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Commentary: A Proposed Bankruptcy for Banks That Will Lead to Bailouts

ABI Bankruptcy Brief
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June  29, 2017

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

Commentary: A Proposed Bankruptcy for Banks That Will Lead to Bailouts

One core piece of the congressional drive to dismantle Dodd-Frank is the move to repeal orderly liquidation authority and with it the special powers of the Federal Deposit Insurance Corp. to deal with big bank insolvency, according to a commentary by Prof. Stephen Lubben in New York Times DealBook blog on Monday. Instead, Congress proposes leaving the failure of big financial institutions to the general bankruptcy system. In particular, the legislation tries to move the “single point of entry” strategy developed for the big banks in orderly liquidation authority to the bankruptcy court. Under this strategy, a bank would be recused by forcibly converting junior debt to equity. If Congress proposes to kill off orderly liquidation authority, a tool that would be of most use to the really big banks, it would be replaced with a bankruptcy system that will be irrelevant for the really big banks and won’t work for medium-size banks, according to the commentary.
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Puerto Rico Judge Nixes Negotiation Plan in Debt Battle

The judge in Puerto Rico's landmark bankruptcy yesterday shot down a proposal to appoint fiduciary agents to represent warring creditors in debt restructuring talks, Reuters reported. Judge Laura Taylor Swain, at a hearing in San Juan, denied the proposal by the federal board in charge of managing Puerto Rico's finances, giving credence to concerns of some creditors that the board cannot be objective in certain investor disputes. Puerto Rico, battling more than $70 billion of debt and a decade of economic contraction, last month filed the biggest bankruptcy in U.S. municipal history. A major clash in the case is between creditors of Puerto Rico's central government and creditors of its sales tax authority, COFINA. Together, they own about half the island's debt, and each side claims an ironclad right to repayment from Puerto Rico's sales tax revenue. The board had proposed appointing agents to advocate for each side in settlement talks, but the plan would have given the board a hand in selecting the agents. This riled COFINA holders who believe the board plans to side with GO creditors, and feared the COFINA agent would not be independent.
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For updated news and analysis of Puerto Rico's debt crisis, along with current docket filings in Puerto Rico's case, be sure to visit ABI's "Puerto Rico in Distress" webpage.

Analysis: The Deepening Debt Crisis in Illinois

Illinois is locked in a political stalemate, and in danger of becoming the first U.S. state to have its debt downgraded to junk status, the Wall Street Journal reported today. S&P Global Inc. threatened to take that action if Gov. Bruce Rauner and Democratic Speaker of the House Michael Madigan can’t agree on a package of spending and taxes by the start of the next fiscal year on Saturday. Much of Illinois’s $25 billion in outstanding general obligation debt is held by individual investors seeking a stable source of income, according to analysts’ estimates. But Wall Street is also exposed via mutual funds, hedge funds and insurers that purchased the state’s bonds. Money management giant Vanguard Group has $1.2 billion spread across seven mutual funds. It is the biggest holder among all mutual-fund firms that had a total of $4.5 billion in Illinois bonds as of the first quarter of 2017, according to research firm Morningstar.
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U.S. Congress Tries, Again, on Corporate Transparency

Lawmakers in the U.S. House of Representatives and Senate unveiled bipartisan legislation yesterday they say will pierce the veil on shadowy corporate ownership, the Wall Street Journal reported today. The legislation, which would require companies to reveal their true, beneficial owners at the time of incorporation, has been proposed several times before in Congress, but it has always stalled in committee amid opposition from banks and states. Questions about U.S. policy surrounding corporate ownership transparency have been around for years, most recently from the Financial Action Task Force, a Paris-based international anti-money-laundering standards body, which said late last year that beneficial ownership is a deficiency that must be addressed. The U.S. Treasury Department has tried to address some of the questions, imposing rules that go into effect in 2018 that require banks to identify the beneficial owners of corporate accounts. Under that rule, a beneficial owner is any individual who owns 25 percent or more of the equity interest in the legal entity, or an individual with “significant responsibility” to control the entity.
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Participate at Next Consumer Commission Meeting on July 15 at NACTT

The ABI Commission on Consumer Bankruptcy welcomes you to participate at its next open meeting on July 15 at the NACTT Annual Meeting in Seattle (Sheraton Seattle Hotel). The meeting will be held from 4:00 to 5:30 p.m. PT and is a field hearing for the Chapter 13 Committee. Major topics for consideration by the Committee include (a) chapter 13 eligibility, (b) homeowner issues, (c) chapter 13 plans, (d) credit reporting, (e) local legal culture and (f) after-acquired property. For more information, go to consumercommission.abi.org. To request a time for a public statement or to submit a written statement, email the Commission at ConsumerCommission@abiworld.org.

For more information on the Commission, including oral and written statements from the May 6 meeting, please click here.

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BLOG EXCHANGE

New on ABI’s Bankruptcy Blog Exchange: Recast EU Insolvency Regulation Comes into Force

On June 26, the Recast EU Insolvency Regulation (Council Regulation (EC) No. 2015/848) came into force, according to a recent blog post. It will apply to all relevant insolvency proceedings (although existing and ongoing proceedings will continue to be bound by the EU Insolvency Regulation (Council Regulation (EC) No. 1346/2000) (the “EIR”)). The Recast EU Insolvency Regulation will have direct effect in all EU member states (except Denmark).”

To read more on this blog and all others on the ABI Blog Exchange, please click here.

 
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