Author: Buce

  • Eeuw, This Won’t Help Our Standing in the League Tables

    Posted by

    Buce

    It wasn’t all that long ago when every
    corporate failure was followed, sure as the sun rises over Flatbush, by a
    lawsuit against the accountants.

    Clinton securities “reform” and a hard-hearted Supreme Court put a stop to that, and
    not such a bad thing, either: not every bad guess should lead to the penalty
    box.

    But some should. And nostalgia buffs will feel a ripple of
    remembrance when they read about John Haukland, 57, (former?) KPMG partner
    “sentenced to 30 days … for negligent accounting in one of this country’s worst
    bankruptcies…” (link) “This country” is "Norway” where Haukland was auditor of something called Finance
    Credit, which went bankrupt to the tune of $242 million in 2003.

    I know what you are thinking: insert “fraud
    in  Norway ?” joke here. Evidently
    the Norwegians are not amused. Commentators discussed the case, among others, in a Norwegian “Country
    report” produced by Transparency International, the ratings agency that
    regularly ranks Norway as one of the least corrupt countries in the world (link). The report said: 

    Cases like
    these have been characterized in the Norwegian media as symptoms of a business
    community that has lost its virtue This
    is a new phenomenon in Norway and the public debate has been as lively as it has been mixed.
    Most have welcomed the new focus on
    corruption, the media revelations and the enhanced debate about ethics and
    corporate responsibility. But shallow and rosy declarations about zero
    tolerance, and a lack of public recognition of corruption in everyday practice
    do not make for a convincing anti-corruption strategy or promote genuine
    corporate progress. While companies recognise the need to strengthen protective
    measures and internal controls, they have yet to acquire the knowledge and
    tools to implement effective anti-corruption policies.

    Haukland has the opportunity to appeal. But
    he has apparently already given up something more pricey than 30 days’ freedom:
    his license to practice his profession.

    There is a wonderful tag end to the story.  We are told that

    The court
    said a mitigating circumstance in sentencing Haukland was that ”[the
    principals of the company] both verbally and in other ways had skills that few
    other criminals possess.”

     Man, I would love to know how that one
    sounds in Norwegian. There’s an old saw
    that criminals are stupid. Wrong: stupid
    criminals are stupid. The real danger to
    society are the guys that learn to work in the white space around the letter of
    the law while getting other poor sods to pick up their doggy doo. I used to dine out with a psychiatrist. I would tell him some of my bankruptcy war
    stories (he was more reticent). “I think you know more psychopaths than I do,”
    my friend said, “but you know the successes. I only see the failures.”

    Oh, and PS : KPMG was acquitted.

  • My God How the Money Rolls In…

    Posted by

    Buce

    Couple of interesting followups from correspondents re the capital slosh.  One, here’s a former student who works as a money manager:

    One little-known (or
    little-appreciated) fact about private equity is that a huge chunk of the
    capital which PE funds use for LBOs comes from public pension plans. 
    Oregon had $640M invested in KKR’s funds by 1988!  Oregon and
    Washington both committed $1B-plus to KKR’s 2004 vintage.  … From the very
    start of big-time private equity it’s been as much about pension money as it’s
    been about rich-guy money.  If anything the pension money has
    created a lot of rich guys…

    And this, from a bankruptcy judge:

    You (or Palley) left out of #6 the advent of Securitization of accounts receivable in credit
    cards and both car and home mortgages from the mid-90’s forward, largely unregulated
    by Congress — at least intentionally:  the securities laws apply, but they weren’t written
    to apply specifically to this new form of "asset-based financing."

  • “Too Much Capital (Again?)?”

