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Hedge Funds Are a Holdout in Fed’s Plan to Prevent the Next Lehman

 

 

 
 

July 9, 2015

 
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  NEWS AND ANALYSIS

HEDGE FUNDS ARE A HOLDOUT IN FED'S PLAN TO PREVENT THE NEXT LEHMAN

The Federal Reserve, Federal Deposit Insurance Corp. and Bank of England have met with representatives for hedge funds such as Citadel LLC, D.E. Shaw & Co., BlackRock Inc. and Pacific Investment Management Co. to try to persuade them to wait before canceling contracts with a collapsing lender, Bloomberg News reported yesterday. The purpose is to give regulators a bit more time to resurrect a failed bank so that the derivative trades and lending arrangements that underpin the global financial system don’t have to be terminated. Money managers who account for trillions of dollars of swaps trades are resisting, because they’re concerned that giving up their right to quickly kill contracts with a bankrupt firm could stick them with losses and violate a requirement that they act in their investors’ best interests. "What you're giving up is, in many cases, not your own money; it's your client’s money," said Darrell Duffie, a finance professor at Stanford University who has studied derivatives markets. Late last year, regulators resolved the issue for an estimated 90 percent of the swaps market when they persuaded the International Swaps and Derivatives Association to change its legal documents for transactions directly between banks. Under that agreement with the industry's main standard-setter for derivatives, lenders will wait as long as 48 hours before pulling collateral from failed lenders and canceling transactions. Read more.

ANALYSIS: LEHMAN CASE SHOWS BLURRED LINES ON REPOS

In a little-noticed recent opinion, a distressed-debt trader came awfully close to undermining the basis for the repo safe harbors, according to a commentary by Prof. Stephen Lubben in the New York Times DealBook blog. However, the U.S. Court of Appeals for the Second Circuit blocked that possibility. The case arose out of the liquidation that is dealing with Lehman's brokerage subsidiary. In 2000 and 2001, Doral Financial of Puerto Rico entered into a repo agreement with Lehman whereby Doral could "sell" various securities to Lehman in exchange for cash. Doral promised to buy back those securities at a set point in the future, for slightly more than the cash it had received from Lehman. Nonetheless, under both the Bankruptcy Code and the Securities Investor Protection Act, repo transactions are not treated like ordinary secured loans. They are exempt from the automatic stay and other features of normal insolvency law. In the case before the circuit court, Doral wanted to retrieve securities that it had given to Lehman when the Wall Street firm failed. But Doral ultimately sold whatever claims it had against the Lehman estate to distressed-debt investors. The investors in turn wanted to argue that Doral had been a customer of Lehman’s brokerage subsidiary. The appeals court noted that Doral had signed a contract saying that it was transferring full title to Lehman. It's hard to argue that Lehman was nonetheless holding the securities in trust, according to Lubben. Read more.

STUDENT LOANS MAY BE DRIVING THE TUITION EXPLOSION

A report by the Federal Reserve Bank of New York said that the surging cost of U.S. college tuition has an unlikely culprit: the generosity of the government’s student-aid program, Bloomberg News reported today. Increases in federal loans, meant to help students cope with rising costs, are quickly eaten up by schools with higher prices, wrote David O. Lucca, Karen Shen and Taylor Nadauld. Private colleges raise their tuition 65 cents for every dollar increase in federal subsidized loans and 55 cents for Pell grants given to low-income students, according to the report. College tuition has outstripped U.S. inflation for decades. “The subsidized loan effect on tuition is most pronounced for expensive, private institutions that are somewhat, but not among the most, selective,” they wrote in a paper released this month. The premise, raised in 1987 by former Education Secretary William Bennett, is more pronounced today as the sticker price of college has increased to $65,000 annually at some private schools. About two-thirds of undergraduates take out loans to fund their education. Outstanding student debt is now more than $1.36 trillion, according to the Federal Reserve Bank. Read more.

