Author Archive for jonathan-lipson
Broken Records: It’s About Bankruptcy Relief, Stupid
posted by Jonathan Lipson
If hypocrisy is your cup of tea, you can’t get much better than this. The New York Times reports that hedge funds—who stand a good chance of being the direct or indirect beneficiaries of about $1 trillion in U.S. financial bailout money—do not think homeowners should catch a break. They—like banks and bondholders before them—have come out against any proposal to amend the Bankruptcy Code to provide relief to homeowners by giving judges the power to modify mortgages to fair market value. According the the Times,
“Hedge funds are fighting proposals to ease the terms of home mortgages, arguing that such a move would hurt their investments. Two funds recently warned mortgage companies that they might take action if the companies participated in government-backed plans to renegotiate delinquent loans in a way that undercut the funds’ interests”
Although there is evidence that that there has been some drop in mortgage foreclosure numbers in the last month, it remains true that we are experiencing record numbers of home foreclosures, and this will likely continue well into the future absent some sort of government intervention.
One reason for the recent dip is that some states are apparently making it more difficult to foreclose, although this would seem only to forestall the inevitable. For her part, Sheila Bair, FDIC chair, has proposed streamlining restructuring procedures at the homeowner level in order to facilitate renegotiations.
While these are laudable attempts to address the fundamental market failure that has occurred by virtue of the investor-servicer-homeowner CF (“CF” is a term of art. The first letter stands for the word “cluster.” I cannot print the second word), I remain convinced that the most fair and efficient way to deal with this is through bankruptcy.
October 27, 2008 at 11:34 am
Posted in: Bankruptcy
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Live, From Tsinghua University, It’s Saturday Night!
posted by Jonathan Lipson
Okay, just about everything in the title is false, except that I have been at Tsinghua University, in Beijing, to present a talk entitled “Enron Rerun: The Credit Crisis in Three “Easy” Pieces.” [ Download file]
Every year, Tsinghua, which partners with Temple’s China LLM program, puts on an international conference on corporate or commercial law. This year’s theme: Corporate Restructuring. Speakers from around the world (but mostly Asia) gathered to talk about everything from bringing the ineffable elegance of the reverse triangular merger to China to the scourge of needless transactional complexity.
Organized by Tsinghua Professors Wang Baoshu and Zhu Ciyuan, speakers included Helmut Kohl (University of Frankfurt); Professor Chih-Cheng (Spencer) Wang (National Chung Cheng University (Taiwan)); Professor Len-Yu Liu (Chengchi University, Taiwan; Professor Alain Couret (Sorbonne); Jennifer Hill (Sydney University); Daniel Ohl (Orleans); Nicholas Howson (Michigan) and Daniel Kleinberger (William Mitchell).
October 26, 2008 at 11:03 pm
Posted in: Uncategorized
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The Biggest Fraudulent Conveyance Lawsuit Ever
posted by Jonathan Lipson
New York Attorney General Andrew Cuomo has been making headlines because he has strong-armed AIG into trying to recover “outrageous” bonuses and other perks while its financial condition was not so great.
Cuomo’s leverage (so to speak) arises from, among other things, laws forbidding fraudulent conveyances and similar transactions. Fraudulent conveyance law is a complex, if vital, corner of debtor-creditor law. It essentially says that a company cannot convey property for less than “reasonably equivalent value” if it is “insolvent,” undercapitalized, or the like. If you’re in financial trouble, the saying goes, “you must be just before you are generous.”
Among other things, this means that if a company like AIG was paying bonuses (or redeeming stock) while it was in fact in distress, those who received AIG’s cash—like Joe Cassano, who was paid millions for running AIG’s brilliant credit default swap shop–should have to pay it back unless they gave AIG “reasonably equivalent value.” Gifts are axiomatically not supported by any (much less reasonably equivalent) value.
But if AIG is Cuomo’s only target, he’s thinking WAY TOO SMALL. Today’s New York Times reports the following “grim milestone: All of the combined profits that major banks earned in recent years have vanished:”
In the case of the nine-largest commercial banks — Citigroup, Merrill Lynch, Bank of America, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Wells Fargo, Washington Mutual and Wachovia — profits from early 2004 until the middle of 2007 were a combined $305 billion. But since July 2007, those banks have marked down their valuations on loans and other assets by just over that amount
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October 17, 2008 at 12:48 am
Posted in: Bankruptcy
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Maverick-Backed Securities
posted by Jonathan Lipson
In last night’s debate, John McCain proposed that Treasury purchase defaulted mortgages, thereby providing relief to distressed homeowners.
“As president of the United States,” Mr. McCain said, “I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes, at the diminished value of those homes and let people make those, be able to make those payments and stay in their homes. Is it expensive? Yes.”
How? He didn’t say. But he’d have to overcome a mountain of contractual and legal obstacles in the “toxic” securities (bonds) that these defaulted mortgages were supposed to back (pay for).
Georgetown Law Professor Adam Levitin has done a good job of explaining why simply purchasing the bonds themselves will provide little relief to homeowners: Unless the government purchases a controlling amount and number of bonds–meaning lots of bonds–it will lack the voting power, among other things, to cause any changes to the underlying mortgages.
October 7, 2008 at 10:50 pm
Posted in: Bankruptcy
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The Craziest Claims Yet about the Credit Crisis
posted by Jonathan Lipson
The credit crisis has provided ample opportunities for foolishness. Certainly California Republican Darrell Issa’s claim that the House bill would have been a “coffin on top of Reagan’s coffin” was an oddly necrophilic bunkmate to President Bush’s penetrating insight that “this sucker’s going down.”
But the prize for crazy claims about the credit crisis must go to former Dallas Fed President Bob McTeer, whose Monday post on the New York Times’ Economix blog claims that: (i) Wall Street banks were the real victims of the crisis; (ii) the real villains were minorities; and (iii) the only thing needed to fix the crisis is to change accounting rules.
I kid you not.
Let’s consider each in turn.
1. Banks are Victims
“[A]ll the focus on C.E.O. salary caps,” he writes “implied that the holders of illiquid mortgage-backed securities were the villains in this drama rather than the victims. They didn’t package the securities, or sell them; they bought them as an investment.”
October 3, 2008 at 12:52 pm
Posted in: Accounting, Bankruptcy, Corporate Finance
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