Inside Wall Street’s Playbook to Prevent Debt-Ceiling Chaos​​​

Wall Street is breaking out its doomsday playbook for how to survive a U.S. default, the Wall Street Journal reported. The industry’s primary goal: keep the financial markets functioning. Many fear everything from computer glitches to cascading panic if the U.S. misses payments on Treasurys, which are a bedrock of trading and usually considered almost as safe as cash. Under Wall Street’s plan, though, investors would be able to keep trading all U.S. Treasurys, even those with past-due interest or principal payments. Chaos and confusion would be kept at bay through a series of conference calls, each with an agenda already organized by the Securities Industry and Financial Markets Association trade group. Leading Sifma’s effort is Robert Toomey, a former lawyer at the Securities and Exchange Commission and New York Fed. He told a conference last week that market participants had been surprised when Treasury Secretary Janet Yellen said at the start of the month that the government could run short of cash to pay its bills as soon as June 1 if Congress doesn’t raise the U.S. debt ceiling by then. That was earlier than many analysts expected, jarring an industry that has labored to develop a plan for a default since the debt-ceiling fight of 2011 rattled markets. Now firms across Wall Street are actively planning to mitigate the damage. The threat of “execution tends to focus the mind,” said Toomey, who heads Sifma’s capital markets practice. Wall Street’s work on planning for a default got off to a rocky start more than a decade ago. At the end of the 2011 standoff, a staff member at the New York Fed told central bank officials that market participants had been “unable to get to a well-coordinated, very effective approach” to handling a potential default, according to a transcript of the meeting. Since then, progress has come along gradually, spearheaded both by Sifma and a group of market participants sponsored by the New York Fed.​​​​​​ ​​​Read more.

House Passes Measure Overturning Biden’s Student Debt Forgiveness Program​​​

House Republicans passed a resolution yesterday to overturn President Biden’s student debt relief plan that would give up to $20,000 in loan forgiveness to borrowers, The Hill reported. In a 218-203 vote, Rep. Bob Good (R-Va.) succeeded in his measure to terminate the pandemic-era student loan payment pause and cancel the potential relief for 40 million borrowers. The Biden proposal, which is also currently at the mercy of the conservative-leaning Supreme Court, is estimated to cost around $400 billion. Two Democrats, Reps. Jared Golden (Maine) and Marie Gluesenkamp Perez (Wash.), joined Republicans in supporting the move. The measure against the program, which the White House has threatened to veto, was brought under the Congressional Review Act (CRA), which allows Congress to suspend executive actions taken by the president. This move was only recently put on the table, after the Government Accountability Office said Biden’s plan was subject to the act. While a victory for Republicans, it would be an uphill battle to get this measure through the Senate. Democrats hold the majority in the upper chamber, though centrists such as Sen. Joe Manchin (D-W.Va.) have previously criticized Biden’s student debt relief. If it did pass, the Congressional Budget Office recently said it would reduce the deficit by around $320 billion over 10 years. “This resolution is an unprecedented attempt to undercut our historic economic recovery and would deprive more than 40 million hard-working Americans of much-needed student debt relief,” the administration said in a statement. Before the vote, a House Education and Workforce investment subcommittee held a hearing with two top Education Department officials about the Biden administration’s student loan policies. The hearing focused on all the different actions the Biden administration has taken in regard to student loans, such as changing income-driven repayments and proposing a gainful employment rule. Democrats brought up concerns during the hearing that the CRA measure, if passed, would make it so borrowers would retroactively have to pay back the interest for when their student loans were on pause the past three years. Republicans say that would not happen and the concern is overblown. ​​​Read more.