Click here to read the full study.

U.S. CONSUMER CREDIT CLIMBS 5.7 PERCENT IN MAY

American consumers increased credit by an annualized 5.7 percent pace in May, mainly to buy cars and trucks and pay for college loans, MarketWatch.com reported yesterday. Consumers increased their debt by a seasonally adjusted $16.1 billion in May, the Federal Reserve said yesterday. Credit had climbed at a 7.6 percent annual pace in April, 7.6 percent in March and 5.4 percent in February. The amount of credit taken out by consumers has risen every month since August 2011. Nonrevolving credit that involves longer-term debt such as federal student loans jumped 7 percent. Credit card debt rose a much smaller 2.1 percent after an 11.5 percent spike in April. Read more.

MISS THE SPECIAL PRESENTATION AT ABI'S CROSS-BORDER PROGRAM FOCUSING ON BRAZIL'S PETROBRAS SCANDAL AND ECONOMIC DISTRESS? WATCH NOW!

ABI's Cross-Border Program on June 18 featured a special Bloomberg "Eye on Bankruptcy" Presentation featuring Bloomberg's Bill Rochelle, Fabio Vassel of Banco Brasil Plural and Luis DeLucio of Alvarez & Marsal discussing the Brazilian Petrobras bribery and corruption scandal. The case has had wide-ranging effects on Brazilian companies, from the criminal prosecution of corporate executives and government officials to open-ended prohibitions on future contracts with Petrobras and, in some instances, fines of millions of reals. Watch the video to gain insight on how the current economic and political landscape is likely to impact Brazilian companies, lenders and investors in the years to come.

NEXT THURSDAY: CASES AND ISSUES SURROUNDING "MAKE-WHOLE" PROVISIONS TO BE DISCUSSED ON ABI'S UTC COMMITTEE CALL

All members are welcome to join a special presentation on July 16 of ABI's Unsecured Trade Creditors Committee examining "make-whole" provisions in bankruptcy. While lenders have relied on the protections of make-whole provisions in their loan agreements in the voluntary-redemption context for years, what happens when a borrower files for bankruptcy and challenges the enforceability of such provisions in the bankruptcy context? What specific language do bankruptcy courts require to ensure enforceability? What strategies have creditors and creditors’ committees employed to challenge these provisions? Jon Pearson and Christine Barba of Ballard Spahr LLP will answer these questions and examine recent important decisions in Momentive Performance Materials, Inc. and Energy Future Holdings. Corp, et al. To join the UTC Committee teleconference on July 16 at 4 p.m. ET, please utilize the following dial-in:

Phone: (712) 432-1500
PIN: 6 9 2 9 3 3

ABI WORKSHOP TO FEATURE BANKRUPTCY JUDGES EXAMINING COMMISSION RECOMMENDATIONS ON RESOLVING COURT SPLITS

Which Chapter 11 Reform Commission recommendations are most likely to be well received by judges? The 2015 Bankruptcy Judges Roundtable, an ABI Workshop, will take place at ABI headquarters on Aug. 4 to examine the Chapter 11 Reform Commission's recommendations on resolving court splits. The Commission identified more than 30 splits in case law on important bankruptcy issues. Attend the program from 3:00-4:30 p.m. ET in person or via live webstream to hear five bankruptcy judges discuss the recommendations and issues surrounding the court splits. Speakers on the program are Bankruptcy Judges Dennis R. Dow (D. Mo.), Bruce A. Harwood (D. N.H.), Barbara J. Houser (N.D. Texas), C. Ray Mullins (N.D. Ga.) and Eugene R. Wedoff (N.D. Ill.). ABI will seek 1.5 hours of general CLE credit in 60-minute-hour states and 1.5 hours of credit in 50-minute-hour states for the program. A networking reception will follow from 5-7 p.m. ET for in-person attendees, and registration for just the reception is also available. Click here to register.

