What Qualifies an Investment Banker to be a Regulator?

As the Antonio Weiss nomination contest heats up, I'd like to pose a question that seems to be taken for granted by Weiss's supporters, namely that he's obviously qualified for the job.  As far as I can tell, Weiss's chief qualifications are that (1) he's an investment banker and (2) he's a major Obama donor, who (3) professes Progressive sympathies. (It's awesome that he bankrolls the Paris Review, but surely that's not what qualifies him.)  

Weiss isn't Obama's only donor, and his Progressive bona fides seem to consist of co-authoring a Center for American Progress piece in favor of progressive (small p) taxation.  So really the case for Weiss's qualification comes down the the fact that he's an investment banker. His investment banking experience appears to be in mergers and acquisitions, and at an investment bank that does not have a depository.  Why on earth does that qualify him to be the Undersecretary for Domestic Finance?  

Another Tribute to Jean Braucher: On the Lighter Side

Bob’s post made me cry. Jean was an incredible scholar and colleague. She also had a fun, light side that I will forever cherish, and that I share here. 

I met Jean about 18 years ago through my mentor Bill Woodward (formerly of Temple University Law, now at Santa Clara Law), Jean and Bill were very close academic friends and he thought Jean and I would also hit it off.  He was right. From the very beginning, she helped me with everything from casebook selection to choosing (and negotiating) my job here. Not too long after I moved to New Mexico Law, Jean moved to the Arizona Law faculty. Bill used to ask me “do you ever see Jean out there?” as if we’d now run into each other regularly, since we lived just 7 hours apart by car. The west is a big place, for all your easterners out there, but actually, Bill was on to something. Whatever the reason, Jean herself became a mentor and close friend.

We organized a few conferences together, most recently at Washington and Lee in 2011 with Jim Hawkins (Houston law Center). Wherever we were, we always stayed up late, drinking and gossiping and just having fun. One year at Richard Alderman’s Conference in Houston, my husband said “that’s it, no more hanging out with Jean Braucher” (Mary Spector you were also implicated)

Tributes to Jean

Our friend and co-blogger, Jean Braucher, passed away a week ago today. Our first post here on Credit Slips had only a few paragraphs about her contributions to our professional community. There was a lot more to say about Jean.

Since that time, a number of comments have made their way into my inbox or were posted on to that original post. The comments have come from practicing attorneys, academics, judges, and journalists and from all over the United States as well as Europe, Australia, and South America. If you sent me a longer comment, I hope I have done justice to it below in excerpting it, and my apologies if I mistakenly omitted some. Here is what people wrote about Jean.

Jean Braucher, In Memoriam

It is with great sadness that I pass along the news that Jean Braucher passed away yesterday. Jean was my co-author, my co-blogger, and my friend. This news came suddenly this morning for all but her closest family and friends who were aware of her illness. 

The official record will show that Jean was a giant among bankruptcy and contracts scholars. Her work on local legal culture in bankruptcy courts is one of the standard references on the topic. As Dov Cohen and I were trying to understand the disparities we were seeing in our data among local bankruptcy courts, we turned to Jean. She joined our research team, and her understanding of the very fine detail of how the bankruptcy courts worked in action made the project's experimental materials a success. Jean also was widely known for her work on contracts law, being one of the authors of the seminal Contracts: Law in Action textbook.

That is the official record. I last saw Jean just in October at the symposium in honor of Bill Whitford where Jean presented her latest work. Bill exhorted us to study how the law actually worked and how it actually worked for the least-privileged in society. Jean lived that research ethos and spread it to others. She helped to nurture a small gathering at the Law & Society Association that has grown into a section of close to 100 household finance experts from around the globe. She was continuing to play a leadership role for that group while encouraging the next generation of scholars to become leaders in their own right.

Looking back at what I have written seems a paltry overview of the big footprint that Jean leaves in the  academic world. Her work touched so many others. Tomorrow I will give thanks that Jean was part of my professional life.

