important firms. For those of you who won't find yourself in lower Manhattan tomorrow, my current thinking on the subject is thus:

  • We need a common forum. Be it insurance company, broker-dealer, hedge fund, or bank the entire enterprise needs to be addressed in one place, at one time. Ideally this forum would encompass all the major financial jurisdictions (New York, London, Zurich, etc.) but for now I'd be willing to settle for a single forum for the U.S. part of the problem.
  • The mechanism needs to provide liquidity to the failed firm until resolution. And it needs to accommodate the possibility that the liquidity provider might be the government (either the Treasury or the Federal Reserve) or some quasi-governmental thing like the IMF. I note that chapter 11 already has such provision, including provisions for subordinating preexisting liens.
  • Regulators need to be able to institute proceedings, because if the failing firm is big enough sometimes nobody else will have the incentives to face the inevitable (see, General Motors, Lehman, etc.).
  • Moreover, we need to institute proceedings while the firm still has some working capital, instead of allowing management to drive until the tank is dry (see, Lehman, AIG, Morgan Stanley (almost), etc.).
  • Modeling the resolution system on the FDIC approach only makes sense if we think there should be similar goals -- namely, protecting customers of the failing firm from losses and reducing the costs to the government. The second one might be applicable, but I'm not sure about the first -- that sounds a lot like destroying incentives to monitor counterparty risk (or that "Moral Hazard" thing everyone was talking about in August 2008.).
  • I don't think it makes a lot of sense to "reinvent the wheel" and create an entirely distinct resolution authority that (hopefully) will only be used once or twice every twenty years.
  • Instead, why not use a modified chapter 11, that gives the failed firm a brief period (90 days at most) to reorganize, recapitalize, or sell the debtor? Locate the court in New York, but cherry pick the best judges from around the country to staff it. Or at least look to the SIPC proceedings, which bring in Bankruptcy Code provisions except where there is an express need to do it differently.
  • I keep hearing that the Bankruptcy Code won't work because the judge has to consider everyone's interests -- I'm not sure that the lack of transparency and due process has helped in the current situation -- shall we ask the WaMu shareholders and bondholders what they think? -- and the GM, Chrysler, and Lehman sale hearings show that speed, respect for the collateral effects of a case, and due process are not inconsistent.
  • Talking about too big to fail or derivatives markets reform without addressing the safe harbors, and their effect on systemic risk, leaves the job half-done, unless we really think no big financial firm will every fail again. In which case, why are we worrying about a resolution authority?
  • Overall, the traditional separation between bankruptcy and banking law collapses in a financial crisis. The financial system would be better off if these two disciplines talked more often, and definitely before the petition date.
  • While everyone (including me) is talking about too big to fail . . .

    posted by Stephen Lubben

    The small banks are dropping like flies.  At this rate the only banks left are all is going to be too big to fail.

    What? Sovereign Debt Edition

    posted by Stephen Lubben

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

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

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

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

    De-Detour: FCIC Economists' Forum

    posted by Anna Gelpern

    I spent most of Friday at the Financial Crisis Inquiry Commission forum, which we are hosting at the American University Washington College of Law.  I am going back on Saturday morning.  The forum is open to the public, the papers are posted, and the proceedings are webcast live.  At a minimum, this is a pretty high-end conference, featuring some of the top names in the crisology business:  Brunnermeier, Geanakoplos, Gorton, Gourinchas, Jaffee, Kashyap, Kroszner, Lusardi and Mayer.  The presentations are quite accessible, reflecting the FCIC’s public inquiry mission. If it is any indication, a goodly number of my students came, stayed awhile, and seemed to leave happy.  Even where the underlying material is not new, I have found the exchanges among the panelists and the commissioners well worth tuning in for. A rare mix of economics and civics.

    A Snow Day Diversion

    posted by Stephen Lubben

    My new Economist arrived today, cover story is The Data Deluge, And How to Handle It:  A 14-Page Special Report. Next week they'll have a cover story on irony.

