War on the Home Front | Mortgage Loan Investigations | Securitization Audits

88053Leave a Comment2012-05-21+13%3A30%3A39Stephen+Lubben

A few quick thoughts and suggested readings on Chase's ever expanding losses from the Whale Trade.

First, if you have not been reading Lisa Pollack's Alphaville posts on this topic you really must.

Next, Krugman makes the obvious but also vital point that "invisible hand" type arguments are really pointless in the specific context of financial institutions, especially giant financial institutions. It's a point I've made before with regard to resolution, and a reason why things like the fabulous Hoover people's Chapter 14 plan is totally unmoored from reality, but it also applies equally well to pre-distress regulation.

And finally Economics of Contempt has a good post on the Volcker Rule and the Chase situation. Most importantly, the post points out the nuances in the rule that are too often ignored.

That said, let me push back on that post a bit. The author suggests that the Chase trade might not have been permissible under the VR -- despite the hedging exception -- because to get that exception you also have to have a trade that satisfies several other criteria. In hindsight it is arguable that Chase did not meet several of these requirements. But that's in hindsight. How easy would it have been for Chase to argue that these boxes had been ticked if a regulator questioned them ex ante?

May

Bankruptcy Court Calls

By Melissa Jacoby | Securitization-MBS

87581Leave a CommentBankruptcy+Court+Calls2012-05-18+12%3A09%3A20Melissa+Jacoby

In connection with some ongoing research, I have noticed that U.S. bankruptcy courts have different approaches to informing the public about matters being taken up in open court. Many provide PDFs of court calls on their websites up to several weeks in advance (recognizing that matters settle, are postponed, or can change for other reasons). But on other bankruptcy court websites, it is difficult to find out what's happening on any given day. Might the informed readership of this blog offer reasons that courts refrain from making that information available on their websites? If you'd rather not comment directly on this post, feel free to write me privately at bankruptcyprof@gmail.com.

May

Article 9 and Bankruptcy Judges

By Melissa Jacoby | Securitization-MBS

87196Leave a CommentArticle+9+and+Bankruptcy+Judges2012-05-16+11%3A00%3A00Melissa+Jacoby

A prior post addressed a proposed amendment to Article 9's official comments stating that the date of an Article 9 filing relates back to the initial filing date even if the debtor did NOT authorize the filing at that time. This post returns to that topic for two reasons. First, although it is risky to generalize, I sense that bankruptcy judges may still be unaware of this proposed amendment. This is relevant because bankruptcy judges often are on the "front lines" of Article 9 interpretation. Second, I have heard, indirectly, that at least some people want this amendment to lend approval to some lenders' current practice to routinely file without authorization during the loan application process. In other words, the loan is likely to be given within a few days, so no harm no foul. Maybe I misheard or misunderstood?

Article 9 does contemplate and even endorses "pre-filing," (filing a financing statement before the loan is approved). Absent exceptions not relevant here, however, Article 9 expressly conditions a lender's authority to file a financing statement against a debtor on getting that debtor's authorization for the filing in an authenticated record - whether in an elaborate loan application or scrawled on a napkin. This may well be one of the clearest parts of Article 9. Whatever one's views of the merits, a comment cannot trump this statutory requirement that reserves to the debtor some control over the clouding of title to his/her/its property.

As suggested by one of the commentators in response to my last post, eliminating debtor signatures from financing statements sure did open a can of worms. Moving to medium neutrality is one thing. Rendering debtor authorization optional is something different entirely.

May

Storage Wars and the Credit Practices Rule

87034Leave a Comment2012-05-15+15%3A59%3A51Bob+Lawless

A few times I have caught Storage Wars, a television show on A&E. When storage units customers do not pay their fees, the contents are auctioned off by the storage unit company. The show follows professional treasure hunters who bid at these auctions. The catch is that the treasure hunters are purchasing the unit without full knowledge of the unit's contents. With all the drama of finding out what was behind door number three on Let's Make a Deal, viewers get to watch these treasure hunters paw through the storage unit's contents and try to profit by finding items of real value. Every now and then, an item of tremendous value might be uncovered. A few days ago, I started wondering how this was legal.

The law of every state apparently gives the storage unit operator a lien against any property stored in the unit and allows the storage unit operator to auction off this property to recover unpaid bills. These laws are a great deal for the storage unit operator but not such a great deal for the customer. The auctions often must include items of little value to the storage unit operator but of great sentimental value or replacement value to the customer.

There is already a regulation that is supposed to police these sorts of situations, and as a federal regulation, it would control over any contrary state law. Specifically, the Federal Trade Commission (FTC) created a rule that bans the taking of a nonpossessory, non-purchase money security interest in household goods. A purchase money security interest (or "PMSI" as lawyers call it) is one where the loan enabled the borrower to purchase the collateral used for the loan. Common examples would be a car loan or a home mortgage loan. A non-PMSI is everything else. The FTC adopted the regulation in 1984 to put an end to predatory lending practices where consumer lenders would routinely repossess household items of little value just to put pressure on the consumer to repay. The regulation now falls under the jurisdiction of the new Consumer Financial Protection Bureau (CFPB).

Still, the application of the existing rule to storage unit liens is far from a slam dunk. First, it would only apply to the extent the items in the storage unit are "household goods." Many items in storage units, of course, would meet that definition but many others would not. The most difficult legal issue is whether the rule applies at all to storage unit operators. By its own terms, the rule applies to "lenders" and "retail installment sellers." Storage unit operators might be selling services on a "deferred payment basis," which is the way the regulation defines a "retail installment seller." Even if the storage unit fee is nominally payable in advance, the customer can still access the unit if payment is made later and thus could be seen to be paying on a "deferred" basis. But, it all depends on what the rule means by "deferred."

