FASB Won’t Consider Changes in Securities Accounting After Bank Failures ​​​

The Financial Accounting Standards Board declined to consider any changes to how companies account for held-to-maturity securities, a debate revived in the wake of the failures this spring of banks with significant related unrealized losses, the Wall Street Journal reported. The debate over the accounting rules has repeatedly surfaced following financial crises, in the early 1990s after the savings-and-loan crisis and in 2010 after the 2008 financial crisis — and most recently with the collapse of Silicon Valley Bank. Silicon Valley Bank’s parent company in March filed for bankruptcy after federal regulators took control of the bank, which failed when depositors lost confidence and fled. SVB’s collapse marked the second-biggest bank failure in U.S. history. Under existing accounting rules, companies can report starkly different amounts for the same debt securities depending on what they say they plan to do with them. If companies, typically banks and other financial firms, designate bonds as held-to-maturity securities, they are allowed to exclude unrealized losses on them from equity as long as they don’t sell. Banks have to carry HTM instruments at amortized cost, or an adjusted version of the original price they paid. Banks occasionally change their mind about these plans. If banks sell any HTM securities, they must reclassify all of their HTM securities as available for sale and potentially take a big loss on the securities they didn’t sell. That proved timely when the market value of SVB’s bonds plummeted amid rising interest rates. (Subscription required.) Read more.

Three Webinars in January Will Help Provide You with a Well-Informed Start to 2024! ​​​

ABI will be holding two abiLIVE webinars and, in collaboration with NCBJ, one "Behind the Bench" webinar to make sure you have a well-informed start to the New Year! Be sure to register for these complimentary webinars:

- "2023 Filing Trends and What to Expect in the Year Ahead" abiLIVE on Jan. 9 at 2:30 p.m. ET. Register here.

- "Revisiting Evidence in Bankruptcy with the Authors of ABI’s Quick Evidence Handbook" abiLIVE on Jan. 16 at noon ET. Register here.

- "Behind the Bench: Chapter 13 Plan Issues – The Good, The Bad, and The Ugly" in collaboration with NCBJ on Jan. 23 at 1 p.m. ET. Register here.

Burned Investors Ask ‘Where Were the Auditors?’ A Court Says ‘Who Cares?’ ​​​

One of the country’s most influential courts has asked the nation’s top securities regulator for its views on an uncomfortable subject: whether audit reports by outside accounting firms actually matter, the Wall Street Journal reported. The court already ruled that, at least in one case, they didn’t. That case, where an insurer overstated profits and an auditor signed off on its books, led to an investor lawsuit against the auditor that was dismissed. In its ruling, the court said the audit report was so general an investor wouldn’t have relied on it. The decision could have broad ramifications for the Securities and Exchange Commission, which oversees corporate financial disclosures, and for the auditing industry, which charged about $17 billion last year for blessing the books of publicly listed companies in the U.S. The ruling, by a three-judge panel of the U.S. Court of Appeals for the Second Circuit, prompted three former SEC officials to tell the court it got the answer wrong. They asked the court to reconsider its decision, noting that the SEC in a previous enforcement case had said that “few matters could be more important to investors” than whether a company’s financial statements had been subjected to a properly conducted annual audit. The court responded by inviting the SEC to file a brief expressing its views on the former officials’ arguments. The SEC in a court filing said that “the commission has an interest in ensuring its views on this issue are considered by the court.” Its brief is due Feb. 16. The court ruling involved a lawsuit by investors over an audit gone wrong. AmTrust Financial Services, an insurance company, had overstated its profit, and BDO USA, its outside accounting firm, had blessed the numbers. Investors sued BDO, and a court dismissed their claims. They appealed, and the Second Circuit this summer said the language of BDO’s audit report was so general that an investor wouldn’t have relied on it. Consequently, the court said the audit report wasn’t material — meaning it didn’t matter — and upheld the dismissal of the claims against BDO. Audit reports operate on a pass-fail model, and their language is standardized. Either a company gets a clean opinion on its financial statements from the outside auditor, or it doesn’t. The notion that the standardized language is essentially meaningless raises larger questions about whether audit reports serve a useful purpose. Total audit fees at U.S.-listed companies were almost $17 billion last year, according to the research firm Ideagen Audit Analytics. Independent audits have been a legal requirement for public companies since Congress passed the Securities Act of 1933, four years after the stock market crash that spurred the Great Depression. (Subscription required.) Read more.