    Sovereign CDS -- Random Thoughts

    posted by Stephen Lubben

    Lots of attention on Greece these days, but has anyone noticed that France's CDS has declined more on a percentage basis this year (from 32.05 to 53.40)? Even Germany has seen a bigger percentage decline (from 26.33 to 37.84). And Iceland has completely fallen off a cliff, closing today at 639.42. That's the fourth highest price for sovereign CDS, after only Argentina, Venezuela, and the Ukraine.

    Just saying, maybe we're a bit too focused on Greece . . .

    Meanwhile, it's been a bit since I've talked about California, but today its CDS was selling for 327, which means that the market currently thinks California is more likely to default than Lithuania (270.80) and somewhat less likely to default than . . . Greece (396.83).

    Meanwhile, US CDS is trading at 46.71, which puts us right between Germany and Switzerland (49.21), but we're all in a twitter about the federal budget deficit and debt burden.

    Notes:  all prices are for 5 year CDS and come from Bloomberg. CDS prices are in basis points, so that California's price suggests that one would have to pay 3.27% of the amount you want to buy protection against (or $3.27 for every $100 of protection).

    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." »

    A Special Bankruptcy Court

    posted by Stephen Lubben

    Lots of news today about a Congressional plan to create a special bankruptcy court for financial services firms. One question that jumps to mind:  who staffs the court?

    The most likely answer is that the court would draw from other bankruptcy courts -- there is some precedent for that sort of thing.

    Another, less likely, option would be to draw the court from a panel of bankruptcy professors. Presumably this would have to come with an obligation to stay current on the state of the art in finance, and the panel membership would have to be updated on a regular basis. Arguably even the worst bankruptcy judge would be better than Prof. Deadwood and his collection of war stories about the Bankruptcy Act and the Penn Central case.

    Not that there is anything wrong with a Penn Central fixation, of course.

    What's Your Point?

    posted by Stephen Lubben

    Over the past year there have many, many articles about the perils of our nation's debt load, and I've been largely context to see these dispatched by that other New Jersey professor.

    But now the WSJ has entered my territory, arguing in a recent personal finance column that the CDS market shows that US government debt is not as safe as many might think, because there is a positive price to be paid to protect against the risk of default. This argument represents a failure to do much hard thinking about what exactly a CDS contract written on US government debt represents.

    Continue reading "What's Your Point?" »

    Lehman & Barclays

    posted by Stephen Lubben

    Lehman has sued Barclays over the incredibly rushed sale of Lehman's key brokerage assets to Barclays a year ago. No doubt the financial industry crowd will use this to further promote their argument that chapter 11 does not work for large financial firms, thus supporting the need to reinvent the wheel create a new "resolution authority."

    This, of course, ignores the degree to which the financial community created the Lehman mess, by both undermining chapter 11 through the reckless expansion of the derivative safe harbors in 2005 and by the general refusal to work with the existing chapter 11 system both before (Bear Sterns) and after (AIG) Lehman. In the case of AIG, this also connects to today's story about the Fed's decision to pay top dollar to AIG's counterparties, whereas a credible threat to put AIG into chapter 11 might well have saved  billions of dollars. Of course, Treasury and the Fed were unable to make such a credible threat, given their generally dismissive relationship with chapter 11 and an extreme case of cold feet following Lehman.

    To be sure, Lehman's old management should get a good deal of the blame for calling bankruptcy counsel on the day they wanted to file. It strikes me as a breach of fiduciary duty to conduct no advance planning  for the largest chapter 11 case, ever. The trick, of course, is whether the estate can make the breach into a duty of loyalty claim, as duty of care claims are essentially useless as a result of Delaware's §102(b)(7).

    Congress to Outlaw Indiana Pension Funds

    posted by Stephen Lubben

    Not really, of course. But Felix Salmon does have an important new post about how, in the sovereign debt context, Congress is honestly considering preventing purchasers of distressed sovereign debt from collecting the full face amount of the debt. It is aimed at the "vulture funds" who buy distressed debt and then engage in aggressive collection tactics, often against countries that really have better uses for their money than defending lawsuits.

    This is the sovereign equivalent of the Indiana Funds, who bought their Chrysler claims at a mere fraction of face value and then proceeded to make a fuss in the chapter 11 case. Indeed, they continue to do so, as their petition for cert. is still pending before the Supreme Court.

