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Editorial: Shrink the Government's Role to End Too-Big-to-Fail

Submitted by ckanon@abi.org on Tue, 2016-06-07 00:00

We have now entered the Bizarro World of financial regulations, where the people who in 2008 orchestrated billions in bailouts for “too big to fail” institutions are now insisting that they can craft a plan to end “too big to fail,” according to an editorial posted today by The Heritage Foundation. The same people who once insisted that the only way to head off an economic crisis was for the federal government to bail out large financial institutions now say they’ll devise cunning ways to head off an economic crisis without government bailouts. Ben Bernanke, a principal author of the 2008 bailouts, is participating in the Minneapolis Fed’s ongoing Ending Too Big To Fail Policy Symposium. This effort is headed up by Minnesota Fed President Neel Kashkari, who is in charge of the $700 billion Troubled Asset Relief Program (TARP) that former U.S. Treasury Secretary Henry M. Paulson and Bernanke pressured Congress to sign off on. Former Sen. Jim DeMint distinctly remembers Paulson telling Senate Republicans, without any substantiation, that world financial markets could collapse over the weekend if Congress didn’t pass TARP immediately. Now Bernanke and Kashkari — two main architects of TARP — are working on a plan to end government bailouts? The word “irony” isn’t really strong enough to describe this situation. The editorial asserts that we’re now clearly in the realm of Orwellian double-think: “We’ve always been at war with too-big-to-fail, we just had to do it last time because things were so bad.” Theatrics aside, there’s an enormous gap among policymakers in both the economic and political reality of too-big-to-fail.

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SEC Issues

Appeals Court Denies Tilton’s Challenge to SEC Case

Submitted by jhartgen@abi.org on Fri, 2016-06-03 00:00

A federal appeals court in New York refused Wednesday to stand in the way of a fraud case that the U.S. Securities and Exchange Commission brought against former distressed-company financier Lynn Tilton, the Wall Street Journal reported yesterday. Tilton sought to raise a constitutional challenge to the SEC administrative securities fraud action, which focuses on the $2.5 billion collection of distressed company loans she controlled until recently. The U.S. Court of Appeals for the Second Circuit, in a split decision, said Tilton and her Patriarch Partners private-equity firm cannot seek the aid of a federal court until the SEC proceeding, an administrative action, is concluded.

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SEC Issues

Despite Travails, White Calls SEC “Aggressive and Successful”

Submitted by jhartgen@abi.org on Tue, 2016-05-31 00:00

After three years as Wall Street's top watchdog, Mary Jo White defends the track record of the Securities and Exchange Commission with a prosecutor's knack for building a case, the Washington Post reported on Saturday. Despite complaints that the agency has not been tough enough on Wall Street, White points to the 89 senior executives and more than 100 companies charged with misdeeds associated with the 2008 financial crisis. The agency has collected $3.76 billion for those misdeeds, she says. "The SEC has been quite aggressive and successful in that space," she says, "but I also understand the frustration." By the time President Obama tapped White to lead the SEC in 2013, the agency had long suffered under the popular notion that it was a slow and toothless tiger. By nominating White to rebuild the agency's reputation, Obama was leaning on a former federal prosecutor who had helped put John Gotti behind bars. But in the years since, the SEC has been swallowed by the task of implementing dozens of rules called for under the 2010 Dodd-Frank financial reform law and the 2012 JOBS Act, which aims to make it easier for small businesses to raise money. The 4,000-person agency is seemingly constantly at war with Congress, while scrambling to keep up with the technological changes that have overtaken Wall Street. Just recently, Senate Democrats blocked the nomination of two SEC commissioners and Sen. Elizabeth Warren (D-Mass.) complained that the agency was not tough enough on Wall Street. “The SEC doesn't have the criminal powers, and I think often when you're hearing people complain about the lack of accountability, it's, 'well, nobody or few went to jail.' That is not really the SEC,” White said.

