ANALYSIS: SIDELINED BY DISABILITY AND SADDLED WITH STUDENT LOANS
While the federal government has rules for income-based repayment, forbearance and waivers for severe disability, there are no industry-wide equivalents governing private lenders, the Washington Post reported on Sunday. Instead, each bank or financial firm decides whether to institute those policies, and not all do. Private student loans represent about $104 billion (less than 10 percent) of the $1.12 trillion in outstanding education debt, according to the New York Federal Reserve. There is no clear data on the number of private student lenders, though by some estimates there are fewer than a hundred banks, credit unions and other financial outfits in the market. Only four private student loan providers — Sallie Mae, Wells Fargo, Discover and New York Higher Education Services Corp. — will cancel a borrower's debt in cases of permanent disability. Each has policies that are largely based on the federal government's guidelines that call for a certified letter from a physician or a Social Security Administration notice of award. Private lenders are generally opaque about their standards and don't apply them across the board to all of their loans, said Persis Yu, an attorney at the National Consumer Law Center. Lenders say that some of their loans have been bundled into securities that have contract restrictions that prevent adjustments for individual borrowers. "There is no law that requires them to do anything in the case of disability or death, so borrowers are subject to [the banks'] individual whims," Yu said. Lawmakers are starting to take notice of the disparities. In June, Sen. Tom Harkin (D-Iowa) proposed a provision as part of a higher education package that would require schools to work only with private lenders that discharge loans in the event of a student's death or permanent disability. Read more.
COMMENTARY: POLICYMAKERS WALK A FINE LINE ON EASING MORTGAGE LENDING STANDARDS
While subprime auto lending and new car sales are growing in the post-recession economy, the housing market's uneven recovery has policymakers examining how to safely ease mortgage lending standards that tightened after the 2008 bust, according to a commentary in the Wall Street Journal yesterday. "Credit is tight. That said, incomes for a lot of the country are not up," said Austan Goolsbee, a former chief economic adviser to President Barack Obama. Right now, borrowers who can flash good credit, stable incomes and enough cash to make a 3.5 or 5 percent down payment can qualify for a loan. To guard against the risk that they will face unexpected costs if loans default, many banks have adopted standards that go beyond the basic requirements of loan giants Fannie Mae or Freddie Mac and federal loan-insurance agencies. Officials are looking at how to provide more clarity to lenders so that they can ease up on their standards. Other aspects of the tight-credit problem will be harder to fix. Banks are facing higher costs associated with handling defaulted loans, and as a result, some are choosing to simply make loans to only the best borrowers. Read more.(Subscription required.)
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ANALYSIS: NUMBER OF DISSENTS GROW ON FED'S POLICY-MAKING COMMITTEE
In the wake of the worst financial crisis since the Great Depression, the number of dissents on the Federal Reserve's policy-making committee has not only reached the highest level in nearly 20 years, but the volume of the opposition has also been turned up, the Washington Post reported on Sunday. An analysis by the St. Louis Fed of central bank meetings dating to 1957 shows that about 6 percent of votes cast have been dissents, though the actual number varied widely by year. The record occurred in 1963 with 28 opposing votes. As the nation grappled with runaway inflation in 1980, 25 dissents were registered. But dissent diminished as the country entered the long economic expansion that began in the early 1990s. The Fed also started pulling back the curtain on its operations during this period of preternatural calm. Under the leadership of Alan Greenspan, the central bank began acknowledging its target for short-term interest rates, issuing policy statements and announcing the breakdown of its votes. During his 20 years in office, Greenspan averaged 0.54 dissents per meeting, according to the St. Louis Fed's research, about half the rate of his predecessor, Paul Volcker. In two years, 2000 and 2004, there were no dissents. Ten years later, dissent is back in vogue: Less than 48 hours after central bank officials wrapped up their meeting in Washington, D.C., on Wednesday, Richmond Fed President Jeffrey Lacker registered an objection. "I cannot support the committee's planned approach to moving the Fed's balance sheet toward its normal state," he wrote. "It is unnecessary to the conduct of monetary policy, the central bank's primary responsibility, and involves distributional choices that should be made through the democratic process and carried out by fiscal authorities, not by an independent central bank." Lacker, who will return as a member of the FOMC in 2015, has spent the years since the crisis warning that the Fed is overstepping its authority. The central bank has been propping up the housing sector by buying massive quantities of mortgage-backed securities. To Lacker, it is essentially distorting financial markets, helping to determine winners and losers. Read more.
Listen to Richmond Fed President Jeffrey Lacker's perspectives at ABI's luncheon at the 88th Annual NCBJ conference. Lacker will deliver the luncheon keynote on Oct. 10, titled, "Rethinking the Unthinkable: Bankruptcy for Large Financial Institutions," during ABI's programming at the NCBJ Annual Meeting. Click here for more information.
A court ruling in the Lehman Brothers Holding Inc. case hurt a swath of managers, including some of the biggest firms in the industry, that have in recent years enjoyed a steady stream of profits from claims, the Wall Street Journal reported today. The losses are among the first for hedge funds due to Lehman claims, managers and investors in hedge funds say. Davidson Kempner Capital Management LP, which manages $23.7 billion, and Highfields Capital Management LP, with $13.1 billion, held some Lehman claims that lost about 10 percent in a day. Similarly, $22 billion King Street Capital Management LP, whose most profitable bet last quarter was Lehman, lost about 0.2 percent last month, in part due to those claims, investors say. Last week marked the six-year anniversary of Lehman's collapse in September 2008, the largest chapter 11 filing in history. After the bank failed, some creditors didn't want to wait for their money or take a chance that they wouldn't get paid at all. Hedge funds were willing buyers of their claims, betting that they would gain in value after the initial panic subsided. On Aug. 5, the U.S. Court of Appeals for the Second Circuit issued a ruling that affirmed Barclays PLC's right to billions of dollars in assets that the Lehman brokerage, Lehman Brothers Inc., had claimed belonged to it. Nearly $6 billion in securities and margin assets had gone to Barclays when it bought Lehman's U.S. brokerage business amid the unfolding of the financial crisis in September 2008. After the ruling, unsecured claims against LBI, which had been trading at around 46 cents on the dollar, dropped to 40 cents before closing the day at around 42 cents, where they remained last week, according to an investor who holds some of the claims. Read more. (Subscription required.)