    Posted by

    Buce

    I guess I have been one of those pushing the meme that there
    is just “too much” capital sloshing around out there, chasing too few deals,
    and with no completely obvious reason (aliens?). I am therefore happy to introduce Thomas
    Palley, proprietor of “Economics for Democratic and Open Societies,” who offers
    no fewer than eight alternate
    explanations for asset price levels. The
    whole piece is superb reading, a marvel of concision and exposition (link). But here are the takeaway points: 

    Factor #1:
    increased income inequality. …

    Factor #2:
    increased profit shares. …

    Factor #3:
    taxation policy. … [B]etween 1978 and 1999 top marginal tax rates fell
    significantly in every OECD country for which statistics are available. …

    Factor #4:
    export-led growth. It is now widely recognized that China and much of East Asia have adopted export-led growth, a key ingredient of which is undervalued exchange rates. To keep their exchange rates
    under-valued, East Asian governments have been accumulating U.S.  and European bonds, resulting in lower interest
    rates that have in turn fostered higher equity and real estate prices.

    Factor #5: lower
    central bank interest rates.  … 

    Factor #6: credit
    market innovations. The last twenty years have also witnessed tremendous credit
    market innovation. In the corporate sector, the 1980s saw the introduction of
    junk bonds, and such financing is now the favored vehicle of leveraged buyouts
    that bid up asset prices. Additionally, the emergence of private-equity funds
    allows the super-rich to pool their funds and leverage them. …

    Household credit
    markets have also changed as evidenced by home equity loans and the advent of
    interest-only mortgages. These innovations have liquefied homes and increased
    the volume of money chasing real estate assets.

    Factor #7:
    demographic trends. Another widely recognized development is the aging of the
    baby boom generation, which is now in the second half of its work life. That
    places baby boomers in their period of heaviest saving for retirement, which
    has increased asset demand.  …

    Factor #8: mania.…

    (Hat tip:  Economist’s View, your one-stop shopping site for good econ reading (link))

  • Is There an Inflation Lobby?

    Posted by

    Buce

    Here’s one that is way above my pay grade but this has never stopped me before. I write about the inflation lobby, if there is one. 

    Anybody
    out there old enough to remember when Adlai Stevenson was president?
    Okay, how about Jimmy Carter? Remember the great kidney stone of a
    year, 1980, when the inflation rate veered toward 14 percent per year?
    Not exactly Germany 1923, but enough to inflict a lot of pain: -“people on fixed incomes,”
    we were told, and it was true—if inflation went to 14 percent while
    your monthly social security check stayed just the same, you just had a
    14-percent pay cut. It was throw an awful lot of small (and some big)
    businesses under the bus: try keeping up with a your monthly revolving
    when your (floating) rate goes up by a factor of, say, three.

    But where you stand depends on where you sit. If you are not on a fixed income—if your paycheck goes up—and if your debt is
    fixed—then congratulations, bucky, you just got yourself a big chunk of
    relief. From your point of view, the more inflation the better.

    In the 70s and 80s, we saw the inflation lobby hard at work—no, strike that, not hard at work, but sitting on the furnace eating chocolates while the pensioners and others did the work. In
    particular, I’m thinking of all the people who bought their homes on
    30-year fixed mortgages in, say, 1967, just in time to enjoy the jolts
    and disruptions of the next two decades.

    Clearly, there are political implications here. If
    we truly have a nation full of people with fixed-rate debt (and
    floating incomes), then there is no incentive to control inflation.
    Quite the contrary: you want all the inflation you can. Ironically,
    this is true even if the subjects don’t see it that way themselves: way
    I remember it, some of the loudest grousing about inflation came from
    people who were its biggest beneficiaries.

    This
    is the point where you would expect me to write about how the inflation
    is coming back again, with the inflation lobby in tow. In truth, I believe the first part of that proposition. I’m
    one of those who believes that we are behaving like Donald Duck in the
    cartoon, suspended in mid-air, having run off the diving board and not
    yet having noticed that he’s ready for a fall. But what about the inflation lobby? Recall what I said before: “if your debt is fixed.” Back then, the mainstay of the loan market was the fixed-rate loan. Consumer installment loans were fixed-rate. So also credit card debt (if you had any). And the system thrived on the 20-year (or 30-year) fixed rate real estate loan.