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SEC Issues

Tender Offers in Bankruptcy Pass Muster in the Third Circuit

Third Circuit holds again that equal treatment is not required in settlements.

Judge Name - Do not use it.

Patty Shwartz

Analysis: Goldman, Morgan Stanley Seek to Plug Holes After Split Verdict on 'Living Wills'

Submitted by ckanon@abi.org on Thu, 2016-04-28 00:00

April 28, 2016

Bankruptcy Brief

NEWS AND ANALYSIS

Analysis: Goldman, Morgan Stanley Seek to Plug Holes After Split Verdict on 'Living Wills'

When U.S. regulators this month announced their verdicts on eight big banks' "livings wills" — blueprints showing how the institutions would fail without needing a bailout — officials promised more clarity in a process that the industry has criticized as opaque. The government did release more information than in the past about decisions that affect banks' business plans and balance sheets. But the fact that the two agencies involved issued clashing verdicts on a pair of large Wall Street investment banks, Goldman Sachs Group Inc. and Morgan Stanley, stoked confusion and added to calls for the government to be even more transparent in next year's verdicts, according to an analysis in today's Wall Street Journal. Both Goldman and Morgan Stanley said this month they are committed to addressing regulators' concerns, and all the banks are set to meet with the two agencies, the Federal Reserve and the Federal Deposit Insurance Corp., in the coming weeks. While the Fed and FDIC spoke with one voice to six of the eight firms they assessed — failing five and passing one — their disagreement on Goldman and Morgan Stanley came without a clear explanation. The Fed failed Morgan Stanley, but the FDIC didn't. The opposite was true for Goldman. Because the regulators disagreed on Goldman and Morgan Stanley, the firms avoided the "failing" label — and the potential sanctions that come with it, such as higher capital requirements — but the firms still have to take action on the shortcomings that regulators perceived. The opposing verdicts are a reminder of the subjective nature of regulators' decisions and the agencies' continuing struggle to communicate their expectations to the industry.

Analysis: Buyouts Saddle Struggling Retailers with Debts They Can't Repay

Sports Authority Inc. learned the hard way that buyout debt can be a drag as the bankrupt company was loaded with at least $643 million in debt, a hangover from its $1.4 billion leveraged buyout in 2006 by investors led by Leonard Green & Partners, Bloomberg News reported today. Other retailers filing recently for bankruptcy include Deb Shops Inc., a 2007 buyout by Thomas H. Lee Equity Partners Inc., and Dots Stores Inc., a 2011 purchase by Irving Place Capital. Also headed for the debt wall are Claire's Stores Inc., bought by Apollo Global Management in 2007, and Gymboree Corp., a 2010 Bain Capital Partners acquisition. Some in the industry see high levels of indebtedness as a new normal. Many retailers that are struggling now have been slowing down for years, said Sandeep Mathrani, chief executive officer of mall-owner General Growth Properties Inc. In the fast-evolving world of retail where the one constant is the need for investment, retailers laboring under heavy debt are at a disadvantage. "Doing it right is very expensive," said Raya Sokolyanska, an analyst with Moody’s Investor Service in New York. "Limited financial flexibility has been a reason why a lot of these retailers haven’t been able to fight back and position themselves correctly for growth." With the rise of smartphones, shoppers can compare prices in an instant. While competitors such as Dick’s Sporting Goods Inc. were sprucing up stores and building their online businesses, Sports Authority was falling behind, said Ryan Severino, senior economist at REIS Inc. Charles Tatelbaum, a bankruptcy attorney with Tripp Scott in Fort Lauderdale, Fla., said he expects companies acquired through leveraged buyouts to be well represented in the next round of retail bankruptcies because a firm with high debt is running in a three-legged race.

What are the prospects for traditional brick-and-mortar retail? A panel at ABI’s New York City Bankruptcy Conference will examine retail’s changing landscape. Register today!

