I just read a really fabulous annotated bibliography of books (alas, articles by such luminaries as Emily Kadens are excluded) on the history of credit, debt, and bankruptcy in the United States. Many of my favorites are on here, along with a few new entrants with which I was, embarrassingly, unfamiliar. This is a great resource for new lawyers and law professors, in particular, but also for anyone interested in this fascinating history and/or looking for something to help while away the cold, blizzard-bound winter hours. Enjoy!
Category: Historical Perspectives
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Shocking Business Bankruptcy Law
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Another quick announcement that I have posted a draft essay on some under explored intersections between big business bankruptcy and big shocks here. The abstract is short, yes, but so is the essay. It also discusses ice cream. Thanks for reading!
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Who extracts the benefits of big business bankruptcy?
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The Deal has a new podcast called Fresh Start hosted by journalist Stephanie Gleason. Stephanie and I recently chatted about big bankruptcies with litigation management at their core and the stakes those cases raise. We covered a lot of ground along the way, including non-debtor releases and the SACKLER Act, notice and voting, forum shopping, equitable mootness, the homogeneity of the restructuring profession, bankruptcy administrators and the United States Trustee system, and the skinny clause of the Constitution at the heart of all of this. We begin by reminiscing about the mass tort and future claims discussion during the deliberations of the National Bankruptcy Review Commission, for which Elizabeth Warren was the reporter, and how much has changed. Check it out here.
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Antique Chinese Debt – The Latest
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Mark Weidemaier and I have talked about antique Chinese (mostly Imperial) debt often on this site. And we've also discussed these debts on our podcast with sovereign debt gurus Tracy Alloway and Lee Buchheit (here). Yes, we are a bit obsessed. Part of our fascination with this topic is that the Chinese government asserted a defense of odiousness to paying these debts. The lenders (backed by western powers, seeking influence in China) and the Imperial borrowers (seeking to sell access to their country in exchange for self preservation) had, in essence, sold out the people of China. End result: Revolution and refusal of successor communist governments to pay these debts, no matter what – even today, when China is a financial behemoth.
Below is the abstract for a wonderful new paper, "Confirming the Obvious: Why Antique Chinese Bonds Should Remain Antique" in the U Penn Asian L. Rev. by two of our former Duke students, Alex Xiao and Brenda Luo. Bravo! We are so proud.
As the Sino-U.S. relationship goes on a downward spiral, points of conflict have sparked at places one might not expect: antique sovereign bonds. In recent years, the idea of making China pay for the sovereign bonds issued by its predecessor regimes a century ago have received increasing attention in the U.S. This note takes this seeming strange idea seriously and maps out the possible legal issues surrounding a revival of these century-old bonds. Although two particular bonds show some potential for revival—the Hukuang Railways 5% Sinking Fund Gold Bonds of 1911 and the Pacific Development Loan of 1937—the private bondholders would unlikely be able to toll the statute of limitations on the repayment claims based on these bonds. Even in the unlikely scenario that they succeed, the Chinese government would have an arsenal of contract law arguments against the enforcement of these bonds, most notably defenses based on duress, impracticality, and public policy. By going into the details of the legal arguments and history behind these bonds, we seek to confirm the obvious, that is, the idea of making China pay for these bonds is as far-fetched as it sounds and would not be taken seriously by courts.
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A Campaign to Opt-Out
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Following-up on my prior post, let’s talk more about what’s at stake in this little legislative kerfuffle in the Hawkeye state, as well as how consumer advocates should seize on this moment in a different way.
First, repealing this 521 provision in Iowa law is really all about whether states should have, to a large degree, the ability to control the interest rates charged on products and services that are offered to consumers by nonbank firms.
Many readers of this blog may already know this history backwards and forwards – but for those who don’t, here’s the backstory. In Marquette Nat’l Bank of Minneapolis v. First of Omaha Serv. Corp., the U.S. Supreme Court interpreted the National Bank Act as giving nationally-chartered banks the ability to charge the highest interest rate allowed in the state where the bank is located to borrowers located not only in that state, but also to borrowers located in any other state. This means, for instance, that a national bank located in Iowa can not only charge the highest interest rate allowable in Iowa to anyone located in Iowa, but it can also charge that same rate to a borrower located in Oklahoma, Louisiana, or any other state. Even if Louisiana, Oklahoma, or another state’s laws prohibit interest at such a rate, the loan is nevertheless free from being usurious. This concept is known as “interest rate exportation.”