Commentary: The Draft, Student Loan Forgiveness and College Privilege*​​​

The Supreme Court is considering the fate of President Biden’s student loan cancellation plan. The economic significance of the case is obvious: If the court holds that it is lawful, it will transfer more than $400 billion from taxpayers to student borrowers, according to a Wall Street Journal commentary. Even more significant is the foundational question at the heart of the debate: What privileges, if any, should higher education receive in a democratic society? It’s a question that was once carefully considered by leading political and educational leaders, including Franklin D. Roosevelt, Dwight D. Eisenhower (who served as Columbia University’s president, 1948-53) and James Conant (Harvard’s president, 1933-53). The broader context of the mid-20th century debate over educational privilege was student deferments from the military draft. It’s a useful analogy for today’s debate, according to the commentary, and it illustrates how higher-education interests succeeded decades ago in creating a privileged place above the ordinary duties of American civic life. The U.S. instituted the draft in 1940, more than a year before Congress declared war on Japan and Germany. FDR, who came out for the draft at the 1940 Democratic National Convention, championed universal military service by able-bodied males as an expression of national unity and democratic solidarity. On the day of the first draft lottery, Roosevelt read, with great fanfare, from letters written by Catholic, Jewish and Protestant leaders in support of conscription. Roosevelt was keen that the public needed assurance that the draft was “absolutely democratic and made no distinction between men of different social ranks or economic status.” Already educators were pressing for special treatment for students, which concerned FDR. Writing to the director of the Selective Service, the president was clear that he didn’t want “the mere matriculation into college” to “serve as a means of evading compulsory military training.” After World War II, educators began to gain the upper hand. For educational and industry leaders of the era, defending the country from nuclear attack required turning away from the democratic values of shared sacrifice in uniform. The stated intention of the educators who pushed for a broader student deferment program was to protect the future of the hard sciences. ​​​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. 

Analysis: Emails, Chat Logs, Code and a Notebook: The Mountain of FTX Evidence​​​

Snippets of computer code. More than six million pages of emails, Slack messages and other digital records. And a small black notebook, filled with handwritten observations. For months, federal prosecutors building the criminal case against fallen cryptocurrency executive Sam Bankman-Fried have been assembling a vast and unusually varied array of evidence, according to a New York Times analysis. The documents include crypto transaction logs and encrypted group chats from Mr. Bankman-Fried’s collapsed exchange, FTX, as well as strikingly personal reflections recorded by a key witness in the case. The mountain of evidence reportedly ranks among the largest ever collected in a white-collar securities fraud case prosecuted by the federal authorities in Manhattan. The diversity and growing volume of materials in the FTX case underscores the legal challenges facing Mr. Bankman-Fried, 31, who is charged with 13 criminal counts, including accusations that he misappropriated billions of dollars in customer money, defrauded investors and violated campaign finance laws. He has pleaded not guilty. With the trial set for October, prosecutors have gathered evidence ranging from phones and laptops to the contents of Mr. Bankman-Fried’s Google accounts, which amounted to 2.5 million pages alone. At a hearing in March, Nicolas Roos, a federal prosecutor investigating FTX, said the government had obtained a laptop crammed with so much information that the FBI’s technicians were struggling to decipher all of it. Typically, the evidence in a criminal case remains largely secret until right before trial. But in Mr. Bankman-Fried’s case, interviews and a review of recent court filings have offered an early glimpse of the idiosyncratic array of records that the FTX prosecutors have collected. ​​​Read more.

Companies Unveil Details About Supply Chain Financing Under New Rule​​​

Companies including PPG Industries and LyondellBasell Industries are providing details about their supply chain finance programs for the first time under a U.S. rule that recently went into effect, but questions remain about risks associated with the cash-management tools, the Wall Street Journal reported. The Financial Accounting Standards Board last year approved a rule requiring U.S. companies to disclose the terms and size of their supply chain financing programs starting this year. The rule mandates that companies provide a general description of payment terms and any assets pledged as securities or other forms of guarantees the company or its affiliated entities have offered to the finance provider. Supply chain finance, which has been around for decades, is essentially a form of short-term borrowing to pay for goods and services from suppliers. These financing arrangements free up cash generally without a lot of cost or effort, an advantage that can be appealing to companies as finance chiefs are looking to improve cash flow amid economic uncertainty and inflation and as rising interest rates drive demand from both suppliers and corporate users of the financing. The 2021 collapse of Greensill Capital Management, a major provider of supply chain finance, raised concerns about liquidity risks associated with the practice. Among the companies that made their first disclosures of supply chain finance data in the latest quarter, according to a review of filings by Bedrock AI, were paint maker PPG Industries, Dutch chemical company LyondellBasell Industries, electric-services firm Fluence Energy and pharmaceutical company Viatris. Several companies with the largest supply chain programs were already disclosing program details before the rule. Companies such as Coca-Cola, Boeing, AT&T, General Electric, Kimberly-Clark, General Motors and Keurig Dr Pepper have reported running programs of more than $1 billion in the latest quarter, filings show. But the latest disclosures gave investors a better sense of the extent to which the payables for a broader swath of companies consist of outstanding obligations tied to the programs, information not previously mandated in the U.S. ​​​Read more.