In the coming days, I hope to gather thoughts and remembrances of Jean into a longer blog post. If you knew or worked with Jean and have something to pass along, please email me.

Update (12/2/2014): A new post collects comments that were emailed to me. I have closed the comments on this post and encourage new comments to be left on the new post.

Some Bibles Are More Exemptable Than Others

I wonder how many Bankruptcy professors have posed a hypothetical about the exemption of a rare Bible worth lots of money? Well, a federal District Court in Illinois had to answer the question for real.

The Illinois personal property exemption statute includes the debtor's Bible. A debtor in Southern Illinois asserted this exemption in a rare, first-edition Mormon Bible that she had acquired (for free) from her local library. Apparently, the library director had not been paying attention, as the 1830 Bible was appraised at at least $10,000.

Amusingly, the debtor's lawyer described this item of property on Schedule B as "old Mormon bible," further observing that "debtor has been told that there is a 100% exemption for bibles but valuable bibles may or may not be covered under such exemption" (!). The trustee accepted this open invitation and objected that the statute was never intended to apply to a Bible of such value, and the bankruptcy court agreed. The District Court reversed.  Responding to the standard law professor questions, the court noted that the word "necessary" in the statute modified only the first word, "wearing apparel," not the other words ("one does not need a bible, school books, or family pictures to survive"), and unlike other property in the statute, bibles are not subject to an explicit value restriction. QED.

Sometimes life does imitate fiction.

Holy Bible image courtesy of Shutterstock

Rent Control in New York and Bankruptcy

Following up on my prior post, the New York Court of Appeals has ruled that a rent stabilized appartment is a public benefit, rather than an asset.

Detroit's Bankruptcy: The Conversation

Readers who have not otherwise received notice in the twittersphere may be interested in this commentary at The Conversation.

Are Some Banks Using Credit Reports to Help Collect Discharged Debts?

Last week, Adam pointed us to a NYT's story on "zombie debt" after bankruptcy. I did a bit more research into the story because I had a hard time understanding the problem from the article.

There are a few lawsuits that have been filed about this (I found ones against GE Capital/Synchrony, Bank of America/FIA Card Svcs, Citigroup, and Chase). The GE complaint alleges that the banks have a systematic practice of "selling and attempting to collect discharged debts and ... failing to update and correct credit information to credit reporting agencies to show that such debts are no longer due and owing because they have been discharged in bankruptcy." You can download the complaint in the GE case here.

More specifically, the allegations are that after a discharge, some creditors do not update their tradelines to a status of "in bankruptcy" and instead leave them as "charged-off." The credit report of a person in this situation would then say they have filed bankruptcy and obtained a discharge but you could not tell whether any individual debt has been discharged in that bankruptcy. The (non-binding) credit bureau reporting guidelines (METRO 2) specify that creditors should report accounts as "included in bankruptcy" once they receive a notice of discharge.

The complaint characterizes GE's argument as being that the FCRA does not require it to make this change, perhaps especially in particular after a debt has been sold and they no longer have an interest in it. (GE has not filed an answer yet, but it seems like this is one argument they might make from reading their other filings). That seems to me to be a wrong interpretation of the FCRA and the FTC's Furnisher Rule. It should also be a violation of the discharge injunction. As Judge Drain put it in an opinion denying a motion to compel arbitration:

One could argue that the reporting of a discharged debt as still outstanding when the credit report also shows that the debtor has been in bankruptcy is even a worse result, indicating to those who are considering providing credit in the future that the debtor has fallen into the category of the dishonest debtor who did not receive a discharge.

I am told that NPR's On Point will be doing a segment on this on Thursday at 10AM EST with one of the attorneys filing these cases. You can listen to the podcast here.

Note: post has been edited to correct the timing of the NPR program and to add the link to the podcast.