After the 1978 decision in Marquette, there was a concern about the ability of state-chartered banks to compete with national banks. So, state legislatures started enacting “parity laws” that allowed their state banks to charge the maximum rates of interest allowable by any national bank “doing business” in that particular state. These parity laws were often even broader, granting to state chartered banks all of the incidental powers granted to national banks. In sum, the goal of these parity laws was to put state banks on equal footing with national banks, particularly when it came to usury. Good so far?
Ok here comes the part dealing with this shady Iowa house bill…
In a final effort to give state-chartered banks a competitive edge, in 1980 Congress passed the Depository Institutions Deregulation and Monetary Control Act (DIDMCA). A portion of DIDMCA, specifically section 521 (see where this is going…) granted interest rate exportation to any state-chartered bank that was federally insured (in other words, to all FDIC-insured state-chartered banks). 12 U.S.C. 1831d. This allowed a state-chartered bank to charge out-of-state borrowers the same interest rate allowable for in-state borrowers. Thus, a state-chartered bank located in Iowa could charge an Oklahoma borrower the Iowa-allowable interest rate, even if that rate was higher than what would otherwise be legal under Oklahoma law.
But here’s the catch. In Section 525 of DIDMCA, Congress gave states the ability to opt-out of section 521 by enacting legislation stating the state did not want section 521 to apply. Only two jurisdictions opted out: Puerto Rico and…you guessed it…Iowa. In 1980, right after DIDMCA was passed, Iowa opted out per 1980 Iowa Acts, ch. 1156, sec. 32. To add one more bit of background, Iowa also did not enact any parity laws. In fact, a former general counsel to the Iowa Division of Banking stated in a 2002 interview that enacting such a law that delegated control over Iowa state banks to the feds would be seen as “a slap in the face” to the Iowa legislature.
So, there you have it. This little provision in an otherwise unrelated tax bill is to OPT INTO section 521 and thereby reverse the decision Iowa’s legislature made in 1980.
Now you may say to yourself, why is this so bad? The bad part requires you know something about the rent-a-bank partnership model between certain state-chartered banks and a number of online “fintech” lenders. Since the 2008 financial crisis, a growing number of nonbank fintech firms that make loans over the internet have partnered with a handful of state-chartered banks (mostly chartered in Utah, Kentucky, and New Jersey) in order to make and market unsecured installment consumer loans. By and large the way the business model works is that although the loan application is submitted through the nonbank’s website or smartphone app, it is the partner bank that actually advances the funds. The marketing and underwriting process are both performed by the nonbank. Then, very shortly after, the bank sells the loan along with others (or some interest in those loans) to the nonbank fintech company or an affiliate. The fintech or another firm then sells the interest to a pre-arranged wholesale buyer or sponsors a securitization of a large pool of loans for sale as securities in the capital markets.
The bank’s role is merely passing, and it typically retains no material economic interest in the loans. However, so the argument goes, because the loan is originated by an insured state-chartered bank, it can export the interest rate of its home state to borrowers located in ANY state (with state usury laws preempted by DIDMCA section 521). And sometimes these loans can be quite expensive (rates of 160% APR or more e.g., CashNet USA, Speedy Cash, Rapid Cash, Check n' Go, Check Into Cash). You can get more info on these partnerships and check out some nifty maps provided by the folks at the National Consumer Law Center here.
So, here’s how I think consumer advocates can turn the tables. There are a number of states that have aggressively gone after these rent-a-bank schemes (adding a lawsuit by AG of DC to the mix here) and a group of state AGs are currently suing the OCC on account of its true lender rule. In other words, a number of states do not want this kind of high cost, fintech-bank lending happening in their jurisdiction.
Here’s my suggestion to those states: why not just pass your own opt out of DIDMCA Section 521?
As mentioned above, many of these online lenders in high-cost rent-a-bank schemes favor partnering with FDIC-insured, state-chartered banks rather than national banks. Opting out of DIDMCA would deprive these schemes of their regulatory arbitrage. Without the ability to import the interest rate law of another state into a given jurisdiction, it would force these online firms to apply for a lending license and otherwise abide by the jurisdiction’s usury limit. DIDMCA allowed states to opt out of Section 521, and the statute didn’t give a deadline to do it. So, here’s a call to states like Colorado and others who are going after these usury and regulatory evasive business models…take away the linchpin of the business model. Opt-out of section 521!
