Usury Laws Are Dead. Long Live the New Usury Law. The CFPB's Ability to Repay Mortgage Rule

[Updated 1.14.13] The CFPB has come out with its long awaited qualified mortgage (QM) rulemaking under Title XIV of the Dodd-Frank Act.  The QM rulemaking is by far the most important CFPB action to date and will play a crucial role in determining the shape of the US housing finance market going forward. The QM rulemaking also represents a return in a new guise of the traditional form of consumer credit regulation—usury—and a move away from the 20th century’s very mixed experiment with disclosure.

An Empirical Overview of Modern Sovereign Debt Litigation

In December, I attended a terrific conference examining historical parallels to the European debt crisis. I was there to talk about the early-20th century antecedents of modern collective action clauses, the magic contractual potion - or is it snake oil? - that will banish holdout litigants from the kingdom forever more. There were some really great papers, including this one (Sovereign Defaults in Court: The Rise of Creditor Litigation 1976-2010, by Julian Schumacher, Christoph Trebesch, and Henrik Enderlein), which may interest many Credit Slips readers.

One of my interests involves how changes in sovereign immunity law influence bond contracts, and I have written about that relationship here. Schumacher et al. address a related but quite distinct subject: the determinants of sovereign debt litigation. Why are some restructurings followed by a flood of lawsuits when others produce few or none? Are poorer countries more likely to be targeted? Does the size of the haircut matter? They have assembled a comprehensive dataset, which includes essentially all lawsuits filed in London and New York since the advent of the modern era of sovereign immunity (which they date to the 1976 enactment of the Foreign Sovereign Immunities Act in the US). My synopsis of their findings after the jump.

CFPB's Anti-Abuse Authority: A Promising Development in Substantive Consumer Protection

The Consumer Financial Protection Bureau is doing something promising with its anti-abuse authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  It is going after credit industry exploitation of consumers, particularly when business models involve using confusing terms that disclosure cannot adequately address.  See my paper on this topic. So I was not surprised to see George Will attacking this development.   We can't have smart, effective consumer protection, no matter how popular it might be.

In a column published in many newspapers this week,Will wrote: “The CFPB's mission is to prevent practices it is empowered to ‘declare’ are ‘unfair, deceptive, or abusive.’ Law is supposed to give people due notice of what is proscribed or prescribed, and developed law does so concerning ‘unfair’ and ‘deceptive’ practices. Not so, ‘abusive.’”

The flaws in Will's critique are legion. First, the CFPB has given lots of notice of what it is doing, in a detailed examination handbook.

Allied Bank revisited?

Last Friday was the filing deadline set by (a rather irked) Judge Griesa for Argentina and interested third parties in that country's long-running battle with NML and other restructuring holdouts. NML's reply brief is due today, but it has already made clear that it wants to be paid in full (roughly $1.4 billion) and that it expects the district court's injunction to bind a lot of third parties, including the trustee for the exchange bondholders. The genius of NML's strategy is that it has found a way to enforce its claims without having to find and seize Argentine assets. (Not that it's afraid to seize an asset or two.) If the strategy works and can be used in other cases, it will have major policy implications.

Readers familiar with the sovereign debt markets may remember the Allied Bank litigation - a trilogy of opinions that launched the modern era of holdout litigation. The parallels between the Allied Bank case and this one are striking, right down to the identity of the district judge.

Race and the Housing Bubble

While we wait to see if the second Obama administration will do anything new to help homeowners hit by the lingering mortgage crisis (finally replace Bush-holdover Ed DeMarco at FHFA to make way for debt relief?), there’s time to review a recent development that didn’t get the full attention it deserved.

I am referring to a lawsuit, Adkins v. Morgan Stanley, filed in the Southern District of New York in October by the ACLU. We don’t usually associate the ACLU with consumer protection in mortgage finance, and not surprisingly, it has brought a fresh perspective on the abuses that led to the housing bubble, highlighting race disparity in subprime originations.

Together with the National Consumer Law Center, the ACLU has brought a class action against Morgan Stanley charging that it financed a major subprime mortgage originator, dictated the nasty terms offered, and bought up a big portion of the resulting junk to feed its securitization maw.  The originator was New Century Mortgage Corp., which filed in bankruptcy in 2007.

The plaintiffs are African-American homeowners in Detroit who were sold New Century mortgages and who have ended up facing foreclosure. Also joining as a plaintiff is Michigan Legal Services, which has been swamped with mortgage cases in foreclosure ground zero, Detroit.

The legal theories used include the Fair Housing Act and the Equal Credit Opportunity Act, which are promising because these federal laws cover purchasing loans and also make disparate racial impact sufficient to make out a discrimination case. The 71-page complaint presents data that Detroit-area African-American customers of New Century were 70 percent more likely to end up in subprime loans than white borrowers with similar financial characteristics. The suit seeks a jury trial and disgorgement of ill-gotten gains, among other relief including appointment of a monitor (a good idea given the constancy of race discrimination in US housing finance practices).

