Puerto Rico is in financial trouble, after years of bad policies, mismanagement, excessive debt and bad luck, according to a New York Times editorial today. Its economy has been shrinking or stagnant for a decade, and its unemployment rate has soared to nearly 12 percent. The commonwealth and its utilities have debt of $73 billion, its public pension funds are woefully underfunded, and one state agency has warned that the government could be forced to shut down soon because it might run out of money, according to the commentary. Lawmakers in Washington, D.C., and San Juan need to come up with a plan that addresses the financial and economic problems of the territory, which is home to 3.6 million American citizens, according to the commentary. The island's difficulties also affect investors in the 50 states who own the tax-exempt bonds issued by Puerto Rico's government and utilities. One of the biggest and most immediate problems for the island is the roughly $20 billion of debt owed by three government-owned companies: the electricity utility, the water and sewer system and the highway authority. Because Puerto Rico is a territory, these businesses are not allowed to restructure their debt in chapter 9 bankruptcies. Congress should approve a new bill that would allow these and other Puerto Rican government-owned companies, as well as municipalities, to use chapter 9, according to the editorial. Read the full editorial.
REPORT: STUDENT-LOAN SURGE UNDERCUTS MILLENNIALS' PLACE IN U.S. ECONOMY
Beth Ann Bovino, U.S. chief economist at Standard & Poor's, wrote in a recent report that surging student-loan debt represents a key risk to the economy's expansion because wage gains are failing to keep up, Bloomberg News reported today. Education-related loans amounted to $1.16 trillion at the end of last year, a 71 percent increase from the second quarter of 2009, when the latest recession ended. The growth contrasted with declines in mortgages, home-equity loans, credit cards and other forms of consumer borrowing. "Millennials' heavy student-loan burdens could seriously crimp spending," Bovino wrote yesterday in a report. Student borrowing rose more than six times as fast as average hourly earnings between mid-2009 and the end of last year, according to data compiled by the Labor Department. Read more.
COMMENTARY: DESPITE SHORTCOMINGS OF CORINTHIAN COLLEGES, FOR-PROFIT COLLEGES SHOULD NOT BE DEMONIZED
While Corinthian Colleges, a major for-profit college company that announced plans to shut down its campuses, certainly deserved government sanctions, it's also important not to demonize the entire for-profit college industry, according to a commentary in today's Washington Examiner. Like many big chain for-profit colleges, Corinthian has a well-documented history of using deceptive recruitment tactics and providing substandard course offerings. Its outcomes, measured in graduation and loan default rates, were dismal, and it failed to address Department of Education allegations that it had falsified job placement data. For-profit colleges do a better job than their traditional peers at recruiting minorities, women, older, and poorer students, according to the commentary. Students who attend two-year programs at for-profits, moreover, graduate at higher rates than students attending similar programs at non-profit private or public colleges. Read the full commentary.
A related commentary in the Huffington Post yesterday said that if we're going to turn off the student loan default spigot, then we need to understand and fix what's preventing borrowers from making choices that seemingly run against their best interests. The logical first step, according to the commentary, is for the Department of Education to instruct its servicers to collect data on why borrowers are not making payments or are letting payments lapse for so long. There's no need for speculation about borrowers' motives when every day servicers are speaking directly to thousands of the very people whose behavior needs to be better understood. Additionally, the commentary recommends collapsing the three highly similar income-driven student loan repayment options with different income caps, terms and conditions into one single program. The commentary also advocates simplifying the process for maintaining hardship repayment eligibility so that program recertification can be as simple as checking a box on one's tax return or welfare application or unemployment filing that authorizes collection agencies to share information with the Department of Education. Read the full commentary.
FED'S TARULLO SEEKS SIMPLER CAPITAL RULES FOR SMALL BANKS
Federal Reserve governor Daniel Tarullo suggested that the Fed and other banking regulators should look for ways to simplify the complex set of capital rules imposed on small banks since the 2008 financial crisis, the Wall Street Journal reported today. "We should explore whether we can achieve the safety and soundness purpose of capital regulation in a simplified way" for community banks, said Tarullo. He added that it was important to update capital rules for all banks after the crisis to make them more sensitive to the real risks posed by various kinds of lending. But regulators should also acknowledge that the greater complexity and detail of the new capital rules requires record-keeping and reporting that can be "particularly costly, in relative terms, for smaller community banks." Read more. (Subscription required.)
