Finance and Financial Management Commons^™

The New Bond Workouts, William W. Bratton, Adam J. Levitin

All Faculty Scholarship

Bond workouts are a famously dysfunctional method of debt restructuring, ridden with opportunistic and coercive behavior by bondholders and bond issuers. Yet since 2008 bond workouts have quietly started to work. A cognizable portion of the restructuring market has shifted from bankruptcy court to out-of-court workouts by way of exchange offers made only to large institutional investors. The new workouts feature a battery of strong-arm tactics by bond issuers, and aggrieved bondholders have complained in court. The result has been a new, broad reading of the primary law governing workouts, section 316(b) of the Trust Indenture Act of 1939 (“TIA”), …

Governmental Intervention In An Economic Crisis, Robert K. Rasmussen, David A. Skeel Jr.

All Faculty Scholarship

This paper articulates a framework both for assessing the various government bailouts that took place at the onset of Great Recession and for guiding future rescue efforts when they become necessary. The goals for those engineering a bailout should be to be as transparent as possible, to articulate clearly the reason for the intervention, to respect existing priorities among investors, to exercise control only at the top level where such efforts can be seen by the public, and to exit as soon as possible. By these metrics, some of the recent bailouts should be applauded, while others fell short. We …

The New Synthesis Of Bank Regulation And Bankruptcy In The Dodd-Frank Era, David A. Skeel Jr.

All Faculty Scholarship

Since the enactment of the Dodd-Frank Act in 2010, U.S. bank regulation and bankruptcy have become far more closely intertwined. In this Article, I ask whether the new synthesis of bank regulation and bankruptcy is coherent, and whether it is likely to prove effective.

I begin by exploring some of the basic differences between bank resolution, which is a highly administrative process in the U.S., and bankruptcy, which relies more on courts and the parties themselves. I then focus on a series of remarkable new innovations designed to facilitate the rapid recapitalization of systemically important financial institutions: convertible contingent capital …

Single Point Of Entry And The Bankruptcy Alternative, David A. Skeel Jr.

All Faculty Scholarship

This Essay, which will appear in Across the Great Divide: New Perspectives on the Financial Crisis, a Brookings Institution and Hoover Institution book, begins with a brief overview of concerns raised by the Lehman Brothers bankruptcy about the adequacy of our existing architecture for resolving the financial distress of systemically important financial institutions. The principal takeaway of the first section is that Title II as enacted left most of these issues unanswered. By contrast, the FDIC’s new single point of entry strategy, which is introduced in the second section, can be seen as addressing nearly all of them. The …

When Is A Dog’S Tail Not A Leg?: A Property-Based Methodology For Distinguishing Sales Of Receivables From Security Interests That Secure An Obligation, Steven L. Harris, Charles W. Mooney Jr.

All Faculty Scholarship

There are two principal ways in which a firm that is owed money payable in the future but needs the money now may use its rights to payment (“receivables”) to obtain the needed financing. It might sell its receivables, or it might borrow and use the receivables as collateral to secure the loan. Different legal consequences follow depending on whether the transaction is a true sale or is a security interest that secures an obligation (a “SISO”).

These legal consequences are particularly salient when the firm enters bankruptcy. If the transaction is a sale, then the buyer can collect the …

Harmonizing Choice-Of-Law Rules For International Insolvency Cases: Virtual Territoriality, Virtual Universalism, And The Problem Of Local Interests, Charles W. Mooney Jr.

All Faculty Scholarship

This paper explores the potential content and feasibility of a set of harmonized choice of law rules (HICOL Rules) that would apply in insolvency proceedings. It contemplates a main insolvency proceeding opened in a debtor’s center of main interests (“COMI”) and the existence of (or possibility of opening) one or more non-main (or secondary) proceedings. It also contemplates the possibility that an insolvency representative in a main or non-main proceeding may seek and be granted recognition in another state under the UNCITRAL Model Law on Cross-Border Insolvency (codified as Chapter 15 of the Bankruptcy Code in the U.S.) Under HICOL …

Bankruptcy And Economic Recovery, Thomas H. Jackson, David A. Skeel Jr.

All Faculty Scholarship

To measure economic growth or recovery, one traditionally looks to metrics such as the unemployment rate and the growth in GDP. And in terms of figuring out institutional policies that will stimulate economic growth, the focus most often is on policies that encourage investment, entrepreneurial enterprises, and reward risk-taking with appropriate returns. Bankruptcy academics that we are, we tend to add our own area of expertise to this stable— with the firm belief that thinking critically about bankruptcy policy is an important element of any set of institutions designed to speed economic recovery. In this paper, written for a book …

A Dialogue On The Costs And Benefits Of Automatic Stays For Derivatives And Repurchase Agreements, Darrell Duffie, David A. Skeel Jr.

All Faculty Scholarship

For nearly two years, the two of us have had a running discussion of the costs and benefits of automatic stays in bankruptcy for qualified financial contracts (QFCs) such as derivatives and repurchase agreements, particularly those held by systemically important major dealer banks. Under current U.S. bankruptcy law, these contracts are exempted from the automatic stay. The advantages and disadvantages of this treatment have been a matter of significant debate for the past decade, particularly since the 2008 crisis.

After some background on AFCs and automatic stays, we provide our joint analysis of the costs and benefits of stays on …

Transaction Consistency And The New Finance In Bankruptcy, David A. Skeel Jr., Thomas Jackson

All Faculty Scholarship

Prior to the enactment of the Dodd-Frank Act last summer, derivatives and repurchase agreements (“repos”) were largely unregulated outside of bankruptcy, and also were exempted from core bankruptcy provisions such as the automatic stay, which prevents creditors from seizing collateral or attempting to collect what they are owed. The Dodd-Frank Act now extensively regulates derivatives outside of bankruptcy, but it left their special treatment in bankruptcy completely untouched.

There is a gap in the debate over this special treatment. To date, neither scholars nor the derivatives industry have fully analyzed the key counterfactual: what would happen if derivatives and repos …

Bankruptcy Phobia, David A. Skeel Jr.

All Faculty Scholarship

As the recent economic crisis has unfolded, bankruptcy has offered possible solutions at several key junctures. The first of these solutions, often referred to as mortgage modification, was geared toward homeowners who faced the loss of their homes in the months—now several years—since the start of the subprime crisis On the corporate side, Chapter 11 was an obvious alternative when large nonbank financial institutions like Bear Stearns and AIG stumbled in 2008. But regulators repeatedly balked, and the one exception to the avoidance of bankruptcy at all costs—Lehman Brothers—was anomalous. This aversion to bankruptcy, which seems to pervade all sides …

Bankruptcy Boundary Games, David A. Skeel Jr.

All Faculty Scholarship

For the past several decades, Congress has steadily expanded the exclusion of securities market operations from core bankruptcy protections. This Article focuses on three of the most important of these issues: the exclusion of brokerage firms from Chapter 11; the protection of settlement payments from avoidance as preferences or fraudulent conveyances; and the exemption of derivatives from the automatic stay and other basic bankruptcy provisions. In Parts I, II and III of the Article, I consider each of the issues in turn, showing that each has had serious unintended consequences. Both Drexel Burnham and Lehman Brothers evaded the brokerage exclusion, …

The Market Revolution In Bank And Insurance Firm Governance: Its Logic And Limits, David A. Skeel Jr.

All Faculty Scholarship

No abstract provided.

Beyond Negotiability: A New Model For Transfer And Pledge Of Interests In Securities Controlled By Intermediaries, Charles W. Mooney Jr.

All Faculty Scholarship

No abstract provided.