Texas, Oklahoma, Wyoming: Oil Woes Start to Hit Hard

In states from Oklahoma and Texas to North Dakota and Wyoming, rising unemployment in the energy sector is pushing up loan delinquencies and raising the risk of new losses for banks, the Wall Street Journal reported yesterday. Wells Fargo & Co. this month reported an increase in borrowers falling behind on payments in areas including Houston and parts of Alaska. JPMorgan Chase & Co. said that auto-loan delinquency rates picked up in some energy-related markets. Overall, energy-dependent states are posting delinquency rates that in many cases exceed the national average, according to data prepared for the Wall Street Journal by credit bureau TransUnion. Nearly 119,600 oil and gas jobs nationwide have been eliminated — 22 percent of the total — since September 2014, according to the Federal Reserve Bank of Dallas. The price of U.S.-traded oil, while on the rise this year, has dropped 28 percent since June. Some analysts have warned that persistent crude oversupply could prevent further price gains. (Subscription required.)

White House Steps Up Effort to Reform Student Loan Servicing to Stave Off Rising Defaults

The White House unveiled a series of initiatives today to improve the way the government collects payments on education loans, at a time when defaults are rising, the Washington Post reported today. Government agencies are working together to provide the 43 million Americans who carry $1.3 trillion in student debt more transparent information about the terms of their loans, account features and consumer protections. They also are asking colleges, local governments and employers to help get the word out about repayment plans, especially those that cap monthly payments to a percentage of earnings, known as income-driven repayment plans. The Obama administration has given Americans more options for repaying their student debt so they can avoid default, expanding income-driven plans that require little to no money from people in dire straits. Direct outreach by the Department of Education and marketing campaigns has led to higher enrollment, yet the amount of people severely behind on their debt remains stubbornly high. To reach as large an audience as possible, the CFPB is releasing its own “Payback Playbook,” a guide to help borrowers determine the best repayment plans for them. The playbook will be available to borrowers included in their monthly bills, in email communications from servicers and when they log into their student loan accounts. The bureau is also working to develop guidance to make sure that servicers provide fair, consistent and accurate data to credit bureaus.

In related news, more law firms are adopting initiatives to help lawyers refinance their law school loans at reduced rates, American Lawyer reported yesterday. Last year, Latham & Watkins spearheaded a program with First Republic Bank Co. that allows associates with student loans exceeding $50,000 to refinance at rates as low as 2.5 percent. Since January, at least three other Am Law 100 firms have set up similar programs with the bank. The latest to join the club is Kirkland & Ellis, which launched a program this week that allows associates paying between 6.5 and 8 percent interest on their loans to refinance with First Republic.

Opponents of New Retirement Rule Renew Efforts to Kill It

Opponents of a new rule on retirement advice are regrouping to mount a fresh attack, as their initial optimism has given way to the realization of the regulation's deep and long-lasting impact on the financial industry, the Wall Street Journal reported today. Three weeks after the Labor Department unveiled a tougher standard for brokers working on retirement accounts, the House is expected to pass a resolution tomorrow to scrap it. Trade groups, after keeping relatively quiet as they sought to digest the regulation known as the fiduciary rule, have come out strongly in support of Republican-led efforts aimed at preventing it from taking effect. Any legislative attempt to block the new rule has a slim chance of success. The White House issued a statement yesterday saying that the president would veto the bill. Still, the lawmakers' swift action and the unified front of industry groups show that opposition to the rule remains strong. Reflecting continued industry concerns, eight big trade groups had jointly sent a letter to House lawmakers yesterday timed to coincide with the vote, urging them to kill the new rule. (Subscription required.)

Latest ABI Podcast Looks at the Challenges in Representing Creditors' Committees

In a new ABI Podcast, ABI Resident Scholar Melissa Jacoby talks with Mark E. Felger of Cozen O'Connor (Wilmington, Del.) and Paul Hage of Jaffe Raitt Heuer & Weiss (Southfield, Mich.) about the challenges that professionals face when representing creditors' committees. Felger and Hage are co-authors of ABI's Representing the Creditors' Committee: A Guide for Practitioners, available for purchase in ABI's Bookstore.