    Vulture investors, foreign and domestic, can be a pain in the . . .  as we saw in the Chrysler case. But Congress' proposed legislation is a really bad idea. First of all, I don't know of you confine it to the sovereign debt context. They say they can do so, but is that going to pass with courts? Certainly if it applies to outstanding debt, there is a retroactivity/due process, takings, and perhaps even equal protection problem (why are some creditors subject to the act, but not others?).

    And does Congress really want to kill the distressed debt market? Does this mean that whenever bond debt trades at below face value it implicitly trades without enforcement rights? That will do wonders for the high-yield market.  How much will you pay me for my unenforceable Ford bonds?

    Paying transferred claims at full face value has been the law since at least Hamilton's first Report on Public Credit. I'd pause a bit before overruling a founding father, especially one who remains the one clearly good Treasury Secretary we've had.

    Chapter 11 & Financial Institutions

    posted by Stephen Lubben

    The FT has a good story today about "living wills," the idea that banks and other large financial institutions should provide a plan for the own wind-down in the event of a future financial crisis. The hope is that such a plan will necessitate simplification of corporate structures and provide the basis for an orderly, pre-described resolution of the firm's troubles.

    Although I have yet to see the discussion move this way, it seems to me that these living wills need to be designed in conjunction with a system for resolving an institution's financial distress. Be it chapter 11, chapter 11 modified, or a new chapter entirely, in the United States living wills should essentially plug directly into a pre-existing statutory structure.

    Continue reading "Chapter 11 & Financial Institutions" »

    Morning graph

    posted by Stephen Lubben

    Lehman From a new dataset of CDS prices I'm working with -- this suggests that even though the credit crisis began in the summer of 2007, the market didn't pick up on Lehman's problems until Spring 2008, and even then really didn't see a problem until a few weeks before the petition date. Aren't these things supposed to help with price discovery?

    I've got Morgan Stanley on the graph too for context -- Lehman's a bit more volatile, but not notably different.

    California

    posted by Stephen Lubben

    I just gave an interview with a reporter from Santiago, Chile on the situation in California. My assessment of the situation, which may be of interest to Credit Slips readers, follows:

    The key problem in California is that the state budget is comprised of many fixed expenses. Many of these were put in place by voter initiatives. That leaves a relatively small part of the budget (welfare programs and the Universities are two of the larger ones) that can be adjusted down when tax revenues fall, such as they have been, because people's incomes have fallen.

    So California faces a tough choice of radically cutting its budget -- which may have collateral economic consequences, for example, cutting welfare will dramatically cut spending by the poor -- or finding some other source of "plugging" the hole in its budget. One possible solution would be to borrow money from the federal government. The federal government might consider doing this if it believes that the austerity measures required to balance California's budget would have knock-on effects for the national economy. Given that California's economy is the biggest single part of the national economy -- California's GDP is comparable to France or Canada -- this would not be an unreasonable assumption.

    On the other hand, the politics are quite complex. The Republicans in California hold a blocking position (by virtue of rules that require a 2/3 majority in the legislature to pass a tax increase), and generally hope to use the present situation to achieve the kind of minimalist state government they have always desired. And the Obama Administration has to fear that Republicans in Washington, including some from California, will criticize any further government involvement in the economy, particularly involvement that increases the federal debt load.

    Thoughts? Did I miss anything?

    I'm Confused (California Edition)

    posted by Stephen Lubben

    On the day that California's credit rating has dropped through the floor, the FT has an article noting that traders are looking to buy the IOUs that California has been issuing to pay daily obligations, quoting one buyer who "would like" to purchase the IOUs for 50% of face.  But the same article goes on to note that key banks in California are accepting the IOUs as deposits -- so if I can sell my IOU to Wells Fargo for 100, why exactly would I sell it to the random trader in Ohio for 50? 

    Another example of the "float a wacky idea to get in the paper" phenomenon, I suspect. 

    UPDATE:  Or perhaps not.  The banks are apparently reconsidering.

    The Current Paradox

    posted by Stephen Lubben

    I'm spending the week at the INSOL conference in Vancouver. I think it is important for academics to interact with the "real world" on occasion, to make sure that one's scholarship does not become too ivory tower. And the INSOL events are especially good since they provide a chance to interact with the global insolvency community.