And as for those of us back here in the Hawkeye state, here’s to hoping that the Iowa legislature doesn’t (pardon the Peloton pun) get so easily taken for a ride.
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Book Recommendation: Caesars Palace Coup
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A fun new book applies a revealing Law & Order analysis to the multi-billion-dollar, knock-down-drag-out reorganization of Caesar's Palace. In The Caesars Palace Coup, Financial Times editor, Sujeet Indap, and Fitch news team leader, Max Frumes, open with a detailed examination of the personalities and transactions that preceded the Caesars bankruptcy case, leading to the second (and, for me, more interesting) part of the book, tracking step-by-step the harrowing negotiations, court proceedings, and examiner report that led to the ultimate reorganization.
There is so much to like in this book. Its primary strength is its Law & Order backstory, peeling back the onion of every major player, revealing how they got to where they were in their careers in big business management, high finance, or law, and revealing their thoughts and motivations as the deals and legal maneuvers played out. Four years of painstaking personal interviews have paid off handsomely in this fascinating account of the inner workings of big money and big law reorganization practice. On a personal note, I was treated to a bit of nostalgia, as the book opens with and later features Jim Millstein, an absolute gem of a person who taught me about EBITDA when my path fortunately crossed with his at Cleary Gottlieb in New York City in the late 1990s. It also features the Chicago bankruptcy court in my backyard, which seldom hosts such mega cases as Caesars', and the story in the second half of this book reveals part of the reason why. Cameo appearances include some of my favorite academics, such as Nancy Rapoport, as fee examiner, and Slipster, Adam Levitin, as defender of the Trust Indenture Act. On that latter point, the book alludes to (but does not particularly carefully explain) the key role of the Marblegate rulings on the TIA, which is described in a bit more depth in a vintage Credit Slips post. Again, the book's most valuable contribution is a behind-the-scenes look at the motivations and machinations behind a salient instance of collateral stripping, adding to the literature on this (disturbing) trend.
For would-be, currently-are, or has-been (like me) business managers, investment bankers, hedge fund managers, and reorganization lawyers, this book is a fascinating under-the-hood analysis of every stage of a financial business restructuring (not much about the operational side). For anyone interested in the thoughts and motivations of the Masters of the Universe who control so much of our world and its most famous companies, this book offers a brutally honest peek at how the sausage is made. It's not always pretty, but it is both entertaining and enlightening.
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Of Sheep, Twyne’s Case, and a Better Story
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Professor Emily Kadens has just published a great paper that explodes the myths about Twyne's Case. We all know Twyne as the case where an insolvent farmer gave away his sheep, thereby leading to a Star Chamber decision that laid the foundation for modern fraudulent conveyance law. It turns out most all of the story we know isn't true. Even better, the actual story is much more interesting and instructive.
Kadens did an incredible amount of archival research, going through the depositions and other original records from the case. Obstacles included documents that had been partially eaten by rats, a point I need to remember the next time I want to complain about difficulties with my own research.
Pearce, who was the debtor, had resisted writs of execution from the undersheriff who had come to seize his property, which was a lot more than just a few sheep. And, it was not Pearce himself, but his laborers and community members who did the resisting. Confrontations occurred over three days. After an unsuccessful foray to Pearce's farm on the first day, the undersheriff made somewhat of a surprise attack on the second day to seize cattle at a more distant place called Holden Field (the picture to the right, courtesy of Kadens). The undersheriff pastured the cattle overnight at Pole Meadow (pictured below the fold, again courtesy of Kadens). The next day, the undersheriff attempted to drive the cattle to market, but Pearce's allies interceded and took the cattle.
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Back to the Future (Again): Horatio Gadfly and Those Imperial Chinese Bonds
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FT Alphaville has had a long line of quirky and brilliant reporters over the years, something that I've always enjoyed (Joseph Cotterill, Tracy Alloway, Colby Smith, Cardiff Garcia and more). And I've especially liked the pieces that do deep dives into obscure and arcane sovereign debt matters.
The latest such piece is from Izabella Kaminska, on the the topic of antique imperial Chinese bonds and the possibilities for recovery (from about ten hours ago, here). The likelihood of using purely legal methods and recovering on these today is near zero. But near zero is not zero and periodically, as a means to get students engaged on the thorny questions of statutes of limitations and sovereign immunity, Mark Weidemaier and I will assign them the task of figuring out which of the defaulted imperial sovereign bonds have the best chance of recovery. The assignment is usually framed in terms of a set of bonds that Mr. Horatio Gadfly inherited (here) (Joseph Cotterill's hilarious piece on Mr. Gadfly's adventures is here)).