    You can see where I am going with this one.  I’m not smart enough or well informed enough to say anything conclusive about the loan market today.  But I do know that a lot  of our debt is floating-rate. Translated,
    that means we have shifted the risk of rate fluctuation from lenders
    (where it lay in the 70s/80s, and since time immemorial) to borrowers. If I’m right, then inflation may be far more painful for the mass of borrowers next time than it was last. Indeed,
    this may be one reason why there hasn’t been as much worry about the
    risk of inflation as you might expect—it may be that the people most
    like to suffer from it belong to a class that has no memory of any such
    pain. Keep this in mind  as you try to figure out what will happen when payday comes on all the borrowing and spending of the last few years.

  • It’s All One Guy!

    Posted by

    Buce

    I’m a little shaky on just how the issue of income inequality comes to fall into the brief of this weblog, but the precedent seems to be established, so perhaps readers will be amused by this just in from Dan Walters at the Sacramento Bee (link–and thanks again, Joel, who gets up earlier than I do):

    When California’s personal income tax revenues took a sudden jump
    last year, those who chart the state’s fiscal affairs wondered why —
    and it turned out to be mostly due to a payment by one very high-income
    taxpayer.

    State tax officials, citing tax confidentiality laws,
    are very reluctant to provide any information about the person who sent
    in about $200 million in unpaid taxes, even the taxpayer’s profession
    or business. It could be a Silicon Valley tycoon, a Hollywood
    entertainer, an athlete — or someone else entirely.

    The payment
    was in response to a state amnesty program aimed at settling
    outstanding tax disputes, but its sheer immensity implies that the
    income involved must have been about $2 billion. It indicates that
    amnesty has been a success, but more than anything, it underscores a
    tax system that makes it increasingly difficult for the state to
    balance its books because of its utter dependence on a relative handful
    of high-income taxpayers.

    State and local governments, including schools, rely on three major
    taxes to finance their operations: property taxes, sales taxes and
    personal income taxes. But the three-legged stool of public finance has
    become unstable.

    Property taxes are limited by Proposition 13,
    which voters passed in 1978, while taxable retail sales have flattened
    out due to demographic changes — especially the aging of the state’s
    economically dominant white population.

    Over the last
    quarter-century, and especially in the last decade, personal income
    taxes have become, by far, the most important revenue source, and
    because California has a steeply progressive income tax system, the
    bulk of those revenues come from a relative handful of high-income
    taxpayers.

    Roughly half of personal income taxes are collected
    from those reporting incomes of $200,000 a year or more, while they
    file just 3 percent of state tax returns. The roughly 3,000 (out of 14
    million) California tax returns with incomes over $5 million a year pay
    a whopping 10 percent of all personal income taxes.

    From a
    populist standpoint, that’s all to the good, but there’s a downside
    that should bother everyone: Wealthy taxpayers tend to receive much of
    their income from capital gains, business profits and other non-salary
    sources.

    Simply put, California’s fiscal health — its ability to
    pay for schools, colleges, medical care and other programs — is very
    dependent on how well a few people do with their personal investments,
    and that’s bothersome for several reasons.

    First, the wealthy are
    mobile. Many could simply relocate their residences, at least for tax
    purposes, to Nevada or some other income tax-free venue. Second, they
    have at least some flexibility in the timing and other aspects of their
    income streams. Finally, their incomes are in large measure dependent
    on how well the stock market is doing.

    It is, in practical
    effect, a triple whammy. Increasingly, revenues depend on a narrow base
    of taxpayers whose incomes are increasingly volatile while at the same
    time, the spending side of the public ledger is increasingly rigid,
    thanks to decrees by voters and politicians, and unable to adjust to
    the system’s inevitable peaks and valleys.

    That’s why we
    developed a state budget deficit in the first place seven years ago and
    why, fiscal forecasters believe, it will continue as a chronic headache
    even if the economy continues to expand — which is not at all certain.

    Gov.
    Arnold Schwarzenegger and lawmakers have voiced all sorts of grandiose
    schemes they want to pursue this year. Their first priority, however,
    should be to address the state’s dangerous fiscal predicament, whatever
    that may take. And it will take much more than getting a few rich
    scofflaws to cough up.