Pesky holdouts, old-timey edition. (Or, more on why Argentina matters.)

"[T]he principal beneficiaries of the litigation were an unscrupulous body of commercial pirates, who had purchased ... bonds at a mere nominal price..."

When would you guess the litigation referenced in this quote took place? The sentiment sounds like something an Argentine finance official might have expressed in the last week or so. But the quote (p. 449) refers to buyers of distressed Bolivian bonds in the 1870s. Like modern holdouts, these old-timey "commercial pirates" recovered an amount disproportionate to their investment, and it didn't win them any friends.

In this post, I want to discuss the historic treatment  of holdouts in sovereign debt restructurings. In a (just posted) paper, Mitu Gulati and I review terms used in both sovereign bonds and sovereign debt restructuring proposals over the course of the 20th century. We're primarily interested in collective action clauses-which, as many readers know, are clauses that allow a majority of bondholders to approve a restructuring in a way that will bind dissenters. Indirectly, however, these historic practices also shed light on the pari passu clause at the center of the NML vs. Argentina litigation.

Crystal Ball Department: Bankruptcy Filings to Rise in a Few Years

Good times in the economy mean goods times a few years later for bankruptcy professionals who deal with consumer cases.  We saw this from the mid-1990s through the 2000s. The last big party in the bankruptcy world was in 2010 (1.5 million non-business cases filed!), a few years after the end of the last debt binge came to a crashing halt starting in 2007.  The reverse is also true.  Bad times in the economy make for fewer bankruptcy filings a few years later, which is what we have been seeing lately.

Those of us who blog on Credit Slips get frequent calls from reporters asking about bankruptcy filing statistics, specifically:  what do they mean?  Filings, which are mostly consumer filings, have gone down steadily for two years now, so it gets hard to come up with anything new to say, as Bob Lawless recently wrote here.

When filings go down, reporters new to the bankruptcy beat often think that means the economy must be getting better. Wrong. What drives bankruptcy filings is debt.  Decreases in debt are followed a few years later by decreases in bankruptcy, and increases in debt are followed by increases in bankruptcy.  The Great Recession that started in 2007 resulted in a great decline in household debt due to a combination of reduced access to credit and consumers voluntarily cutting back on debt-driven spending because of a lack of consumer confidence.

It’s so old hat to talk about the continuing decline in bankruptcy filings, produced by a long process of household deleveraging (meaning taking on less debt and instead paying off old debt), that I’m going out on a limb with a prediction. We may finally be seeing signs of a reversal in progress—consumer confidence going up, which should drive up debt volume, and presto chango, we’ll see more bankruptcy in a few years. Bankruptcy attorneys, take heart: recovery will mean a return to your good times, too, but a few years hence. 

In Defense of Bankruptcy Courts (or, Is Bankruptcy Really That Exceptional?)

Although not always acknowledged expressly, exceptionalism is pervasive in bankruptcy scholarship. Some work makes no attempt to contexualize bankruptcy within the federal courts, apparently assuming its unique qualities (for example, the disinterest in most bankruptcy venue scholarship about venue laws applicable to other multi-party federal litigation). But other projects are more deliberate in their exceptionalist pursuits.

Why No Prosecutions

The NYTimes had a very good editorial today bemoaning, with resignation, that there will not be any serious prosecutions of senior bank executives or institutions for the financial crisis.  The biggest fish to be caught was Lee Farkas. Who? That's the point. There have been prosecutions of some truly small fry fringe players and some settlements that are insignificant from institutional points of view (even $500 million, the SEC's record settlement with Goldman over Abacus was a yawn for Goldman), but that's it.  

The NYT editorial incorrectly states that the relevant statute of limitations have expired.  The usual statutes of limitations have or will shortly expire, but not those under FIRREA (for frauds that affect federally insured banks), which are 10-years long. So there is still theoretically the possibility of prosecutions (and remember that Mozilo's deal, for example, was with the SEC, not with the states...). But don't count on it happening.

My prediction is that when the history of the Obama Administration is written, there will be some positive things to say about it, but also two particular blots on its escutcheon.  First, the failure to act decisively to help homeowners avoid foreclosure, and second, the failure to hold anyone accountable for the financial crisis. These two failures are intimately tied, of course. Both are explained by the "Obama administration’s emphasis on protecting the banks from any perceived threat to their post-bailout recovery." 

The logic here is that financial stability and economic recovery are more important than rule of law. There's an argument to be made that law has to give way to basic economic needs.  I, however, would reject the choice as false. Instead, the best way to restore confidence in markets is to show that there is rule of law.  The best route to economic recovery was through rule of law, not away from it. (Yes, I realize there are those who would argue that the GM/Chrysler bankruptcies and cramdown aren't rule of law, but rule of law can include flexible systems like bankruptcy, rather than just rigid rules.)

