Academic Proposes Nationalization of Central Counterparty Clearinghouse

ABI Bankruptcy Brief | August 5, 2014

August 7, 2014

NEWS AND ANALYSIS

ACADEMIC PROPOSES NATIONALIZATION OF CENTRAL COUNTERPARTY CLEARINGHOUSE

Regardless of the Dodd-Frank efforts to eliminate bailouts of "too-big-to-fail" entities, Prof. Stephen Lubben of the Seton Hall University School of Law said that the U.S. government should codify plans to nationalize "over-the-counter" (OTC) swaps clearinghouses in the event they approach failure, the International Financing Review reported today. "Bailouts of clearinghouses are inevitable, because the important, central place of clearinghouses after Dodd-Frank makes their failure too disruptive to be politically tolerated," according to Lubben. With Dodd-Frank mandating that OTC swaps be centrally cleared, clearinghouses have become a key part of the new swaps infrastructure, housing trillions of dollars in swaps notional and acting as the central manager of counterparty risk. Market participants have raised concerns that the firms, as privately held entities with shareholder commitments to keep, could venture into riskier territory in a search for profits that would undermine the stated aim of reducing market risks. "Inexplicably Dodd-Frank makes no real provision for the potential failure of a clearinghouse. Recent events have shown that such optimism is unwarranted," Lubben said. Although Dodd-Frank did create the Orderly Liquidation Authority to address the resolution of large complex financial firms, Lubben notes that a clearinghouse's unique legal standing under the statute carves it out from the OLA and relevant regulators' jurisdiction. Furthermore, he notes that certain exemptions for derivatives and securities could impede the use of the Bankruptcy Code in addressing a clearinghouse failure in bankruptcy court. He believes Congress should create a structured bailout procedure that includes the nationalization of clearinghouses in order to address such legal nuances. "Clearinghouses need a directly applicable resolution device; a backstop is simply insufficient," Lubben says. "A clear, upfront legal structure would provide the basis for imposing losses on shareholders and creditors in the event of failure, and thus provide them with some incentives to avoid such a fate." Read more.

BANKS' FAILURE ON "LIVING WILLS" FRAYS RELATIONS WITH REGULATORS

The failure of the biggest U.S. banks to convince regulators that they can go bust without bringing down the financial system is likely to further strain an already tense relationship between Wall Street and the government, the Wall Street Journal reported today. On Tuesday, the Federal Reserve and the Federal Deposit Insurance Corp. told 11 of the largest banks to address significant shortcomings in so-called living wills that they submitted showing how they can be dismantled under bankruptcy and without government support. Bank officials were reportedly surprised by the public rebuke: A senior executive at one of the banks noted that his firm got a 19-page memo less than three hours before the public release by the Federal Reserve and FDIC. The executive said that there was no communication with regulators beforehand. "This widens the gap" of trust between banks and their regulators, something that the banks are working desperately to close, he said. Much of regulators' displeasure stems from a concern that Wall Street remains too sanguine about its ability to avoid some of the problems that contributed to the 2008 financial crisis. Regulators also said that the 11 firms so far had failed to overhaul their structures or practices in way that is necessary to forestall the damaging consequences of a giant financial firm's bankruptcy. Read more. (Subscription required.)

POLL: COLLEGE LOANS ARE A BURDEN LONG AFTER GRADUATION

A recent poll of college graduates found that people who take out significant college loans score worse on quality-of-life measures, a trend that persists into middle age, the Wall Street Journal reported today. Even 24 years after graduation, students who borrowed more than $25,000 are less likely to enjoy their work and are less financially and physically fit than their counterparts who graduated without debt. For more recent college grads, the discrepancy is even more pronounced. The data come from a March survey conducted by Gallup Education in conjunction with Purdue University of 30,000 college graduates of all ages in all 50 states. The amount of debt students are taking out to get through college has been climbing for years. About 70 percent of college graduates have debt, and the average debt today is more than $33,000, up from $18,600 in 2004. Among those who took the poll, 11 percent took out more than $50,000 and an additional 21 percent borrowed between $25,000 and $50,000. Read more. (Subscription required.)

For an analysis of college loan debt and bankruptcy, be sure to pick up a copy of ABI's Graduating with Debt, available in the ABI Bookstore.

FORMER SBA CHIEF: SMALL BUSINESS LENDING HASN'T RECOVERED, AND THAT'S A BIG PROBLEM

Securing a bank loan is still not as easy it was prior to the recession -- and that appears to be holding back the broader economic recovery, according to Karen Mills, the former head of the Small Business Administration and now a senior fellow at Harvard Business School and Harvard Kennedy School of Government, the Washington Post reported today. Mills points to a survey of loan officers by the Federal Reserve revealing that banks have in the past few years loosened their post-recession lending standards for large firms at a much faster pace than they have for small-business borrowers. Meanwhile, the National Federation of Independent Business's polling shows that both the percentage of small business owners reporting that credit is getting easier to find and the percentage reporting that all of their company's current credit needs are being met remain below the levels reported before the recession began. Mills highlights reports by the Federal Deposit Insurance Corp. that reveal that commercial loans of less than $1 million (the amount often sought by small firms) are down about 20 percent from the years leading up to the recession, even as banks' total commercial loan balances have continued to grow. Mills acknowledges that "for most banks, lending to small businesses, especially in the lower dollar range, is costly and risky." Still, she says there appear to be other factors at play that "seem to be preventing banks, both large and small, from ever fully returning to the small business market." In the short term, the lingering effects of the recession have left many small business owners suffering from fewer sales (consumer spending still hasn't fully recovered), poor credit (often, entrepreneurs finance their small operations with personal assets), or both. A number of reports suggest that small business credit scores are lower now than they were before the economy took a nosedive in 2008. Read more.

NEW CASE SUMMARY ON VOLO: GERON V. SEYFARTH SHAW LLP (IN RE THELEN LLP; 2D CIR.)

Summarized by David Saponara of Thaler Law Firm PLLC

After receiving the response of the New York Court of Appeals to two certified questions, the Second Circuit affirmed the decision of the U.S. District Court for the Southern District of New York, which held that under New York law, the "unfinished business doctrine" does not apply to a dissolving law firm's pending hourly matters, and that a partnership does not retain any property interest in such matters upon the firm's dissolution.

There are more than 1,300 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.

NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: BANKRUPTCY FILINGS LIKELY TO DROP OVER 900,000 IN 2014

Following the release of the July monthly filing data from Epiq Systems, a recent blog examines why total bankruptcies will drop to just over 900,000 for 2014.

For more information on the July bankruptcy filing statistics, be sure to read ABI's press release.

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

ABI Quick Poll

Consumer collateral should be valued at liquidation value in chapter 13 confirmations, even when the debtor retains the property.

Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.

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