ICMA CACs, New York Edition - Vietnam! - and More Un-Boilerplate

Mexico's public offering with New York-style ICMA CACs is a huge deal. But it turns out that Vietnam's exempt offering on November 6, also under New York law, was there first. Since it is not a public offering, the disclosure document is not public, and the one press article describing it is behind a paywall. Here are a few bits that struck me as interesting about the three adoptions so far.

The Clause Formerly Known as Pari Passu:

Like Kazakhstan and Mexico, Vietnam fixes the pari passu clause to exclude the ratable payment interpretation. Funnily enough, the three seem to do it in slightly different ways:

Kazakhstan:

The Notes will at all times rank pari passu without preference among themselves and at least pari passu in right of payment, with all other unsecured External Indebtedness of the Issuer from time to time outstanding, provided, however, that the Issuer shall have no obligation to effect equal or rateable payment(s) at any time with respect to the Notes or any other External Indebtedness and, in particular, shall have no obligation to pay other External Indebtedness at the same time or as a condition of paying sums due on the Notes and vice versa.

Vietnam:

The Notes shall at all times rank without any preference among themselves and equally with all other present and future unsecured and unsubordinated External Indebtedness (subject to Condition 11 below [Negative Pledge]) provided, however, consistent with similar provisions in the Government’s other External Indebtedness, that this provision shall not be construed so as to oblige the Government to effect equal or rateable payment(s) at any time with respect to any such other External Indebtedness and, in particular, it shall not be construed so as to oblige the Government to pay other External Indebtedness at the same time or as a condition of paying sums due on the Notes and vice versa.

Mexico:

The debt securities rank and will rank without any preference among themselves and equally with all other unsubordinated public external indebtedness of Mexico. It is understood that this provision shall not be construed so as to require Mexico to make payments under the debt securities ratably with payments being made under any other public external indebtedness.

Majority Voting:

In substance, all three are the same as the ICMA model. They allow series-by-series, two-tier aggregated, and stock-wide aggregated votes at the option of the issuer--though they are drafted differently. Kazakhstan and Vietnam mostly use the ICMA language. Mexico is in line with its existing New York documentation, more pared down -- but really a matter of style. The voting thresholds are the same: 75% of outstanding for individual series and stock-wide votes, 66 2/3% of each series + 50% of stock for two-tier aggregated votes. In a stock-wide vote, the output must be uniformly applicable (same instrument or same menu for all).

Collective Representation and Majority Enforcement:

Kazakhstan and Vietnam have fiscal agency agreements; Mexico has a trust indenture. All three require a creditor vote of 25% to accelerate. Kazakhstan provides for a noteholder committee if bad things happen; Vietnam and Mexico do not. ICMA has recommended contract clauses on committees since 2004; some issuers in London have taken up the call, but virtually none in New York have. Note that you do not need a contract clause ex ante to form a committee ex post; in contrast, you cannot have majority voting, ranking, or trustees unless your contract provides for them in advance.

Probably No Strip-Offs After Supremes Rule

The headline for this post will be mysterious and perhaps slightly salacious in a general newsfeed, but bankruptcy experts will know it means the time is nigh in the 11th Circuit for lien strip-offs. The Supreme Court agreed to hear Bank of America v. Caulkett and Bank of America v. Toledo-Cardona, where the 11th Circuit allowed lien strip-offs of wholly underwater junior  mortgages in a chapter 7. The Supreme Court case of Dewsnup v. Timm would seem to hold otherwise, but the 11th Circuit ruled Dewsnup applied only to partially underwater mortgages. Hence, the 11th Circuit believe it was bound by its own pre-Dewsnup precedent allowing strip-offs for wholly underwater junior mortgages.

I like the 11th Circuit rule as a matter of policy, but I have to believe that as a matter of precedent, the Supreme Court is almost certain to reverse. I have to get back to work on some other things, but perhaps other Credit Slips bloggers might have more to say. Until then, SCOTUSBlog also has a summary.