The Administration, however, determined that it wasn't going to rock the boat via prosecutions, even though there is no person in the banking system who is so indispensible to economic stability as to merit immunity from prosecution, and as the experience of 2008-2009 shows, recapitalizing institutions isn't rocket science. In any case, the Administration's policy has produced the worst of all worlds, where we have neither justice nor economic recovery. This is our new stagflation. Call it injusticession.  

Everything You Always Wanted to Know About CDOs (But Were Afraid to Ask)

Bill Bratton and I have a new paper out, called A Transactional Genealogy of Scandal:  from Michael Milken to Enron to Goldman Sachs.  The paper is about the development of the collateralized debt obligation (CDO) and its incessant connection to financial scandal, from its origins in Michael Milken transactions through Enron (who knew that Chewco was basically a CDO?) and then of course Goldman Sachs' Abacus 2007-AC1 transaction.  

The paper is chock full of scandalous transactional detail (my personal favorite is how the Federal Home Loan Bank Board interpreted its 1% junk bond investment limit to mean 11%), but it also has a larger theoretical move: the CDO is a particular type of special purpose entity (SPE) that is often used for regulatory and accounting arbitrage purposes. SPEs are a new form of corporate alter ego. Whereas the traditional alter ego such as the subsidiary or affiliate has equity control, the SPE is nominally independent, but is in fact controlled by pre-set contractual instructions. As a result, SPEs like CDOs that are used in regulatory and accounting arbitrage transactions are particularly prone to scandal even over minor compliance violations whenever there is red ink in a deal because of the mismatch between corporate formalities (protesting separateness) and economic realities (the alter ego).  Accounting treatment has caught up with the SPE, but corporate law has not. Yet because accounting gets incorporated into securities law, in particular, transaction engineers need to be particularly cognizant that liability may track the economic realities, not just the legal formalities of transactions. 

Sovereign Debt

From the the second volumn of J.F. Molloy, Court Life Below Stairs (rev ed. 1885), regarding events after the death of George III's spouse, Queen Charlotte:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A 5% recovery is pretty bad, even by modern Greek standards, but maybe that's where things are headed. Of course, maybe the proper point of comparison is actually personal bankruptcy. But note the numbers -- £1,000 in 1818 (the year the Queen died) would be worth about £70,000 today; about £85,000 if we count from 1827, the date of the Duke of York's death. So the Duke's debts were ... large. Much larger that most personal bankruptcies today for sure.

Bankruptcy's Living History

The American College of Bankruptcy (ACB) in cooperation with the Biddle Law Library at the University of Pennsylvania has made available a great and often overlooked resource for scholars who prefer to study "law on the ground" instead of just the "law in the books." The National Bankruptcy Archives collects historical material regarding the development of bankruptcy, and three separate oral history projects make up a particularly interesting part of that material. These oral history projects come from Judge Randall J. Newsome, the National Conference of Bankruptcy Judges, and the Biddle Law Library's own oral histories related to bankruptcy.

On the web site, one can access transcripts of the interviews, audio recordings, and often videotapes (although more on the videotapes in a moment). Of course, the web site is open to anyone with an Internet connection who might have a professional interest or just a curiosity about bankruptcy and its history. And, who would not harbor such interests?

Whence Corporate Bankruptcy

A correspondent and I were discussing the changes wrought by the 1978 enactment of the current U.S. Bankruptcy Code. My correspondent noted that corporate bankruptcy became more salient after 1978 and linked this phenomenon to the 1978 law. My perception is the same: corporate bankruptcy became more salient after the 1978 enactment of the Bankruptcy Code, and my guess would be that many experts would have the same reaction. We all remember big cases like Johns-Manville, Drexel Burnham, most all of the airline cases (Pan-Am, Eastern, Braniff), and many others. These cases all tend to occur after 1978 suggesting that the 1978 law did lead to a boom in corporate bankruptcy filings. Then I wondered whether my perception was backed by empirical fact.

Do You Remember How Overdraft Protection, Overdraft Fees, and Free Checking Used To Work?

Calling everyone in the over-40 set to help me remember something. When dealing with those old-fashioned things called “checks,” how did your own overdraft protection used to work?  My recollection is that, back in the day, as long as a person had a certain level of creditworthiness, the bank used to cover your check in a discretionary manner. Then, as I recall, middle class people were encouraged to set up various protections to keep checks from bouncing, such as automatic transfers from savings or a line of credit to cover overdraft accounts.  Why don’t more people use these? Is it because they do not qualify? I keep hearing about $35 and even $39 overdraft fees, on both debit and check transactions, like in the New York Times blog today, and wondering who is paying them. Apparently lots of people, since the $38 billion in overdraft fees earned by lenders in 2009, is double what lenders made off these fees in 2000. Is this the ultimate example of banking for the “haves” versus the “have-nots?”

Recommended Reading

As I await the arrival of this semester's exams, and all the fun that those will entail, I'm getting caught up on my reading. The best of the bunch thus far is Emily Kaden's history of the Pitkin Affair, which appears at 84 Am. Bankr. L.J. 483 (2010), and online here. Having read a lot of bankruptcy history, I was generally familiar with the plot, but Emily presents the definitive history of the entire episode, which is so often referenced, but not explained, in latter histories of English and American bankruptcy.