One might also question whether the storage unit operator's security interest is possessory and thus outside the federal rule. After all, the goods are physically located on the storage unit operator's premises, but location of the goods would not be dispositive. When a friend parks his new Porsche in my driveway during a visit, it cannot be said I am in possession of the Porsche simply because it is parked on my driveway. (If I am wrong about that, let me know as I would like to take it for a spin.) Possession requires something more than location. Importantly, many of the same statutes that create the liens for the storage unit operator also specify that any items in the storage unit remain in the custody and control of the customer. And, I would bet that many--or maybe all--of the form contracts used in the industry contain similar language to try to protect the storage unit operator for liability for damage to stored items. If the items are in the custody and control of the customer, it is hard to see them as being in the possession of the storage unit operator.

A friend said that he did not think the federal rule would apply to a statutory lien like the storage unit liens, but why not? A state could not simply adopt a law that circumvented the federal rule by saying the activity prohibited by the feds is now deemed to be a statutory lien. Why should the storage unit liens be any different? Moreover, the rule is broad and applies to any direct or indirect taking of a security interest. Of course, the rule does not necessarily invalidate the lien -- it just makes the taking of a lien an unfair trade practice.

All things considered, the storage unit industry probably does not have a lot to fear from the federal rule. It would take an unusual case to raise the issue. In most of these situations, the dollar values are too low to make it worthwhile to make a federal case out of it (literally), and even then it is not clear what the standing would be of a single customer. The industry certainly does not seem to expect its activities fall under the ambit of the federal rule, and I am not a big fan of using the courts to suddenly upset settled commercial expectations. Still, the auctioning of items in the storage unit may be the same raise the same sort of problems the FTC meant to address in its original rulemaking. As the CFPB contemplates the future of the credit practices rule, perhaps its application to storage unit liens should be considered, and the CFPB can create a more level playing field for storage unit customers.

A different question is what the bankruptcy laws have to say about these storage unit liens. If I have the time in the next couple of days, I may follow up on those points.

May

Storage Wars and the Credit Practices Rule

87033Leave a Comment2012-05-15+15%3A59%3A51Bob+Lawless

A different question is what the bankruptcy laws have to say about these storage unit liens. If I have the time in the next couple of days, I may follow up on those points.

May

Smoking by the Powderkeg

87011Leave a CommentSmoking+by+the+Powderkeg2012-05-15+14%3A32%3A04Adam+Levitin

A major defense of JPM's beached whale is that $2B isn't that big of a deal to Fortress Balance Sheet. That's correct, but it misses the point.

If a supposedly well-run bank like JPM could lose $2B so quickly, the same could easily happen to a bank with a less solid balance sheet. Losses of this magnitude that materialize very quickly are exactly the sort of thing that can spark a panic as counterparties suddenly start to wonder if they'll be paid and then their counterparties start to worry about them, etc. In other words, a sharp, sudden shock like this is exactly the type of thing that can create a financial crisis. The issue isn't JPM. It's that the financial system is still has the potential for great volatility post-Dodd-Frank.

May

Hedging and Proprietary Trading

87012Leave a CommentHedging+and+Proprietary+Trading2012-05-15+14%3A25%3A29Adam+Levitin

Jaime "Shamu" Dimon's beached whale has thankfully breathed some new life into discussions of the Volcker Rule, Glass-Steagal, and narrow banking. This is the first in a trio of posts on the topic.

The Volcker Rule would distinguish between hedging and proprietary trading. I'm skeptical about that distinction. Proprietary trading involves the voluntary assumption of risk. Hedging should, in theory, involve the reduction of risk. But in practice hedging can often just substitute types of risks. The result is that hedging can increase some types of risk exposure, either intentionally (by a party looking to avoid a proprietary trading restriction) or by accident (by an incompetent risk manager).

While "hedging" sounds like it is about risk reduction, we need to recognize that there are two kinds of hedges: a perfect hedge and an imperfect hedge. A perfect hedge would make a party completely risk neutral for a particular risk. Perfect hedges are kind of like 4-leaf clovers. They don't really exist. Instead, we have different degrees of perfection. Thus a pretty good hedge is holding stock in a company and having a put option on the stock at its current market price. That provides a floor against the decline in the stock price. It isn't a perfect hedge because the put option has created counterparty risk--if my counterparty is insolvent, that hedge isn't worth much, and I'm still exposed to the decline in the stock price. Still, with something simple and liquid like publicly traded stock, I can hedge pretty well.

Hedging becomes much more imperfect when the risk exposure stems from a less liquid or more complicated instrument. For example, mortgages. There are two types of risks with mortgages--credit risk and rate risk. And they're not completely independent, as a foreclosure is a prepayment. If you're long on a bunch of California mortgages (say ones you picked up from your friend WaMu), there aren't a lot of great hedges. You can go short on a nationwide index, like the ABX, on CME's S&P/Case-Shiller Housing Price Futures housing price futures index, but nationwide indexes don't give you good mapping with California. You'll probably get things directionally right, but unless you can find someone who wants to take a swap on that particular group of mortgages, you're not going to be especially well hedged. In 2007 it was still possible to find fools who would go long on those assets (see Abacus). I suspect it is considerably harder to find willing counterparties for such deals today. And if you can, again you are exposed to the failure of your counterparty as well as any other number of risks that could arise if the contracts aren't perfectly matched.

And then what about exposure to say, European sovereign debt? There are direct exposures, namely, do you hold Greek or Spanish or Italian bonds, etc. And there's a sovereign CDS market that offers reasonably good hedging there. But what about all of the indirect exposures? A loan to a Spanish corporation or to Spanish consumers? Or loans to businesses that are dependent on Spanish clients? To hedge those risks, first you have to be able to identify the extent and shape of your exposure, and then you've got to go find a lot of hedges.

All of this is to illustrate two things. First, it is very difficult to get a perfect hedge and second, hedging can create risks as well as reduce them. Which may be the very goal of the "hedge."Even if JPM were completely hedged, we should still be worried, especially for complex, illiquid products, because bankers, like the rest of us, can make mistakes. But when a bank makes a mistake, it can have externalities that don't happen when, say, a bookstore screws up.

