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GP2Mar05: Laws That Make Outlaws

The Terrorist.  Furtive types that we are, we arrived an hour and one half before our plane was to dash off for New York last week, quietly checked our bags, and slithered down to the airline club. All this gave us plenty of time to chat with the club hostesses, down an unhealthy Krispy Kreme financially-tinged, fatty donut, use the facilities, send off cryptic messages to points north and west from the lumbering computer put there for those of us who travel without laptops, scan some trashy newspapers, and, an hour later, start to amble out the door towards our plane.  But Jenny hailed us and told us they needed to see us up at security.  Something wrong with our bags. 

We hightailed it back through the security gates and, 700 feet up the way, encountered an airline employee.  “Your bags have set off our bomb alarm.  We’ll have to go to the curb and see what it’s about.”  Our belongings, from a very small bag, were scattered about the security cage which housed the electronic equipment that had marked us down as a terrorist.  As best the employees could figure out, a small, forgotten vial with 4 generic pills had set off the alarm.  Nobody ever was quite sure of the cause, and nobody could tell us why it took an hour for the machine operators to discover there was a problem.   As we repacked the bag, the Federalistas lazily took down some vital information about us (our presumed address and telephone number) and then sent us on our way, with nary a “sorry” to be had.  Nobody notified the gate personnel that we were cleared for takeoff, so the plane sat on the ground yet another 15 minutes while frantic calls were made in all directions to see if the bag, now aboard the plane, was really safe.  We had now unwillingly joined the distinguished outlaw band of Senator Edward Kennedy, Cat Stevens, and some other notable terrorists who have been doubletreble checkmated by Homeland Security. 

A Homeless Person.  Of course, we should be stopped, if any shamus ever looked into our address.  Perhaps 8 years ago a very creative employee at the Department of Motor Vehicles (a “child left behind,” to quote Bush the Younger) had so misspelled the street name on our driver’s license that you would be hard put to find the safe house we call home if you were to look at it.  This week we were up for renewal.  To be helpful we tried to point out this hilarious mistake to the folks at the DMV, but we were then asked to supply a document proving that the correct address was correct.  Please understand, the address as written on the license simply does not exist.  We gave up trying to get it changed, since, as you might expect, none of  the 50 or so cards we had at hand bear any address whatsoever, and the bureaucracy had clear orders, which they had to follow, not to do anything without a paper trail.  We are homeless terrorists.  

Bad Laws and Hapless Governance.  Bad laws and slothful, venal, incompetent governors turn honest men into outlaws who then are perceived as bomb-throwers, homeless or stateless vagabonds, and worse.  Such has been the case with all the rules and regulations surrounding our global capital marketplace and our financial institutions. Over the last 30 years, ungoverned international financial markets and devil-may-care decisions by our national leaders have filled our economy with bubbles that threaten our welfare and vitiate our power to do good throughout the world.  You have heard of the Internet bubble and the current hyperinflation in housing.  You have not heard  much about our unannounced  Federal bankruptcy which has been brought on by such future commitments as Social Security and Medicare which we do not account for, even as contingencies, in the statement of accounts from the  federal government.  There’s an old fashioned crap game going on in high finance and in the councils of government. 

Lloyd Got It Right.  The Presidential race of 1988 was such an upside down affair.  It pitted George Bush Senior and Quayle (VP) against Dukakis and Lloyd Bentsen (VP).  Bentsen had the real stuff and should have been at the top of his ticket.  In the debates, he made shredded wheat out of Dan Quayle.  Incidentally, though he was not a presidential candidate, he did garner one electoral vote from an astute chap in West Virginia.  Many remember him telling Quayle “you’re no Jack Kennedy” in their Omaha, Nebraska match-up on October 5.  But we fondly recall his words from these debates about Republican spending which have proved to be prophetic: 

You know, if you let me write $200 billion worth of hot checks every year, I could give you an illusion of prosperity, too.  [Laughter and applause]  This is an administration that has more than doubled the national debt, and they've done that in less than eight years.  They have taken this country from the No. 1 lender nation in the world to the No. 1 debtor nation in the world.  And the interest on that debt next year, on this Reagan-Bush debt of our nation, is going to be $640 for every man, woman, and child in America because of this kind of a credit-card mentality. 

Since Reagan, we have been passing a lot of rubber checks.  In a reversal of party roles, the Democrats have pretended to be budget balancers, while the Republicans have gone out and consistently spent like a bunch of drunken sailors.  Bush Senior was relatively sensible about his expenditures, but his son has been profligate to a fair-thee-well abroad (Iraq) and domestically (prescription drug care, proposed expenditures on Social Security, and others).  Since Reagan, we have been a society of bubbles, and we are beginning to pay for it now.  Fiscal irresponsibility has been the hallmark of both major parties. 