A Conversation with Trailblazing Women

Yesterday, I attended the International Women's Insolvency and Restructuring Confederal (IWIRC) Annual Spring Program. The featured event was entitlted, "A Conversation with Trailblazing Women in the Insolvency Field." Moderated by the Hon. Marjorie Rendell of the 3rd Cir. Court of Appeals, the panel's participants incuded Norma Corio of JPMorgan Chase, Marcia Goldstein of Weil Gotshal & Manges, Hon. Barbara Houser, Chief Bankruptcy Judge, N.D. Texas, Hon. Mary Walrath, Bankruptcy Judge, District of Delaware, and Bettina Whyte of Alvarez and Marsal. The program opened with a parable. A man cuts himself shaving in the shower. He wonders out loud what is wrong with the razor. A woman cuts herself shaving in the shower. She wonders out loud what she did wrong. 

The Upside of High Fees

Some of the comments to Stephen Lubben's post on "overhead" raised the longstanding complaint about high fee awards in New York and Delaware Chapter 11 cases. We all know the academic and political condemnations of Chapter 11 as merely a feast for lawyers.

It's important to remember, though, that the possibility of higher attorney's fees was considered a feature, not a bug, when the Code was enacted in 1978. Or, more precisely, the liberalization of fee awards was intended to attract lawyers (the elite bar) who had largely shunned bankruptcy practice after the New Deal-era bankruptcy reforms. There's no doubt that the overall quality of representation in business bankruptcy cases has increased markedly since 1978, along with the cost of that representation. That's why I don't understand those critics whose objections really seem to be about the presence of large, sophisticated (and expensive) national law firms in Chapter 11 cases.  

Of course, high fee awards come out of the pockets of unsecured creditors, who don't have much say in hiring the attorneys. The system needs an outsider monitor to take account of that inherent principal-agent problem, and that's where the US Trustee plays a crucial role. But anyone who has practiced in New York knows that the US Trustee's Office has not always been predictable in its fee objections. The overhead argument is an example.

 

Anna Nicole Smith and Mass Torts in Bankruptcy

Stern v. Marshall presents another issue that deserves attention. In addition to the constitutional arguments, the respondent (the creditor) raised a statutory objection to the bankruptcy court's ability to hear and decide the debtor's counterclaim as a core proceeding. The judicial code (28 U.S.C. § 157(b)(2) and (b)(5)) limits the power of bankruptcy courts to adjudicate "personal injury tort and wrongful death claims" as core proceedings--provisions that come into play in mass tort bankruptcy cases.

I'd like to focus on why we have such a genuinely odd qualification of the jurisdiction of the bankruptcy courts.

Robosigning and Evidence

The robosigning issue brought to mind a Talmudic evidentiary rule that declares the testimony of certain types of people inadmissible:  

These are they who are ineligible (as witnesses): a dice-player, a usurer, pigeon-flyers, traffickers in Seventh Year produce, and slaves. This is the general rule; any evidence that a woman is not eligible to bring, these are not eligible to bring.  

Mishnah Rosh ha-Shanah 1:8.  

This is hardly the Federal Rules of Evidence, but I just thought it interesting.  

Modern Redlining in Historical Context

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.

Measures of TARP

The curtain drew on TARP to a flood of assessments, from Treasury's up to TARP COP's down, with the commentariat all along the spectrum in between, converging around about the "necessary-evil-begets-moral-hazard" meme.  But this New York Times graphic and the surrounding talk of taxpayer repayment left me wondering.  To be sure, it is always better to make money than to lose money.  And I suppose if a government program were an abject policy failure but made a killing for the Treasury, it would not feel quite as bad as a failure that cost an arm and a leg.  The Clinton Administration's package for Mexico in 1995 is often described as a success in key part because it was repaid in a year, and made a profit for the Treasury -- so much so that Paul O'Neil, George W. Bush's first Treasury Secretary, famously endorsed his Democratic predecessors' controversial bailout.  All this makes sense if the fiscal rescue works like the central bank's lender of last resort function, meant to overcome illiquidity with safe short-term loans at penalty rates.  As Steve Davidoff points out, TARP's overriding goal was rapid stabilization, in which case the big difference between TARP's containment strategy and the preceding Fed facilities is some mix of extreme fear and political exhaustion.  I suspect that this view of  what makes TARP successful lends itself to certain methods-- big loans to banks over little subsidies to households, which would take a long time to wind their way back to the Treasury.  Should "bailouts" make more of an effort to distribute and stimulate, even if it means more risk of near-term loss?  I wonder.  Would any political body ever do it?  I doubt it.  Bye, TARP.