     

  • Uh oh Again

    Posted by

    Buce

    This AALS stuff is becoming a permanent feature of my participation here. 

    Anyway–I had said that "Douglas Baird" was speaking on sales of receivables, Thurs aft at the AALS.    In fact, he is one of four.  Here is the whole listing:

    Moderator: Carl S. Bjerre, University of Oregon School of Law

    Speakers:

    

  • Douglas G. Baird, University of Chicago 
    • 

  • Leianne Crittenden, Chief Counsel, Oracle Corp.
    • 

  • Bruce Markell, Bankruptcy Judge, Las Vegas
    • 

  • William H. Widen, University of Miami School of Law
    • 

    

    That would be 4:00 – 5:45 p.m. Thurs in the Harding room, Mezzanine Level, Marriott Wardman Park Hotel, head to head against the AALS Scholarly Paper Presentation by Rashmi Dyal-Chand down the hall in the Hoover room.   In my haste, I had misread it as one speaker and three commentators.  My bad, and apologies to the three non-Bairds.  
    

    


  • 


    Followup on Ownit
    



    

    Posted by
    



    Buce
    



    



    

    

    

    



    More on Ownit (cf. last night’s post), from a former student who knows this stuff far more intimately than I do (though not directly involved in the Ownit BK, I am advised):
    

    

    
These days, what happens is that the
    
  lender makes a loan, packages with a lot of other loans and sells the 
    
package  to Wall Street.   But, the sale has a put back for
    
  "EPDs" (early payment defaults) and "FPDs" (first payment
    
  defaults).   All the sub prime lenders are getting squeezed
    
  because what Wall Street will pay them for the loans isn’t enough over what
    
  it cost them to book the loan (competition is fierce).   Then
    
  they get hit with their repurchase obligations and they are all losing
    
  money big time.  Sometimes its bad underwriting but often it is just
    
  plain old garden variety fraud by brokers, sponsors, appraisers
    
  and/or  borrowers.  Going to take some time before the industry
    
  can right itself.  As for the borrowers, when the mortgage company
    
  sell the loans the servicing rights (which are worth a lot of money) are
    
  transferred to a different, often unrelated, entity.   I would
    
  suspect that the Ownit borrowers will see no interruption in receipt of
    
  that monthly payment statement.
    

    

    
My correspondent calls attention to a hobbyhorse of mine: who owns the assigned intangibles?  While I admit it can get dicy in detail, I’ve always harped on the point that the "owner" is the one who bears the risk of decline in value.   The point can be critical in a bankruptcy, on the issue of who owns the incoming payment stream–does the trustee get it for distribution pro rata, or do the individual components go to individual assignees? Cf. Bear v. CoBen, 829 F.2d 705 (9th Cir. 1986), All these "putbacks" seem to make a pretty clear case that the loss remains with the transferor Ownit (i.e., or his trustee) in this case.  Congress may have mooted the point by all those special-interest rules for securitizations: perhaps I should hop on a plane and pop over to Washington, so I can listen to Douglas Baird’s presentation at the AALS tomorrow.   
    

    


  • 


    Micawber on Insolvency
    



    

    Posted by
    



    Buce
    



    



    

    

    

    



    For lawyers, the big Dickens novel is supposed to be Bleak House, but for bankruptcy lawyers, I think the choice should be Little Dorrit. You
    
will remember: that is the one about William Dorrit, the “Father of the
    
Marshelsea,” famous for being famous, in debtor’s prison for longer
    
than anyone can remember.
    

     
    

    But in fact, debt was a recurrent theme for Dickens; it pops up throughout his novels. Indeed,
    
perhaps the most famous Dickensian debtor is not William Dorrit but Mr.
    
Micawber, great friend of the eponymous author of David Copperfield.  Even people who have never cracked a Dickens novel will remember W. C. Fields saying    
    

    Annual income twenty pounds, 
    

    annual expenditure 
    

    nineteen nineteen six, 
    

    result happiness. 
    

    Annual income twenty pounds, 
    

    annual expenditure 
    

    twenty pounds ought and six, 
    

    result misery.
    