Even as Alan Greenspan has pumped excess credit into the economy, the banks and credit card companies and all the subprime lenders have been allowed to go hog wild.  We have propped up a no-growth economy with phony money.  During the 90s personal bankruptcies doubled and more, in part because wrongful credit was extended hither and thither, but also because the bottom income segments of society simply have not been able to keep up with ordinary necessities, no matter how diligent they are, even with two wage earners.  We are about to have a rash of personal and corporate bankruptcies, since many have maxed out on their cards, a fact which we are beginning to discuss in the “Bankruptcy Tsunami.”  This widespread financial chicanery has affected our capital markets, which are beginning to be shunned by both lenders and borrowers from abroad. 

Punish the Poor: Pound Small Companies.  For years the credit industry has been trying to push so-called bankruptcy reform legislation through the Congress that would allow it to get at more of the assets of small people and small companies that have slid into bankruptcy. Now they’re about to get their way.  Utterly reckless, the Senators on the Judiciary Committee easily reported S.256 out of committee, and, says Majority Leader Frist, the bill should easily pass the Senate in early March and get to the President’s desk.  The Congressmen in their wisdom are blithely legislating “big stick” bankruptcy laws for the unfortunate, but are not even talking about getting their own house in order.  Thoughtful people of every political stripe know that the government is on a financial binge, that lending practices are beyond the pale, and this legislation is irrational providing a temporary band aid for shaky lenders. 

With her permission, we include here snippets from Harvard Law Professor’s Elizabeth Warren’s February 10 Senate Judiciary testimony on this embarrassing, poorly wrought piece of legislation, which is a train wreck waiting to happen.  She  comments but slightly on the matter that disturbs us most—the need for clear regulation of the abysmal promotion and lending practices of lenders that lead us into this kind of stew.  Nonetheless, Professor Warren has been very close to the bankruptcy arena for years, not only doing time in Cambridge, but serving on the National Bankruptcy Review Commission (see http://govinfo.library.unt.edu/nbrc).  Here’s what she has to say:   

While the actual number of consumer bankruptcy cases has declined slightly in the past year, many of the largest corporate bankruptcy cases in American history have occurred since the Senate last reevaluated the bankruptcy laws, and some of those cases are already legend for the corporate scandals that accompanied them.  Because it was written eight years ago, this bill has nothing to deal with these abuses, with these dangers, with the needs that these cases have made so painfully clear.

Problems not even on the horizon when this bill was written are now front and center. 

• Companies in Chapter 11 that cancel pension plans and health benefits, leaving thousands of families economically devastated.

• Companies that continue to pay executives and insiders tens of millions of dollars, while they demand concessions from their creditors.

• Military families targeted for payday loans at 400% interest, insurance scams, and other forms of financial chicanery.

• Scandals have rocked the so-called non-profit credit counseling industry, exposing how tens of thousands of consumers struggling desperately to pay their bills and not file for bankruptcy were cheated.

• Sub-prime mortgage companies, financed by some of the best names in American banking, have unlawfully taken millions of dollars from homeowners, then fled to the bankruptcy courts to protect their insiders and bank lenders.  

In the eight years since this bill was introduced, there has been a revolution in the data available to us.  Unlike eight years ago, we need not have a theoretical debate about who turns to the bankruptcy system.  We now know:  

• One million men and women each year are turning to bankruptcy in the aftermath of a serious medical problem—and three-quarters of them have health insurance.

• A family with children is nearly three times more likely to file for bankruptcy than an individual or couple with no children.

• More children now live through their parents’ bankruptcy than through their parents’ divorce.

Unlike eight years ago, we need not have a theoretical debate about the homestead exemption because we have had example after example of abuse tied directly to the failure of American companies. Millions of jobs have been lost but not the Florida and Texas fortunes of their corporate executives. Others are welcome to use the unlimited homestead exemption as well.

• After he lost a $33 million dollar lawsuit in California, O.J. Simpson moved to Florida, explaining to a reporter that the unlimited exemption would permit him to protect a multimillion-dollar house.

• Abe Grossman ran up $233 million in debts in Massachusetts and Rhode Island, then fled to Florida to purchase a 64,000 square foot home valued at $55 million.

• Some physicians are reportedly dropping their malpractice insurance and putting all their assets in their homes—where they can’t be touched by bankruptcy.

Under S. 256, they would still be welcome to file for bankruptcy and to keep their fortunes and properties intact while leaving their creditors with nothing.

Unlike eight years ago, we need not have a theoretical debate about the effects of the proposed legislation on small business.

