FEDERAL RESERVE PROPOSES RULE TO SCALE BACK EMERGENCY LENDING POWERS
The U.S. Federal Reserve Board of Governors unveiled a proposal yesterday that would limit the scope of its authority to bail out a large financial company on the brink of collapse through its emergency-lending programs, Reuters reported yesterday. The Fed's proposal would implement a key provision in the 2010 Dodd-Frank Wall Street Reform law that sought to prevent future big bailouts after the Fed extended more than $1 trillion in emergency credit during the height of the financial crisis. Prior to the Dodd-Frank law, the Fed had broader powers to extend emergency loans to "any individual, partnership or corporation" that met certain conditions. Dodd-Frank limits this authority to ensure that the Fed's emergency lending program cannot be used to aid a failing financial company by helping it avert bankruptcy. Under the proposed rule, the emergency lending system should only be used to help bolster liquidity to the financial system. Yesterday's proposal also requires the U.S. Treasury secretary to sign off before extending emergency loans. Previously, an institution only needed an affirmative vote of five Federal Reserve Board members in order to tap into an emergency lending program. The Fed's plan will be open for public comment until March 7. Read more.
Click here for further information on the Fed's proposal.
COMMENTARY: "SAFE HARBOR" IN BANKRUPTCY IS UPENDED IN DETROIT CASE
As Detroit struggles to come up with money to improve services for its residents, two large banks are poised to receive hundreds of millions of dollars to cancel a deal that helped push the city into bankruptcy in the first place, according to a commentary in the New York Times DealBook blog yesterday. The two banks, UBS and Bank of America, were the only creditors that managed to reach a settlement with Detroit before the city declared bankruptcy last July. They agreed to let Detroit out of financial contracts called interest-rate swaps for 75 percent of what the city owed, or about $230 million. They also agreed to give up some casino tax proceeds that Detroit had pledged to them as collateral for the swaps. The 75 cents on the dollar is a far better deal than the city's other creditors will probably get, and because of the "safe harbor" provision of the Bankruptcy Code, these two banks actually have a legal right to 100 cents on the dollar. "These safe harbors make no logical sense in this context," said Steven L. Schwarcz, a professor at Duke University School of Law who has written on the special treatment of derivatives in corporate bankruptcies. Detroit was in bankruptcy court last week seeking approval for its deal with Bank of America and UBS, but on Friday, Bankruptcy Judge Steven W. Rhodes sent the city and the banks back to confidential mediation to improve the terms for the city. The mediation was expected to continue through Christmas Eve. The swaps deal is only one part of the equation: Detroit is seeking to borrow $350 million from another bank, Barclays Capital, to finance its operations in bankruptcy, and it needs to resolve the swaps deal before it can secure the loan. Without the loan, lawyers for the city say, it soon might not be able to meet its payroll. Read more.
For further commentary, analysis and court documents from Detroit's chapter 9 filing, be sure to visit ABI's "Detroit in Distress" page at http://news.abi.org/Detroit.
ABA THREATENS TO SUE REGULATORS OVER VOLCKER RULE
The American Bankers Association (ABA) plans to challenge the Volcker Rule in court unless regulators immediately suspend portions of the controversial regulation that restrict certain collateralized debt obligations (CDOs) of trust-preferred securities, American Banker reported yesterday. In a letter to regulators, the trade group said that the financial harm from the provision is "real, imminent and irreparable." "If the rule is not suspended, we will shortly file a lawsuit challenging the rule ... and seeking emergency relief," said Frank Keating, ABA president and chief executive. At issue are whether banks are required to shed CDOs that are made up of trust-preferred holdings and how quickly. Under the final Volcker Rule issued two weeks ago, regulators said that certain CDOs that relied on a particular legal exemption from investment registration might be restricted. As a result, at least three banks said that they would have to write down or sell such assets immediately, potentially at a substantial loss, despite the fact that the Volcker Rule does not go into effect until July 2015. Zions Bancorp. in Salt Lake City said that it may take a $387 million charge on its portfolio of CDOs. Read more. (Subscription required.)
