Tuesday, January 29, 2013

"The Origins of the Financial Crisis"


Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing chapter 13 and chapter 7 bankruptcy cases. His office is in Miami at 1221 Brickell Ave., 9th Fl., Miami and may be reached at (305) 891-4055. www.bublicklaw.com  


In 2009, the article "The Origins of the Financial Crisis" was released by the Brookings Institution. In this article the authors explained that the then present financial crisis had its origins in an asset price bubble that interacted with financial innovations that hid risks, with companies that failed to follow their own risk management procedures, and with regulators who failed to restrain excessiveness. The housing market asset bubble developed as prices increased yearly from the mid-1990's to 2006 out of line with fundamentals such as household income and with an unrealistic expectation of future price increases. The financial innovations with rapidly increasing subprime lending, masked the inherent risk included Adjustable Rate Mortgages with low "teaser rates", no down-payments, and negative amortization predicated on the expectation of future increases of housing prices.

The development of private sector mortgage-backed securities backed by "non-conforming" loans with other means of "credit enhancements" allowed the growth in subprime lending. This technique of "securitizing" mortgages was developed in the 1970's by the government-sponsored entities Fannie Mae and Freddie Mac for "conforming" loans or loans below a certain dollar amount and for borrowers with good credit scores. The private sector mortgage-backed securities market remained small until the late 1990's until the investment banks developed new ways of securitizing subprime mortgages, including dividing cash flows from the mortgage-backed securities into various "tranches" with different levels of risk, high credit rating agency ratings for the highest "tranches", and "monoline" bond insurance that would pay off in the event of loan defaults. The increase in homeownership due to the availability of subprime lending increased housing demand and inflated home prices.

The article notes that during this period of new mortgage financial innovations there was an environment of easy monetary policy by the Federal Reserve and poor regulatory oversight. Financial institutions borrowed to finance their increased purchases of mortgage-related securities and created "off-balance sheet" entities that were not subject to regulatory capital requirements. The authors relate taht financial institutions turned to and relied on short-term collateralized borrowing such as repurchase agreements, so much that by 2006 investment banks were rolling over a quarter of their balance sheets every night. Once panic hit in 2007, the uncertainty over asset values caused lenders to abruptly refuse to rollover their debts and overleveraged banks found themselves undercapitalized and with assets with falling values.

The authors are shocked to find that institutions along the mortgage securitization chain grossly failed to perform adequate risk assessment with respect to the mortgage-related assets they held and traded. These institutions along the chain include the mortgage originator, the loan servicer, the mortgage-backed security issuer, and the credit rating agencies. There was a lack of due diligence in each link in the securitization chain and instead there was a reliance on computer models.

The article finds that due to the nature of the securitization model, financial institutions had little concern about the risks in the mortgage-related assets as they were able to pass the risk down the chain -- the so called "originate to sell" model. The authors question why the ultimate buyers of the mortgage-backed securities failed to understand the involved risk. They suggest that factors were that the ultimate buyers were caught up in the "bubble mentality" as were the others, the complexity of the securitization system, reliance on rating agencies, and complex flawed computer models.

Tuesday, January 8, 2013

Foreign Creditor May Be Sanctioned for Violating U.S. Bankruptcy Court Injunction


Miami Bankruptcy Attorney Jordan E. Bublick has over 25 years of experience in filing chapter 13 and chapter 7 bankruptcy cases. His office is in Miami at 1221 Brickell Ave., 9th Fl., Miami and may be reached at (305) 891-4055. www.bublicklaw.com  


The issue before the court in the pre-BAPCPA case of In re Simon, 153 F.3d 991 (9th Cir.1998), cert. denied 525 U.S. 114 (US 1999) was whether a foreign creditor is subject to U.S. bankruptcy court sanction for pursuing foreign collection of a debt discharged in a U.S. bankruptcy case in which the foreign creditor participated. The court concluded that the bankruptcy court may sanction the foreign creditor for violating a court injunction.

