Gibson Dunn discusses MPM Silicones, LLC – The Dawn of a New Golden Age for Debtors?

On May 4, 2015, the District Court for the Southern District of New York affirmed Bankruptcy Judge Robert D. Drain’s ruling confirming the chapter 11 plan of MPM Silicones, LLC. The holdings of the District Court and the Bankruptcy Court are likely to have wide ranging ramifications, because they decrease the bargaining position of secured creditors in plan negotiations, while increasing the rights of debtors and junior creditors in contentious chapter 11 cases.

I. Background 

On August 26, 2014, Judge Drain ruled on several plan confirmation issues, including, most notably, that the debtors, Momentive Performance Materials, a manufacturer of silicone … Read more

The AIG Case: Moral Hazard on Steroids!

The AIG decision (actually, Starr International Co. v. The United States[1]) has shocked many but for the wrong reason. Some commentators have focused on the ingratitude of Maurice Greenberg, AIG’s former CEO and the “architect” of its international insurance business. In their view, he should have been thankful for the $85 billion loan extended by the Federal Reserve Board (which still left AIG’s shareholders holding 20% of their stock). Ultimately, AIG’s shareholders did much better than their Lehman counterparts (who received nothing), but these issues of comparative fairness and Greenberg’s alleged chutzpah go mainly to the cosmetics and … Read more

Gibson Dunn discusses Delaware Court of Chancery Decision Rejecting Continuous Insolvency Requirement for Creditor Derivative Claims

On May 4, 2015, Vice Chancellor Travis Laster of the Delaware Court of Chancery issued an opinion providing a thoughtful analysis of when the creditors of an insolvent corporation have the right to bring derivative claims, such as those alleging breach of director fiduciary duties. In Quadrant Structured Products Co., Ltd. v. Vertin,[1] the Court examined a question of first impression under Delaware law: whether that law imposes a continuous insolvency requirement for creditors to maintain standing to bring derivative claims against a corporation. The Court began its analysis with a discussion of the nature of a creditor’s … Read more

Law School Moral Hazard and Flawed Public Policy

Law schools have become poster children for market dysfunction. As the Great Recession decimated the demand for new lawyers, a functioning market would have led most schools to reduce enrollments. Instead, the overall number of admitted students increased to more than 60,000 in 2010 – up ten percent from 2008. Three years later, the result was the largest-ever graduating class of JDs: 46,776 in 2013. Nine months after law school, only about half of them had found full-time long-term (“FTLT”) JD-required jobs.

Beginning in 2011, the ABA finally forced schools to reveal the dismal employment results for many recent graduates. … Read more

Brief of 15 Professors of Law and Finance in MetLife v. FSOC

Last week, along with our co-authors Kate Andrias and Michael Barr of the University of Michigan Law School, we filed an amicus brief on behalf of fifteen professors of law and finance in MetLife v. Financial Stability Oversight Council. MetLife has challenged the FSOC’s determination that the company’s distress could threaten U.S. financial stability—and, thus, that MetLife should be subject to Federal Reserve supervision. The case, which is currently before the federal trial court in Washington D.C., represents the first major challenge to an FSOC designation. Our brief explains why the court should reject this challenge.

Our brief reflects … Read more

Why Law Firms Collapse

Law firms don’t just go bankrupt – they collapse. Dewey & LeBoeuf; Heller Ehrman; Howrey; Thelen. All of these firms and many others have disappeared with extraordinary swiftness and finality. Large law firms often go from apparent health to liquidation in just a few months – sometimes even weeks or days. And none has ever managed to reorganize its debts in Chapter 11 bankruptcy and survive. This pattern of swift and complete collapse is puzzling, because it is strangely out of proportion to law firms’ actual financial distress. Most collapsed firms have remained profitable up through the days they dissolved.… Read more

The Politics of Sovereign Debt in Greece: Crisis and Realism

The Greek crisis emerged as an offspring of the financial crisis of 2007, the institutional and fiscal problems of the Greek economy, the institutional structure of the Eurozone and, crucially, the failed political management in the last months that led to the European Financial Stability Facility (EFSF) and the bailout agreement in May 2010. Since then, the Greek governments, along with the creditors, designed and implemented a program of fiscal austerity and institutional reform which lead to some positive fiscal results but also to an unprecedented crisis of liquidity, orientation and cohesion in Greek economy and society.