NEW CASE SUMMARY ON VOLO: JONES, JR. V. CASTELLUCCI (10TH CIR.)

Summarized by Lars Fuller of BakerHostetler

The Tenth Circuit affirmed the district court's (D. Colo.) grant of summary judgment in favor of the plaintiff and the district court's denial of post-judgment motion to reconsider. The Tenth Circuit agreed that the disputed term in the settlement agreement did require defendant to make a settlement payment, and the defendant's failure to make a payment constituted a breach.

There are more than 1,800 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: EMERGING SECONDARY MARKET FOR CROWDFUNDED SECURITIES

Crowdfunded equity investments are generally illiquid because there is no organized secondary market for crowdfunded shares, according to a recent blog post. However, the post predicts that a secondary market will emerge, not only for private securities in general, but for some crowdfunded shares specifically, as securities crowdfunding grows and evolves.

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

INSOL INTERNATIONAL

INSOL International is a worldwide federation of national associations for accountants and lawyers who specialize in turnaround and insolvency. There are currently 23 member associations worldwide with more than 9,800 professionals participating as members of INSOL International. As a member association of INSOL, ABI's members receive a discounted subscription rate. See ABI's enrollment page for details.

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NEXT THURSDAY:

UTC Committee Telecon Presentation:
"Make-Whole" Provisions in Bankruptcy

July 16, 2015
Phone: (712) 432-1500
PIN: 6 9 2 9 3 3

UPCOMING EVENTS:

20th Annual Southeast Bankruptcy Workshop
July 23-26, 2015
Register Today!

ABI Workshop: 2015 Bankruptcy Judges Roundtable
Aug. 4, 2015
Register Today!

11th Annual Mid-Atlantic Bankruptcy Workshop
Aug. 6-8, 2015
Register Today!

23rd Annual Southwest Bankruptcy Conference
Sept. 10-12, 2015
Register Today!

41st Lawrence P. King & Charles Seligson Workshop on Bankruptcy and Business Reorganization
Sept. 16-17, 2015
Register Today!

20th Annual Views from the Bench Conference
Oct. 9, 2015
Register Today!

7th Circuit Consumer Bankruptcy Conference
Oct. 12, 2015
Register Today!

35th Annual Midwestern Bankruptcy Institute
Oct. 15-16, 2015
Register Today!

Corporate Restructuring Competition
Nov. 5-6, 2015
Register Today!

Complex Financial Restructuring Program
Nov. 5, 2015
Register Today!

11th Annual Detroit Consumer Bankruptcy Conference
Nov. 11, 2015
Register Today!

 
   
  CALENDAR OF EVENTS
 

2015

July
- UTC Committee Telecon (See above.)
July 16, 2015
- Southeast Bankruptcy Workshop
July 23-26, 2015 | Amelia Island, Fla.

August
- Mid-Atlantic Bankruptcy Workshop
Aug. 6-8, 2015 | Hershey, Pa.
- ABI Workshop: Bankruptcy Judges Roundtable
Aug. 4, 2015 | Alexandria, Va.

September
- Southwest Bankruptcy Conference
Sept. 10-12, 2015 | Las Vegas, Nev.
- Lawrence P. King & Charles Seligson Workshop on Bankruptcy and Business Reorganization
Sept. 16-17, 2015 | New York, N.Y.

 

 


October
- Views from the Bench Conference
Oct. 9, 2015 | Washington, D.C.
- 7th Circuit Consumer Bankruptcy Conference
Oct. 12, 2015 | Chicago, Ill.
- Midwestern Bankruptcy Institute
Oct. 15-16, 2015 | Kansas City, Mo.

November
- Corporate Restructuring Competition
Nov. 5-6, 2015 | Philadelphia, Pa.
- Complex Financial Restructuring Program
Nov. 5, 2015 | Philadelphia, Pa.
- Detroit Consumer Bankruptcy Conference
Nov. 11, 2015 | Detroit, Mich.

 

 
 
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