LARGE BANKS BACKING NEW SAFEGUARDS IN SHORT-TERM LENDING MARKETS
Large banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley are backing new safeguards in short-term lending markets, a bid to prevent a replay of the 2008 financial crisis, the Wall Street Journal reported today. Facing rising regulatory pressure over the stability of the multitrillion-dollar "repo" market, the banks are pushing to expand the role of so-called central clearinghouses that guarantee financial obligations on trades are met in case of a default. Regulators and bankers believe that central clearing could reduce the risk that traders will flee the repo market following a financial or economic shock, forcing a damaging spiral of "fire sales" in collateral, akin to the 2008 meltdown. Repos, or repurchase agreements, play a critical role in the financial system, allowing hedge funds, investment banks and other financial firms to borrow and lend short-term funds, often overnight. Trading has fallen this year amid rising capital and liquidity requirements for banks, but fear that the market will freeze remains a key concern for watchdogs such as the Federal Reserve Bank of New York and the U.S. Treasury's Financial Stability Oversight Council. The Fed is concerned about the $1.6 trillion "tri-party" repo market, a large chunk of the overall repo market. Regular repos are between two trading partners, but tri-party repo trades typically are handled by one of two major clearing banks, JPMorgan and Bank of New York Mellon Corp. The Fed is worried that the failure of one of those clearing banks would disrupt the financial system. Read more. (Subscription required.)
COMMENTARY: THE FED'S MORTGAGE FAVORITISM
Central-bank legitimacy will wane without boundaries on tools used for credit-market intervention, according to a Wall Street Journal commentary yesterday by Richmond Federal Reserve President Jeffrey Lacker and John Weinberg. Since 2009 the Fed has acquired $1.7 trillion in mortgage-backed securities underwritten by Fannie Mae and Freddie Mac, the mortgage companies now under government conservatorship. Housing finance was at the heart of the financial crisis, and these purchases began in early 2009 out of concern for the stability of the housing-finance system, according to Lacker and Weinberg. Mortgage markets have since stabilized, but the purchases have resumed, with more than $800 billion accumulated since September 2012. Lacker and Weinberg were skeptical of the need for the purchase of mortgage assets, even in 2009, believing that the Fed could achieve its goals through the purchase of Treasury securities alone. Now, as the Fed looks to raise the federal-funds rate and other short-term interest rates to more normal levels, that normalization should include a plan to sell these assets at a predictable pace, according to Lacker and Weinberg, so that distortion of credit markets can be minimized. Read more. (Subscription required.)
CFPB LOOKING AT HOW BANKS USE CREDIT REPORTS FOR CHECKING ACCOUNTS
The Consumer Financial Protection Bureau is raising questions about the policies and data banks use to vet consumers before allowing them to open a checking account, Collections & Credit Risk reported today. CFPB Director Richard Cordray said yesterday that some consumers are unable to open an account because of marks on their credit report, regardless of whether the information is factual. Such consumers can also face greater overdraft charges if they do open an account because they are perceived as riskier credit. "We are seeking, in particular, to explore ways that account screening can move beyond the use of specialized consumer reports as crude 'black lists' where consumers are turned down for an account simply because their name appears on the list," Cordray said. "We envision a process that better understands consumers' needs and can provide an account that is appropriate to their personal circumstances." Read more.
COMMENTARY: WHAT STATES SHOULD DO TO KEEP THEIR CITIES OUT OF BANKRUPTCY
To head off problems before they become crises, states need to monitor their local governments' finances and borrowing practices, according to a commentary in yesterday's Governing magazine. Detroit's bankruptcy has added urgency to the discussion of how state and local governments should respond when a municipality faces financial distress. The Motor City's revenue shortfall is unusually large, mirroring its sharp population decline, but Detroit isn't alone in its struggle to balance its books after years of poor fiscal management and excessive reliance on debt. Tenuous finances have pushed other municipalities to the brink of receivership or bankruptcy, often requiring state policymakers to decide whether to intervene and, if so, when and how. A recent Pew Charitable Trusts report, "The State Role in Local Government Financial Distress," found that 19 states have passed laws allowing them to intervene in local-government fiscal crises. In dire cases, states have set up advisory commissions, receivers, emergency managers and financial control boards to oversee the local governments. These mechanisms are intended to prevent bankruptcy, which officials consider to be so harmful that only 12 states specifically authorize local governments to file for bankruptcy protection. Read the full commentary.
PRIVATE-EQUITY CONSULTANTS FACE SEC SCRUTINY
Private equity's highly touted executives-turned-advisers are under scrutiny by the Securities and Exchange Commission, the Wall Street Journal reported today. Buyout firms deploy these professionals, often known as operating partners, as in-the-field experts when they acquire a company and set out to improve its operations. Their salaries are typically paid by the company they advise or the buyout firm's investors. The firms, however, often list the operating partners alongside their full-time employees and in marketing materials when seeking cash from investors. Regulators are concerned that buyout firms aren't giving investors in private-equity funds — including pensions, endowments and wealthy individuals — enough information about exactly how these consultants are paid. A Wall Street Journal review of regulatory filings from 80 private-equity firms found that only about half disclosed that they charge the cost of operating partners to their investors or the companies they control. The rest made no mention of the consultants or how they are compensated; however, that doesn't imply firms are unfairly passing those costs on to investors. Read more. (Subscription required.)
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NEW CASE SUMMARY ON VOLO: DYE V. SACHS (IN RE FLASHCOM INC.; 9TH CIR.)
Summarized by Joel Newell of Lane & Nach, PC
Bankruptcy courts have equitable authority to modify or vacate compromise stipulations if the factual circumstances warrant the same; however, the bankruptcy court may do so only to the extent no intervening rights have vested in reliance thereon. The 9th Cir. Bankruptcy Appellate Panel affirmed the bankruptcy court's ruling that under state law the buyout option of the settlement constituted an unenforceable penalty. However, the Bankruptcy Appellate Panel vacated and remanded the bankruptcy court's ruling that excluded a portion of the prejudgment interest.
There are nearly 1,500 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.
NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: IF CONGRESS WON'T END GSE CONSERVATORSHIP SOON, FHFA CAN
A recent blog post suggests that the same broad powers that allowed the federal government to place Fannie Mae and Freddie Mac into conservatorship could also allow it to reconstitute both companies.
Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.
ABI Quick Poll
The debt ceiling for chapter 13 cases should be increased substantially again, perhaps to $5 million.
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