The financial crisis … Read more

Hogan Lovells discusses U.S. Regulators’ Continued Focus on Leveraged Lending

On March 22, 2013, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation (“FDIC”), and Office of the Comptroller of the Currency (collectively, the “agencies”) published “Interagency Guidance on Leveraged Lending (78 Fed. Reg. 17766) (the “Guidance”).

The stated purpose of the Guidance is to ensure that federally regulated financial institutions conduct leveraged lending activities in a safe and sound manner so that they do not heighten risk in the U.S. banking system or the broader financial system through the origination and distribution of poorly underwritten and low-quality loans. The … Read more

The Moral Hazard Paradox of Financial Safety Nets

Financial panics are pernicious, but they can be countered with government guarantees of panic-prone debt. In the wake of the crisis, however, Congress has stripped regulators of this sort of guarantee power, motivated in large part by concerns that such powers could exacerbate moral hazard. In a new article, The Moral Hazard Paradox of Financial Safety Nets, I suggest that the moral hazard impact of guarantee authorities in the current system is ambiguous – indeed, it is plausible that guarantee authorities could reduce the (net) cost of moral hazard arising from expectations of government intervention. This supports the view … Read more

The DuPont Proxy Battle: New Myths, Old Realities—and Even Newer Data About Hedge Fund Activism

A watershed moment is coming for shareholder activism and corporate governance generally, as the proxy contest brought by Trian Management Fund, seeking effectively to break up DuPont, enters its final stages (with the vote being less than a month away). Technically, the contest is to elect four Trian Fund nominees to the DuPont board, but, as a column in the New York Time’s Dealbook put it more bluntly, the real fight is over whether to break DuPont into three parts and “shut down DuPont’s central research labs.”[1] Much about this contest is unusual: unlike other targets of activism, DuPont … Read more

The Limited Liability Partnership in Bankruptcy

The last twenty-five years have brought about widespread changes in the organizational forms through which individuals organize economic activity. Once momentum built, the creation of hybrid entities such as limited liability partnerships, limited liability companies and even limited liability limited partnerships seemed inevitable, as did the surrendering of flow-through taxation to all of them by the U.S. Treasury. However, how these strange mash-ups of management power, limited liability, and fiduciary duty would operate was left to work itself out over time. The limited liability partnership in particular has evolved with very little judicial or legislative scrutiny as LLPs are usually … Read more

A Third Way: Examiners as Inquisitors

There is a buzz in the air concerning bankruptcy examiners. Recently in such cases as ResCap, Dynegy and Tribune, and perhaps now in Caesars, examiners have played a decisive role in resolving major chapter 11 cases that turned on disputed litigation claims and avoiding power rights. Numerous commentators, and now the ABI Chapter 11 Study Commission, have called for their expanded use.

“Litigate or settle” is the dispute resolution choice generally available in American courts, including bankruptcy courts. But there is another way: An inquisitorial model of justice in which an active and informed neutral investigates the … Read more

Puerto Rico’s Public Corporation Debt Restructuring Law Ruled Unconstitutional

The Commonwealth of Puerto Rico’s efforts to deal with more than $70 billion in debt have been a magnet for media scrutiny during the last two years. A question frequently asked in connection with the island territory’s struggles to stay afloat is whether Puerto Rico, as an unincorporated territory of the U.S., could resort to a bankruptcy filing as a means of alleviating its financial problems.

