Bankruptcy and Dodd-Frank

Does the new Dodd-Frank bill have anything to say about corporate bankruptcies?

Yes, and to say myself the trouble of paraphrasing, I'll simply link you to a fine listing of direct and indirect consequences.

None of it seems to address the core dysfunction of our corporate bankruptcy system, though.

Back in March 2008, Judge Posner, of the 7th circuit court of appeals, suggested the key dysfunction -- out-of-control bankruptcy trustees. Posner wrote, “While the management of a going concern has many other duties besides bringing lawsuits, the trustee of a defunct business has little to do besides filing claims that if resisted he may decide to sue to enforce.”

In particular, trustees had become very aggressive by that time (BEFORE the worst of the credit crunch that autumn) in pressing claims for fraudulent conveyance. The result was that counter-parties to any institution that might even have been close to bankruptcy, which may even be rumored to be close to bankruptcy, have got very jittery. Why set one’s self up to be the defendant in a lawsuit brought by the next aggressive trustee?

It was and still is a legal climate that encourages “runs on the bank,” and that is what we have gotten.

It is more than a pity that neither Dodd nor Frank nor any of the many cooks that shared the legislative kitchen creating this crazy soup saw fit to address that problem head on. It is more than a pity, it is a symptom.

OTC derivatives bill

On Friday, Rep. Barney Frank (D-MA), the chairman of the Financial Services Committee of the House of Representatives, released a "discussion draft" of legislation to regulate over-the-counter derivatives.

This draft takes a point of view distinct in an important respect from that of the administration. The White House/Treasury proposals have focused on standardizing OTC derivatives so that they could be processed through clearing houses, in the expectation that such clearing would lower the risk of such instruments to the broader financial system.

Look at this from the point of view not of hedge funds or speculators, but of companies who really use derivatives to hedge their operational positions. Airline companies, for example, are in the market for derivative products in regard to oil prices. Why? because sharp increases in oil prices proves very costly to their operations, so they look for a way to make such a sharp increase work for them through the derivative, getting them back in one pocket what that development takes away from them via the other.

Yet airlines might have a tougher time doing this under the Obama proposal than they'd like, because the centralized clearinghouses could require they put up cash or liquid assets as collateral. That would burn a hole in their balance sheets.

The discussion draft says that the requirement for OTC swaps to be cleared centrally would not apply if "one of the counterparties to the swap is not a swap dealer or other major swaps participant." Learn more here.

See the discussion draft itself here.

Gary Ackerman's bill

On Thursday, Rep. Gary Ackerman introduced into the House of Representatives a bill (HR 302) that would require the SEC to reinstate the uptick rule.

This bears watching. I don't think the Obama administration will give it high priority, simply because they'll have too much else on their plate, but if it should strike a chord the incoming administration surely won't get on the opposite side.

Ackerman, a Democrat, represents New York's fifth congressional district -- the northwestern corner of Nassau County and the northeastern chunk of Queens.

His bill has six co-sponsors. It has been referred to the Financial Services Committee, chaired by Barney Frank.