BANKS SEEN AT RISK FIVE YEARS AFTER LEHMAN COLLAPSE
While the amount of capital at the six largest U.S. lenders has almost doubled since 2008, policymakers and some Wall Street veterans say that's not enough, Bloomberg News reported today. They see a system that is still too leveraged, complicated and interconnected to withstand a panic, and regulators who are ill-equipped to head one off: the same conditions that led to the last crisis. Bankers, regulators, economists and lawmakers disagree about what needs to be done. Some say that the six biggest U.S. banks have only gotten bigger since 2007 -- a 28 percent increase in combined assets, according to data compiled by Bloomberg -- making it harder to let them fail. Others say that they aren't troubled by their size or by a system that requires government intervention every now and then, calling it an inevitable cost of financing global business. Banks "are too big, and I think they're going to have to be too big," says David Komansky, CEO of Merrill Lynch & Co. from 1996 to 2002. Congressional inquiries and outside analyses about the crisis have identified many villains: homeowners borrowing beyond their means, banks selling subprime mortgages, government-supported agencies backing the loans, Wall Street packaging them for investors, ratings firms giving seals of approval, regulators offering few objections and politicians encouraging it all to happen. Three fundamental flaws stand out: Regulators stripped of power allowed banks to embrace too much risk and load up on toxic debt with short-term funds; insufficient capital left them little margin for error when those assets plunged in value; and a system too large, opaque and interconnected meant they couldn't fail without catastrophic consequences for the economy. Regulators have since pushed banks to cut the amount of borrowed funds that they use, hold onto more easy-to-sell assets and rely less on overnight loans. The 2010 Dodd-Frank Act established a protocol that would, in theory, enable authorities to seize even the largest lenders and dismantle them without bringing down the entire system. An interagency group has been empowered to make sure that banking supervisors work together to monitor systemic risk. However, leverage is still too high, some regulators and economists say. Read more.
ANALYSIS: INSIDE THE END OF THE U.S. BID TO PUNISH LEHMAN EXECUTIVES
In early 2011, the Securities and Exchange Commission's eight-member Lehman Brothers team, having hit one dead end after another during the previous two years, concluded that suing the bank's executives would be legally unjustified, according to a New York Times DealBook blog yesterday. The group, noting that prosecutors and FBI agents had already walked away from a parallel criminal case, reached a unanimous agreement to close its most prominent investigation stemming from the financial crisis, according to officials who attended the meeting. But Mary L. Schapiro, Chair of the SEC, disagreed. She pushed George S. Canellos, who supervised the Lehman investigation as head of the SEC's New York office, to explain how executives who presided over the biggest bankruptcy in U.S. history could escape without a single civil charge. Five years after Lehman's collapse hastened a worldwide economic panic, the government faces lingering questions about the decision to spare executives like Richard S. Fuld Jr., who ran Lehman for 14 years until its demise. Not a single senior executive from any Wall Street bank faced criminal charges from the crisis, either. And the government's deadline for filing most charges will expire this month, the anniversary of Lehman's collapse, providing a reminder of the case and its unpopular outcome. Read more.
INVASIVE TACTIC IN FORECLOSURES DRAWS SCRUTINY
Faced with more than 10 million foreclosures that have piled up since the start of the mortgage crisis, the nation's largest banks are turning to property-management firms behind the scenes to help them navigate the wreckage, determine the occupancy of the troubled properties and preserve them until the homes can be resold, the New York Times DealBook blog reported today. Ohio-based Safeguard is the largest of these firms. But the firms are coming under fire for using questionable and possibly illegal tactics. The scrutiny threatens to ensnare JPMorgan Chase, Bank of America, Citibank and other lenders that depend on the firms. Legal aid offices in California, Nevada, Florida, Michigan and New York say that calls about Safeguard's aggressive tactics rank among the top complaints received. Illinois yesterday became the first state to take on the property-management firms legally, contending in a lawsuit that Safeguard wrongfully dispossessed hundreds of homeowners in the state. In suing Safeguard, Indiana Attorney General Lisa Madigan contends that the company broke into homes despite stark evidence that homeowners still lived in them, bullied tenants into leaving even though they had no legal obligation to do so and, in some instances, damaged the very homes they were sent to protect, according to the suit. Read more.
CONSUMER CREDIT EDGES UP AS CREDIT CARD USAGE SLIDES
Growth in U.S. consumer credit slowed for the second straight month in July, held back by a decline in a measure of credit card usage that hinted at a mood of caution among consumers, Reuters reported yesterday. The Federal Reserve said yesterday that consumer credit rose at a 4.4 percent annual rate in July, down from a 5 percent rate in June. Credit expanded by $10.4 billion during the month, missing analysts' expectations for a $12.5 billion gain. Credit has been expanding almost continuously since mid-2010, when the economy began to recover from the 2007-09 recession, a trend that has supported economic growth by helping consumers spend more on cars and education. Still, the data also showed that Americans appeared to use their credit cards more sparingly in July. Revolving credit facilities, a measure that includes credit cards, declined by $1.8 billion during the month. The overall increase in credit was driven by non-revolving facilities, which include auto loans as well as student loans made by the government. Non-revolving credit increased $12.3 billion during the month. Read more.
