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.

Brown and Snowe on Board with Dodd-Frank

This huge Rube Goldbergian contraption seems finally on the verge of becoming a law.

Senators Scott Brown and Olympia Snowe, of Massachusetts and Maine respectively, say that they are now on-board, which should give the bill's proponents the votes they need to overcome any filibuster.

Byrd's replacement? That is still an unknown. Governor Manchin has the power to make the appointment, and he is taking his time. Some announcement is likely this weekend.

Still, the Dood-Frank bill should come to a vote tomorrow, Thursday, even with that seat still empty. The Democrats, it appears, don't need that vote. They have, with Brown and Snowe and one other, a total of three Republican votes, and if they stay together as a party that should do the job.

This blog has been following the developments regarding this legislation for months. There was, for example, this observation last month about the fiduciary-obligation issue, and this one about the Volcker rule.

Going back to January, I wrote about the ambivalence of the President on these matters.

But here we are. It will probably be a done deal tomorrow. A small part of it is the "Collins amendment," a provision that would, after a three-year phase-in beginning on January 1, 2013, eliminate Trust preferred securities as Tier 1 capital for bank holding companies that had $15 billion or more in assets as of December 31, 2009. Where do you think that third Republican vote comes from? In the name of this amendment lies a clue, grasshopper.

This could all result in certain bank holding companies having to raise significant amounts of new Tier 1 capital. And that, in turn, (as the Wachtell Lipton law firm asserted in a memo they sent out yesterday) could result in significant capital structure inefficiencies.

That is just one of many respects in which this bill just seems to be a flailing-of-the-arms by politicians who don't have a clue what to do, but who feel strongly that they ought to do "something". Beware always the siren call of doing "something"!!!

Merkley-Levin Amendment

We have reached endgame. We know the rough contours, at least, of the financial-regulatory reform that will become law this year. See the particulars here.

Among the tweaks pending, there is an amendment on offer from Sens. Carl Levin, D-Mich., and Jeff Merkley, D-Ore., that would re-work the “Volcker Rule,” Paul Volcker's brainstorm re keeping banks from using their deposits for nasty speculative purposes. This is the rule that would prohibit banks from sponsoring hedge funds or from running their own proprietary trading operations.

The Volcker Rule is section 619 in the Dodd bill, S. 3217. The key point is that the only way to ban prop trading is to distinguish between prop trading on the one hand and market making on the other. The Dodd bill simply took it as a given that legislation can't do this effectively, and left that detailed distinction to the regulators. Subject to "such restrictions as the Federal banking agencies may determine," the buying or selling of securities "as part of market making activities, or otherwise in connection with or in facilitation of customer relationships," is not proprietary trading and thus is not banned. Those Federal banking agencies will presumably "know it when they see it" as a Supreme Court Justice once said in another context.

Levin and Merkley aren't satisfied with this, and their language would attempt to take some discretion away from the federal banking agencies. They, too, have a generic "market maker" exception, which they word so as to exclude from prop trading "the purchase, sale, acquisition, or disposition of securities and other instruments ... in connection with underwriting, market making, or in facilitation of customer relationships, to the extent that any such activities permitted by this subparagraph are designed to not exceed the reasonably expected near term demands of clients, customers, or counterparties."

Which means ... what? For an argument to the effect that this is a loosening of Dodd's version of the rule posing as a toughening-up thereof see The Economics of Contempt, an excellent blog in general and a worthy posting on this subject in particular.

Senate Banking Committee

Although all of the public attention and drama has focused on the health care legislation, there is news about the financial-reform bill as well.

Yesterday, March 22, the Senate Banking Committee voted in favor of the bill formulated by Christopher Dodd, of Connecticut, the commitee's chair. The Committee was split along party lines, 13 to 10.

The bill is similar to one the House of Representatives passed in December 2009, also with a split along party lines.

One important addition that this bill has and that one didn't is the Volcker rule: the prohibition of certain activities for banks that accept retail deposits. In some sense this is a return to the old Glass-Steagal Act. But not really.

Glass-Steagal created a wall between banks on the one hand and brokerage activities on the other. That is the wall that came crumbling down in the late Clinton period and this bill would not attempt to erect it anew. It would make some what more discriminating bans than that. Still, whether it would work, toward its presumed goal of limiting systemic risk, and how it would work, in specific administrative terms -- these are not easy questions to answer.

Interestingly, the Obama administration itself was late to pick up on the cause of the "Volcker rule." It showed no interest in the matter until after Scott Brown won his election in Massachusetts. Thereafter, it wanted to re-assert its populist cred, and this seemed to be an easy way to do that.

Three brief items

1. Lion's Gate has adopted a poison pill

Lion's Gate is the film and TV studio named after the "Lion's Gate" in Greater Vancouver, Canada, where the studio got its start. It is responsible for movies like The Haunting in Connecticut and Precious. It is also trying to fend off the unwanted attentions of Carl Icahn.

To that end, it is adopted this defense.

2. Part of Dodd's bill involves proxy votes

There will be a lot of talk about Christopher Dodd's plan for the reform of financial regulation in the days ahead. One intriguing fact is that Dodd has no reason to court popularity back home in Connecticut. He has already announced he will not run again. So he has come up with this.

3. Cedar Fair postpones its meeting

Cedar Fair Entertainment Company, a leader in regional amusement parks, water parks, etc., has announced the postponement of the special meeting of "unitholders" that had been planned for this week. That meeting, which will consider and vote on a merger agreement with affiliates of Apollo Global Management, has now been scheduled for April 8, 2010. The company also tells us that "additional information regarding the meeting, including time and location, will be provided at a later date.

Happy St. Patrick's Day, everyone.

Ripples from Senator Kennedy's death

A story in the Wall Street Journal's weekend edition makes an important point about the political fall-out from Senator Edward Kennedy's demise.

Kennedy had chaired the Senate's Health committee, which was to have made him the administration's point man in efforts to reform the US health care system. Now that he is gone, it appears that one of my Senators, Christopher Dodd, will take over at Health.

Yet Senate rules prohibit Dodd from chairing more than one committee at a time, so this will mean he'll have to step down as chair of the Banking Committee. He was to have been the administration's go-to guy for the re-wiring of financial regulation. The question then is: who will step in there?

Next in line would be Senator Tim Johnson. Johnson has in the recent past broken with his party over financial-regulatory issues, so he may not be a loyal soldier for President Obama's plans. The administration might have to chose between fighting to keep him out of that chairmanship, or lettinbg him take it and trying to work around him.

I recommend the story, which had Damian Paletta's byline and gave a contribution credit to Jonathan Weisman.