Americans who are 60 years of age and older made up 26 percent of all fraud complaints tracked by the Federal Trade Commission in 2012, the highest of any age group, the Wall Street Journal reported today. In 2008, the level was just 10 percent, the lowest of any adult age group. One in every five Americans age 65 or older has been abused financially, according to a 2010 survey by the Investor Protection Trust, a financial-education organization. Financial abuse has cost older Americans at least $2.9 billion in 2010, up 12 percent in two years, according to Metropolitan Life Insurance Co. The ability to recognize the signs of fraud can fade with aging, even among people without dementia, research shows. As the number of seniors increases, they also are becoming more-enticing targets. Cheap Internet phoning, emailing and rapid fund-transfer technology make it easy to contact -- and swindle -- potential targets. Only 10 percent of such frauds are reported, investigators estimate. Read more. (Subscription required.)
ANALYSIS: JUNK LOANS TOP '08 RECORD AS SAFEGUARDS ARE STRIPPED
The amount of loans to the riskiest U.S. companies ballooned to a record high this year, propelled by unprecedented demand for floating-rate debt that offers protection from rising interest rates, Bloomberg News reported yesterday. The market for junk-rated loans increased to $683 billion, exceeding the 2008 peak of $596 billion, according to Standard & Poor's Capital IQ Leveraged Commentary and Data. The $130 billion surge was fueled by borrowings that don't include typical lender protections, such as limits on leverage. Loans, which suffered the biggest losses in the fixed-income market during the financial crisis, staged a comeback as investors funneled a record $64.4 billion into funds that buy the debt in anticipation that the Federal Reserve would start unwinding its bond buying that has suppressed borrowing costs. The demand has enabled companies to take on more debt for shareholder rewards, prompting regulators to warn that the excesses which contributed to the credit crisis might be creeping back. Read more.
NEW ABILIVE WEBINAR SERIES LOOKS AT THE BASICS OF FINANCIAL STATEMENTS, DOCUMENTS AS EVIDENCE AND HEDGE FUNDS
Send your associates to ABI's "Back To Basics" webinar series, hosted by the Young and New Members Committee, next month. The series will cover the fundamentals of financial statements and operating reports (Jan. 14), using financial documents as evidence (Jan. 21), and hedge funds (Jan. 28). Let a trusted CLE provider help get your associates up to speed. Register for the complete series and get the third webinar free!
RENEW YOUR ABI MEMBERSHIP BY DEC. 31 AND SAVE!
Beginning in January 2014, ABI will institute its first dues increase to the regular dues rate in six years. The $20 increase will ensure that ABI can continue to provide you with the latest and most effective tools available in insolvency information and education. You can lock in 2013 rates, and additional discounts, for up to three years by using a multi-year renewal option (save $75!). You can also save 10 percent on future dues by opting into the automated dues program. To renew your membership and save, please go to renew.abi.org.
ABI LAUNCHES SIXTH ANNUAL WRITING COMPETITION FOR LAW STUDENTS
Law school students are invited to submit a paper between now and March 4, 2014 for ABI's Sixth Annual Bankruptcy Law Student Writing Competition. ABI will extend a complimentary one-year membership to all students who participate in this year's competition. Eligible submissions should focus on current issues regarding bankruptcy jurisdiction, bankruptcy litigation, or evidence issues in bankruptcy cases or proceedings. The first-place winner, sponsored by Invotex Group, Inc., will receive a cash prize of $2,000 and publication of his or her paper in the ABI Journal. The second-place winner, sponsored by Jenner & Block LLP, will receive a cash prize of $1,250 and publication of his or her paper in an ABI committee newsletter. The third-place winner, sponsored by Thompson & Knight LLP, will receive a cash prize of $750 plus publication of his or her paper in an ABI committee newsletter. For competition participation and submission guidelines, please visit http://papers.abi.org.
NEW CASE SUMMARY ON VOLO: DZAKULA V. MCHUGH (IN RE DZAKULA; 9TH CIR.)
Summarized by Lovee Sarenas of the U.S. Bankruptcy Court for the Central District of California
The Ninth Circuit Court of Appeals affirmed the U.S. District Court for the Northern District of California's ruling, applying the ruling in New Hampshire v. Maine Standards, that failure to disclose potential litigation on schedules was neither inadvertent nor a mistake; therefore, judicial estoppel barred Dzakula from filing the action.
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: FINANCIAL SYSTEM'S RISK NAVIGATOR STILL HAS BLIND SPOTS
The Bankruptcy Blog Exchange is a free ABI service that tracks more than 80 bankruptcy-related blogs. A recent blog post examines how the Treasury Department's Office of Financial Research has made a number of improvements in its measurement of systemic risk, but falls short of providing a forward-looking assessment of emerging dangers.
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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