As I await the arrival of this semester's exams, and all the fun that those will entail, I'm getting caught up on my reading. The best of the bunch thus far is Emily Kaden's history of the Pitkin Affair, which appears at 84 Am. Bankr. L.J. 483 (2010), and online here. Having read a lot of bankruptcy history, I was generally familiar with the plot, but Emily presents the definitive history of the entire episode, which is so often referenced, but not explained, in latter histories of English and American bankruptcy.
Category: Historical Perspectives
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A Conversation with Trailblazing Women
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Yesterday, I attended the International Women's Insolvency and Restructuring Confederal (IWIRC) Annual Spring Program. The featured event was entitlted, "A Conversation with Trailblazing Women in the Insolvency Field." Moderated by the Hon. Marjorie Rendell of the 3rd Cir. Court of Appeals, the panel's participants incuded Norma Corio of JPMorgan Chase, Marcia Goldstein of Weil Gotshal & Manges, Hon. Barbara Houser, Chief Bankruptcy Judge, N.D. Texas, Hon. Mary Walrath, Bankruptcy Judge, District of Delaware, and Bettina Whyte of Alvarez and Marsal. The program opened with a parable. A man cuts himself shaving in the shower. He wonders out loud what is wrong with the razor. A woman cuts herself shaving in the shower. She wonders out loud what she did wrong.
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The Upside of High Fees
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Some of the comments to Stephen Lubben's post on "overhead" raised the longstanding complaint about high fee awards in New York and Delaware Chapter 11 cases. We all know the academic and political condemnations of Chapter 11 as merely a feast for lawyers.
It's important to remember, though, that the possibility of higher attorney's fees was considered a feature, not a bug, when the Code was enacted in 1978. Or, more precisely, the liberalization of fee awards was intended to attract lawyers (the elite bar) who had largely shunned bankruptcy practice after the New Deal-era bankruptcy reforms. There's no doubt that the overall quality of representation in business bankruptcy cases has increased markedly since 1978, along with the cost of that representation. That's why I don't understand those critics whose objections really seem to be about the presence of large, sophisticated (and expensive) national law firms in Chapter 11 cases.
Of course, high fee awards come out of the pockets of unsecured creditors, who don't have much say in hiring the attorneys. The system needs an outsider monitor to take account of that inherent principal-agent problem, and that's where the US Trustee plays a crucial role. But anyone who has practiced in New York knows that the US Trustee's Office has not always been predictable in its fee objections. The overhead argument is an example.
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Anna Nicole Smith and Mass Torts in Bankruptcy
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Stern v. Marshall presents another issue that deserves attention. In addition to the constitutional arguments, the respondent (the creditor) raised a statutory objection to the bankruptcy court's ability to hear and decide the debtor's counterclaim as a core proceeding. The judicial code (28 U.S.C. § 157(b)(2) and (b)(5)) limits the power of bankruptcy courts to adjudicate "personal injury tort and wrongful death claims" as core proceedings–provisions that come into play in mass tort bankruptcy cases.
I'd like to focus on why we have such a genuinely odd qualification of the jurisdiction of the bankruptcy courts.
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Robosigning and Evidence
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The robosigning issue brought to mind a Talmudic evidentiary rule that declares the testimony of certain types of people inadmissible:
These are they who are ineligible (as witnesses): a dice-player, a usurer, pigeon-flyers, traffickers in Seventh Year produce, and slaves. This is the general rule; any evidence that a woman is not eligible to bring, these are not eligible to bring.
Mishnah Rosh ha-Shanah 1:8.
This is hardly the Federal Rules of Evidence, but I just thought it interesting.
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Modern Redlining in Historical Context
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A paper that I wrote while an employee of the Federal Reserve System a couple years back documents the presence of ‘redlining’ in the issue of credit cards. Credit Slips picked it up here (link).
(To ensure there are no misunderstandings, this paper did not and does not represent the views of the Federal Reserve Bank of Boston or the Federal Reserve System; in fact, both entities did their utmost to prevent its release) … continue…
To be more specific: I find that credit issuers use the racial composition of a neighborhood in determining how much credit to give to individuals that live in it. I use the term ‘redlining’ with historical reference: this idea is that particular areas have been identified as high risk. What I find is that the ‘high risk’ areas are highly correlated with the presence of minorities.
I’ll be clear, I cannot definitely prove that lenders use race—I’m an economist, not a lawyer! Regardless, I’ll present the point that the practice is still redlining even if lenders never use race, but use location-based information that is correlated with race.