     
    

    It’s
    
an imperishable scene and a priceless bit of character comedy but it
    
overlooks a hard fact: Micawber is a calamity. He’s a drifter and a
    
dreamer. He has a wife to support, and a disastrous knack for fathering children. David, first their tenant, becomes their protector, adult before his time. Micawber is always waiting for something to turn up. For
    
the most part, nothing does turn up; Micawber winds up in debtor’s
    
prison, and the best thing he can find to do with his time is to
    
compose “a petition to the House of Commons, praying for an alteration
    
in the law of imprisonment for debt.” Copperfield explains:      

    

    There was a club in the prison, in which Mr. Micawber, as a gentleman, was a great authority. Mr. Micawber had stated his idea of this petition to the club, and the club had strongly approved of the same. Wherefore
    
Mr. Micawber (who was a thoroughly good-natured man, and as active a
    
creature about everything but his own affairs as ever existed, and
    
never so happy as when he was busy about something that could never be
    
of any profit to him) set to work at the petition, invented it,
    
engrossed it on an immense sheet of paper, spread it out on a table.,
    
and appointed a time for all the club, and all within the walls if they
    
chose, to come up to his room and sign it. 
    

     Dickens
    
readers apparently find this all touching and loveable: apparently the
    
book remains about the best-selling of all Dickens novels. It is not entirely clear just what Dickens himself thinks. It is he who sketches out all this sunny innocence; yet it is he who lays out the evidence that Micawber, for those around him, is pretty much of a train wreck. Dickens does also mention “the boot-maker” who 
    

    had declared in open court that he bore [Micawber] no malice, but that when money was owing to him he liked to be paid. He said he thought it was human nature. 
    

    Human nature indeed. Compare with Micawber’s human nature at work as he undertakes to discharge an obligation to his young friend Traddles:
    

    ‘One thing more I have to do, before this separation is complete, and that is to perform an act of justice. My
    
friend Mr. Thomas Traddles has, on two several occasions, ‘put his
    
name,’ if I may use a common expression, to bills of exchange for my
    
accommodation. On the first occasion Mr. Thomas Traddles was left—let me say, in short, in the lurch. The fulfillment of the second has not yet arrived. The
    
amount of the first obligation,’ here Mr. Micawber carefully referred
    
to papers, ‘was, I believe, twenty-three, four, nine and a half; of the
    
second, according to my entry of that transactions, eighteen, six, two. These sums, united, make a total, if my calculation is correct, amounting to forty-one, ten, eleven and a half. My friend Copperfield will perhaps do me the favour to check that total?’
    

    I did so and found it correct. 
    

    ‘To
    
leave this metropolis,’ said Mr. Micawber, ‘and my friend Mr. Thomas
    
Traddles, and I now hold in my hand, a document, which accomplishes the
    
desired object.  I beg to hand to my friend Mr.
    
Thomas Traddles my I O U for forty-one, ten, eleven and a half, and I
    
am happy to recover my moral dignity, and to know that I can once more
    
walk erect before my fellow man!’ 
    

    

    

    With
    
this introduction (which greatly affected him), Mr. Micawber placed his
    
I O U in the hands of Traddles, and said he wished him will in every
    
relation of life. I am persuaded, not only that this was quite the same
    
to Mr. Micawber as paying the money, but that Traddles himself hardly
    
knew the difference until he had time to think about it.  
    

    

     It’s
    
something to reflect that Micawber’s cheerful, calamitous innocence who
    
has more to do with public attitudes towards debt than any other
    
character in literature. 
    

    Fn.: Dickens never was much good at endings. After
    
carrying him through one scrape after another, there wasn’t much to do
    
with Micawber, so (in desperation?) Dickens sent him to the antipodes
    
and made him a judge. The reader is left to draw whatever moral he sees fit.
    

    


  • 


    Pity the Poor Mortgagee
    



    

    Posted by
    



    Buce
    



    



    

    

    

    



     “I’m tired of worry
    
about my debts,” goes the old story, “now you
    
worry about them.”  
    

