Catholic Church Shields $2 Billion in Assets to Limit Abuse Payouts
A Bloomberg Businessweek review of court filings by lawyers for churches and victims in the past 15 years shows that the U.S. Catholic Church has shielded more than $2 billion in assets from abuse victims in diocesan bankruptcies. “The survivors should have gotten that money, and they didn’t,” says Terry McKiernan, president of BishopAccountability.org. The unfolding of one diocese’s bankruptcy provides a road map for what may come as more go this route. The chapter 11 filing of the Archdiocese in Santa Fe shows how easy and routine it is to reconfigure a balance sheet. The archdiocese was facing a few dozen clergy abuse suits when it filed in December 2018, saying that it was too poor to defend itself. The number rose to about 375 by the June 2019 deadline that the bankruptcy court had set for victims to file claims. In court papers, the archdiocese reported owning $49 million in real estate, cash, and investments. By contrast, the church’s 1951 incorporation papers put its estimated value at $40 million, or $396 million in today’s dollars. To arrive at that $49 million figure, church leaders said at least $178 million in cash and property associated with the archdiocese was owned by parishes or held in a trust or foundation and thus wasn’t eligible for inclusion in the estate. James Stang, lead lawyer for the alleged clergy abuse victims in the bankruptcy, wrote in a June court filing that the incorporations and transfers were made with the intent to “hinder, delay, or defraud” the claimants. J. Ford Elsaesser, an archdiocese lawyer, disputes accusations that the archdiocese shuffled assets to keep money from claimants. The relationship between the church and its parishes is like that between an adult child and an elderly parent who can no longer handle his affairs, he says: “The property is yours in name, but it’s not your money.” He says that bankruptcy is the best venue for settling large numbers of abuse claims in part because it makes for a fairer distribution of finite church assets, with all victims sharing the money in an orderly way instead of it being quickly scooped up by victims who file claims first.

Analysis: A Borrower Will Be 114 When Bonds Backed by Her Student Loans Mature

Julie Chinnock is 50 years old and owes about $250,000 in student loans. She was happy to get a new payment plan that lowered her monthly bill, but the holders of two bonds backed by her loans were probably less cheerful, according to a Wall Street Journal analysis. The two bonds were due in 2043 and 2054, but Chinnock and other borrowers were paying less each month under a new government plan that tied debt payments to income. Because borrowers were taking longer to pay off their loans, there was a risk the bonds backed by the loans wouldn’t be paid off in time. Bond-rating firms were watching and getting ready to downgrade the highly rated bonds, potentially causing losses for investors. The issuer of the bonds and the investors who owned them hatched a plan to avoid the downgrades. Their solution: Make sure the bonds were paid off in time by extending their maturity dates by decades. The bonds that include a big chunk of Chinnock’s loans now mature in 2083, when she will turn 114. Today, the bonds are rated triple-A. Altogether, issuers have extended maturities on about $11.5 billion of outstanding bonds backed by mostly older-vintage student loans, extending maturity dates by as much as 54 years. (Subscription required.)

Commentary: Public Pensions Throw Their Weight Around in Private Debt

The hedge-fund industry swelled over the past two decades in no small part because of eager pension managers, according to a Bloomberg commentary. In the U.S. alone, state and local retirement funds have $4.57 trillion in assets. Local officials banked on star investors delivering outsized gains to help the retirement funds meet their lofty annual return benchmarks, which in some cases exceeded 7 percent. According to data from Pew Charitable Trusts, U.S. state pension funds had a 26 percent allocation to alternative investments in 2016, up from just 11 percent in 2006. Of course, with more hedge funds came fewer ways for them to profit — and pensions took notice. In September 2014, the California Public Employees’ Retirement System rocked Wall Street by announcing that it would divest the entire $4 billion it had across 24 hedge funds and six hedge funds of funds. In 2016, New Jersey’s pension fund cut its $9 billion hedge-fund allocation in half and New York City’s retirement fund for civil employees exited its $1.5 billion portfolio. More than 4,000 hedge funds have been liquidated in the past five years. With even some of the most well-known managers calling it quits, hedge funds are clearly in retreat. The market for private debt and direct lending is trending in precisely the opposite direction. Managers are raising money hand over fist, as they have in each of the past few years. Assets in private-credit strategies now total more than $800 billion — doubling from 2012 and up from less than $100 billion in 2005.