Zombie Debt and the Metaphysics of Discharge

The NYT has a piece about credit reporting of so-called "zombie debt"--debt that has been discharged in bankruptcy.  Apparently the US Trustee Program is investigating various creditors in connection with this debt.

The reporting obscured a bit of very subtle bankruptcy metaphysics. The discharge of debt in bankruptcy does not void the debt. The debt is still owing. But it cannot be collected except if the debtor volunteers to repay it. The discharge is an injunction against the enforcement of the debt against the debtor as a personal liability. The discharge voids judgments on the debt, but not the debt (and it does not prevent the enforcement of liens).  In other words, the debt still exists post-discharge.  It just isn't enforceable.

That means that there is nothing per se inaccurate about the debt being reported to a credit reporting agency as owing, provided that the debt is also reported as discharged in bankruptcy. (Different story altogether under Fair Credit Reporting Act and Fair Debt Collection Practices Act if the discharge is not reported.)   

As far as I can glean from the reporting, the problem seems to be less the continued reporting of the debt than creditors saying that they will only cease reporting it as owing if the debt is paid.  Is that a violation of the discharge injunction?  I'm not sure.  It is fine for a private party to require payment as a condition of future dealings:  "pay up if you want to do another deal with me." But that's not quite this situation. The purpose of continuing to report a discharged debt is not to invite a condition of future dealings.  Instead, its purpose (other than if continued reporting were the default) would seem to be to extract payment, which would be an "act to collect, recover, or offset any such debt as a personal liability of the debtor."  It'll be interesting to see more about how this plays out. 

Sign of the Times: Tightening Mortgage Rules in Europe

Two stories in today's world news caught my attention because they were both related to rising consumer debt and tightening mortgage rules. 

First, Sweden is proposing a particularly aggressive approach to reducing the weight of mortgage debt on consumers' balance sheets. The new accelerated amortization rules really struck me from a comparative US perspective: Swedes borrowing more than 70% of the value of their homes would have to pay the loan down by 2% a year (that's 2% of the principal) until the LTV falls to 70%, then 1% of the principal of the loan each year until LTV reaches 50%, the desired level. Wow. In the 15 years that I've been wrestling with a variety of home mortgages, I don't think I've ever paid 2% of the principal (given the back-loaded amortization schedule of most standard US home mortgage loans). To make matters worse (better?), the Swedish central bank is also considering grabbing onto the third rail of US tax reform--reducing tax deductions for mortgage interest. These are pretty aggressive moves to cool off the mortgage market and bring down consumer leverage, and they stand in stark contrast to efforts in the US and the other country in today's news ...

ICMA CACs v. 2.0: Mexico Moves in New York

Mexico has just filed a registration statement with the SEC for New York-law bonds with a version of ICMA collective action clauses (CACs), cheered here just a few months ago, among other refinements. This is a big deal for three reasons: Mexico, New York, and the clauses. Bottom line -- a classy, confident move.

In 2003, Mexico led the market shift from unanimous consent to majority modification in New York. Once Mexico issued with CACs, everyone else followed. This time around, some expressed doubts that Kazakhstan, which adopted ICMA CACs in English-law bonds hot off the press in early October, could exert a comparable gravitational pull, especially in New York. As if to prove the point, a few Latin American issuers have issued in New York since Kazakhstan with revised pari passu clauses, but no new CACs. Mexico fixed both pari passu and CACs, and has a track record of bringing the market along.

New York is a big deal because all these contract reforms respond, at least in part, to U.S. court rulings, which (a) interpreted Argentina's pari passu clause as requiring ratable payment to holdout creditors, (b) said that CACs could cure the common cold, and (c) told market participants that they could avoid Argentina's fate by fixing their contracts. From this perspective, fixing English-law contracts is prudent; fixing New York-law contracts is imperative.

Mexico's refurbished contracts are notable in three ways.