Time Flies

To keep this debt thing in perspective ... Germany is about to pay the last of the debt it took on to finance World War I reparations.  This debt is mostly interest payments to private bondholders.  The reparations came out of the Treaty of Versailles in 1919, but Germany had no money, so it issued bonds in the private capital markets in the 1920s to fund its payments to the Allies.  The bonds defaulted in the 1930s (first crash, then Hitler, then it got really messy), but resumed principal payments under a 1953 agreement.  Interest payments were deferred until reunification, and resumed once the Berlin Wall fell, with the last one due this weekend.  Der Spiegel story here.  How poignant yet deeply screwed up all around. 

The Beginning of a Return to Consumer Protection?

Many years ago, in the mid 1970's, when I began my career as a legal services lawyer practicing consumer law, it seemed that we were on a roll. Congress and state legislatures were passing a bevy of laws to protect consumers (including the Bankruptcy Reform Act of 1978.)  The FTC was passing regulations and taking action against consumer scams. Innovative lawyers, often in legal services programs, were bringing class actions against a wide variety of illegal and unfair practices. These cases were received sympathetically by courts that, from a common sense perspective, could see that those practices took advantage of consumer ignorance or confusion.  Little did we know that we were at the peak of the consumer protection movement and it would be almost all downhill from there.

Pro-Consumer Innovations in Payments

Todd Zywicki wrote in a Wall Street Journal op-ed yesterday that "The most important pro-consumer innovation in payment systems of the past two decades has been the general disappearance of annual fees on most credit cards." 

Todd is right that consumers are happy to see annual fees go away, but the disappearance of annual fees wasn't a freebie for consumers.  It came about as part of a shift in the credit card business model whereby upfront fees were replaced with backend fees that have lesser salience to consumers when the consumers decide which cards to carry and use.  This was a move that was made to increase revenue for card issuers (or put another way, to siphon off more consumer surplus); it was not a charitable act.  The disappearance of annual fees is an important innovation, but I think it is a stretch to call it a pro-consumer innovation, when it is viewed contextually.  

The disappearance of annual fees was a step in the democratization of credit (or put another way, the decline in underwriting standards).  Whether this was a good thing is unclear.  It certainly increased consumer's borrowing ability and choices, and might have led to a substitution from secured installment credit to unsecured revolving credit.  But greater ability to borrow and more borrowing choices are not necessarily good.  They are only good to the extent that a consumer is capable of repaying the increased credit line and making informed choices among credit options.  Both of those are questionable for many consumers.  

In Todd's defense, though, I am hard pressed to think of another widespread innovation that would qualify unabashedly as pro-consumer, so maybe the disappearance of annual fees wins by default.  I would have placed the card associations' waiver of all consumer liability for unauthorized transactions (going beyond TILA) as the clear winner, but I don't know how far back this policy goes.  (Please pipe in if you do.)  

The difficulty in naming pro-consumer innovations is a sorry indictment of the payments industry, and one that says something about the nature of innovation and competition in payments.  Maybe others have thoughts about pro-consumer innovations.  Comments are open.  

Bankers, pawnbrokers, actors, jugglers, acrobats, quacks, and brothel keepers...in 16th Century Holland

It's pretty amazing how the status of some professions has changed over time.  I came across this astounding passage in Simon Schama's The Embarassment of Riches:  An Interpretation of Dutch Culture in the Golden Age (now you know what I read for fun): 

"Bankers were excluded from communion by an ordinance of 1581, joining a list of other shady occupations---pawnbrokers, actors, jugglers, acrobats, quacks, and brothel keepers---that were disqualified from receiving God's grace.  Their wives were permitted to join the Lord's Supper, but only on condition that they publicly declared their repugnance for their husband's profession!  Their families shared the taint and were only permitted to join communion after a public profession of distaste for dealing in money.  It was not until 1658 that the States of Holland [the representatives of the estates of nobles and commoners to the court of Holland] persuaded the church to withdraw this humiliating prohibition on "lombards."

That's a remarkable shunning of those in finance by a culture that was absolutely obsessed with material goods of every sort (tulips, satin, brocade, damasks, gold, silver, pearls, etc.).  There's a long history of religious discomfort with finance, but to see this in as commercial of an early modern culture as there was surprised me. 

Are You a Work Horse?

Two items of interest . . . .

First, from West's "headnote of the day" service on a case interpreting what it meant for a horse to a "work horse" within the meaning of an exemption statute. Given the holding, I wonder how many modern-day householders might fit the description! I, for one, vow never to be broken to gear.

To entitle a poor debtor to the benefit of the act which declares "one work horse," etc., shall be retained for the use of every family in this state "free and exempt from levy or sale by virtue of any execution or other legal process," it is not necessary to prove that the horse had been broken to gear, or used in harness; but it is enough if he performed the common drudgery of the homestead, either by hauling wood, drawing the plow, carrying the family to church, etc., under the saddle or in traces. And he need not have performed all these services. If he is intended to be used in any or all of them, or in others of a kindred character, he comes within the exemption. Noland v. Wickham, 9 Ala. 169 (1846).

The second item -- there is a headnote of the day service? Who knew?