This past semester, a group of our students — Michael Chen, Charlie Fendrych, and Andres Paciuc, dug deep and found a small subset of bonds that maybe, just maybe, had a long shot. Their fun paper, "The Emperor's Old Bonds" (soon to appear in print in the Duke Journal of Comparative and International Law) is here.
Izabella's article today makes a deeper point, which is that these legal claims — while implausible if viewed in purely legal terms — can acquire muscle as a function of political context. Is this such a time? Maybe. Coronavirus, trade talks, election rhetoric, Taiwan, and given that some of Trump's supporters have lots of these old Chinese bonds and Trump is . . . well, Trump may have changed the equation from what it has been for the past century. Steve Bannon, of all people, has talked about imperial Chinese bonds on his War Room show multiple times (e.g., this War Room episode at about 40:50. . . Aiyiyiyi . . . here).
If you are intrigued and want to go down the rabbit hole, this question of politics and antique Chinese bonds has come up before — see Tracy Alloway's piece on Bloomberg (here), Cardiff Garcia on NPR (here) and Mark Weidemaier on creditslips (here and here).
Izabella is (I hope) not done with her writing on this topic and there might be more on Alphaville soon (today's teaser was in the main paper). This topic connects to so many other fun topics relating to historic wrongs too — like the fact that the British museum holds the Elgin Marbles and the British crown holds the Koh-i-Noor diamond (US museums undoubtedly have lots of these sorts of items as well). If Chinese imperial bonds need to get paid, maybe it is time to give the Elgin Marbles and the Koh-i-Noor back? Come to think of it, maybe it is time to give them back regardless of the bonds? Sovereigns are infinitely lived, which means that their obligations are too — if someone can figure out a way to get around the statutes of limitations.
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David Graeber’s Debt, The First 5000 Years
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I’m just getting around to reading a 2014 book some Creditslips readers may be familiar with, Debt: The First 5000 Years. In this utterly fascinating work, Anthropologist David Graeber exhaustively recounts the history of debt and money. He begins by debunking the myth of barter, the story told in introductory economics textbooks that money was spontaneously invented to permit merchants to exchange goods and services in imaginary markets, as an improvement over primitive market economies based on barter. In fact, early human societies all relied on central planning (by kings and high priests), communism, gift-giving, redistribution, and various forms of debt, notably in Mesopotamia, Egypt and Greece, the earliest western civilizations, and probably in India and China as well. Debts and their units of account (i.e. money) arose to compensate for injuries, to seal marriages and other relationships, and to tabulate taxes paid and owed to sovereigns. Kings invented coinage both to relieve the poverty of their subjects and to provision their armies by spending coins, and as a convenient means to collect taxes. Modern monetary theorists like to cite this research to make the essential point that money and markets are created by sovereigns and states, and rarely if ever arose spontaneously. The idealized construct of a free market based solely on exchange first arose much later in economic history, in mercantilist societies and then with the liberal philosophers (Bentham, Owen, Smith, Ricardo) of the Industrial Revolution.
Bankruptcy has always been with us. From the earliest times debt-based money led to
periodic crises and debtor revolts, and wise rulers from the dawn of written history periodically decreed the cancellation of all debts, sometimes memorialized by the physical destruction of debt tokens. The biblical inscription on the Liberty Bell from Leviticus, “proclaim liberty throughout the land”, was the announcement of a debt jubilee including the liberation of debt slaves. The Rosetta Stone was a similar Ptolemaic royal decree announcing a tax and debt jubilee.
Capitalism had its origins not in the exchange of goods and services between free traders and workers but in slavery and debt peonage, not only in the United States but in every colonial empire. After reminding us of Martin Luther King’s description of the founding documents as an unpaid debt to Black Americans, Graeber concludes by reminding us that the validity and morality of various debts can and should be determined democratically. Thought provoking in a moment when we hear calls for both payment of reparations and cancellation of student loan and housing debts.
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The Great American Housing Bubble
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My new book, The Great American Housing Bubble: What Went Wrong and How We Can Protect Ourselves in the Future was just released by Harvard University Press. The book is co-authored with my long-time collaborator, Wharton real estate economist Susan Wachter. It's the culmination of over a decade's worth of work on housing finance that began in the scramble of fall 2008 to come up with ways of assisting hard-pressed homeowners.