BLOG EXCHANGE

New on ABI's Bankruptcy Blog Exchange: Where Is OCC in Court Battle over State Usury Limits?

The potentially wide-ranging effects of an appeals court decision in Midland Funding v. Madden could deal a serious blow to preemption under the National Bank Act, 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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Thursday, April 28, 2016 - 12:00

Elizabeth Warren Questions SEC’s Ability to Protect Investors

Submitted by jhartgen@abi.org on Thu, 2016-04-21 00:00

Sen. Elizabeth Warren (D-Mass.) condemned the Securities and Exchange Commission for failing to stop billionaire Steven Cohen from playing a key role in starting a new hedge fund just months after the agency chastised him for failing to properly supervise a former employee accused of insider trading, the Washington Post reported today. Federal prosecutors had long suspected that the stellar returns at Cohen’s famed hedge fund, SAC Capital, were too good to be true. In 2013, SAC Capital, which once had $15 billion in assets, agreed to pay $1.2 billion to settle charges that it tolerated rampant insider trading. But connecting Cohen, one of the richest people on the world, directly to those misdeeds proved difficult. Instead, the Securities and Exchange Commission reached a settlement with Cohen in January that prohibited him from managing other people’s money until 2018 — essentially barring him from the industry that had made him famous. But just a few months later, Cohen took part in an effort to start a new hedge fund, Stamford Harbor Capital. Cohen owns more than 25 percent of the firm, according to documents filed with the Securities and Exchange Commission. “This is an unacceptable outcome from the nation’s primary enforcer of securities laws, and it is the latest example of an SEC action that fails to appropriately punish guilty parties, deter future wrongdoing, and protect investors,” said Warren.

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SEC Issues

SEC Sets Penalties in Two Corporate Fraud Cases

Submitted by jhartgen@abi.org on Wed, 2016-04-20 00:00

The U.S. Securities and Exchange Commission announced two fraud cases alleging that accounting failures left investors in the dark about the finances of computer accessories maker Logitech International SA and now-defunct electric car battery maker Ener1 Inc., Reuters reported yesterday. "We are intensely focused on whether companies and their officers evaluate judgmental accounting issues in good faith and based on GAAP," or generally accepted accounting principles, said Andrew Ceresney, head of the SEC enforcement division. Logitech agreed to pay a $7.5 million penalty to settle charges it inflated its fiscal 2011 results to meet its earnings guidance and committed other accounting violations over five years, culminating in a 2014 restatement. Former Chief Financial Officer Erik Bardman and former acting controller Jennifer Wolf were charged with minimizing inventory write downs of a slow-selling TV set-top device because they felt "substantial pressure" to meet the guidance. In the Ener1 case, the SEC said the company overstated revenue and assets in late 2010 and early 2011, when it failed to take needed writeoffs for Think, a Norwegian electric car maker and major customer.

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SEC Issues

SEC Takes First Step in Disclosure Rule Revamp

Submitted by jhartgen@abi.org on Fri, 2016-04-15 00:00

The Securities and Exchange Commission is getting back to basics as it considers an update to financial reporting rules, the Wall Street Journal reported today. The Commission on Wednesday issued a “concept release” outlining some of the questions it is considering as part of a disclosure rules review. The release runs 340-pages and considers some fundamentals as it begins a months-long process to potentially update the rules. The SEC in December 2013 recommended a “comprehensive evaluation” of rules that govern how much and what type of information companies must disclose in their annual and quarterly reports. SEC Chairwoman Mary Jo White said in a statement Wednesday that the commission is trying to balance competing interests of investors who “want more, not less, information” and those of companies who complain about “requiring unnecessary, immaterial disclosures.”

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SEC Issues