The Hot New Market in Crypto? Trading FTX’s Carcass.​​​

After the FTX cryptocurrency exchange filed for bankruptcy last year, Thomas Braziel, an investor who specializes in collapsed businesses, started brokering an unusual kind of transaction: a market to profit from FTX’s downfall, the New York Times reported. Braziel put one of his clients in touch with a large financial firm that had lost nearly $100 million when FTX went under. Last December, the firm agreed to sell its claim in the FTX bankruptcy for 6 cents on the dollar, betting that it was better to collect some fast cash than wait years for the husk of FTX to start paying creditors back. Then the market for FTX claims exploded. Braziel recently brokered the sale of a $19 million FTX claim for 68 cents on the dollar, collecting a nearly $100,000 commission, he said. Some claims are selling for more than 70 cents, as investors grow optimistic that FTX’s new leadership will recover a sizable portion of the roughly $8 billion that the founder, Sam Bankman-Fried, was convicted of stealing from customers.The initial despair over FTX’s failure has given way to a strange afterlife for the bankrupt exchange: a trading frenzy that has intensified in recent weeks as major financial firms seek opportunity in the rubble of one of the worst business collapses in decades. The story of FTX has come full circle, as investors who once used the platform to place risky crypto bets now gamble on the company’s prospects in bankruptcy court — and funnel any gains back into the resurgent crypto market. For speculators, the math is simple: They are betting that if they buy a $10 million claim for, say, 50 cents on the dollar, they will pocket substantial profits if more than $5 million is ultimately paid back by the bankruptcy estate. In total, $1 billion to $1.5 billion in FTX claims has changed hands since the bankruptcy began, according to Xclaim, a company that connects buyers and sellers. Read more.

ABI TechBytes Concludes Cryptocurrency Series with Key Insights for Practitioners ​​​

The final installment of a series of TechBytes podcasts looking at cryptocurrency and bankruptcy provides key insights and takeaways that practitioners may encounter in these cases. Join Patricia K. Burgess of Frost Brown Todd LLP (Nashville, Tenn.), the Special Projects Leader of ABI's Emerging Industries and Technology Committee, as she talks with John S. Wagster, who leads Frost Brown Todd's Technology Industry Team (Nashville, Tenn.); Jordan S. Blask, the partner-in-charge at Frost Brown Todd's Pittsburgh office; and Jared M. Tully, who is vice chair of Frost Brown Todd's Business Litigation Practice Group and serves as the team leader for the firm’s Community Bank and Financial Institutions Team, as they provide their perspectives on cryptocurrency bankruptcy cases. Click here to listen.

Weekly U.S. Unemployment Claims Rise Slightly but Job Market Remains Strong as Inflation Eases ​​​

The number of Americans applying for unemployment benefits rose slightly last week but still remained at historically low levels despite high interest rates intended to slow hiring and cool the economy, the Associated Press reported. The Labor Department reported Thursday that jobless claims were up by 2,000 to 205,000 the week that ended Dec. 16. The four-week average of claims, which smooths out week-to-week ups and downs, fell by 1,500 to 212,000. Overall, 1.87 million Americans were collecting jobless benefits the week that ended Dec. 9, little changed from the week before. Read more.