COMMENTARY: THE MUNI BOND LOBBY
Sen. Charles Schumer (D-N.Y.) has launched a campaign in response to a new federal rule that does not force big banks to lend to municipalities, according to a Wall Street Journal editorial today. Regulators at the Federal Reserve, Federal Deposit Insurance Corporation and Treasury recently decided not to include state and muni debt in the category of "high quality liquid assets" that banks must hold in case of emergency. The point of this new liquidity rule is to make sure that in times of market stress, big banks have on hand instruments that they can easily convert into cash to meet their obligations. In the past banks generally haven't considered muni paper to be of the highest quality, and with good reason. The regulators note that many muni issues simply do not enjoy deep and liquid trading markets, and that "financial data from municipal issuers can be inconsistent and vary in timing." Stockton, San Bernardino and Detroit have gone bankrupt, and the likes of Chicago and Los Angeles have an ever-growing burden of unfunded pension liabilities. Giving banks incentives to hold even more muni debt in this environment is almost the definition of financial recklessness, according to the commentary. However, Schumer sees "disastrous side effects" if regulators don't rewrite their new liquidity rule, which he claims "threatens to stifle the job growth and investment in infrastructure that is critical to sustaining our economic recovery." Fed Governor Dan Tarullo is already signalling that regulators might bend their rule for some state and local politicians whose debt issues currently enjoy liquid markets. A leading candidate to get the government's seal of approval is none other than New York City, according to the editorial. The Big Apple's pension bills are rising fast, and Mayor Bill de Blasio has been rewarding his union supporters with generous new contracts. Regulators know that if they ever take New York off the favored list, they can expect an angry phone call from Schumer. Read the full editorial. (Subscription required.)
OBAMA HITS COMPANIES MOVING OVERSEAS TO AVOID TAXES
The Obama administration took action on Monday to discourage corporations from moving their headquarters abroad to avoid U.S. taxes, announcing new rules designed to make such transactions significantly less profitable, the Washington Post reported today. The rules, which take effect immediately, will not block the practice, and Treasury Secretary Jack Lew again called on Congress to enact more far-reaching reforms. But in the meantime, he said, federal officials "cannot wait to address this problem," which threatens to rob the U.S. Treasury of tens of billions of dollars. The pace of inversions has quickened in recent months, with such American icons as Burger King and Chiquita Brands announcing mergers with foreign firms and plans to move their tax homes to countries with lower rates. The new regulations are still being drafted, but senior Treasury officials said on a conference call with reporters that they would apply to inversion deals sealed on Tuesday or thereafter. Under the new rules, inverted companies would no longer be able to take advantage of so-called "hopscotch loans," a maneuver aimed at giving them tax-free access to cash earned abroad. The rules would also make it more difficult for U.S. firms to invert in the first place by strengthening rules that require the former owners of the U.S. company to own less than 80 percent of the new, foreign-domiciled entity. Read more.
FALL LINE-UP OF FREE ABI COMMITTEE TELECONFERENCES FEATURES TIMELY ISSUES
Members are encouraged to dial-in and listen or participate on upcoming ABI Committee conference calls. While committee membership is encouraged, it is not required to join the free teleconferences. Upcoming Committee teleconferences include:
Asset Sales Committee: Thursday, Oct. 2; 4 pm ET
Topic: Call to cover "the progeny of Fisker," as well as the practical implications of the decisions.
Speakers: Oscar Pinkas of Dentons (New York) and Justin Paget of Hunton & Williams LLP (Richmond, Va.)
Unsecured Trade Creditors Committee: Wednesday, Oct. 1; 4 pm ET
Topic: "Tricks of the Trade: New Issues and Strategies in Preference Cases"
Speakers: Mark Felger of Cozen O'Connor (Wilmington, Del.) and Travis Powers of Buchanan Ingersoll & Rooney PC (Buffalo, N.Y.)
All committee teleconferences will utilize the same dial-in information:
Call in: (712) 432-1500
Participant code: 692933
NEW CASE SUMMARY ON VOLO: ENDEAVOR ENERGY RESOURCES L.P. V. HERITAGE CONSOLIDATED LLC (5TH CIR.)
Summarized by Bryan Robinson
The U.S. Court of Appeals for the Fifth Circuit affirmed the Fifth Circuit District Court's dismissal of the drillers' constructive trust and equitable lien claims. The appeals court reversed and remanded the district court's grant of summary judgment on the drillers' mineral subcontractors' lien claims because the drillers submitted sufficient evidence to survive summary judgment.
There are nearly 1,500 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: STUDENT LOAN DEFAULTS PLAGUE THE WEALTHY, TOO
A recent blog post examines how professionals in all fields, even in medical and law careers, are plagued by student loan defaults.
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
The debt ceiling for chapter 13 cases should be increased substantially again, perhaps to $5 million.
Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.
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