Puerto Rico, however, is statutorily barred from seeking protection under the Bankruptcy Code. In addition, Puerto Rico’s municipalities and instrumentalities cannot be debtors under chapter 9. On June 28, 2014, Puerto Rico’s governor, Alejandro … Read more

Regulating Against Bubbles

In the Great Recession’s morality play, unscrupulous financiers on the inside of the mortgage industry exploited ordinary folk on the outside. Predatory lenders pushed unsuspecting homebuyers into teaser rate mortgages that seemed affordable but were in fact ticking time bombs. Wall Street’s financial alchemists then packaged these mortgages into impenetrably complex securities, which the credit rating agencies dutifully declared to be triple AAA gold. Everyone on the inside of this chain—the brokers, lenders, securitizers, and rating agencies—took their cut. But when the mortgage bomb finally exploded, the unsuspecting borrowers and investors on the ends of the chain were left in … Read more

Vice Chairman Stanley Fischer discusses Nonbank Financial Intermediation, Financial Stability, and the Road Forward

It is an honor to speak at the Federal Reserve Bank of Atlanta’s 20th Financial Markets Conference, and I am grateful to President Lockhart and the organizers for inviting me to do so.[1] This evening I would like to take stock of progress on financial reforms in the nonbank financial sector and highlight some principles for approaching prudential regulation of this sector to further strengthen financial stability.

The nonbank sector includes firms with diverse business models and practices, many of which differ greatly from those of banks. Even so, nonbank firms and activities can pose the same key vulnerabilities … Read more

Competition Among the Big Three: How Multiple Credit Ratings Pay Off for Investors

Asymmetric information is an important characteristic of the securitization market, where products exhibit complex architecture and information about the underlying credit portfolio is highly opaque. In order to overcome these information asymmetries, issuers use rating agencies who act as agents and provide a credit rating at tranche-level for each issued security. In fact, based on our data, most of these tranches were rated by more than one rating agency and few of the tranches had been downgraded by the beginning of 2008. Ultimately, investors have to bear the costs of multiple ratings in the form of lower interest rates on … Read more

Shearman & Sterling discusses Flexibility for Debt Refinancings Under New SEC No-Action Letter

The SEC staff issued a no-action letter recently that will allow some companies to refinance their debt using tender and exchange offers shorter than the 20 business days required in the tender offer rules. The letter extends to high yield debt tender offers and to exchange offers pre‑existing guidance that allowed shorter tender offers for investment grade debt. The letter also imposes a number of new limitations on and requirements for shorter tender offers.

The no‑action letter—Abbreviated Tender or Exchange Offers for Non‑Convertible Debt Securities, January 23, 2015—supersedes prior no‑action letters for tender offers launched after its date.… Read more

Today we talk about Fannie and Freddie…

Today we feature three posts on the theme of Fannie Mae and Freddie Mac. The first two posts — from David Min and Brad Miller, respectively — question assumptions about the proper role of government and markets in home mortgage securitization markets, arguing for restraint in privatization.  The third post, from Mark A. Calabria, looks to the conservatorships of Fannie Mae and Freddie Mac to draw lessons as to whether tools for resolution introduced by the Dodd-Frank Act are likely to be used in the event a major financial institution suffers distress.  All of these posts are based … Read more

The Resolution of Systematically Important Financial Institutions: Lessons from Fannie and Freddie

There was perhaps no issue of greater importance to the financial regulatory reforms of 2010 than the resolution, without taxpayer assistance, of large financial institutions. The rescue of firms such as AIG shocked the public conscience and provided the political force behind the passage of the Dodd-Frank Act. The force is reflected in the fact that Titles I and II of Dodd-Frank relate to the identification and resolution of large financial entities, and Title VIII relates to the resolution of financial market utilities. How the tools established in Titles I, II and VIII are implemented is paramount to the success … Read more

Davis Polk discusses Novel SDNY Opinion Holding that Out-of-Court Restructurings May Violate Noteholder Rights Under the Trust Indenture Act

In Marblegate Asset Management v. Education Management Corp. (S.D.N.Y. 2014), the Southern District of New York found that a proposed out-of-court debt restructuring to the detriment of non-consenting creditors likely violated provisions of the Trust Indenture Act of 1939 (TIA), a Depression-era federal statute intended to protect rights to payment under a TIA-qualified indenture, which is a feature of any U.S. public offering of debt securities. Unlike earlier TIA cases, a critical element of the proposed restructuring here was explicitly permitted by the governing indenture, and no consent was required under the indenture. Nonetheless, the Court read the TIA … Read more