• It takes time to negotiate a reorganization, even for a small company.  The timelines in S. 256 would have denied reorganization to more than a third of the small businesses that eventually saved themselves—destroying value for the companies, their creditors, their employees and their communities.  

• This bill would be the first in American history to discriminate affirmatively against small businesses.  For the first time ever, Congress would pass a law that says companies like Enron and Worldcom don’t have to file extra forms, Enron and Worldcom don’t have to schedule meetings with the Office of the United States Trustee, and Enron and Worldcom don’t have to meet fixed deadlines that a judge cannot waive for any reason—but every troubled small business in the Chapter 11 system would have to file those papers, undergo that supervision and meet those deadlines or be liquidated.  No exceptions allowed—for small companies. 

The means test in this bill, Section 102, has been one of its most controversial provisions.  Proponents like to say that the means test will put pressure only on the families that can afford to repay.  And yet, the bill has 217 sections that run for 239 pages.  The means test aside, virtually every consumer provision aims in the same direction.  The bill increases the cost of bankruptcy protection for every family, regardless of income or the cause of financial crisis, and it decreases the protection of bankruptcy for every family, regardless of income or the cause of the financial crisis.

There are provisions that will make Chapter 13 impossible for many of the debtors who would file today, provisions that make it easier than ever to abuse the unlimited homestead provisions in some states and yet at the same time hurt people with more modest homesteads in those same states.  Other provisions will compromise the privacy of millions of families by putting their entire tax returns in the court files and potentially on the Internet, making them easy prey for identity thieves.  Women trying to collect alimony or child support will more often be forced to compete with credit card companies that can have more of their debts declared non-dischargeable.  All these provisions apply whether a person earns $20,000 a year or $200,000 a year.  

But the means test as written has another, more basic problem: It treats all families alike.  It assumes that everyone is in bankruptcy for the same reason—too much unnecessary spending.  A family driven to bankruptcy by the increased costs of caring for an elderly parent with Alzheimer’s disease is treated the same as someone who maxed out his credit cards at a casino.  A person who had a heart attack is treated the same as someone who had a spending spree at the shopping mall.  A mother who works two jobs and who cannot manage the prescription drugs needed for a child with diabetes is treated the same as someone who charged a bunch of credit cards with only a vague intent to repay.  A person cheated by a sub-prime mortgage lender and lied to by a credit counseling agency is treated the same as a person who gamed the system in every possible way.  [For a complete transcript of this testimony, see http://judiciary.senate.gov/print_testimony.cfm?id=1381&wit_id=3996.] 

For more on the evolving issues surrounding bankruptcy, bankruptcy reform, the Wild-West antics of the lending industry worldwide, see our “Bankruptcy Tsunami” which we will be expanding frequently.  For the best database on bankruptcies of public companies, see BankruptcyData.com in our Global Province Network.

What the new bankruptcy law will do is selectively inflict pain on our underclasses and certain small businesses.  What we really need is a comprehensive instrument in the form of a Financial Services Reform Bill that will tighten the screws across the board on lender and debtor alike, bringing the sledgehammer down on George Bush the Profligate Son, reckless lending institutions, and a host of other parties that set up the conditions for bankruptcy and financial collapse that now abound in America.  Not since the nineteenth century has the financial sector been so out of control and out of sync with the needs of America.  This flawed bankruptcy legislation is a threat to the commonweal not only because it persecutes the unlucky few, but, because it neglects major malefactors, it threatens our economy. 

Thorough, balanced reform is not proposed by anyone, even those who object mightily to this utterly silly, hurtful bill.  That has deep implications for investors, particularly in our financial services area, and is today serving as a drag on our economy.  Temporarily this legislation will create another little boomlet in financial services, and investors should regard the lending sector in general as an opportunity for quick trades and opportunistic speculation.  Through and through, financial services equities have become nothing more than a trading vehicle.  But, with the lack of evenhanded financial services reform of which bankruptcy legislation is only a subset, no rational, sober individual can regard this diseased sector as a good, long term investment.  Caveat emptor.  

The Highwaymen.  In the 1960s, singers Willie Nelson, Waylon Jennings, Johnny Cash, and Kris Kristofferson joined together in a supergroup called The Highwaymen.  See http://en.wikipedia.org/wiki/Outlaw_country.  They had a title song called “The Highwayman” where they pledged “to find a place to rest my spirit if I can / Perhaps I may become a highwayman again / or I may simply become a single drop of rain / But I will remain / and I’ll be back again … and again … and again.”  Were they prophetic?  Are we to become highwaymen in the face of a government that has gone plumb loco?  Congress has gone off the rails.  

P.S.  Look for the number of public company bankruptcies to turn up now.  They’ve been lagging but there is now enough bad paper (i.e, aka “junk bonds”) out there to create a whole mess of juicy implosions.

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