By the way, I mainly wanted to post this for the benefit of our resident horse expert, Debb Thorne, who I am sure will chastise me for my cavalier attitude toward the comparisons between humans and horses.

Hat tip to Bob Hiller for pointing the way to this.

New English Bankruptcy History Archive on SSRN

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!

Contracts in Crisis: Variations in Z and S

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.

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

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.

Hands on Their Faces

Whenever there's a stock market crash, you can be sure that a bunch of newspapers are going to run cover photos of some broker with his hands on his face. There's probably an interesting history to this cultural meme. I always figured that there was just a few stock photos that got recycled crash after crash. And what was the story of the actual individual in the photo? Did he lose his shirt in the market? Or perhaps he was rubbing his eyes in disbelief that he'd just made a killing? Or maybe it was allergies?

Turns out that someone has gathered a collection of photos of brokers with hands on their faces. A little gallows photo humor here.

Some Curious Parallels with the 1930s

There are lots and lots of differences in the financial institutions situation of the Depression and today. And yet there are some remarkable parallels in the problems and government responses. We shouldn't overread parallels as predictive matters. But some of them are pretty astounding:

Regulation Cannot Depend on Irrational Markets

At this point, it is all too clear that financial markets can get things wrong. This is not an isolated phenomenon. No, getting it wrong tends to be the name of the game for financial markets. Understanding that financial markets regularly underestimate or overestimate the risks of investing is crucial to the proper design of financial market regulations.

Wealth Destruction by the Numbers

Financial markets went into free fall in late September and early October. The third quarter of 2008 continued the wealth destruction that took place in the previous nine months. This wealth decline is large, broad, and quick.

The primary reason for wealth building is retirement. Many families nearing retirement, though, relied primarily on their homes for their retirement income. According to the Federal Reserve, only 62.9% of families between the ages of 55 and 64, had a retirement account, such as a 401(k) or IRA, in 2004. The typical holding in such accounts was $83,000 in 2004 dollars. In comparison, 79.1% of such families owned their own house with a total typical value of $200,000. In other words, policymakers need to take a comprehensive view at restoring family wealth in an effort to strengthen retirement income security. Much of the policy attention has been on protecting housing wealth. Policy responses, though, need to match the problem, specifically by fostering a pension renaissance and by vastly improving existing retirement savings plans in addition to protecting housing wealth.

How Long is the Way Out of the Hole?

The stock market just ended its worst week in history. This has sharply eroded families' financial security. Under rather optimistic expectations it would take about six years before families can hope to achieve the same level of financial security as they had at the end of 2007, before the latest round in the financial market crisis took shape.

This is a Financial Crisis like Any Other – Treat it Like One

I wanted to thank Bob Lawless, Elizabeth Warren and Credit Slips to invite me back as guest blogger. It seems an appropriate time to discuss topics in two of my areas of expertise -- financial crises and retirement income security -- as they are directly related to the current financial turmoil.

The markets are crashing. This is a standard financial crisis, as many other countries experienced over the past twenty or so years. In a crisis four risks materialize: default risk, maturity risk, interest rate risk, and exchange rate risk. We are spared from the last one since the dollar dropped well before this crisis. The problem is that we are not adequately addressing the remaining risks.

Market Apropos Reading

As a way to searching for some historical frame of reference for the current financial crisis, I've eschewed LTCM, etc. and gone back to the granddaddy of modern market crises, 1929. To that end, I've been reading Maury Klein's Rainbow's End: The Crash of 1929. It's a cultural history of the 1920s that uses the stock market's rise in the 20s as a way to explore the development of a culture of consumption. Nonetheless, it has quite a bit of detail about the events of October 1929. There's a lot to be said about comparative financial crises---do they fall under the Anna Karenina rubric or not?

For now, though, two key points (not original to Klein) of how popular memory and actual events diverge: (1) the "Crash" was not a one-day event. It was a series of ups-and-downs that stretched out over a month, with some sighs of relief in between. (2) The relationship between the Crash and the Depression is uncertain and hotly debated--the Depression did not immediately follow the Crash; it only set in a half a year later and the causal mechanism, if any, is uncertain.

God Was the Poor Man’s Only Surety

The Conference opened with a talk on "Debt, Credit and Poverty in Early Modern England" presented by Dr. J. Craig Muldrew, a history professor from Cambridge (the one in England, not the one in the US).  (He used the term that is the title for this post.)

Though his paper related to Early Modern England, you'll notice striking similarities between what happened then, and what's going on now.  Indeed, Professor Edward Balleisen (a history professor at Duke) connected the dots between then, and now, in his response to Dr. Muldrew's paper.

The Future of Consumer Credit in the US

During these few posts we've been writing about aspects of consumer credit today in the US.  We'd like to close our week by inviting comments about the future of consumer credit.  How much indebtedness should we expect in the long term?  Will plastic be with us forever?  Will the terms of consumer credit improve (lower interest rates, more frequent flyer miles) or worsen (higher late fees, more invasive collections practices)?

