Commentary: Involuntary Third-Party Releases: A Riposte*​​​

by Cliff White
Former Director of the U.S. Trustee Program; Washington, D.C.

Last week, ABI’s Bankruptcy Brief featured an essay by Thomas Salerno, who defended involuntary third-party releases in the well-known Purdue Pharma case. In this piece, Mr. Salerno argues that the U.S. Trustee Program (USTP), which I headed for 17 years, is on a “fool’s errand” as it seeks the “destruction of third-party releases.” The most recent USTP/Justice Department action that raised Mr. Salerno’s ire was a request filed in the Second Circuit for a stay pending Supreme Court review. There was a fair amount of invective hurled throughout the article, reminding me of the old adage that “if the law is on your side, argue the law; if the facts are on your side, argue the facts; and if neither is on your side, pound the table.” The legality and wisdom of involuntary third-party releases in bankruptcy merit continued discussion. The legal issues are important, and resolution of them will have an enormous impact on the proper role of the bankruptcy system in the future. Click here to read White’s full commentary.

*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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Student Loan Interest Crisis? New Bill Could Eliminate Rates for Many Borrowers​​​

Tens of millions of Americans who have student loan debt are slated to resume making payments in the fall. The interest that comes with that debt will kick in again, too. For many borrowers, that interest has been the obstacle to paying off their loans. Advocates say the return to payments, which the Education Department is now preparing for after the Supreme Court struck down President Joe Biden’s sweeping debt-forgiveness plan, could be catastrophic financially. But new legislation, authored by Rep. Joe Courtney (D-Conn.) and Sen. Peter Welch (D-Vt.), aims to get rid of that interest for current borrowers while capping it based on a sliding scale for future ones. The bill, unveiled and shared exclusively Thursday with USA TODAY, would also devise a means of paying for the lost interest — one that wouldn’t leave taxpayers covering those costs. There have been a number of attempts to address the interest on student loans. One new repayment option from the Biden administration would cut borrowers’ payments from 10% of discretionary income to 5% and forgive balances after 10 years of payments — far less than other income-based plans. When it comes to interest, borrowers on this new so-called SAVE plan won’t be charged for unpaid monthly interest, so a borrower’s loan balance can’t grow as long as they are making payments, even if their payment is cut to $0 because they earn a low wage. Other legislation has been introduced to tackle interest, too. One bill introduced last month by Republicans in Congress would, among other prongs, cap interest for borrowers who are going through income-driven repayment. Another would forgive existing interest owed on federal student loans while setting the new rate to 0%. But this, the bill’s sponsors say, would be the first bill to address the interest issue as a whole — and to create a mechanism for covering the resulting costs. That mechanism: a trust fund that would be created with borrowers’ principal payments and then invested in various bonds. ​Read more.

Commentary: Why SVB Financial Is Getting Off Easy in Bankruptcy Court*​​​

It’s one thing to make the big banks foot the $16 billion bill for Silicon Valley Bank’s risk-management failures, as the Federal Deposit Insurance Corp. is planning to do. It’s another thing to ask them to pay those staggering sums when the unsecured creditors and shareholders of SVB Financial Group — the bank’s holding company — walk away with billions that should have been used to help save the bank or reduce the FDIC’s losses when it failed, according to a Wall Street Journal commentary. Yet such is the likely outcome of SVB’s meltdown, which is being resolved in a Manhattan bankruptcy court. While we can expect a settlement in the dispute between the FDIC and the bankrupt holding company, the hedge-fund creditors and shareholders of SVB Financial are expected to come out of chapter 11 reorganization with most of the organization’s assets. That includes about $2 billion in cash, more than $9 billion in assets under management in its venture-capital subsidiary (as of December 2022), $100 million from the recent sale of its investment-banking business, and a reported net operating loss carry-forward of nearly $11 billion. Read the full commentary. (Subscription required.)

*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.

U.S. Regulators Propose Ordering Banks to Hold 16% More Capital​​​

U.S. regulators unveiled a sweeping overhaul Thursday that would direct banks to set aside billions more in capital to guard against risk, Reuters reported. If fully implemented, the proposal would raise capital requirements for large banks by an aggregate 16% from current levels, with the brunt felt by the largest and most complex firms, regulators said. The industry is already warning that such a big hike could force them to trim services, raise fees, or both. Agency officials argued Thursday that such costs would be more than offset by the benefit of a more resilient banking system. The proposal, set to be voted on later today by the Federal Deposit Insurance Corporation and the Federal Reserve, marks the first step in an extensive effort to tighten bank oversight, particularly in the wake of spring turmoil that saw three large financial firms fail. ​Read more.

