Tag: bankruptcy code

Bachus Plan a Good Start toward Ending Bailouts

Today Congressman Spencer Bachus, along with several of the Republican members of the House Financial Services Committee, offered a plan for reforming our financial system and ending future government bailouts of the financial sector

At the heart of the financial crisis has been the Federal Reserve’s willingness to invoke its powers under Paragraph 13-3 of the Federal Reserve Act to bail out firms like Bear Stearns and AIG — all without a single vote from Congress or any form of public debate. Almost 10 months after the initial AIG bailout by the Fed, there is still no plan for resolving that firm, and no strategy for recovering the taxpayers investment.

While some might pretend that the Fed puts no taxpayer funds at risk under the use its 13-3 powers, it is the American taxpayer who ultimately stands behind any Federal Reserve actions. In focusing on 13-3, the Bachus proposal rightly targets the largest, and least accountable, source of the bailouts. The Bachus proposal would require the Treasury secretary to approve any 13-3 actions and allow Congress the ability to disapprove such actions. While a complete repeal of 13-3 would be preferred, the presented reforms are a step in the right direction.

Another feature of the Bachus plan is to require large, non-financial firms to be resolved under the bankruptcy code, and not under a regime of continuing bailouts or political manipulation. Despite whatever flaws it may have, the bankruptcy process is one that is separated from politics. As we have witnessed in the recent government restructuring of U.S. auto companies, allowing Washington to resolve firms is an invitation for violating contracts and rewarding political constituencies.

The Bachus plan also addresses the two institutions at the center of our mortgage crisis: Fannie Mae and Freddie Mac. Their model of private profits and public losses has become an expensive one, with little public benefit. Any reform proposal that does not deal with Fannie and Freddie does not merit being called reform. The Bachus plan would rightly begin phasing out the privileged status of Fannie and Freddie.

With ‘Cramdown’ Rejection, Is Senate Ready to Respect Marketplace Contracts Again?

After rejecting the proposed ‘cramdown’ changes to the bankruptcy code, the Senate may be slowly waking up to the need to respect contracts.  One cannot rebuild trust and confidence in our markets, while at the same type trying to destroy the trust that underlies contractual relations.  Were the cramdown legislation approved, the message to investors, or any market participants, would be that the enforceability and terms of your private agreements will be subject to the direction of the political winds.

Proponents of cramdown claimed that the bankruptcy code favored one’s vacation home or yacht over one’s primary residence, as the mortgages on these assets could be reduced to reflect their current value.  Such a claim is at best misleading, if not outright false.  One’s primary residence is already the most favored asset in bankruptcy – due to the very simple fact that one generally gets to keep their home, while one usually has to give up their boat or vacation home in order to satisfy one’s debts.  There simply is no ‘yacht-stead’ exemption.  In fact, under Chapter 13, primary residences whose equity values are greater than the homestead exemption are crammed-down, and the home is transferred to the lender.

Our economy will only turn around once families, investors, entrepreneurs and other market participants believe the rules of the game will be fair and certain, and not constantly subject to political manipulation.  Voluntary consensual agreements are one of the basic pillars of our society, and should be respected as such.  They should not be written solely as a means of taking from one groups of citizens and giving to another.