We've had a blast blogging this week. Thanks!

Debt Slavery? Correlation of Slavery with Chapter 13 Filing Patterns

Looking at Bob's posting of chapter 7 and 13 filing rates, I couldn't help but notice the correlation between high chapter 13 filing rates and states in which slavery was legal until 1863 (the "South" broadly speaking). The 11 jurisdictions with the highest rate of chapter 13 filings (and all of those with over half the filings being 13s) were slave states. The top 9 (and but for Lincoln imposing martial law in Maryland, the top 11) states were all part of the Confederacy. With a few of exceptions, all former slave states were in the top 15.

What are we to make of this this correlation?

State Control of Pre-Modern Bankruptcy

At the end of my turn, I want to thank the Credit Slips bloggers for the opportunity to talk about some of my work and the readers for putting up with my long posts.

With my last post, I want to turn away from stories and air an issue about which I admit I am rather confused. I hear some modern bankruptcy scholars calling state control the defining characteristic of bankruptcy, and I am not sure what that means, or at least, I am not sure how to explain the way the state and the bankruptcy procedure intersected historically if state control is the defining characteristic. I will agree that from the first, bankruptcy has been a fundamentally statutory system. Not completely, mind you, because medieval northern Europe had a customary debt relief system that was something like bankruptcy, and some of the elements of what became modern bankruptcy were developed customarily in medieval northern Italy. Also, a great deal of English bankruptcy law was judge-created expansion and explanation of the statutes. But at its base, bankruptcy was built on statutes. Thus, even though for centuries the procedure was often run by the creditors, they operated in the shadow or under the compunction of the statutes, and more importantly under the threat of state-imposed punishment for not following the statutes. Given this caveat, I still think that indiscriminately labeling the various shades of state involvement “state control” is to homogenize what was a varied situation. By homogenizing under one descriptor, we lose a sense of important differences. What follows are a few very, very sketchy and selective observations about the public-private coexistence of bankruptcy procedure in several times and places. My question for readers is: what is the role of the state in bankruptcy procedure? Where is it vital and where is it, perhaps, optional?

Hanging Bankrupts

As previously promised, today's post is an overview of the history of the use of capital punishment for fraudulent bankruptcy in England.

The English instituted capital punishment for fraudulent bankrupts in 1707, but they were not the first to do so. In 1560, Charles IX of France legislated that “All bankrupts and those who failed (feront faillite) fraudulently are to be punished . . . capitally.” The royal ordinance of 1579 seems to have stepped back from the death penalty, but the punishment was reinstated in the royal edict of May 1609 on account of concerns that the multiplication of bankruptcies would lead to the ruin of commerce. Capital punishment remained the legal penalty for fraudulent bankrupts in the 1673 French national commercial code and until the time of the Revolution. In reality, the French courts often tried to avoid sentencing fraudulent bankrupts to death, but the law was not an empty threat. In 1602, two bankrupts were tortured and hanged. In 1637, a fraudulent bankrupt was tortured then condemned to be led around with a signboard around his neck reading, “Fraudulent Bankrupt,” prior to being strangled to death. But some judges preferred a more humane punishment. In 1673, for instance, a prominent bankrupt in Paris was sentenced to be led around by a rope around his neck, carrying a signboard advertising his crime, pilloried for three days, and then enslaved on a galley ship for nine years, and—to add insult to injury—made to pay court costs.

Perrott Bankruptcy, Part 3: Lord Mansfield, a Dead Prostitute, and Hidden Banknotes

This is the final installment of the Perrott bankruptcy story begun here and continued here.

Perrott was not pleased about being sent back to Newgate, so he turned to the courts.  In September 1760, he brought a writ of habeas corpus in King's Bench arguing that he should be released because he had answered the commissioners’ questions.  Lord Mansfield remanded Perrott to Newgate.  This case resulted in no published report, but Perrott's next two habeas attempts did.  In Rex v. Perrott, 2 Burrow's Reports 1122, heard on February 10, 1761, Perrott again argued that 1) he had already given a full answer to the commissioners’ questions; and 2) the commissioners' jurisdiction to question him, and therefore to commit him to prison, lasted only for the statutory 42 days that the bankrupt had to surrender himself and be examined.  Mansfield summarily dismissed point one, saying that Perrott’s answer to the commissioners was "very insufficient and unsatisfactory."  On question two, he pointed out that Perrott's counsel was reading the relevant statute (5 Geo 2 c. 30) selectively, for one section clearly permitted the commissioners to commit the bankrupt until he made a full answer. "The objection has been strongly argued," Mansfield said, "but there is no case to support it.  It is a new invention, and would entirely defeat the end and intention of the bankrupt-acts."