    But I have noticed that many of the panels could benefit from an "outside voice." In particular, during one panel I attended today two points were made:  (1) government intervention in the restructuring process increases uncertainty and makes life difficult for senior lenders in particular (lots of agreeing nods) and (2) because of "deleveraging," banks are essentially not making loans to distressed companies (more nods here).  Well, given point 2, either you are going to have government intervention or you are going to have corporate failure on a massive scale. Given the social dislocation associated with the latter option, politicians have strong incentives to embrace intervention (especially those in the majority, who will face the blame for said dislocation).

    A Further Thought on Securitization Regulation

    posted by Stephen Lubben

    As I noted in my earlier treatise post, the Administration has proposed requiring all originators to keep a stake in each asset securitization, to ensure that they have "skin in the game."  In particular, the Administration proposes requiring retention of a 5% stake, and would further mandate that the stake remain unhedged.

    The last bit troubles Felix Salmon, who seems to think that makes CFOs life difficult.  Perhaps, but should we care?  In particular, there clearly is some tension between this proposal and traditional risk management.  But at present, originators can use CDS to give themselves a zero or even negative stake in the outcome of the securitization.  In such a world -- and that's the world we'll return to if we simply restart the securitization market without change -- the downward spiral of asset quality I described in my prior post in essentially unstoppable.

    Sure investors will be "smart" now, and they won't buy low quality assets with the same mania, but individual investor moderation does only little to address the systemic issues that come from excessive securitization.  Only an unhedged originator stake can correctly align incentives.  I doubt 5% is a sufficiently large stake; but it's a start, indeed any number greater than zero is a move in the right direction.

    When Is a Market Too Big?

    posted by Stephen Lubben

    The emerging details of the Administration's securitization regulations have got me to thinking about an issue I first began to consider with regard to CDS. Namely, at what point do apparently useful tools allow a market to become "too big," in the sense that the market begins to generate systemic risks. And what can be done about it?

    In the case of CDS (credit default swaps, see here and here), the existence of CDS allows for a magnification of the underlying debt market in ways that may create systemic risks. For example, although I have generally argued that GM would have been better off filing for chapter 11 a few years ago, doing so would have have had the potential to result in several collateral failures of financial institutions, because of the massive amount of then-outstanding CDS in which GM was the "reference entity." Indeed, a simple downgrade of GM's rating during this period almost completely unhinged the CDS market. In this respect, GM's slow glide into bankruptcy court was actually helpful, in that it allowed the market to "burn off" a lot of outstanding CDS, which simply expired before the bankruptcy.

    Continue reading "When Is a Market Too Big?" »

    California and Default

    posted by Stephen Lubben

    As I noted previously, a default by California would have serious repercussions for the larger national and even global economy. Extreme budget cuts in California to avoid such a default could also have serious effects on the larger economy, given California is such a big part of the U.S. economy.

    Given this conundrum, the one obvious way out of the problem would be for the federal government to loan California the money it needs to balance it budget without radical program cuts. But I have previously noted that the Administration has political reasons to avoid getting further entangled in "bailouts," particularly when doing so will aid a Republican governor who is likely to have little ability to "call off" the members of his party in Congress.

    Thus, it is perhaps unsurprising that the Washington Post reports that the Administration has denied California's request for federal aid. But this bears watching, as I suspect -- baring a truly marvelous economic recovery -- the Administration will be forced to revisit this issue again.

    California is, after all, facing a $24 billion budget shortfall. It is going to be very hard for the State to close this gap without some serious effects on the broader economy. For example, the Governor has proposed ending the State's welfare program, all financial aid for college students, and its program that provides medical insurance to children of low-income parents. I'm sure my personal-bankruptcy savvy co-bloggers can anticipate what effects that might have on consumer spending, and bankruptcy rates, in California.

    Yet another reason not to pack up the stimulus program just yet.

    Oakland = GM?

    posted by Stephen Lubben

    Where have I heard this before:

    Oakland City Council members may have privately bandied about the possibility of the city filing for bankruptcy, an unusually rare event in U.S. history. But none says it's likely, and Mayor Ron Dellums virtually ruled it out Tuesday.

