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Op-Ed: Puerto Rico Needs Bankruptcy Protection. Now.

The last thing that Puerto Rico needs now is yet another shock to its very troubled economy. Yet, that is precisely what the island should be bracing itself for once the temporary stay that the U.S. Congress afforded it last year from creditor lawsuits expires on May 1, according to an OpEd in The Hill today. It is difficult to understand why Puerto Rico’s governor and its Oversight Board have not already availed themselves of the island’s right to file for bankruptcy protection that was made possible under last year’s PROMESA Act of Congress. It is also difficult to overstate how desperate the present state of the Puerto Rican economy is. Even before the slew of costly and disruptive creditor lawsuits that will almost surely follow the expiry of the U.S. Congress’ temporary stay on such suits next week, the island’s economic outlook was nothing short of grim. According to the Puerto Rican government’s own 10-year budget plan, which was approved by its Oversight Board, the island’s economy is projected to decline by more than 3 percent a year in 2018 and 2019 and by around 10 percent over the next five years. In these dire circumstances, one would think that it would be in the island’s best interest to secure as soon as possible an orderly restructuring of its public debt mountain. If such a restructuring were quickly done in the context of a far-reaching structural economic reform program, especially one that included reforms to its archaic labor laws, the island would have a chance to at last begin recovering from its deep economic depression. By orderly restructuring its debt, the island would reduce the investor uncertainty from which it now suffers as a result of a debt level that everyone knows it cannot afford to pay.

Commentary: A Better Idea for Bankrupt Big Banks

The most significant Wall Street reform in nearly a decade may soon become law, according to a commentary in Monday’s Wall Street Journal. Last Friday, President Trump directed Treasury Secretary Steven Mnuchin to review Title II of the 2010 Dodd-Frank Act, which gives the federal government authority to wind down involuntarily failing financial institutions. Treasury is to issue a report that considers whether changing the U.S. Bankruptcy Code “would be a superior method of resolution for financial companies” while preventing bailouts. Congress is already moving in that direction. The Financial Institution Bankruptcy Act (FIBA) passed the House earlier this month with wide bipartisan support. FIBA would amend the Bankruptcy Code to streamline chapter 11 cases of “systemically important financial institutions,” or SIFIs, while minimizing disruptions to the rest of the economy. By endorsing FIBA, Treasury could bring the administration a key legislative victory. FIBA builds upon existing Bankruptcy Code protections but would work more quickly, leave operating subsidiaries outside chapter 11, and assign bankruptcy court judges preselected by the chief justice for their expertise in financial markets. FIBA would enable a quick separation of “good” and “bad” SIFI assets through the rapid post-petition transfer of the good assets to a newly formed bridge company that is not in bankruptcy. The bridge company would be capitalized by leaving behind unsecured debt, and creditors would pursue their claims in the chapter 11 case. Prior Senate versions of these reforms also included a provision to repeal Title II, which FIBA does not. But debate over Title II should not impede the prospects for FIBA’s prompt enactment, according to the commentary.

Analysis: TBTF: Is More Capital Really the Best Way Forward?

The use of the term “too-big-to-fail” (TBTF) found its way into the lexicon of finance after the global financial crisis of 2007-09, and it continues to be redefined and argued: Which financial institutions should be so identified, and have current regulations resolved the problems of the financial crisis? According to an analysis in The Hill yesterday, the TBTF business model proved faulty, not because it was wrong to be big, global and diversified, but because the capability for seeing into these financial behemoths was missing. Regulators needed a blueprint and a plan to fix long-overdue data standards, legacy systems, risk-data aggregation issues and infrastructure problems. Without these improvements, TBTF CEOs and their regulators could not — and still cannot — see risk exposures building up in a single TBTF institution nor across multiply interconnected ones. With these improvements, TBTF institutions and their regulators will be better able to determine and monitor their risk, according to the analysis. They can then be rewarded with less capital, not more. The issue of TBTF has revolved around whether more capital (the equivalent of saving more for a rainy day) will support the systemic impact of another financial crisis. However, capital was then and is still now a measure with which to count down to failure. Even with mandates for more capital, higher-quality capital and more-liquid capital, capital will be depleted as before. More capital will buy a bit more time, but not the time needed to successfully unwind a TBTF financial institution nor even a modestly sized, globally interconnected one.

Analysis: Startups Rarely File for Bankruptcy, but Could That Change?

Plastc, a company that raised millions from crowdfunders with the promise of revolutionizing payments, has shut down. On its own, this is not notable, but this firm isn’t just ceasing operations. A notice posted to the company’s website said that it is “exploring options” to file for bankruptcy. According to an analysis in Forbes Monday, there is an increasing willingness of venture-backed companies to go through bankruptcy. Normally when startups shut down, bankruptcy is pointless for a few reasons. With young software companies, there are usually no assets to reorganize. What’s more, venture backers and founders would rather not glorify their failure with an embarrassing public auction. Lastly, bankruptcy is expensive. If the company is truly out of money, who will pay for it? “Their muscle memory is to avoid chapter 11 at all costs,” says Jeffrey L. Cohen, a partner at Lowenstein Sandler LLP. “It’s pretty taboo in the Valley to use the term ‘chapter 11.’” But bankruptcy is becoming more appealing for startups for two reasons: the increased number of asset-based lenders, and the fact that, for many, their assets have become more valuable.

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