So, run this a frame forward: what if we said "no proprietary trading" means "no hedging." It would mean that banks would operate as utilities. They would execute trades for their clients, and that would be it. There would be risk on the banks from clients getting overexposed and being unable to meet their commitments, but that's why we have margin regulations, single-borrower exposure limits, etc. Put another way, those risks can be largely managed by limited exposure and through pricing. The one exception would be hedging against macro-shocks, such as a downturn that would affect all Euro-area borrowers. But can anyone really hedge this kind of tail risk well? If not, putting aside the "market maker" issue, I don't see a compelling case for a hedging exception to proprietary trading.

May

Doggie DNA Tests: Waste of Money or Legitimate Tool?

By Nathalie Martin | Securitization-MBS

85746Leave a Comment2012-05-08+20%3A37%3A37Nathalie+Martin

Do mutt-lovers (with admittedly too much time and money on their hands) get anything in exchange for the $75-100 they pay to find out what kind of dog they have? It depends. My advice: before ordering a doggie DNA test over the net, do lots of research. Perhaps just have the vet do it. If you do order a test over the internet, make sure you pick one that tests for the maximum number of breeds and that gets very high marks from consumers, and carefully read the fine print. Now they tell me, the more mixed your mutt is, the less likely you are to get any info at all from the test. I’ll let you decide if the test was worth my money. Here is the dog:

And the results?

Primary breeds, none; secondary breeds, none; and in the mix, Italian Greyhound,
Beagle, and Wirehaired Pointing Griffon. I don’t THINK so, do you?

Lessons: Pick your tester wisely. I used Canine Heritage.com, because they were in Chapter 11 some years back, and I like to frequent companies that have made it through this process. When I asked for my money back, or at least some explanation for the results, the company identified two breeds they do not test for that could be in the mix, just by looking at the photo of Ringo. I wondered why they do not test for these breeds if they are so common. They offered to redo the test, but we have shaken faith now, so we said no. Again, go to one that tests for more breeds than Canine Heritage. Have any of you had better luck with this? What kind of dog do you think he is?Can you beat the test?

May

Consumer Scam Review: Lower Your Interest Rate, Lower Your Credit Card Balances, and Work at Home

By Nathalie Martin | Securitization-MBS

85747Leave a Comment2012-05-08+20%3A16%3A02Nathalie+Martin

I have been meaning to write on several consumer scams so here are a few to avoid.

“We Can Lower Your Home Loan Interest Rate” Scams.

We’ve all gotten the calls at home. “We can lower your interest rate.” “The banks got their bail-out, now get yours.” But imagine what it feels like if you really need that kind of help. The false hope these scams create is criminal. One of my coworkers has been going through a Chapter 13 in which her mortgage payments are really high. She got this card in the mail asking her to call 800-936-4400 and saying that they could lower her mortgage payment (currently over $1,300) to $611.01. She was very hopeful. She called the numbers, which directed her to RMA Legal Network in Holbrook, New York, and RMA turned out to stand for Michael Alarcon. She spoke with a Bruce Thomas, a case consultant manager, who asked her for tons of very personal information. She then hung up and did a google search, which turned up a great deal of negative information on this company, including that they want $1,400 up front to even start to do a deal for you. Red flag!

“We Can Reduce Your Credit Card Balances”

Forget it, it doesn’t work. If I’m wrong, tell me how and where you can get this help legitimately. If you have the time, follow the directions they leave on your phone and report back here.

Work at Home Scams

A third cousin got involved with one of these, and when I say scam, I mean Scam. Again, selling

false hope is big business, but here the Zaken Corporation sold nothing at all. My cousin called 1-800-840-1060 and ordered the Zaken Corporations 90-day Risk free trial work at home kit plus special mystery gift. He was told he could not use a money order but would need to use a pre-paid card, which he got from Green Dot. This will be the subject of another blog. He order this kit on February 1 and as of May 8, he has received nothing. I have spent two afternoons on the phone trying to get his $104 back, talking to real people who somehow managed to get away and not come back to the phone. They all said they’d return my call but no one even has. This would be funny if it wasn’t so sad and sickening. Zaken now claims that they have never heard of him. It is interesting because it looks like they are a real companyand that most people get their kits, though few make money from them. Before you pay anything for a work at home kit, check out the company very extensively on the Internet. There were lots of red flags there for Zaken, if only he'd have checked.

May

Affidavits Are Not a Substitute for Evidence of Debt Ownership

85587Leave a Comment2012-05-07+16%3A57%3A07Bob+Lawless

The Tennessee Court of Appeals has issued a decision that highlights the problems facing credit card debt collectors in a post-robosigning world (see here and here). The decision reaffirms what should be a simple principle in a debt-collection lawsuit. The burden is on the debt collector to show it owns the debt and to show the consumer is liable for the amount the debt collector asserts. The debt collector's say-so is not enough.

In LVNV Funding, the consumer had opened a Sears Gold Mastercard account in 1985 and was being sued for a balance that was a little more than $15,000. He had not used the account since 2001 and thought it had been settled in 2005.

One might first think Sears was the plaintiff. It was not. Sears had sold the account to Citibank, but Citibank was not the plaintiff either as it had sold the account to Sherman Financial Group. The plaintiff was LVNV Funding, a subsidiary of Sherman Financial to which the account had been assigned.

What should have happened is that the account history should have been transferred along with each sale of the account. It is not exactly clear what did happen but nothing more than a bare list of account names and balances was apparently transferred. The custodian of records for LVNV Funding testified that she was familiar with LVNV's business records, and that $15,000 was the amount due based on what was told to LVNV.

