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Majority of Puerto Rico Power Utility Resigns over 'Petty' Politics

ABI Bankruptcy Brief

July 12, 2018

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ABI Bankruptcy Brief

Majority of Puerto Rico Power Utility Resigns over 'Petty' Politics

Five members of the Puerto Rico Electric Power Authority (PREPA) board, including its just-named chief executive officer, resigned today over “petty political interests,” according to a letter from the governor’s office viewed by Reuters. The resignations came a day after PREPA named Rafael Diaz-Granados, an independent member of the authority’s board, as CEO starting July 15. The move followed a statement from Puerto Rico Governor Ricardo Rosselló yesterday asking the seven-member PREPA board to reduce Diaz-Granados’s $750,000 annual salary or resign.
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Commentary: Let Student Borrowers Declare Bankruptcy*

For decades, the U.S. system of higher education has operated on a unique premise: To make college affordable for a broad swath of Americans, student debt must be an almost inviolable obligation. Now, authorities are starting to question that assumption — and it’s about time, according to a Bloomberg News editorial. Unlike other obligations, such as credit card balances, student loan debt can’t be discharged in bankruptcy unless it imposes an “undue hardship.” Courts narrowed that escape route further, in some cases demanding that borrowers demonstrate a “certainty of hopelessness” — a difficult standard to meet. Those precedents, though, were set at a time when student debt wasn’t the big deal it is today, according to the editorial. As federal aid — which once covered as much as 77 percent of a public university degree — has failed to keep pace with expenses, educational debt has surpassed auto and credit card debt to become U.S. households’ second-largest obligation after mortgages. To provide more clarity, it would be better if Congress passed a law repealing the anomalous status of student debt. Granted, treating those obligations like most other debt could make lenders — private and public alike — think more carefully about extending loans in the first place. In any case, as long as Congress remains reluctant to act, judges are right to do what they can through legal precedent.
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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.

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Wall Street Competes with Unregulated Banks for the Riskiest Loans

Competition for junk bonds and leveraged loans is heating up among a few Wall Street factions, Bloomberg News reported. On one side are major banks, which are diving back into high-risk corporate lending now that U.S. regulators have loosened up. On the other are so-called shadow lenders — private-equity shops, boutique banks and other financial players that muscled in on this business when regulators restrained the big banks five years ago. The result: ever-growing competition to provide junk-rated debt used in corporate takeovers. It could turn out to be a “race to the bottom,” said Frank Ossino, a senior portfolio manager at Newfleet Asset Management in Hartford, Conn. For the $2.3 trillion-plus market in junk bonds and leveraged loans, the question is whether all this competition ultimately brings new, greater risks. Underwriters have already been piling more and more leverage onto companies and watering down various protections for investors. Much of that debt is being packaged into complicated structured investments at a pace reminiscent of the subprime boom a decade ago. “The real test will be the market reaction and ultimate recovery if loans made by these entities begin to default,” Ossino said.
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In related news, Jim Millstein, the restructuring veteran who agreed to sell his namesake firm to Guggenheim Partners, said the next economic downturn could strike in less than two years, Bloomberg News reported. Trade wars heating up under U.S. President Donald Trump are likely to “reduce business investment, increase costs to consumers and producers in the U.S., and reduce the sales opportunity for U.S. producers,” Millstein said today. Guggenheim Securities, the firm’s investment-banking unit, agreed to buy Millstein & Co. and named its founder co-chairman of the securities division, alongside M&A rainmaker Alan Schwartz, according to a statement today. Guggenheim Chief Investment Officer Scott Minerd has previously said that he expects a recession within two years, citing mounting corporate debt that would likely spur more defaults and a sharp decline in employment. Millstein, who was the restructuring chief at the U.S. Treasury Department during the 2008 financial crisis, agreed that a mounting wall of debt in corporate America could spur a downturn because higher interest rates constrain investments. He said that the excessive use of leverage in the technology and industrial industries make them vulnerable if the economy worsens, calling the convergence of so many negatives a “perfect storm.”
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U.S. Consumer Prices Increase at Fastest Annual Rate Since 2012

U.S. consumer prices rose for a third straight month in June, eating away at sluggish wage growth and sending inflation to its highest rate in more than six years, the Wall Street Journal reported. The consumer-price index, which gauges what Americans pay for everything from veterinarian services to baby clothes, increased a seasonally adjusted 0.1 percent in June from the prior month, the Labor Department said Thursday. Excluding volatile food and energy components, prices increased 0.2 percent. Last month’s price increases brought the CPI’s cumulative growth in June from a year earlier to 2.9 percent, the highest level since February 2012. Core inflation ticked up to 2.3 percent in June from a year earlier, the highest rate since January 2017.
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Wall Street Is Raising More Cash than Ever for Its Rental-Home Gambit

Financiers who loaded up on homes after the housing bust for pennies on the dollar are buying yet more — despite home prices in many markets being at all-time highs, the Wall Street Journal reported. The number of homes purchased by major investors in 2017 was at least 29,000, up 60 percent from the previous year, estimates Amherst Capital Management LLC, a real-estate investment firm with an affiliated business that made nearly 5,000 of those purchases. That marked the first time since 2013 — when investors like Blackstone Group LP’s Stephen Schwarzman and Barry Sternlicht of Starwood Capital Group gobbled up foreclosed homes — that investors bought more houses year-over-year. Single-family homes have become far more attractive to investors than apartments, where a nationwide glut has driven down rental yields. This year, investors have raised billions of dollars from bond buyers, pension funds and even wealthy Chinese individuals to purchase more homes.
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Commentary: Regulators Have Their Eye on AI*

Given the potential of artificial intelligence (AI), the financial services industry can expect that government will have an increasing number of questions about how banks are using this technology, according to an American Banker commentary. Such questions will likely include how institutions use AI, how well it works, how stable and secure it is, the quality of the data it uses and generates, and how it’s governed. Financial services companies, in particular banks, are racing to harness the potential of artificial intelligence. Lenders are employing algorithms that analyze consumer data to conduct credit scoring and determine appropriate loan amounts, and AI tools examining customer transaction habits are improving fraud alerts and reducing money-laundering risk. At this time, government rules and regulations aren’t specific around the use of AI, as the technology is still new and evolving. But regulators have latitude to determine whether certain practices are unsafe and unsound — which could include misuses of AI.
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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.

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New on ABI's Bankruptcy Blog Exchange: Mulvaney’s Strategic Plan Would Shackle CFPB

The acting director’s proposal to subject the agency’s rules to congressional approval provides an important and overlooked check on administrative power, 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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