Leiden Law Blog

Bail outs, bankruptcies or bond swaps?

Posted on by Joop de Kort in Private Law , 8
Bail outs, bankruptcies or bond swaps?

In 2006, my housing association decided to renew the window frames in our 50 apartments. We arranged for all the local permits, found a supplier with a solid reputation, placed the order and made a down payment of 3,000 euro per apartment. Then the supplier went bankrupt. As we had banked on its solid reputation, we had accepted that the supplier did not partake in the sector’s guarantee fund so we were not reimbursed and had to take our place in the line with other creditors. First of course came back payments, followed by taxes and social security premium. Next in line were other creditors (including us) followed by subordinate loans and finally the owners. I have no idea where payments stopped, but we were never reimbursed.

In 2008, the financial crisis came to the surface with the bankruptcy of Lehman Brothers, quickly followed by the Irish banking crisis and the bankruptcy of the Icelandic savings banks. To save Irish banks from bankruptcies, the Irish government issued an unlimited banking guarantee. Other countries followed suit in an unprecedented movement to save banks from bankruptcies.

Even if banks exercise a public function in the payment system and even if banks are more interconnected with other parts of the economy than industrial companies, these rescue operations defy the pattern to get through a bankruptcy that my housing association learned the hard way. The bank rescue saved bank owners first and creditors – bondholders and savers – second and did so at the expense of the taxpayers who were now running the largest risks of losses. In economic terms this provides a typical example of moral hazard – banks knowing that they will be saved anyway have an incentive to accept large risks.

But if the authorities do nonetheless want to save banks, there is an alternative for the public buying or guaranteeing of banking debts, namely swapping bonds of these beleaguered banks into shares. This is a double-edged sword which both increases assets and decreases liabilities strengthening banks’ balance sheets. This strategy is widely debated in economic policy forums as a means to prevent bankruptcies and moral hazard. See e.g. these two websites.

What may be good economic policy, however, may not be possible legally. Previous suggestions to transfer bonds into equity ran into legal objections as current bondholders argued that they did not buy convertible bonds (which do have a provision to be turned into equity). Forcing them to transfer bonds in equity would be a breach of contract which they would fight. This is typically a civil law argument. But banks have been rescued from bankruptcy, in which case bond holders would have received nothing, because banks exercise public functions and their behaviour has large external effects – their actions do have large consequences for the economy as a whole. Lawyers and lawmakers should, therefore, make great efforts to go beyond the interests of private banking and design and discuss ways to force bondholders into cooperation in rescuing banks from bankruptcy.

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Posted by Lillah on December 26, 2014 at 17:25

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Lea
Posted by Lea on December 3, 2014 at 13:05

This question is best aswrened by a bankruptcy attorney.  I am not an attorney but can give you some info.  If the car has not been repo’d yet and you file for bankruptcy, there is an automatic stay.  That stay prevents the car from being taken while it is in effect.  However, if you are doing a Chapter 7, you will have to re-affirm the debt and make payments or surrender it to the lender.  If you file Chapter 13, you may have the option of keeping the car while you make payments to your reorganization plan that may address the past due balance.  If the purchase was several years ago, you may also be able to get the debt reduced in the 13.See an attorney for the full details!

Jeremi
Posted by Jeremi on November 30, 2014 at 09:45

Ok, here’s the deal. Your loan officer’s right about that, but I’ll eilapxn something. Let me give you a breakdown of what makes up your score first to give you a better idea of what I’m talking about:1. 35% payment history2. 30% total debt vs. available credit3. 15% length of time establishing credit (average age of accounts)4. 10% types of credit established5. 10% inquiries and new accountsAnytime that you apply for credit regardless of whether you’re approved or not, it creates a “hard inquiry” that does in fact lower your score several points and if you’re approved the account usually takes a minimum of 6 months for it to reflect on your report and raise your score again, hence how you were able to get the Lowe’s card after paying on the Capital One for 6 months.As for your Capital One card,that also plays a factor on your score. Reason why is that it reports your current balance as your limit, and doesn’t reveal the true credit limit on your report. Here’s the catch 22: The only way for it to report your credit line is to use to the max. You don’t want to do that, especially if you’re trying to refinance a house. You should keep the balance low, if not at 0 and open up a secured credit card. This way, although you would still get an inquiry for applying, you improve your chances of getting approved. Reason I say get a secured card is that although you have to put a security deposit upfront usually linked to a savings account to get the amount as the credit limit, you can also raise the limit by adding to the deposit. The ratio of the debt that you owe versus the available credit is key, being that it counts 30% of your score. The only credit line that would show would be your Lowe’s card, and that’s going to take a month or two for that to report. You’ll need another open trade line with a higher limit to offset what Captial One’s not disclosing about your available credit. Keep in mind that usually after a year of paying on time and keeping the balance low or if not paid off, you get the deposit back. And the higher you boost your limit, the better becuase the higher limit will help the debt to available credit ratio which will in turn eventually boost your score.

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