Of course, testimony about what someone else said is hearsay. LVNV sought to admit its custodian testimony under the business records exception to the hearsay rule. Judge Kirby, writing for the Tennessee Court of Appeals, correctly pointed out one major flaw with LVNV's positon. Its custodian may be familiar with its business records, but she was not familiar with the business records of Sears or Citibank. The business records exception does not create a documentary record where one does not exist. The result was that LVNV's suit failed for lack of evidence.

The case is interesting not because it is extraordinary but because it is typical. The documentation problems identified in LVNV Funding are pervasive throughout the debt collection industry. Because not every court is careful and because not every consumer has good representation, credit card debts undoubtedly are being collected without adequate evidence the debt is due and owing. (Having had to personally deal with a $50 credit card bill from Sears back in 1990, it would take a lot more than their say-so to persuade me that a debt was actually owed.)

And, if courts correctly apply the law, there are millions of dollars in credit card debts that are practicably uncollectible due to lack of documentation. Attorneys who work in the area always tell me these problems are well known within the industry, but I wonder how well known they are outside the industry.

May

What say?

85541Leave a CommentWhat+say%3F2012-05-07+10%3A21%3A00Stephen+Lubben

Gretchen Morgenson, in Mortgage Unit Troubles Ally Financial explains that:

Although repurchase claimants would be considered general unsecured creditors in a ResCap bankruptcy, the put-back demands would very likely be somewhat senior to those of other unsecured creditors because of their contractual nature.

May

What say?

85542Leave a CommentWhat+say%3F2012-05-07+10%3A21%3A00Stephen+Lubben

Gretchen Morgenson, in Mortgage Unit Troubles Ally Financial explains that:

May

Sovereign Restructuring after NML v. Argentina: CACs Don’t Make Pari Passu Go Away

By Anna Gelpern | Securitization-MBS

84958Leave a Comment2012-05-03+15%3A38%3A17Anna+Gelpern

A remarkable number of people are buying the creditors' argument that widespread introduction of collective action clauses (CACs) in sovereign bonds makes the debate about the pari passu clause in the Second Circuit irrelevant to the broader regime for sovereign debt restructuring. This is intuitively appealing, but totally wrong.

We are in this mess because Argentina defaulted on its debts, restructured most but not all on punitive terms, and is facing lawsuits from the remaining few creditors. The exasperated SDNY judge granted the creditors an injunction based on the pari passu clause in their bonds, requiring Argentina to pay pro rata those creditos that took a 70% haircut and those that took none.

The United States intervened somewhat grudgingly, arguing among other things that the SDNY interpretation of the pari passu clause threatens the broader regime for sovereign restructuring. The creditors and amici retort that, among other things, the introduction of CACs in sovereign bonds should make pari passu injunctions like this one rare-to-nonexistent.

Recall the most common version of a CAC allows a super-majority of bondholders to amend the entire issue against the wishes of a holdout minority. CAC adoption, already pervasive in the UK market, skyrocketed in the United States after a concerted effort by the U.S. Treasury and under threat of a treaty-based sovereign bankruptcy regime promoted by the IMF.

According to the creditors, if most sovereign bonds have both CACs and pari passu clauses that give rise to pro rata payment obligations, debtors will offer attractive restructuring terms to secure supermajority creditor support, and amend the contracts (pari passu and all) over the objections of the holdouts. No holdouts, no pari passu problems.

Even assuming that *all* foreign sovereign bonds soon come to have CACs (we are in the 80% range now according to the briefs), this argument fails for two reasons. First, not all sovereign debt is in the form of CACed or CACable bonds. Second, not all CACs contain an aggregation feature, which allows majority amendment across multiple bond series. As a result, and as was the case in Elliott v. Peru, a holdout can obtain an obscure little instrument that is not even syndicated let alone bonded, and sue to her heart's content. In the alternative, as is the case in Greece's foreign law bonds (which have CACs but no aggregation), she can buy a blocking position in a tiny bond issue trading at a deep discount, block the restructuring of that issue, and pari passu right ahead. Holdout strategies have never been about joining the masses--they are all about piggy-backing on the masses' concessions. From that perspective, and at least until aggregation becomes pervasive, CACs clear the field for the holdouts.

Based on this, some might say that a ruling against Argentina in the Second Circuit that lets loose the pro rata payment interpretation of pari passu would make a darn good argument for statutory sovereign bankruptcy. No ad-hoc, willy-nilly, heterogeneous contracts and wacky interpretations of obscure clauses that take on a life of their own because something got lost in translation between Latin, English and Belgian court-ish.

All that said, if the Second Circuit can see its way to affirming on the narrowest of grounds tied to Argentina's "Lock Law," without passing on a broad interpretation of pari passu, they might not need to reach the broader implications.

May

Debit Interchange Post-Durbin: Some Early Numbers

84693Leave a Comment2012-05-02+01%3A25%3A33Adam+Levitin

The Fed released some data on debit interchange fees since the Durbin Amendment went into effect (here in spreadsheet and here as a memo with more data). It's all still very early numbers, and things may well change. But so far a few noteworthy things have caught my eye:

(1) There is two-tier interchange pricing, just as I and other supporters of Durbin predicted. Big banks (>$10B in assets) have one pricing scheme and small banks, which are exempt from Durbin's "reasonable and proportionate" requirement have another. Many Durbin opponents said that there wouldn't be two-tier pricing and that Durbin would spell the ruin of small banks. So far that hasn't happened. This won't fix our too-big-to-fail problem, but it's a small move in that direction.

(2) The small banks are getting a leg up on the big guys in the two-tier system. Small banks are making on average 19 cents or 50bps more on every transaction than the big boys. That breaks down to 31 cents advantage of signature and 8 cents on PIN (where the pricing was lower to begin with, making less room for differentiation).

(3) Interchange fees for small banks haven't moved much. It's possible to have two-tier pricing with small banks still losing revenue. That doesn't seem to have happened. (It's also possible to have two-tier pricing with interchange fees continuing to rise for small banks...)