For decades, the District of Columbia placed liens on properties when homeowners failed to pay their bills, then sold those liens at public auctions to mom-and-pop investors who drew a profit by charging owners interest on top of the tax debt until the money was repaid, the Washington Post reported yesterday. But under the watch of local leaders, the program has morphed into a predatory system of debt collection for well-financed, out-of-town companies that turned $500 delinquencies into $5,000 debts -- then foreclosed on homes when families couldn't pay, a Washington Post investigation found. As the housing market soared, the investors scooped up liens in every corner of the city, then started charging homeowners thousands in legal fees and other costs that far exceeded their original tax bills, with rates for attorneys reaching $450 an hour. Tax lien purchasers have foreclosed on nearly 200 houses since 2005 and are now pressing to take 1,200 more, many of which have been owned free and clear by families for generations. Of the nearly 200 homeowners who lost their properties in recent years, one in three had liens of less than $1,000. Instead of stepping in, the D.C. tax office created more problems by selling nearly 1,900 liens by mistake over the past six years -- even after owners paid their taxes -- forcing unsuspecting families into legal battles that have lasted for years. One 64-year-old woman spent two years fighting to save her home in Northwest after the tax office erroneously charged her $8.61 in interest. Read more.
ANALYSIS: UNEMPLOYMENT FALLING FOR WRONG REASON CREATES FED PREDICAMENT
While unemployment dropped last month to 7.3 percent, the lowest level since December 2008, the decline occurred because of a contraction in the workforce, not because more people got jobs, according to a Bloomberg News analysis yesterday. Labor-force participation -- the share of working-age people either holding a job or looking for one -- stands at a 35-year low. The reduced workforce "poses a problem for the Fed," said Roberto Perli, a former central bank official who is now a partner at Cornerstone Macro LP in Washington. "The unemployment rate is coming down faster than the Fed thought, but it's not declining for the right reason." The jobless rate is important because Chairman Ben S. Bernanke and his colleagues have established it as the lodestar for policy. Bernanke has said that he expects the Fed to complete its asset-purchase program in mid-2014 when unemployment drops to around 7 percent. So long as inflation remains contained, the central bank has said it won't even consider raising its benchmark interest rate until unemployment falls to 6.5 percent. The Fed cut its target for the overnight interbank rate effectively to zero in December 2008 and has held it at that record low ever since. Read more.
NEW ABILIVE WEBINAR OCT. 3: THE INTERSECTION OF INTELLECTUAL PROPERTY AND BANKRUPTCY: KODAK, NORTEL AND OTHER CASES
IP experts will shed light on the mysteries of understanding IP law and navigating the often puzzling sales processes, drawing from their experiences in Nortel, Kodak and other important cases, in an abiLIVE webinar on Oct. 3 from 1:00-2:15 p.m. ET. Speakers will include David Berten (Global IP Law Group, LLC; Chicago), Pauline K. Morgan (Young Conaway Stargatt & Taylor, LLP; Wilmington, Del.), Cassandra M. Porter (Lowenstein Sandler LLP; Roseland, N.J.), Kelly Beaudin Stapleton (Alvarez & Marsal; New York) and Christopher Burton Wick (Hahn Loeser & Parks LLP; Cleveland). To register, click here.
RECORDING NOW AVAILABLE OF THE ABILIVE WEBINAR EXAMINING THE NEW U.S. TRUSTEE FEE GUIDELINES!
If you were not able to join ABI's recent well-attended abiLIVE webinar examining the U.S. Trustee Fee Guidelines for chapter 11 cases filed on or after Nov. 1, a recording of the program is now available for downloading! A panel of experts, including Clifford J. White, the director of the U.S. Trustee Program, discussed some of the ways the new guidelines could change day-to-day operations in firms, issues relating to the new market rate benchmarks, and how these changes might alter insolvency practice. The 90-minute recording is available for the special ABI member price of $75 and can be purchased here.
ABI GOLF TOUR UNDERWAY; LAST STOP FOR 2013 IS WINTER LEADERSHIP CONFERENCE IN DECEMBER
The 7th and final stop for the 2013 ABI Golf Tour is on Dec. 5 at the Trump National Golf Club, held in conjunction with ABI’s Winter Leadership Conference. Final scoring to win the Great American Cup sponsored by Great American Group is based on your top three scores from the seven ABI events. See the Tour page for details and course descriptions. The ABI Golf Tour combines networking with fun competition, as golfers "play their own ball." Including your handicap means everyone has an equal chance to compete for the glory of being crowned ABI's top golfer of 2013! A 22-handicapper won the tour event at July’s Southeast Bankruptcy Workshop. There's no charge to register or participate in the Tour.
NEW CASE SUMMARY ON VOLO: MORRIS AVIATION LLC V. DIAMOND AIRCRAFT INDUSTRIES INC. (6TH CIR.)
Summarized by Mike Debbeler of Graydon Head & Ritchey LLP
The Sixth Circuit ruled that the airplane manufacturer's opinion of the "quality and reliability" of components was not a fraudulent or negligent misrepresentation where the component manufacturer filed bankruptcy and voided warranties on components shortly after plaintiff purchased the airplane from the manufacturer. The airplane manufacturer's mere opinion as to component manufacturer's financial health did not form the basis of a misrepresentation claim.
There are more than 1,000 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: THE OBSESSION WITH CREDIT BEFORE FILING FOR BANKRUPTCY
The Bankruptcy Blog Exchange is a free ABI service that tracks more than 80 bankruptcy-related blogs. A recent blog post explores situations where a debtor seeking bankruptcy advice thinks beyond the process and into regaining credit. The problem with this line of thinking is that the debtor should be mostly concerned with getting out of debt, according to the blog post.
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.
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