How Holdouts Put Restructuring at Risk

Corporate creditors, perhaps like Americans generally, like to think of themselves as rugged individuals who also work within a communal system.  The fundamental tension is clearest at the point of default: Too much individuality, and a small minority of creditors can block a useful deal that would get the debtor-firm back on track.  But too much collective process, and the majority can bulldoze the minority, forcing it to take outsized losses when the majority cuts a side deal with the firm and its managers.

The restructuring system – comprised of chapter 11 of the Bankruptcy Code, parts of the securities … Read more

Puerto Rico; Act III

In 2017, Puerto Rico and certain of its affiliates filed “bankruptcy” petitions under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”).  These cases are pending in the U.S. District Court for  Puerto Rico; however, under the law Judge Laura Taylor Swain in New York was appointed to preside over the cases.  My new paper – Puerto Rico; Act III – provides an overview of where things stand  and where they might be heading.

PROMESA is a bankruptcy law, with various bells and whistles attached. In addition to its restructuring provisions, the law creates the Financial … Read more

Too Big and Unable to Fail

Financial regulation after the Dodd-Frank Act was enacted in 2010 has produced a blizzard of acronyms, many of which revolve around the basic “too big to fail” problem.  OLA, OLF, SPOE, and TLAC are new regulatory tools that seek to build a regime for resolving failures of systemically important financial institutions.  “Resolution” is the financial industry’s favored term for what most people would simply call “bankruptcy” or, more politely, “restructuring.”

The explicit goal of this new “resolution” regime is to enable a large financial institution (or SIFI, to use another favored acronym) to go bankrupt without a government bailout.  Just … Read more

Failure of the Clearinghouse: Dodd-Frank’s Fatal Flaw?

As is well known, a key feature of the Dodd-Frank Act is the effort to treat swaps more like commodities. In particular, large categories of swaps are to be centrally cleared, replacing the pre-Lehman OTC model with a commodities model that has worked reasonably well for decades.

But the result is to massively increase the importance of the clearinghouses in the global financial system. Clearinghouses are regulated, but given the vital place of clearinghouses in Dodd-Frank, it is surprising that Dodd-Frank makes no clear provision for the failure of a clearinghouse.

Given the key role that clearinghouses will play in … Read more