(4) The small banks' debit card transaction market share grew slightly. It's not clear to me that this is a real trend, but it's possible that this is a side-effect of the big banks like BoA clumsily trying to recapture reduced debit interchange revenue with direct consumer fees. It seems that some consumers don't take well to hidden fees being replaced with direct fees. It's still not clear how many accounts were really moved to small banks/CUs in response to BoA and the like, but that could explain the growth in debit card market share for small banks. In any case, merchants aren't steering away from small banks as we were told they might do. (It was never clear how they would steer anyhow).

(6) There may be other, harder to measure benefits for small banks from Durbin. To the extent that it makes their deposit account/debit product more competitive, this could have spillover benefits for their other products. The deposit account (monetizable via debit or check) is the gateway relationship. It enables the cross-selling of other products (loans, investments, insurance). So the benefits to small banks may be more than just on the debit revenue side.

(5) The big issuers are paying lower network fees (4 cents lower for sig, 2 cents lower for PIN), which means that small issuers are really getting a 23 cent/transaction advantage of signature and 6 cents/transaction advantage on PIN. It's not clear, however, what the network breakdown of small issuer transaction is.

Again, it's still early in the game. There's still the merchants' litigation challenge to the Fed's Durbin Amendment rulemaking, and we could well see a bunch of market moves. Visa seems to be trying to go back to tying credit and debit products via its network fee, and there's always the possibility of either some innovation (think mobile), a new settlement network (PayPal?), or a new entrant buying an existing player and shaking things up (Google or Apple buying MC?).

A final thought. The more distance we get from Durbin, the more I like the amendment. It's public utility regulation: rate regulation (section 920(a)) and open access (section 920(b)). That's not a totally new move in bank regulation (think Reg Q), but it really encourages thinking of at least some banking functions as being public utility functions. There might be something to that.

Apr

Accretive’s Bedside Manner for Debt Collection

84447Leave a Comment2012-04-30+20%3A33%3A18Bob+Lawless

The end of last week got a little busy for many of the Credit Slips bloggers and none of us talked about the story last Wednesday by Jessica Silver-Greenberg at the New York Times regarding aggressive debt collection practices by Accretive at hospitals. The allegations came to light in a report by Minnesota attorney general, Lori Swanson. Among the most appalling claims was that Accretive posted employees in emergency rooms, demanding payment before treatment was administered. Forget the legal side of this. How does a person or an organization get to a place where these sorts of tactics seem like the right thing to do? (In fairness, it should be noted that Accretive has denied the claims made by Attorney General Swanson.)

My colleague, John Colombo, has a post up at the Nonprofit Law Prof Blog discussing the tax-exempt status issues for nonprofit hospitals that deploy aggressive debt collection practices such as those alleged to have been done by Accretive. John's work raises a bigger question: should we still give nonprofit hospitals a tax exemption if they are not doing charitable work in a different sense of the word?

Apr

Research Grants from NCBJ

84432Leave a CommentResearch+Grants+from+NCBJ2012-04-30+19%3A01%3A14Bob+Lawless

As many readers of this blog will know, the Endowment for Education from the National Conference of Bankruptcy Judges has supported many research projects that have contributed to a better understanding of all sorts of issues involving debt and bankruptcy. Judge Dennis Dow, the current chair of the Endowment, contacted me and advised that it has a substantial amount of money available to make grants and is actively soliciting applications. If you are a scholar looking for support for the expenses connected with empirical research, the Endowment may be a great resource for you. Instructions, forms, and eligibility guidelines are available at the Endowment's web site.

Apr

Pari Passu: So Passe! (Extractive Edition)

By Anna Gelpern | Securitization-MBS

84035Leave a Comment2012-04-28+03%3A15%3A48Anna+Gelpern

Felix Salmon stays with the Argentina pari passu saga, about which I wrote here. The holdout creditors have now filed their briefs (Felix has the links), and are doubling down on the text. Much of their argument hangs on a creditor-friendly formulation of the second half of Argentina's pari passu clause, which goes to the status of payments, rather than the underlying obligation. The creditors make a point of dissociating the payment half of the clause from the Latin mumbo jumbo before it ("equal treatment", not "pari passu"!), which is kind of silly, since all the parts and flavors go by pari passu. But rhetorically, equality is much more appealing.

If the Second Circuit follows the creditors into the text, they have succeeded in framing the implications of the case narrowly, and have blunted the policy arguments of Argentina and its reluctant amici, notably the U.S. Government. This is so even though the creditors' reading of the text is more twisted than not, their description of the jurisprudence is strained, and the passage on the interaction between collective action clauses and pari passu is plain odd.The creditors' real problem and the elephant in the room is not pari passu or equal treatment, it's sovereign immunity. Pari passu is the eye of a needle. There is just no way of fixing the immunity problem through pari passu without mangling a bunch of law ... all for the sake of the rule of law?

If the decision becomes about Judge Griesa, I part with Felix and get worried about the creditors' prospects. The venerable judge gets to exercise discretion, but the Second Circuit has had no trouble reversing him on Argentina in the past. His recent opinions on the subject range from scant to ranty. And he himself expressed serious misgivings about granting the pro rata payment remedy under the pari passu clause just before signing the order.

All that said, champagne corks must have gone a-poppin' at Elliott at the news of the YPF nationalization. First, as Felix observes, this action makes Argentina look like the irredeemable law-breaker of Judge Griesa's purplest paragraphs. The response--two wrongs don't make a right, or don't twist New York law to make Argentina abide by it--sounds lame. Second and much, much more interesting, we now have the prospect of state-owned oil tankers setting sail, begging to be seized by judgment creditors. Now who needs pari passu when you can have an oil rig?