    "Bankruptcy is not a strategy that has been seriously considered, nor is it being pursued at this point," he said in a statement.

    Full story here.  At least the mayor qualifies his answer, unlike GM's prior management.

    California and the Argentine Option

    posted by Stephen Lubben

    As a person who still considers Los Angeles home, I often find myself reading the Los Angeles Times webpage.  Yesterday I saw that Los Angeles County's recent note offering got a lower than expected credit-rating, in part because of the State's financial problems.  A county official quoted in the article explained that S&P had based the rating on a "worst case scenario."  My initial response was, are they doing that now?

    Several people have asked me whether California might not follow GM into bankruptcy court.  The easy answer to that is "no," since states, unlike cities and counties, can't file under the federal Bankruptcy Code.

    But the financial press has also picked up on the issue and noted that California might be forced to default at some point this year if it becomes impossible to continually refinance its outstanding debt. In a recent Bloomberg column, Kevin Hassett breathlessly proclaims that "California leads nation to bond default abyss." He goes on to trace the problem to California's high corporate and personal income taxes, and then makes the entirely predictable argument that this shows that federal taxes should not be raised either.

    Of course this ignores the fact that California has high corporate and personal taxes because its property taxes are extremely low. Proposition 13 instituted a kind of rent control scheme for property taxes in the late 1970s that caps increases in property taxes save for when the property is sold.  In a state like California where property values increased much more rapidly than inflation over the past few decades, and the state population has been rapidly increasing, this provided a windfall to generally older, long-time homeowners, that the legislature made up by increases in other taxes.

    But what about the basic question of a California default. Could it happen? Certainly. It has happened before.

    Continue reading "California and the Argentine Option" »

    The Inefficient Capital Markets Hypothesis

    posted by Stephen Lubben

    The Efficient Capital Markets Hypothesis (sometimes just called the Efficient Markets Hypothesis) states that liquid markets quickly absorb information, so that it is essentially impossible for an average investor to make excess profits trading on public information. Share prices are thus the best indication of the value of a company, because they reflect the consensus view of all available information.

    If there ever was a market that might live up to the theory, you'd think it would be the New York Stock Exchange, especially with regard to trading in blue chip stocks like General Motors.  After all, this is a very big company traded on a very liquid market.

    Yet a few days ago I observed -- in the pages of the Wall Street Journal -- that GM shares appeared to be overpriced by a factor of 30. Did that effect share prices? Don't be silly. I'm just a bankruptcy professor; what do I know about chapter 11?

    And again there was a good deal of befuddlement today when GM's share price started going up after the announcement that the company had reached something of a truce with a large group of bondholders. The new announcement didn't change the reality that the shareholders will likely receive nothing in the GM chapter 11 case.

    How much would you pay for something that will have no value in a few months? As of the close of the market today, the surprising answer was apparently $1.12.

    By talking with my non-lawyer friends (all 2 of them), I've come to the conclusion that there are a variety of factors at work here. First, sophisticated investors are essentially unable to engage in significant shorting of GM shares right now because the cost of borrowing the shares is quite high. Second, some retail holders might be resistant to selling their shares if the commission on the sale will exceed the sale proceeds. Not an entirely rational, but plausible.

    In addition, trading by people who don't understand the Bankruptcy Code is probably all going in one direction (i.e., toward buying GM) -- the ECMH presumes that such noise is random and cancels out. There also may be some buying happening to close out whatever short positions do exist. All these factors could conspire to prop up GM's share price.

    On the other hand, shouldn't most investors -- especially retail investors -- be selling GM to lock in their tax losses?  If there ceases to be a market in GM stock, these shareholders might not be able to realize their loss until the conclusion of GM's chapter 11 case -- which could be a long time after the §363 sale. The present value of a tax loss today (or this year) is higher than the same tax loss two or three years from now.

    In short, the market in GM's stock is rather clearly not efficient.

    A Williams Act for Derivatives

    posted by Stephen Lubben

    One reason I’ve often thought that the benefits of moving credit derivatives to a central clearing house/exchange model have been oversold turns on the ability to move trades offshore. This is highlighted in an excellent article in today’s FT, in which a trader states that if the US and EU regulations become too DSCN2008 tough, trading will move to “Switzerland and Singapore.”

