I am in Las Vegas for the National Conference of Bankruptcy Judges. The conference promises 2 1/2 days of events combining leading speakers and some frivolity.
I started off Monday by attending the Commercial Law League of America's breakfast with Paul Begala. Begala attended the University of Texas Law School around the same time that I did, but went on to work in the Clinton White House shortly thereafter. He is speaking on the topic Politics in America Today: Too Important to Be Left to the Politicians. However, it should have been titled Will Obama Crash and Burn. One of his central points was that presidents enter office with high expectations and high approval ratings, but inevitably run into scandals and reality which drag their approval ratings down. Some, like Presidents Reagan and Clinton recover, while others, like Jimmy Carter and George H.W. Bush do not. Begala's thesis is that some presidents succeed despite the unpopularity of their foibles. While Americans did not like Iran-Contra and the Monica Lewinsky affair, they liked Ronald Reagan and Bill Clinton. The key, according to Begala, is a belief in American Exceptionalism, the conviction that America is a place which, as de Tocqueville reported early on, contains unlimited opportunities. Reagan (morning in America) and Clinton (the Man from Hope) got this. Begala believes that Obama gets this also. As a matter of fact, his point is how can anyone go from being the grandson of a Kenyan goatherder whose father deserted him to president of the United States without believing in the promise and the magic of America. He contrasts this with a conversation he had with his haughty French brother in law who became suddenly silent when asked when France would elect a President of Algerian or Moroccan descent.
Upon entering the main hall, my first thought is that I am in a cavern. The speakers are way off in the distance. Most of the audience crowds around the back, leaving plenty of room up front for this willing to walk half a mile or so.
Barbara Houser, the incoming president of the NCBJ, gives a preview of next year's conference in New Orleans. When I think of Judge Houser, I think of serious, sober analysis. However, the promotional video shows the wild side of Judge Houser, speeding around New Orleans in what looks like a go cart, wearing a Saints jersey, eating beignets and wandering down Bourbon street in a feathery Mardi Gras mask. It is nice to know that even judges can have fun. (I will try to get the video for a future blog).
From there, the next topic is Obamanomics and the Future of Bankruptcy. Of course, as the panel later makes clear, Obama's key policies regarding economic stimulus and recovery are largely a continuation of the Bush administration's. First up is former Sen. Gordon Smith, who paints a picture of dire consequences when the demographic Tsunami of entitlements hits. If I heard him correctly, he said that at some point in the future, the gap between tax revenues and entitlement payments will equal the gross national product. He posits that the federal government will shift costs down to the states which will not have the ability to print money or engage in endless deficit spending. He wonders aloud whether the bankruptcy code will need to be amended to allow states to file for bankruptcy.
The panel which follows discusses the meaning of the Chrysler and GM cases. The economist on the panel argues that reorganization should be faster, more like a sale. The panel asks whether the current practice is a signal that the chapter 11 process is no longer viable.
Another panelist makes the point that BAPCPA has caused bankruptcies to fall and defaults to rise, which will lead to bankruptcies increasing. Currently 3% of prime mortgages and 14% of subprime mortgages are in default.
The economist addresses the problem of home foreclosures. She posits that lenders foreclose too often because they only consider their own costs and not the larger costs to society (kids having to change schools, vacant homes, property values crashing). Of course, like any good economist, she has a on the one hand this and one the other hand that approach. The current program of relying on voluntary modifications leads to too few modifications, while allowing cram-down in chapter 13 would lead to too many (i.e., people who could have paid their loans given a little time will be able to modify when they don't really need to).
Later in the day, I learn about the different types of recessions. Apprently, there are bathtub recessions, V recessions and hockey stick recessions. We are in a bathtub recession, which involves a steep slide followed by a long trough and a steep recovery. According to the speaker, we have reached the bottom of the bathtub and will stay there for at least three years.
The panel on chapter 11 bemoaned the fact that while we are seeing an uptick in chapter 11s, we are not seeing true reorganizations. Reorganizations today consist of 363 sales, orderly liquidations and cases with significant litigation which will pay off in a short period of time. Another change is that bankruptcy is now part of the process, rather than the focus of the process. In other words, bankruptcy is a tool used to implement a strategy developed ahead of time, rather than the means where the strategy is developed.
Another change is that almost every case of consequence runs the risk of administrative insolvency due to high amounts of leverage leading to the need for a speedy resolution.
One of the speakers argued that we have shifted from a rehabilitation process to a retribution process. Where there is risk, there is failure. He argued that we should give debtors a chance to reorganize after failure rather than penalizing them.
I learned a new term: fulcrum security. These are the secured creditors who stand to win or lose big time depending on the sucess of the reorganization. They are either first lenders who are undersecured or junior lenders. They are more like equity than secured creditors in that they are willing to take greater risks to try to achieve greater rewards. Some creditors in this category go into the case with a loan to own mentality.