    In trying to understand the plight of borrowers in
    
any prospective subprime lender meltdown, we may have failed to focus on the
    
fact that for every unpaid loan, there is an unpaid lender. Evidence of this point comes from the apparent
    
collapse of Ownit Mortgage Solutions Inc. which filed for Chapter 11 in Van
    
Nuys last Friday. The LA Times says: 
    

     Ownit grew rapidly over the last
    
few years, becoming a top 20 lender nationally in the sub-prime niche, but the
    
closely held company turned unprofitable as interest rates and homes prices
    
rose and competition for a shrinking customer base intensified.
    

    Interest rates? Competition? I wonder if somebody
    
got spun here. Much deeper in the story,
    
the reporter adds that “by far the biggest portion of the debt resulted from
    
soured mortgages,” which sounds to me like “we made a lot of lunatic loans that
    
we never should have made in the first place.”
    

    In any event, is fascinating to speculate on what, if
    
anything will be the implications of a failure like this for the harassed
    
borrower. It used to be that for the
    
debtor, news of your lender’s bankruptcy
    
was the best you could hope for: you’d be dealing with a trustee with a limited
    
warchest; records would get misplaced or simply forgotten; and in any event,
    
during a general unravelling, the last thing the creditor wanted was to take
    
the property back.
    

     I haven’t any idea whether this is what is happening here;
    
it may be a different story altogether, or it may be that I am just fighting
    
the last war –our mantra these days seems to be that securitization has
    
rewritten the rule book, and this may be the place where we find out what the
    
new rules look like.
    

     Paranoid further
    
thought:     now I am really getting beyond myself, but bear with me. Deep in the story, we are also told that, in
    
addition to sour mortgages,  “glitches in
    
recording payments and other technical problems also played a role.” Hello, technical problems?  Glitches? Glitches? I am old enough to remember any number of
    
mortgage-lender meltdowns that came unmasked as outright Ponzi schemes, riven
    
with fraud from top to bottom. Yes, yes,
    
I am getting way beyond the evidence here, but I am wondering if this might
    
turn out to be a case that only a lawyer could love.  
    

    


  • 


    Elsewhere In The Blogosphere…
    



    

    Posted by
    



    Buce
    



    



    

    

    

    



    I feel the urge to showcase a `couple of blogs that may not
    
have surfaced  so far on the radar of
    
CreditSlips readers.
    

     I mostly bypass the specialized bankruptcy blogs: there are
    
so many and it is kind of like counting bees—you never know which ones you have
    
already counted.. Most readers will have
    
their own views on specific items among the proliferation
    
of commercial marketing blogs created by law firms and others, many of which
    
are mediocre and some of which are butt awful. One difficulty that particularly seems to affect the good ones is that
    
the proprietors seem to be discovering that it is a lot of work. Thus the ABI
    
BAPCPA blog     started strong but hasn’t surfaced a new post October. The same fate may be overtaking the Bankruptcy Litigation Blog,
    
or maybe he is just taking a long holiday.  One apparent survivor that perhaps does deserve mention is The Bankruptcy Lawyers Blog (no
    
apostrophe?), if only because it
    
succeeded in getting the phrase “Illinois … Professor” into the headline of two
    
separate posts, for two separate professors (Lawless
    
and Tabb).  BLB
    
does mostly consumer BAPCPA. For business
    
BK, there is straightforward stuff at In
    
the (Red)    .
    

    But further afield–how many readers have ventured far
    
enough afield to find The Housing Bubble
    
Blog    ? As one who has lived through
    
nine of the last four recessions, I find it riveting: of course if the market
    
ever does turn up, these guys will be perhaps the last to know.  Absolutely do not overlook the slide show.  
    

    Or, if that isn’t enough, allow me to introduce The Payday Loan
    
Industry Watch    —not quite a blog, but they’ve got an RSS news feed and
    
Podcasts, along with a direct link for your payday borrowing needs.  And
    
finally, if none of this provides life in tooth and claw, try I Am Facing Foreclosure (good news:
    
his Bible reading is up to 138 chapters, but no word on whether this includes
    
Chapter 11).