    Why not require disclosure of derivative-related information, regardless of the jurisdiction where the trading takes place? For example, the SEC could require all reporting companies to disclose (a) any counterparties who make up more than 5% of the reporting company’s derivative portfolio and (b) any reference entities or asset classes that are the subject of more than 5% of the company’s credit derivative portfolio.  Specific trading strategies and positions need not be disclosed; the foregoing information would be sufficient to gauge whether the company was engaged in appropriate risk management (i.e., making sure that it was not getting all of its credit protection from AIG).

    If the reporting obligation extended to the reporting company and all affiliates, such a rule could provide an important check on the “Switzerland and Singapore” strategy -- at least so long as the US and the EU have subtaintially deeper capital markets than either of those nice, but small, jurisdicitons.

    A Map that Is Cool, Useful, and Scary

    posted by Bob Lawless

    Slate has a put up a map that animates first job growth and then scary job losses from January 2007 to February 2009. It's worth a look, although the sea of red at the end might cause some sleepless nights. Very few data presentations are perfect, and I do have one quibble with this one. The map shows the absolute number of job losses such that higher populations areas appear to be doing worse. Thus, the eastern part of the United States appears to have been hit the hardest, although it is also the part of the country that is more densely populated relative to the rest. In the same vein, note that southern California and the San Francisco Bay area come across as the worst hit western regions, but these are two of the largest U.S. population centers.

    All in all, it's a great piece of data visualization. We've been hearing about job losses to the point where we're almost numb. This map brings those stories alive. Hat tip and thanks to my colleague, Andy Morriss, for pointing the way to this map.

    How to Start to Get Trillions in Lost Wealth Back

    posted by Christian E. Weller

    The fact that wealth is rapidly declining deserves public policy attention. Wealth serves critical functions in the U.S. economy that relies heavily on individual initiative. It is primarily an insurance against a range of economic risks. The more such insurance exists for the typical family, the less a family has to worry about their basic necessities and the more they can focus on longer-term economic growth. A family that has the basics covered can take more chances by sending their kids to college and letting them choose a degree that suits their abilities. Also, family members can more easily switch jobs to match their particular skills. And, a family with enough wealth is in a better position to let their creative side take hold and start a business. The entire economy wins from letting people gain more skills and apply those skills most effectively in their job or by starting a business.

    Recommending what the government should and should not do about rebuilding family wealth has become as ubiquitous as real estate ads in the mid-2000s and dot-com IPO discussions in the late 1990s. Here are just a few principles that will likely guide the reform debate.

    Continue reading "How to Start to Get Trillions in Lost Wealth Back" »

    Warning: Credit Card Practices Can Be Detrimental to Your (and Their) Health

    posted by Christian E. Weller

    Here is another example from the list of “things that we saw coming, but nobody cared.”  Credit card companies are suffering from record default rates. In the fourth quarter of 2008, credit card companies charged off – declared as uncollectible – a whopping 6.3 percent of their debt. Aside from a fluke spike in the data in the first quarter of 2002, this was the largest charge-off rate since the Federal Reserve began collecting these data in 1980.

    Interestingly, these record setting losses for credit card lenders come after the punitive changes to the bankruptcy code were supposed to weed out the “deadbeat” borrowers and lead to lower default rates. Apparently, things did not work out as planned.

    Continue reading "Warning: Credit Card Practices Can Be Detrimental to Your (and Their) Health" »

    Rebuilding the Retirement Dream

    posted by Christian E. Weller

    Ahh, retirement – so many possibilities, so little time! Turns out that for millions of Americans the dream of a secure retirement was just a dream. From 2007 to 2008, total retirement wealth in private and public sector pension plans and retirement savings plans dropped by $2.8 trillion (in 2008 dollars).

    Not all retirement plans are created equal, though. Data from the Fed show that holding gains and losses – changes in asset values minus contributions – relative to initial asset values tend to be higher for traditional pension plans than for retirement savings plans, such as 401(k) plans. Holding gains are typically used as an approximation of rates of return for these data.

    Continue reading "Rebuilding the Retirement Dream" »

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

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