The Debtor William N. Simon filed for chapter 7 relief in the U.S. and obtained his discharge of debt. Pursuant to section 524, the discharge order operates as an injunction against the collection of certain debt against the debtor. Simon scheduled Hong Kong and Shanghai Banking Corp., Ltd. ("HSBC") as a creditor in his case and HSBC filed a proof of claim in the bankruptcy case. HSBC filed a complaint seeking declaratory relief from the bankruptcy court that the bankruptcy discharge injunction was not effective outside of the U.S.

The court found that Congress has the unquestioned authority to enforce its laws beyond the territorial boundaries of the U.S., but whether Congress has exercised that authority in a particular case is a matter of statutory construction. Unless a contrary intent appears, there is a presumption that the legislation of Congress is meant to apply only within the territorial jurisdiction of the U.S.

The court concluded that as to actions against the bankruptcy estate, Congress clearly intended extraterritorial application of the Bankruptcy Code. The bankruptcy court obtains exclusive in rem jurisdiction over all of the property of the estate including property located outside of the territorial jurisdiction of the U.S. The court concluded that Congress intended extraterritorial application of the Bankruptcy Code as its applies to property of the estate. The court further noted that as a matter of general principle, protection of in rem or quasi in rem jurisdiction is a sufficient basis for a court to restrain another court's proceedings and that this rationale extends to foreign proceedings.

The court noted that the more difficult question was whether a bankruptcy court may enjoin a foreign collection action against the debtor personally or as to non-estate assets if the creditor was not a party to the U.S. bankruptcy proceedings. But the court was not required to reach this question as HSBC fully participated in Simon's U.S. bankruptcy case and thereby surrendered to U.S. jurisdiction. In this instance, the presumption against the extraterritorial effect of a statute would not apply. Therefore, Simon's chapter 7 discharge injunction enjoins HSBC, but not the courts in Hong Kong. If HSBC chooses to commence collection proceedings in Hong Kong against Simon, it does so at the risk of U.S. bankruptcy court sanction.

The court rejected HSBC's argument that it only submitted itself to limited bankruptcy court jurisdiction as the proof of claim it submitted in Simon's case was for a different debt than the one it sought to pursue in Hong Kong. The court noted that HSBC failed to assert its position in the bankruptcy court by requesting abstention, to move to lift the automatic stay, to move for adequate protection, or to file an objection to discharge of Simon's debts.

The court noted that it did not decide whether discharge injunction of section 524 itself applies extraterritorially in all cases either as to non-estate assets or as to the debtor's personal liability.

The court also rejected HSBC's arguement that international comity requires the court to vacate the bankruptcy court's injunction forbidding debt collection against Simon for pre-petition debt. The court noted that the international comity concerns underlying Maxwell Communications Corp., 93 F.3d 1036, 1050 (2d Cir. 1996) were not present in this case.

The court noted that the Bankruptcy Code does not codify either the "territorial theory" or the "universalist philosphy" but provides for a flexible approach to international insolvencies dependent upon the circumstances of the particular case. Under the territorial theory or "grab" rule, courts in each national jurisdiction are responsible for seizing and controlling assets within their geographic reach. The universalist philosophy contemplates one plenary transnational proceeding governing the administration of assets world-wide. The court noted in this pre-BAPCPA case, that if the Bankruptcy Code contains any philosophy it is of deference to the country where the primary insolvency proceeding is located and flexible cooperation in administration of assets. e.g. Sections 304 and 305.

In summary, the court held that the lower court's order did not involve an improper extrterritorial application of the discharge injunction as to estate property becaus section 541 expressly includes all of the debtor's property regardless of geographic location. The discharge injunction was also validly applied to HSBC as to Simon's non-estate property because HSBC participated in Simon's bankruptcy case and thereby subjected itself to the otherwise valid orders of the bankruptcy court. Finally, international comity did not compel a contrary result because there was no conflicting proceeding in a foreign nation.