Apr

The Student Loan Tax

By Alan White | Securitization-MBS

83506Leave a CommentThe+Student+Loan+Tax2012-04-25+20%3A40%3A41Alan+White

As student loan debt passed the $1 trillion mark, President Obama, speaking at Chapel Hill yesterday, called the upcoming interest rate hike on student loans a tax. He didn’t tell the half of it. Congress’ dirty secret is that the government makes a huge annual profit on student loans. According to the scrupulously nonpartisan Congressional Budget Office, $37 billion will flow IN to Treasury from student loans made this fiscal year at the 3.4% rate (on a net present value basis and net of about $1.5 billion to administer them.) The President’s current dispute with Congressional Republicans is about whether to increase this annual profit next year. The interest rate that students pay on the basic “subsidized” loan is slated to rise from 3.4% this year to 6.8% next year, unless the lower rate is extended by Congress.

How does the government profit from student loans? In two words, yield spread.

Treasury can borrow money at 0.5% or less, and lends it to students at 3.4%. Administrative costs are well below 1%. Prepayment risk is minimal; repayment stretches over many, many years, and the yield spread just keeps on coming. Interest rate risk is also minimal, given that Treasury can issue debt in a range of maturities.

What about the credit losses, you ask? While many loans go into default (about 10% projected for 2013 loans), credit losses are relatively modest. The Education Department assumes it will collect between 75% and 80% of defaulted loans (on a discounted NPV basis), using its supercreditor powers, especially wage garnishment and tax refund intercepts. There is no statute of limitations on student loans, and even bankruptcy discharge is difficult. The $37 billion Treasury profit for FY2012 is after allowing for estimated credit losses in the $5 billion range.

Treasury even profits on the loans made by banks and guaranteed by the government, although bank loans are costlier and less efficient than direct loans. Guaranteed student loans generate revenue because the guarantee fees paid by lenders to Uncle Sam greatly exceed losses net of recoveries. In other words, if student loan interest rates were set on a break-even basis, they would be much lower, perhaps around 1.5%, albeit rising as Treasury rates rise. Recently adopted loan forgiveness programs, and the expansion of income-based repayment, may increase the cost (or reduce the profit) of the student loan program in the long run, but so far CBO scores those loan modification costs as minimal.

So what are the President and Congress arguing about? They are arguing about how much of the federal deficit to plug with student loan interest money. The current “baseline” budget assumes that the rate will jump up to 6.8% for 2013 loans, yielding another $30 to $40 billion return to Treasury. Congressional Republicans see the expiration of the rate cut as a given, and any extension as increasing the deficit (by reducing student borrowers’ subsidy to all other federal programs). They are demanding offsetting cuts in other programs before agreeing to keep the rate at 3.4%.

Interest rate policy has huge consequences for the American middle class. Charging an above-cost rate in order to fund Pell grants for low-income students, for example, is justifiable on a theory akin to equity financing of human capital. It is a cross-subsidy from successful college grads to needy college students whose future success is uncertain. A similar case can be made for expanded subsidy and loan forgiveness programs for college graduates in low-paying but socially necessary occupations. On the other hand, the rationale to tax student loan borrowers to fund tax cuts for the wealthy, subsidies for energy and agriculture or other unrelated federal expenditures, is less clear.

Apr

Learn about Teaching Consumer Law at Houston Law Center May 18-19, 2012

By Nathalie Martin | Securitization-MBS

83434Leave a Comment2012-04-25+17%3A28%3A53Nathalie+Martin

On May 18-19, the Center for Consumer Law at the University of Houston Law Center will hold its sixth bi-annual Teaching Consumer Law Conference. This year’s theme is “Teaching Consumer Law in an Evolving Economy.” I have always enjoyed this conference as it is the only one in the country devoted exclusively to teaching consumer law. It is designed for those currently teaching consumer law, those interested in teaching, as well as those who just wants to know more about consumer law issues. More than 30 presenters will discuss issues ranging from Fringe Banking, Debt Collection and Advertising, to Foreclosure, Payments and Arbitration. For example, I will moderate a panel with Max Weinstein of Harvard and fellow blogger Jean Braucher, discussing how to fill unmet need for foreclosure defense through foreclosure defense clinics. There also are several presentations discussing consumer law from an international perspective, as well as discussions of teaching U.S. Housing Policy, foreclosure defense clinics, consumer arbitration, international perspectives, what’s new with the FTC, substantive regulation versus disclosure, and a host of other hot topics. . Presenters include law faculty, adjunct faculty, and practicing attorneys. For more information and a registration form, go to http://www.peopleslawyer.net/for-the-lawyers.html. For even more information, call or e-mail Richard M. Alderman, Associate Dean, Dwight Olds Chair, and Director of the Center for Consumer Law, at 713-743-2165 or alderman@Central.UH.EDU.

Apr

Speaking of Student Loans . . .

By Melissa Jacoby | Securitization-MBS

83255Leave a CommentSpeaking+of+Student+Loans+.+.+.2012-04-24+16%3A49%3A19Melissa+Jacoby

President Obama is at UNC-Chapel Hill today to talk about student loan interest rates. His speech should be streamed here at around 1:15 pm EST according to recent estimates.

Apr

Some Thoughts on the Student Loan Debt Problem

82726Leave a Comment2012-04-21+00%3A04%3A23Adam+Levitin

The student loan issue is increasingly coming the front-burner, both domestically and abroad. I haven't blogged about it before (and it's worth noting how little scholarship there is on student loans compared with say mortgages or credit cards). So here are some initial thoughts by way of encouraging a less muddled conversation on student loan debt.

1. Student Loan Debt vs. Cost of Education. We need to distinguish between the problem of student loan debt and the cost of higher education. They are intimately related, of course, but as far as I can tell, the problem is less anything about the structure of student loan debt than its amount, which is a function of the cost of higher education. There's no question that education costs have and continue to grow faster than inflation. Why is more complicated. Before we prescribe austerity in higher education as the solution, however, let's recall that US higher education is the envy of the rest of the world. Foreign students come here for their advanced degrees, not vice-versa. There's huge social value produced by having outstanding domestic higher education. There's also a lot of unnecessary expense (I'll name names when I'm good and ready, though, as that isn't really the issue here).