How Regional Banks Got Healthy Again​​​

After depositor runs led to the collapse of Silicon Valley Bank and Signature Bank this spring, investors and onlookers wondered how similarly sized institutions would fare. Would they have to merge with bigger banks? Break up their businesses and shrink drastically? Or were more of them simply doomed? Then, when a third lender, First Republic Bank, flirted with destruction for weeks before JPMorgan Chase bought it in May, it was hard to see how depositors would ever feel comfortable trusting midsize banks again. Quarterly earnings reports released this month detailing midsize banks’ performance from April through June have shown that their balance sheets look healthier than they did in the previous quarter, with higher-quality loans and more money set aside to cover surprise losses, the New York Times reported. The KBW Nasdaq Regional Banking Index, a proxy for the industry, is rebounding after plunging 35 percent during the crisis. It is now up around 27 percent from its May 11 low. Alexander Yokum, an analyst at the independent research firm CFRA, said worries about the future of midsize banks had “almost completely evaporated in the second quarter.” The stock prices of midsize banks, those with $50 billion to $250 billion in assets, have actually increased more than big-bank stocks recently, he added. ​Read more.

U.S. Economy Grew at 2.4% Rate in Second Quarter​​​

The economic recovery gained momentum in the spring as buoyant consumer spending and resurgent business investment helped, once again, to keep a recession at bay. Gross domestic product, adjusted for inflation, rose at a 2.4 percent annual rate in the second quarter, the Commerce Department said today, according to a New York Times report. That was up from a 2 percent growth rate in the first three months of the year and far stronger than forecasters expected a few months ago. Consumers led the way, as they have throughout the recovery from the severe but short-lived pandemic recession in 2020. Spending rose at a 1.6 percent rate, slower than in the first quarter but still solid. Consumers didn’t carry all the weight, however. Business investment rebounded in the second quarter after slumping in the first three months of the year, and increased spending by state and local governments contributed to growth. ​Read more.

Big Central Banks Hike Again with End in Sight​​​

Major central banks are nervously eyeing the end of aggressive interest rate hikes as price pressures finally show signs of easing, Reuters reported. Inflation remains high across the globe, but in some big economies has cooled faster than expected. Upcoming decisions are on a knife-edge. Pausing too early could cause financial conditions to loosen too fast, re-igniting inflationary pressures. Stopping too late could put a credit crunch and a deep recession in the cards. To date, nine developed economies have raised rates by a combined 3,840 basis points (bps) in this cycle. Japan is the holdout dove. The U.S. Federal Reserve raised rates by 25 basis points on July 26 to a range of 5.25%-5.5% in its 11th rate increase of its last 12 meetings. Fed chair Jerome Powell left the door open to more hikes, but the market was unconvinced, with money market pricing implying that traders thought this was the last hike of this cycle. Having raised its cash rate to a 14-year high of 5.5% in May, the Reserve Bank of New Zealand kept it there in July. This may have marked the end of a 20-month hiking cycle. The Bank of England meets on August 3. Expectations for a big rate increase have eased after the latest data showed that inflation fell to a softer-than-expected 7.9% in June. The BoE raised rates by 50 bps to 5% in June, their highest level since 2008, sending U.K. mortgage rates to a 15-year high. The Bank of Canada hiked rates to a 22-year high of 5% on July 12. Minutes of that meeting showed that policymakers had discussed delaying the rate increase, but decided they could not risk inflation rebounding. ​Read more.

Buyers Are Getting Home Loans from an Unlikely Source: The Seller of Their House​​​

According to an analysis by Realtor.com, as of May 2023, just 1.04% of all U.S. active listings mentioned some type of private financing, down from 1.08% in February and March, which was the highest that figure has been in three years, the Wall Street Journal reported. According to Hillery Dorner, a real-estate attorney with Dorner Law & Title Services in Concord, Mass., seller financing arises most commonly in sales of investment properties. But real estate professionals are reporting that they are increasingly seeing an interest in seller financing for transactions involving residential properties due to the rise in interest rates. “The use of seller financing has become strategic in recent months given our current state of the finance markets,” said Daniel Hershkowitz, senior director of risk management for The Agency, a brokerage in San Francisco. Hershkowitz said that seller financing most often occurs when buyers seek to increase their purchasing power by saving on closing costs or paying lower interest rates, and by sellers who want to encourage buyers to make a full-price or higher offer on the home. In these transactions, the seller hands title to the property to the buyer at closing, as with a traditional mortgage. That kind of financing primarily benefits buyers, who might get more generous credit from the seller than they would from a bank, and who avoid closing costs, such as application fees or escrows. (Other types of seller financing in which sellers hold on to the title until the loan is repaid are risky for buyers and prone to abuse.) (Subscription required.). ​Read more.

Nominations Being Accepted for ABI's International Matter of the Year Award!​​​

ABI’s International Committee is accepting nominations for its Second Annual ABI International Matter of the Year Award. For criteria, eligibility and other information on the award, please click here.​​​​​​ ​​

All nominations must be received by August 31.

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