Commentary: Lehman and MF Global Taught the Need to Prepare for the Next Financial Collapse

Commentary: Lehman and MF Global Taught the Need to Prepare for the Next Financial Collapse

ABI Bankruptcy Brief

August 30, 2018

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Commentary: Lehman and MF Global Taught the Need to Prepare for the Next Financial Collapse

Applying the lessons learned from the failures of Lehman Bros. and MF Global will improve the response to the next institutional downfall, according to a commentary. Coming on the heels of the Lehman bankruptcy in 2008, the failure of a firm the size of MF Global – a $42 billion bankruptcy – could have caused a significant global panic had it not been for the quick, coordinated, decisive response by officials in the U.S. and abroad. Rather than getting mired in how to prevent the next crisis, the commentary offers steps to help respond:

1. FDIC and SIPC are synonymous with bank and securities brokerage failure, but there are no similar shields for customers of commodities brokerages, mutual fund companies, financial advisors and others. The debate that emerged on this topic following MF Global should be renewed.

2. Institutional and retail customers would benefit from knowing that what may be their property in a U.S. failure could well be firm property in a foreign insolvency.

3. Amending our bankruptcy safe harbor laws to compel counterparties who are out of the money against a failed entity to self-report would dramatically speed the return of funds.

4. Clear regulation that data must continue to flow from exchanges, clearing banks and others will equally speed resolution.

5. The people who will be involved in the next crisis must prepare now; concerted efforts should be in place to ensure that the rapid response teams of foreign and domestic agencies are known to each other and that they "war game" collapse scenarios.

6. Further consideration should be given to a specialized branch of the judiciary that is schooled in financial matters and in the crises of the recent past.
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* The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

U.S. Bank Regulator Moves to Modify Lending Rules for Poorer Communities

A national banking regulator took the first step on Tuesday toward rewriting rules for lending in lower-income neighborhoods, an effort that could allow institutions to redirect billions of dollars spent on loans and investments, the Wall Street Journal reported. In a release seeking feedback from the public, the Office of the Comptroller of the Currency proposed new approaches to evaluating banks on their reinvestment activities. One controversial idea in the proposal would reduce the emphasis on loans and investments made locally, and instead create a ratio to measure total low-income spending by bank size. “There are thousands of communities across America in need of lending, investment and financial literacy,” Comptroller Joseph Otting said in a phone call with reporters. Otting has made a priority of overhauling rules under the 1977 Community Reinvestment Act. The policy paper “starts the process of that discussion, of how we can bring more to those communities.” (Subscription required.)
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Commentary: DeVos and the Promotion of Student Debt*

Rather than protecting low-income students — and, by extension, American taxpayers — Education Secretary Betsy DeVos has been promoting and proposing policies favorable to the scandal-ridden for-profit education industry, according to an editorial on Monday in the New York Times. A couple of weeks ago, the Education Department formally introduced its plan to jettison so-called gainful-employment rules. These 2014 regulations require that in order to receive federal student-aid dollars, for-profit colleges — along with certain programs at nonprofit and public institutions — must maintain a reasonable debt-to-income ratio among graduates. If a program’s attendees typically rack up massive student debts and then cannot find decent jobs, the program is deemed a failure. Programs that fail in two out of three years become ineligible to receive the taxpayer-backed loans and grants with which so many students finance their schooling. The rules also require for-profit programs to make clear in their promotional materials whether or not they meet federal job-placement standards. DeVos, delighting industry executives, promptly hit the pause button on these regulations upon assuming her post. Now the pending demise of the rules has been made official, according to the editorial. In recent years, for-profit colleges have been swamped by lawsuits charging that they use deceptive marketing practices and high-pressure recruitment tactics to snooker students into taking on crippling debt in the pursuit of worthless degrees. Two industry giants, ITT Technical Institute and Corinthian Colleges, have collapsed under the weight of the legal claims and government inquiries.
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*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

As Sears Withers, Its Former Stores Fuel a New Fortune

Three years ago, Sears sold about 235 stores to Seritage Growth Properties, a spin-off company that was created to convert Sears and Kmart locations — which Sears also owns — into more valuable uses like offices and restaurants. The struggling retailer, in return, got a $2.7 billion infusion of cash, the New York Times reported. The real estate play, put in motion by Edward S. Lampert, a hedge fund manager with a large role in both companies, is simple. As Seritage works to redevelop some of Sears’s best locations into more profitable uses, it is also collecting rent from Sears for stores still in operation. But Mr. Lampert has been accused in lawsuits filed by pensioners and Sears shareholders of picking apart the more-than-a-century-old retailer to enrich himself. Many retailers are selling off stores to generate cash, which they are reinvesting in their digital operations. Macy’s is selling a portion of the ornate former Marshall Field building in downtown Chicago. Lord & Taylor sold its Fifth Avenue flagship store last fall. Sears’s deal with Seritage generated sorely needed cash to pay down debt, but it did not stabilize the retail business over the longer term. Sears continues to lose hundreds of millions of dollars a year as its sales decline.
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Occupancy issues are at the heart of many significant retail cases, as detailed in the ABI publication Retail and Office Bankruptcy: Landlord/Tenant Rights, available at the ABI Store.