2. U.S. student loan debt is often structured differently from other consumer debt. It's important to recognize that student loan debt is quite different than other types of consumer debt. A lot of student loan debt can be deferred for substantial periods and can be repaid over extended terms. All of this is to say that student loan debt is unlikely to cause a sharp liquidity problem for a consumer by itself. When combined with other debt and impairment of income, the story is different.

3. Student loan debt isn't especially expensive. OK, let me start with some caveats. That's a first impression from eyeballing some loans, and it doesn't apply to for-profit lenders. But as far as I can tell, the bulk of student loan debt isn't crazily expensive in terms of interest rates. It's large dollar debt, rather than high rate debt, and of course it doesn't go away easily. The low rates are at least partially because of government subsidization, but the low rate, large amount issue that goes back to the first point--our problem is more the cost of education than the cost of the debt.

4. International variation. We need to recognize that there is HUGE variation internationally in how education is financed and the structure of student loans. We should be looking very hard at how other countries finance student loans.

5. Legacy Debt vs. Future Education Costs. We need to distinguish between the question of what to do with the existing stock of student loan debt and what the education financing system should look like going forward. Even if we make higher education completely affordable henceforth, we have a massive stock of student loan debt.

To this end, I don't see reforms like changing the bankruptcy dischargeability of student loan debt as being real gamechangers. In a totally efficient world, nondischargeability should have translated into lower credit costs and thus into higher tuition rates. (Bankrup'cy Bob and I are all over this issue, right Bob?)

6. Why not equity financing? Why we are financing education via debt? It's not obvious that we have to do so, and that's the easiest way to avoid leverage going forward. Milton Friedman proposed equity financing some years back, meaning that the school got a % of future income, rather than a fixed amount. It could be as progressive or regressive as a school wanted.

Yale tried such an experiment in the 1970s, but with poor results--the alumni didn't pay. Yale didn't want to sue its alums, and let them convert to debt at a favorable rate. But that's an easily surrmountable problem--we could have education payments rolled into tax bills and collected by the IRS, which would then remit to the schools. Non-payment isn't stiffing the school. It's stiffing Uncle Sam, who is much better at collecting. It's not such a radical idea--Australia collects student loans via its tax service.

There's an entrenched education bureaucracy that would have a lot of trouble changing to an equity financed system (alumni fundraising would surely suffer, for example). But it would mean that people take the jobs they want, rather than the jobs that pay the student loans. That might be a very good thing for society, even if it would certainly hurt some employers (think those who pay recent graduates outsized "hazard pay").

Apr

An Idea to Limit Body Attachments

82537Leave a CommentAn+Idea+to+Limit+Body+Attachments2012-04-19+21%3A39%3A14Bob+Lawless

As many Credit Slips readers will know, so-called "body attachments" allow a creditor to haul a judgment debtor into state court if the debtor fails to respond to court summonses to answer questions about the debtor's financial affairs. It is a highly coercive tactic and was originally intended as a last resort against a recalcitrant debtor. Today, it is an overused tactic that intimidates debtors who often understand only that they have been arrested because they have an unpaid debt.

An AP article ran yesterday around Illinois about abuses in this state. The story recounts how a teaching assistant paid $600 after being arrested over a hospital bill she had been told was issued in error. Two weeks ago, I blogged about widespread errors and problems in the debt collection industry, so it is not difficult to imagine the story recounted in the article is an isolated one. Coercing ill-informed and poorly resourced debtors into paying debts they may not even owe is outrageous. Even readers who may not be particularly sympathetic to the plight of these debtors should question the use of taxpayer financed courts and law-enforcement systems to engage in expensive collection practices on small debts for the benefit of private creditors. These practices are not just a problem in Illinois but across the country.

At least in Illinois, some help may be on the way. A bill is moving through the Illinois legislature, with the support of Attorney General Lisa Madigan, to put some common-sense limits on the use of body attachments. The bill would require personal service, instead of mail service, of a summons before an arrest could occur, a very worthwhile idea in an industry where record-keeping problems seem rampant. The bill also would return any bail to the debtor (in most cases) instead of the creditor. Although the bill has cleared the Illinois House, the latest report says the bill has been postponed before the Senate Judiciary Committee. I hope that action has not dimmed its prospects for passage.

One of the things that annoys me in this story is the corruption of a useful tool for against extremely recalcitrant debtors. When I was in private practice, I remember trying to enforce a judgment in a commercial case against a debtor who had lied about his assets in entering into the transaction that was the subject of the case. The assets he did have were concealed around the country. He answered our interrogatories about his assets because, after a lengthy court proceeding, he finally had no other choice. WIthout the coercive power of the state and the courts, I don't think we would have been able to get any information out of him and collect the small amount of money we did get for our client.

The root of the current problem stems from the fact that the costs are borne primarily by taxpayers and the benefits fall upon private creditors. The system won't really work until these incentives are more aligned. Right now, it makes financial sense for creditors to ask a court and a sheriff to arrest a debtor over a $200 unpaid bill in a consumer transaction. A rule requiring a creditor to pay a substantial fee (maybe $1,000?) before a body attachment could occur might help a lot. And, it would be important that the creditor could not pass along the fee to the debtor as a cost of collection. Such a fee would help ensure that body attachments were again only a measure of last resort, reserved for cases with only the most recalcitrant debtors ignoring court orders and with debts in an amount that justify the expense.

Apr

An Idea to Limit Body Attachments

82538Leave a CommentAn+Idea+to+Limit+Body+Attachments2012-04-19+21%3A39%3A14Bob+Lawless

Apr

Call for Papers – AALS 2013

By Alan White | Securitization-MBS

82523Leave a CommentCall+for+Papers+-+AALS+20132012-04-19+19%3A39%3A26Alan+White

The Creditors' and Debtors' Rights section of the Association of American Law Schools invites paper proposals for the January 2013 conference program. The program theme is "The Great Deleveraging: Bankruptcy after the Crisis, Formal and Informal." Complete information on the call for papers appears below the break.