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Measures of TARP
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The curtain drew on TARP to a flood of assessments, from Treasury's up to TARP COP's down, with the commentariat all along the spectrum in between, converging around about the "necessary-evil-begets-moral-hazard" meme. But this New York Times graphic and the surrounding talk of taxpayer repayment left me wondering. To be sure, it is always better to make money than to lose money. And I suppose if a government program were an abject policy failure but made a killing for the Treasury, it would not feel quite as bad as a failure that cost an arm and a leg. The Clinton Administration's package for Mexico in 1995 is often described as a success in key part because it was repaid in a year, and made a profit for the Treasury — so much so that Paul O'Neil, George W. Bush's first Treasury Secretary, famously endorsed his Democratic predecessors' controversial bailout. All this makes sense if the fiscal rescue works like the central bank's lender of last resort function, meant to overcome illiquidity with safe short-term loans at penalty rates. As Steve Davidoff points out, TARP's overriding goal was rapid stabilization, in which case the big difference between TARP's containment strategy and the preceding Fed facilities is some mix of extreme fear and political exhaustion. I suspect that this view of what makes TARP successful lends itself to certain methods– big loans to banks over little subsidies to households, which would take a long time to wind their way back to the Treasury. Should "bailouts" make more of an effort to distribute and stimulate, even if it means more risk of near-term loss? I wonder. Would any political body ever do it? I doubt it. Bye, TARP.
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Time Flies
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To keep this debt thing in perspective … Germany is about to pay the last of the debt it took on to finance World War I reparations. This debt is mostly interest payments to private bondholders. The reparations came out of the Treaty of Versailles in 1919, but Germany had no money, so it issued bonds in the private capital markets in the 1920s to fund its payments to the Allies. The bonds defaulted in the 1930s (first crash, then Hitler, then it got really messy), but resumed principal payments under a 1953 agreement. Interest payments were deferred until reunification, and resumed once the Berlin Wall fell, with the last one due this weekend. Der Spiegel story here. How poignant yet deeply screwed up all around.
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The Beginning of a Return to Consumer Protection?
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Many years ago, in the mid 1970's, when I began my career as a legal services lawyer practicing consumer law, it seemed that we were on a roll. Congress and state legislatures were passing a bevy of laws to protect consumers (including the Bankruptcy Reform Act of 1978.) The FTC was passing regulations and taking action against consumer scams. Innovative lawyers, often in legal services programs, were bringing class actions against a wide variety of illegal and unfair practices. These cases were received sympathetically by courts that, from a common sense perspective, could see that those practices took advantage of consumer ignorance or confusion. Little did we know that we were at the peak of the consumer protection movement and it would be almost all downhill from there.
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Pro-Consumer Innovations in Payments
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Todd Zywicki wrote in a Wall Street Journal op-ed yesterday that "The most important
pro-consumer innovation in payment systems of the past two decades has been the
general disappearance of annual fees on most credit cards."Todd is right that consumers are happy to see annual fees go away, but the disappearance of annual fees wasn't a freebie for consumers. It came about as part of a shift in the credit card business model whereby upfront fees were replaced with backend fees that have lesser salience to consumers when the consumers decide which cards to carry and use. This was a move that was made to increase revenue for card issuers (or put another way, to siphon off more consumer surplus); it was not a charitable act. The disappearance of annual fees is an important innovation, but I think it is a stretch to call it a pro-consumer innovation, when it is viewed contextually.
The disappearance of annual fees was a step in the democratization of credit (or put another way, the decline in underwriting standards). Whether this was a good thing is unclear. It certainly increased consumer's borrowing ability and choices, and might have led to a substitution from secured installment credit to unsecured revolving credit. But greater ability to borrow and more borrowing choices are not necessarily good. They are only good to the extent that a consumer is capable of repaying the increased credit line and making informed choices among credit options. Both of those are questionable for many consumers.
In Todd's defense, though, I am hard pressed to think of another widespread innovation that would qualify unabashedly as pro-consumer, so maybe the disappearance of annual fees wins by default. I would have placed the card associations' waiver of all consumer liability for unauthorized transactions (going beyond TILA) as the clear winner, but I don't know how far back this policy goes. (Please pipe in if you do.)
The difficulty in naming pro-consumer innovations is a sorry indictment of the payments industry, and one that says something about the nature of innovation and competition in payments. Maybe others have thoughts about pro-consumer innovations. Comments are open.