U.S. Economic Growth for Last Quarter Is Revised Up to a Still-Tepid 1.3% Annual Rate

The U.S. economy grew at a lackluster 1.3% annual rate from January through March as businesses wary of an economic slowdown trimmed their inventories, the government said today in a slight upgrade from its initial estimate, the Associated Press reported. The government had previously estimated that the economy grew at a 1.1% annual rate last quarter. The Commerce Department’s revised measure of growth in the nation’s gross domestic product — the economy’s total output of goods and services — marked a deceleration from 3.2% annual growth from July through September and 2.6% from October through December. Despite the first-quarter slowdown, consumer spending, which accounts for around 70% of America’s economic output, rose at a 3.8% annual pace, the most in nearly two years and an encouraging sign of household confidence. Specifically, spending on physical goods, like appliances and cars, rose 6.3%, also the fastest growth rate since April-June of last year. A cutback in business inventories shaved 2.1 percentage points off January-March growth. The steady slowdown in the nation’s economic growth is a consequence of the Federal Reserve’s aggressive drive to tame inflation, with 10 interest rate hikes over the past 14 months. Across the economy, the Fed’s rate increases have elevated the costs of auto loans, credit card borrowing and business loans. “Consumers — the critical lynchpin to the U.S. economy — are still spending, tapping into savings and credit to be able to do so,″ said Jim Baird, chief investment officer for Plante Moran Financial Advisors. “That can’t persist indefinitely though, raising the risk of a more pronounced slowdown or recession the longer the Fed’s battle with inflation drags on.” As the Fed’s rate hikes have gradually slowed growth, inflation has eased from the four-decade high it reached last year. Still, consumer prices were still up 4.9% in April from a year earlier — well above the Fed’s 2% target. ​​​Read more.

U.S. Labor Market Resilient; Declining Profits a Red Flag for Economy​​​

The number of Americans filing new claims for unemployment benefits increased moderately last week, and data for the prior two weeks was revised sharply lower as fraudulent applications from Massachusetts were stripped out, indicating persistent labor market strength, Reuters reported. The report from the Labor Department today, which also showed fewer people collecting unemployment checks in mid-May, suggested that the economy was enjoying another month of strong employment gains and a lower jobless rate. The government is scheduled to publish its closely watched employment report for May next Friday. Some economists said labor market resilience raised the risk that the Federal Reserve could raise interest rates again in June. Minutes of the Fed's May 2-3 policy meeting published on Wednesday showed that U.S. central bank officials "generally agreed" that the need for further rate hikes "had become less certain." "The worrisome trend of more layoffs just got completely revised away where the labor market isn't loosening up as much as Fed officials and markets had thought," said Christopher Rupkey, chief economist at FWDBONDS in New York. "The Fed looks further behind the inflation-fighting curve than ever with the labor market tightness refusing to budge." Initial claims for state unemployment benefits increased 4,000 to a seasonally adjusted 229,000 for the week ended May 20. Data for the prior week was revised to show 17,000 fewer applications received than previously reported. Claims for the week ending May 6 were revised down by 33,000, leaving filings substantially lower during the period that the government surveyed businesses for the nonfarm payrolls portion of May's employment report. The economy added 253,000 jobs in April. ​​​Read more.

ABI’s New Subchapter V Task Force Needs Data from YOU!​​​

ABI’s Subchapter V Task Force, a nine-member expert panel established during last month’s Annual Spring Meeting to study and evaluate subchapter V of chapter 11 of the Bankruptcy Code, needs your help! The Task Force is seeking input from professionals who have worked or are working with the subchapter to study its effectiveness since it was enacted three years ago. The Task Force also intends to solicit input on subchapter V from the public via hearings and its forthcoming website, culminating in a final report to be delivered in April 2024. Please take a few moments to complete the survey. ​​​

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