Five years from the onset of the global financial crisis, households, companies, banks, cities and nations struggle to redress their balance sheets. Some turn to the formal bankruptcy system, while others restructure or cope with debt in other fora. Is bankruptcy working? Could it be improved to address the debt crises? What alternatives are being used and why? How will bankruptcy reforms and other legal responses (e.g. Dodd-Frank’s orderly liquidation) affect future credit, and future crises?

Law teachers and other scholars who have an interest in speaking at this program are invited to submit a manuscript or precis on any aspect of the foregoing theme. Junior faculty members are particularly encouraged to submit. A review committee consisting of Section officers will select one or more papers or proposals and will invite the author(s) of each selected submission to make a presentation at the program session. Senior bankruptcy scholars will be invited to read and comment on the selected papers. We are expecting a member of the editorial board of the American Bankruptcy Law Journal to attend, and we encourage participants to submit papers to ABLJ, one of the top twenty refereed law journals. A precis should be comprehensive enough to allow the review committee to evaluate the likely content and quality of the proposed paper; however, complete drafts will receive preference in the selection process. Please send submissions to the Program Chair—Alan White, CUNY School of Law, alan.white@mail.law.cuny.edu. Submissions are due no later than August 1, 2012. Please forward this Call for Papers to anyone who might be interested.

Apr

Sit Back and RadLAX

82332Leave a CommentSit+Back+and+RadLAX2012-04-18+20%3A09%3A07Adam+Levitin

I'm having trouble getting excited over RadLAX going before SCOTUS. Ronald Mann has written that RadLAX "well might be the most important business bankruptcy case since its 1999 decision in Bank of America National Trust & Savings Ass’n v. 203 North LaSalle Street Partnership." I think that statement is literaly true, but that's not saying much; the Supreme Court doesn't hear very many business bankruptcy cases, period.

As it stands, I don't think the outcome in RadLAX is going to have much of an impact on bankruptcy practice on the ground. If the creditors prevail, the world will look like status quo, say 2009: credit bidding is allowed in sales under plans (and there will be little reason to teach RadLAX in a bankruptcy course).

If the debtor prevails, then de jure there will be no right to credit bid, but there will be one de facto in most cases (making the case well worth teaching). If there's a DIP financing agreement, that agreement will almost certainly provide for the DIP lender to have a right to credit bid. That means a ruling for the debtors will affect a narrow class of creditors and cases. It will affect secured lenders not in the DIP consortium, and it will affect secured lenders in cases where there is no DIP financing. That's cases financing themselves on cash collateral or unrestricted cash or trade credit or unsecured insider DIP loans. In other words, no impact whatsoever on the mega-cases. Maybe a greater impact on middle market. We'll also see syndication agreements including provisions to deal with cash bidding situations. In other words, a ruling for the debtors in RadLAX is unlikely to result in a major realignment of power in bankruptcy cases.

Sadly, SCOTUS taking RadLAX (which is reasonable to deal with a circuit split) is a reminder that SCOTUS hasn't addressed the two key issues in Chapter 11: the use of DIP financing agreements and asset sales as sub rosa plans. Obviously SCOTUS has to have a proper case to deal with these problems, and SCOTUS generally has discretion on hearing appeals. The Court could have dealt with this in Chrysler, but because of the macroeconomic impact of Chrysler (via GM), it was not the ideal case for addressing the interaction between the DIP loan, the sale, and the plan. So while it's nice to see a business bankruptcy case before the Court, I don't think too much rides on this one.

Apr

FTC Mobile Payments Conference on April 26

82268Leave a Comment2012-04-18+14%3A29%3A32Adam+Levitin

Here's a plug for a conference on mobile payments that the FTC is hosting next week. It will be webcast live. The agenda is here. I'm one of the speakers.

Despite my participation, it should be a really interesting conference. Mobile brings together a range of new and existing consumer finance, privacy, IP, and antitrust issues: mix together one part banks, one part telecoms, one part device manufacturers, one part OS manufacturers, and one part app designers and stir. What's going to result from that mix isn't clear. We're still in the early stages of mobile; it's clear that in 10 years, if not 5, mobile will be a major part of the US payment system, but it isn't clear yet what that will look like. It could develop in a number of ways, with very different implications for the end-users (consumers and merchants) and the various intermediation participants (banks, telecoms, OS, hardware, and app makers).

There is a lot of potential benefit to consumers and merchants from marrying payments with all of the other consumer data that goes through mobile (e.g., location, contacts, interests), but also major privacy and competitive concerns. We don't have a clear framework for working through those issues at present. Mobile's cross-sector business complicates attempts to create such a framework. Mobile touches on the jurisdiction of the FTC, CFPB, FCC, and DOJ (antitrust), raising obvious coordination issues. Uncertainty over regulation isn't simply a concern for end-users; a clear regulatory framework is actually important for the development of mobile platforms, as regulatory uncertainty creates an investment risk. I'm really glad to see the FTC hosting this conference--it shows a regulatory awareness of the need to engage with the issues raised by mobile.

Apr

RadLAX

82076Leave a CommentRadLAX2012-04-17+11%3A54%3A40Stephen+Lubben

Former guest slipster Ronald Mann has a nice post up at SCOTUSblog about RadLAX Gateway Hotel, LLC v. Amalgamated Bank, the Supreme Court case about credit bidding set for argument on the 23rd. While I've discussed the case here and over at Dealbook, Ronald covers the unique aspects of bankruptcy arguments before the Supreme Court, and explains why an issue that is so clearly important for "us" can be a bit of a muddle for the Supremes.

Be sure to take a look.

Apr

Subsidizing Shareholders (and the Sub Debt Too)