As Need Rises, Housing Aid Hits Lowest Level in Nearly 25 Years ​​​

After decades of rising rents, housing assistance for the poorest tenants has fallen to the lowest level in nearly a quarter-century, the New York Times reported. The three main federal programs for the neediest renters — public housing, Section 8, and Housing Choice Vouchers — serve 287,000 fewer households than they did at their peak in 2004, a new analysis shows. That is a 6 percent drop, while the number of eligible households without aid grew by about a quarter, to 15 million. “We’re not just treading water — we’re falling further behind,” said Chris Herbert, the managing director of the Harvard Joint Center for Housing Studies. In an exception to the trend of falling aid, the Low-Income Housing Tax Credit helped build several million subsidized apartments, but most are not affordable to the neediest renters without additional aid. Nearly two-thirds of renters in the bottom income quintile face “severe cost burdens,” the Harvard analysis found, meaning they spend more than half their income for shelter. That is a record high, up from about half two decades ago, and it coincides with government findings of record homelessness this year. Unlike entitlement programs such as food stamps or Medicaid, which automatically grow with need, rental aid is set by Congress each year and reaches only a small share of eligible households. Rising rents have constrained the programs’ growth by making aid more expensive. Housing aid also lacks the business allies that support other programs. It suffers from the stigma left by problems in public housing, though most help now consists of vouchers for private dwellings. And housing aid is especially concentrated among Black households, exposing it to racial opposition. Read more.

Commentary: Disqualified Lender Provisions in the Spotlight*​​​

Contributors in a Creditors Rights Coalition feature tackle the emergence of a new tool in the sponsor toolkit — the use of DQ lists and other anti-assignment tactics to control who is at the table during times of distress. While DQ lists are not a new provision, the analysis finds that their expansion beyond traditional competitors to everyday distressed investors has caused consternation in the market, especially after well-known investors were impacted in Serta, Packers Sanitation and Byju’s. In Serta, a large and active credit investor ignominiously had to forgive half of its loan position after being called to task by the Bankruptcy Court. . . . And, then, more recently, Byju’s sued to disqualify a sophisticated distressed fund for exercising its rights to accelerate the company’s Term Loan. The commentary explores how the evolution of these provisions has wide-ranging implications for market behavior, enforcing creditor rights, liquidity and pricing. Read more.

*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.

Make Sure to Take ABI’s Diversity Working Group Survey by Jan. 8 ​​​

As part of the ABI Diversity Working Group’s (DWG) ongoing efforts to address issues with diversity and inclusion (D&I) within ABI and the insolvency industry, the DWG wants to ensure that ABI’s D&I initiatives align with your interests and needs, including the specific D&I topics, issues and areas of learning that matter most to you. Please take a few minutes to share your thoughts by completing this survey by Jan. 8.

Have an Idea for a Topic for an ABI Conference Session? Submit Your Proposal via ABI’s “Call for Abstracts” Page!​​​

ABI has launched an online portal for professionals to submit proposals for educational sessions at future ABI conferences. Submitters can describe their proposed topic, outline the session’s focus and learning goals, suggest speakers, and provide contact information via the portal’s detailed form. The portal can be accessed here.

All submissions will be reviewed by an internal Education Committee, who will contact the submitter to ask questions as needed and to discuss the status of the proposal. Submissions will be reviewed on a rolling basis, although please note that abstracts to be considered for the upcoming Annual Spring Meeting, being held April 18-20, 2024, at the Marriott Marquis in Washington, D.C., must be submitted no later than December 31, 2023. 

Miss Any of the 25+ Hours of CLE Programming at CPEX23? Access All Replays for Only $100!

Leading practitioners over the past two weeks examined key issues across the consumer bankruptcy landscape during ABI’s 2023 Consumer Practice Extravaganza (CPEX). Did you miss any of the sessions, including an exclusive “Fireside Chat” with EOUST Director Tara Twomey and deep dives into student loans, technology and the future, subchapter V of chapter 11, tax issues and more? Get access to all replays via a state-of-the-art virtual platform for only $100! All sessions will conveniently remain available until Jan. 31! 

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