Finding himself still stuck in Newgate, Perrott agreed to submit to another examination by the commissioners.  This time he explained that about six years previously he had become acquainted with a certain Sarah Powel.  During 1759, he had lavished money upon her to the amount of 5000 £.  He provided an exact accounting of this money, each entry listing the month in which he sent Powel the money and the place to which he sent it.  Each entry was in round numbers:  100 £ at Christmas 1758, 500 £ in January 1759, 400 £ in February 1759, etc.  The commissioners were not persuaded.  First, Perrott could not provide any details about the money he spent on Powel during the first four years of their acquaintance, nor could he remember where she lived during those years, even though he claimed to have visited her often and to have written her.  Second, Perrott claimed that all of the money he sent to Powel came from his agent Henry Thompson.  None of it came from bank notes, and therefore none of it was traceable.  Unfortunately, Thompson had since died.  Conveniently, so had Powel, who had died penniless of consumption about ten months earlier (meaning that Perrott had known of her death when he gave his previous accounting on June 5, 1760).  In fact, Perrott could provide no evidence at all of giving enough money to Powel to keep her in luxury for many years.  On the contrary, the commissioners dug up evidence that Powel had complained to others of Perrott's parsimony.  To make matters worse, the commissioners discovered that Powel, aka Rachel Sims, was a prostitute and a drunk, or as a contemporary account put it, she was "in keeping, as the fashionable term is, by different persons, but was deserted at the time of Perrott’s meeting her.  She had contracted an habit of drinking, an habit not uncommon to ladies of her profession and disposition. . . ."

Perrott Bankruptcy, Part 2: Mysterious Packages and a Lot of Missing Money

(This is a continuation of my post from yesterday here )

In deposing Perrott's agent, Henry Thompson, the commissioners learned that the day after the commission was sued out, Perrott had his apprentice deliver a package to Thompson for safe keeping.  The package was sealed with three seals, and Perrott told Thompson it contained personal papers unrelated to the bankruptcy.  On February 27, Perrott asked Thompson to bring the package back to him, which he did.  An account of Perrott's case here adds the following alert, "it is necessary to advertise the reader, to keep in his memory the paper parcel sealed with three seals . . . as it was principally owing to the same paper parcel, that this complicated scene of iniquity was at last unraveled."  Perrott later told the commissioners that the package contained "'nothing but letters from the fair sex;' which he had since destroyed."

The commissioners also received a tip leading them to a certain Patrick Donnelley, a peruke, or wig, maker, who told them that on March 13, Perrott sent him two large boxes, claiming the boxes contained his clothing and asking Donnelley to hold onto them while he looked for lodging.  Several days later, Perrott instructed Donnelley to deliver the boxes to rooms in a house in one of the fanciest parts of town, on Queen Street in Holborn.  The house was occupied by a Mrs. Mary Anne Ferne.  Ferne was interviewed.  She claimed she had known Perrott for about a year but had received no money, banknotes, or other effects from him, and the matter was dropped.

When the commissioners finally got to examine Perrott again on April 19, they presented him with the following written interrogatory, "As you do admit that you have spent the last week . . . with Mr. Maynard, one of your assignees[,] to settle and adjust your accounts and to draw up a true state thereof, to enable you to close such your examination; and do likewise admit . . . there is a deficiency of the sum of 13,513 £ . . . .  Give a true and particular account; What is become of the same, and how, and in what manner you have applied and disposed thereof?"

Perrott Bankruptcy, Part 1: The bankruptcy Opens

Thank you to Bob Lawless for the far too generous introduction and to the Credit Slips bloggers for the opportunity to regale you with stories of bankruptcies past.  I know this a bit out of the usual stream of discussion on this blog, but I will try to keep things interesting. 

One of the things that strikes me about the history of bankruptcy (to say nothing of modern bankruptcy rhetoric) is the omnipresent ambivalence about the bankruptcy mechanism.  On the one hand, countries that developed bankruptcy laws did so because the elite perceived it to be good for commerce—pre-modern bankruptcy only being available to traders.  At the same time, though, people were offended by the notion that debtors could get away without honoring their commitments. 

This ambivalence comes out forcefully in the fear of “fraudulent bankruptcy.”  This concept meant different things in different countries.  French law, for instance, distinguished between those honorable debtors who were forced into insolvency (in French called faillite, or "failure") through circumstances not of their own making, and those dishonorable debtors whose irresponsible spending and borrowing habits caused their downfall.  The latter were called banqueroutiers, and were considered to have perpetrated a fraud on their creditors and were consequently subject to criminal prosecution. Seventeenth- and eighteenth-century England did not make a comparable distinction between types of bankruptcy.  Instead, one would commit the crime of fraudulent bankruptcy by failing to follow the requirements set out in the statutes, for instance by refusing fully to disclose assets.  In principle, the punishment for this crime was death by hanging.  In a later post, I will talk more generally about the use of capital punishment for fraudulent bankruptcy in England.  For sheer entertainment, I want to start with a multi-post account of the bankruptcy and eventual execution of John Perrott in London in 1761.  In 1819, this case was remembered by a parliamentary commission debating the abolition of capital punishment for bankruptcy as the most famous fraudulent bankruptcy of them all.