Tense Time for Buyers of Riskier Corporate Loans

The market for low-rated corporate loans has suffered sharp declines in recent months, a sign of growing aversion to earnings shortfalls or other strains at indebted companies, the Wall Street Journal reported. In the U.S. at the start of December, some 2.5 percent of leveraged loans were trading at less than 70 percent of face value, the most since September 2016, according to S&P Global Market Intelligence’s LCD, the loan market research service. Analysts and investors blame the loose credit standards that characterized the market in recent years, encouraged by strong demand from yield-hungry investors. The hunt for yield also fed a boom in new issuances of structured loan funds known as collateralized loan obligations (CLOs), which have been the biggest group of lenders in recent years. But investors are shying away from such loans at any sign of trouble, including those deemed “covenant lite” for their scant investor protections, which is sparking steep falls in the prices of loans to firms — particularly when they fail to hit earnings targets. In the U.S., some of the companies whose loans fell below 70 cents on the dollar in recent months included Deluxe Entertainment, a media group whose loans fell to around 40 cents on the dollar in August, according to S&P’s LCD, before the company’s credit rating was downgraded. It later negotiated a debt restructuring, announced in October. Murray Energy Corp., a coal company, and 4L Technologies, a technology recycling group, are two others whose loan values tumbled. Both have since entered restructuring programs. (Subscription required.)

American Consumers, Not China, Are Paying for Trump’s Tariffs

American businesses and consumers, not China, are bearing the financial brunt of President Trump’s trade war, new data shows, undermining the president’s assertion that the U.S. is “taxing the hell out of China,” the New York Times reported. “U.S. tariffs continue to be almost entirely borne by U.S. firms and consumers,” Mary Amiti, an economist at the Federal Reserve Bank of New York, wrote in a National Bureau of Economic Research working paper. The other authors of the paper were David E. Weinstein of Columbia University and Stephen J. Redding of Princeton. Examining the fallout of tariffs in data through October, the authors found that Americans had continued paying for the levies — which increased substantially over the course of the year. Their paper, which is an update on previous research, found that “approximately 100 percent” of import taxes fell on American buyers.

Few Bank Failures Could Be a Warning Sign for U.S. Financial System

Unusually, not a single bank failed in 2018, and just four small lenders have gone under since the end of May 2019. Yet some bank analysts and former regulators say the very paucity of failures may be a sign that hidden risks are building, according to a Wall Street Journal analysis. “It’s in the good times, when things seem very calm and when there are no bank failures, that the bad loans are made,” former FDIC Vice Chairman Thomas Hoenig said. The financial crisis saw a spike in bank failures, as measured by the number of failed lenders and the assets at those firms. Apart from 2018, the only years on record with no failures were 2005 and 2006, when home prices soared and banks feasted on subprime mortgage debt in the run-up to the financial crisis. Regulators say that the current calm is a sign of strength in the economy, which is in its 11th year of expansion. Even banks that do run into trouble can easily raise fresh capital or find a merger partner. All four banks that failed in 2019 were small, and one of them, the Enloe State Bank, with a single branch near Dallas, collapsed as a result of what Texas banking authorities said was “insider abuse and fraud by former officers.” Failures “have been small in number and nothing that gives us concern that there is a systemic problem,” said FDIC Chairman Jelena McWilliams in November. Some of the failures would have occurred sooner in a weaker economy, she said. (Subscription required.)

World Bank Sees Growth Slowing Amid Nagging Risks

Investors set aside their jitters over the recent Middle East tinderbox to send stocks to new highs, but economists taking a long view see graver threats to growth both at home and abroad looming on the horizon, the Washington Post reported. The World Bank in its latest forecast cut expectations for global growth this year by .2 percent — to 2.5 percent — citing “fragile” conditions brought on by ongoing trade uncertainty and a slowdown in investment. That would amount to a tiny improvement over 2019, which saw the worldwide economy expand by 2.4 percent, the slowest pace since the 2008 financial crisis. The development bank left room for rosier outcomes but warned that “downside risks predominate, including the possibility of a re-escalation of global trade tensions, sharp downturns in major economies” and disruptions in the developing world. The outlook closer to home is gloomier. The World Bank sees U.S. growth stumbling from the unspectacular 2.3 percent growth it notched in 2019 to 1.8 percent this year — on its way down to 1.7 percent in both 2021 and 2022. And the World Bank’s forecasters aren’t alone: Economists gathered at the American Economic Association’s annual meeting last week shared a “dark” mood, according to a New York Times article. “Underlying their sense of foreboding was a widespread sentiment that the current expansion is built on a potentially shaky combination of high deficits and low interest rates — and when it ends, as it is bound to do eventually, it could do so painfully,” according to the article. (Subscription required.)

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