COMMENTARY: FIXING WALL STREET'S CULTURE AFTER THE CRISIS
While farther-reaching regulations and better-tailored financial incentives were instituted on Wall Street after the 2008 financial crisis, a commentary in the May edition of The Atlantic examines whether the cultural flaws within the banking industry can be fixed to prevent another crash. Financial regulators since the 2008 crash have looked to policy and within Wall Street firms to correct the fact that bankers' compensation rewarded bad behavior and had a misplaced focus on "counterparties" rather than on clients, according to the commentary. William Dudley, the president of the Federal Reserve Bank of New York, noted that there had been, in recent years, "ongoing occurrences of serious professional misbehavior, ethical lapses, and compliance failures at financial institutions," adding that although these scandals had prompted plenty of fines -- more than $100 billion -- they had resulted in the prosecution of individual bankers and executives "to a lesser degree than I would have desired." Culture, according to the commentary, is a hard thing for any organization to change, and reforms that run against a long-standing ethos -- especially those that emphasize restraint -- can be fragile and reversible depending on the nature, character and ideas of the next CEO who takes over. Read the full commentary.
ABI'S BANKRUPTCY LITIGATION COMMITTEE CALL ON MAY 7 TO FOCUS ON "UNFINISHED BUSINESS" CLAIMS IN LAW FIRM BANKRUPTCIES
ABI members are invited to join the Bankruptcy Litigation Committee's conference call on May 7 at 4:00 pm (EDT) examining law firm bankruptcies. The topics of discussion will center on the "unfinished business" rule and potential claims against former partners of defunct law firms. Participants are encouraged to ask questions about the topics, and speakers will also discuss relevant research, concepts and analysis. Steven S. Flores, of Togut, Segal & Segal LLC in New York, will moderate the discussion. The call is free to ABI members and no registration is required. You may participate by using the following number: (712) 432-1500, #692933.
NEWEST ABI TITLE EXAMINES CREDIT-BIDDING IN BANKRUPTCY SALES!
Make sure to pre-order a copy of Credit-Bidding in Bankruptcy Sales: A Guide for Lenders, Creditors, and Distressed-Debt Investors, the newest title available for purchase in ABI's Bookstore. Although credit-bidding -- in which the secured creditor can credit-bid the amount of its allowed claim in any sale of its collateral by its debtor -- is acknowledged as being an important part of the secured creditor's bundle of rights, some argue that in certain circumstances credit-bidding can chill bidding or otherwise prevent the debtor from maximizing the value of its assets. Credit-Bidding in Bankruptcy Sales details how the courts have handled this debate, with reference to specific cases such as Fisker and Free-Lance Star, and also provides practitioners with the information that they need to know when reviewing credit agreements, debtor-in-possession financing orders and sale orders related to credit-bidding. The book also includes an in-depth analysis of how credit-bidding affects professional fees. Click here to purchase (make sure to log in to receive the discounted ABI member price).
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NEW CASE SUMMARY ON VOLO: VALONE V. WAAGE (IN RE VALONE; 11TH CIR.)
Summarized by Michael Pugh of Thompson, O'Brien, Kemp & Nasuti, PC
The Eleventh Circuit held that the filing of a chapter 13 petition by a Florida debtor who owns, or debtors who own, homestead property does not foreclose the availability of Florida's wildcard exemption to that debtor or those debtors. The court reasoned that the debtors' residence was protected from creditors by the automatic stay, not the homestead exemption, and that debtors are eligible to claim the wildcard exemption in their personal property.
There are more than 1,700 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: CFPB SHOULD HEED CONCERNS OF PAYDAY LENDERS
A recent blog post said that the compliance costs associated with the CFPB's proposed reforms to the payday lending industry would force many small businesses to close shop, reducing access to short-term credit for many Americans.
To read more on this blog and all others on the ABI Blog Exchange, please click here.
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