Commentary: Burned by Toys “R” Us, Will Suppliers Ever Trust a Bankrupt Retailer Again?*

Along with losing the last national retailer dedicated to toys, suppliers to Toys “R” Us also lost, collectively, hundreds of millions of dollars when the retailer moved to shut down in chapter 11, according to a commentary in Retail Dive. Many suppliers feel they were burned not just by poor luck — whether in the form of customer whimsy or the vagaries of the toy market — but by the actions of Toys “R” Us and its lenders. Major suppliers in July forged a settlement agreement with the retailer to pay a fraction of the money they are owed, which effectively resolves the legal dispute many dozens of vendors had with the retailer. But suppliers still have their memories of what happened in the Toys “R” Us case, and they may not be so quick to trust — or ship to — a company in chapter 11 that asks for their financial support. "In 30 years, I've never seen anything remotely close to this, no hint of it," said Rick Woldenberg, CEO of educational toy company Learning Resources. "What happened in Toys “R” Us is shameful in every way, and very damaging," he added, saying he and other vendors could be reluctant to extend trade credit to retailers in chapter 11 in the future, which could be a disaster for those companies.
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*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

One of the worst outcomes for a business owner is having a major customer file for bankruptcy and leave behind a large unpaid account receivable. ABI's Business Creditor’s Guide to Distressed Vendors, Debt Collection and Bankruptcy provides an insider’s look into the options available to help screen a business’s customers, plan for worst-case scenarios, and, if the situation does arrive, efficiently handle the fallout. 

Advocates Ramp Up Efforts Ahead of Next Week's Hearing on Judge Kavanaugh

Supporters of Supreme Court nominee Brett Kavanaugh are ramping up their efforts to get him confirmed ahead of his nomination hearing next week, The Hill reported. Advocates are sending a flurry of letters to the Judiciary Committee pressing senators to support Kavanaugh, who will appear before the panel starting on Sept. 4. Twenty-one of Kavanaugh's former White House counsel colleagues sent a letter to Sens. Chuck Grassley (R-Iowa) and Dianne Feinstein (D-Calif.), the top two members of the Senate Judiciary Committee, saying that while they don't agree with "every substantive view" of Kavanaugh's, they all "agree that Judge Kavanaugh is superbly qualified." Kavanaugh's time in former President George W. Bush's White House has come under the microscope in the lead-up to his confirmation hearing. A legal team for Bush has turned over hundreds of thousands of pages from Kavanaugh's time as a White House lawyer to the committee. But Democrats want to see documents from the three-year period that Kavanaugh served as a staff secretary for Bush. Republicans have thus far refused to request the documents.
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How has the SCOTUS confirmation hearing process in the Senate changed from previous nominations? What comes next for Judge Brett Kavanaugh? Watch ABI Editor-at-Large Bill Rochelle discuss the process with ABI's Sam Gerdano, former chief counsel to Senate Judiciary Committee Chair Charles Grassley (R-Iowa). Click here.

Notice to All ABI Members

UNITE HERE Local 11 is a labor union based in southern California. They represent more than 20,000 workers in the hotel and restaurant industry. The union has been attempting to organize employees at the Terranea Resort, site of ABI’s 2019 Winter Leadership Conference (WLC). UNITE HERE Local 11 is known for their aggressive tactics, both on site and also aimed at hotel clients. The union has repeatedly contacted ABI leadership, including members of the board and committee leaders, to urge ABI to cancel or move the WLC. ABI has no plans to move or cancel the event, which would result in substantial legal exposure. If you are contacted by phone or email by representatives of the union, ABI encourages you to ignore rather than engage or respond. ABI regrets this development and will continue to closely follow events at the property.

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New on ABI's Bankruptcy Blog Exchange: Fight over Unpopular Fair-Lending Standard Rages Long After Court Case

The Supreme Court upheld using “disparate impact” over three years ago. But with HUD weighing a policy change, banks and advocacy groups are still at odds over the court decision, according to a recent blog post.

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

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