1. The new bonds would be issued under an indenture, with its attendant collective enforcement provisions. Holdouts would have to get 25% of their series to instruct and indemnify the trustee before bringing a lawsuit for accelerated principal. Not very mavericky.
2. The pari passu clause has been stripped of all Latin, and disavows the ratable payment construction.
3. ICMA majority modification terms march on in substance, but in sparser (New Yorkier?) language. Modification of key terms can now happen 

(a) with a 75% vote of each series (as in the traditional English or post-2003 New York CACs),

(b) with a 2/3 vote of the aggregated bond stock or subset, *plus* a 50% vote of each modified series (as in Uruguay et al post 2003 and in the Euro area post 2013), or

(c) with a single 75% vote of the aggregated bond stock or subset. Here the outcome must be "uniformly applicable" -- ie, everyone gets the same instrument or the same menu.

 So -- if you are into sovereign debt contracts, this is your iPhone 6. Behold the un-boilerplate.

Detroit's Bankruptcy: End(s) and Means

On Friday November 7, 2014, Judge Rhodes confirmed the City of Detroit's plan of adjustment. As previously noted, this judicial act permits the release of debt and clears the way for the City to forge ahead, but the future of Detroit is in the hands of many others. Although a fuller written decision is expected, the court's oral ruling already hints strongly at new bankruptcy doctrine. Two examples: unfair discrimination and professional fees.

MetLife as a SIFI

Along with some thoughts about FSOC's designation of SIFIs in general, over at Dealb%k.

Prepaid Card Use on the Rise Among Unbanked and Underbanked

Last week, the FDIC released its 2013 National Survey of Unbanked and Underbanked Households. Some of the Survey's results were similar to the FDIC's 2009 and 2011 surveys. 7.7% of households were unbanked. Another 20% of households were underbanked. I took note of the Survey because its maps of unbanked and underbanked rates by state have been receiving some attention online. But what I think is more intriguing are the Survey's questions about prepaid cards.

General purpose reloadable prepaid cards, though still a small segment of the consumer financial
products market, have grown rapidly in past years -- from $28.6 billion in 2009 to close to $65 billion in 2012 (as previously discussed). Consistent with this growth in dollars, the Survey found that prepaid card use had increased among all households from 2009 to 2013 -- from 9.9% to 12%. More interestingly, the share of unbanked households that used prepaid cards had increased more dramatically -- from 12.2% in 2009 to 17.8% in 2011 to 27.1% in 2013. By comparison, 19.6% of underbanked households and 8.8% of fully banked households had used prepaid cards in 2013. When combined, unbanked and underbanked households comprised the majority (55%) of prepaid card users in the previous 12 months.

Local and State Treasurers Can Build Wealth in Struggling Communities

Sometimes you can beat the door down with efforts to get Federal and State officials to tackle problems, but at the end of the day, locals can best get the job done, quietly and quickly. A story in Monday’s New York Times bears this out.  For example, San Francisco City Treasure Jose Cisneros noticed that families who finally took advantage the of the earned income credit, the country’s largest public benefit program, often had no bank accounts in which to deposit their refunds. This meant losing a portion of this important public benefit to check cashers and others.

Because of this problem, Treasurer Cisneros started a program called Bank On, that helps people on the financial fringes open bank accounts and develop credit histories. This model has spread across the country, leading the Treasury Department to conclude that Bank On has “great potential” to “create a nationwide initiative that attends to the needs of underserved families and works to eradicate financial instability throughout the country.” In 2010, Mr. Cisneros also started Kindergarten to College, a program that automatically opened a bank account with $50 ($100 for low-income families) for every kindergartner in public schools. The city pays for the administration and initial deposits, while corporate, foundation and private donations provide matching money to encourage families to save more. His office even figured out how to open bank accounts for thousands of children without social security numbers.

These and similar effort have now been replicated in more than 100 cities, showing that even mundane public races might make a big difference in the health and well-being of citizens, if not the entire U.S. economy.