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Good morning and welcome to the American College of Bankruptcy's Fourth Circuit symposium responding to the financial crisis. I'm Denise Neri. I'm

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with the Federal Judicial Center. My colleague Mark Ellenberg from Cadwalder in DC and I have worked together to develop what we think will be an interesting program. We're delighted that all of you are here. And just assume that I mean you individually and not so

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much of the others. We're delighted to have you here. That's what we really are so glad that all of you are here. A couple of quick administrative notes, we're taping the program, so I'm sure that you're all completely appropriate every moment of the day,

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but especially when you're taping. I will tell you that there are audience mics, and if you'd like to turn the audience mic, there's a button on the front. So just when you'd like to do that, please do. I wanna thank the Georgetown

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University Law Center for hosting us. We appreciate it so much. I want to request, if you've not already done this, to turn off cellphones, and I'm acutely aware that mine is on right now, and hoping it's not gonna ring in the next 30 seconds.

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And I'll give a quick review of what you can expect today. We're gonna set the table with this wonderful panel by talking about why bankruptcy matters. This panel's gonna go until about 10:45. We'll take a short break, and then we'll have Mark Ellenberg and Matt Feldman

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talk a little bit about what it means when a company is considered too big to fail. What that means for society, what it means for all of us. And I could spend the entire time allotted to this first panel by just talking about how wonderful they

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are, because they're pretty wonderful, but I don't think that would be good for them or for you, so I'll just give some quick bullet points. We have here Georgetown Law professor Adam Levitin, who's gonna moderate this wonderful crew. We have former Georgetown adjunct faculty

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and bankruptcy guru, Steve Case here with us. We have two bankruptcy judges. Shelly Chapman from Southern District of New York in Manhattan. Where I understand they have some bankruptcy issues come up every once in a while, Ray Mullins from the Northern District of Georgia

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in Atlanta, he's been on the bench about 10 years. Judge Chapman is celebrating her first year on the bench, 77 months. Both of them came to the bench from a high chapter 11 practice. The missing panelist, Damon Silvers, will

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be here probably in about a half an hour. He is chairing another meeting, and I know that all of you will recognize the dilemma of not being able to be two places at one time, but we look forward to having him. Thanks to the panel, and

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I'll turn things over to Adam. Thank you. Good morning. I don't think you're really here to hear me, so I'm gonna try and keep my remarks rather short. I think a lot of what I'm going to say, it will be old hat

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for many of you, but there may be some bankruptcy novices in the audience, so I think it's good to make sure that we're all at least on the same page with some basic bankruptcy concepts. Modern bankruptcy law in the United States, it has

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its sort of most recent genesis in 1978. You can go back farther and trace historical antecedents all the way back to England, but sort of modern modern bankruptcy law for all purposes starts in 1978 with what we we call the bankruptcy code. And

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bankruptcy law for most purposes comes in three flavors, or what we would call chapters. And these are chapters 7, 13, and 11 of the bankruptcy code, and there's a reason I did not go in numerical order there. The basic sense, to give you just a

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basic sense of how these chapters work, chapter 7 is a liquidation proceeding that when the debtor files for bankruptcy, an estate is created out of all of the debtor's non-exempt property, and exemptions are a complicated area of law, but basically there's some property

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of the debtor that no one can ever get to that, you know, you can't take the shirt off someone's back literally. All the debtor's non-exempt property goes into a bankruptcy estate, and that estate is liquidated and the proceeds are divided up among

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the creditors according to order of priority set forth in statute. So it's just, you know, if you're at the top of the tree you eat first, and if you're at the bottom of the tree, you eat last, and there may not be

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enough food for you if you're at the end of the chow line. Chapter 13 by Kant. So in chapter 7, it's all the debtor's current assets get divided. The debtor keeps his or her future income, and this is also for businesses,

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except that in a business, if you liquidate it, that's the end of the business. But if it's a consumer, future income is yours, so you win the lottery the next day. You keep the lottery proceeds. If you bought the lottery ticket before you filed for

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bankruptcy, your creditors get the proceeds. OK, chapter 13 in contrast is a repayment plan. So in chapter 13, the debtor keeps most of his or her stuff but has to pay creditors out of future income for the next 3 to 5 years, and this

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means the debtor is living on a court supervised budget for several years and it's not a fun budget. So that's the trade-off, with chapter 7 you keep your future income, but you lose

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your current assets, chapter 13, you keep your current assets, you lose your future income for a while. There's also chapter 11. Chapter 11 is available for individuals, but it's mainly used by businesses, and it's similar to 13 in that it's a reorganization chapter, so

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you have a repayment plan, but you can also functionally liquidate a business in a 13, and the major difference between chapter 11 and chapters 7 and 13, is that creditors get a lot more voice in chapter 11, that if you want to propose in chapter 13,

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a repayment plan is not voted on by creditors. There are objections they can make, but they don't get a vote. Chapter 11, there's a vote, and there are all sorts of additional provisions that apply in 11, but chapter 11 is our basic business

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reorganization chapter. OK, so that's sort of the general overview. The other thing I think you should know before the panelists start talking is that in 2005, we had some major amendments to bankruptcy law. The amendments were a very politically contentious issue.

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They generally focused on consumer bankruptcy law, and making it more difficult for consumers, or at least the idea was to make it more difficult for consumers to file for chapter seven. There was a concern that, you know, individuals with high income were filing for

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Chapter 7, and basically not repaying their creditors. There were questions about what actual evidence there was of that being a widespread problem. Certainly there were, you know, there's no doubt there are individual cases of that. But Congress acted to try

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and restrict access to Chapter 7. There's something that you might hear about called the means test. It's not the mean test, even though some people think it's mean. It's the means test, and the idea is, of this incredibly clunky statutory provision to make sure that consumers

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who have too much income, are not able to file for Chapter 7. If they want to file for bankruptcy, they have to go into 13. As it turns out, it does not seem to have been particularly effective, because most consumers who file for bankruptcy don't have

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very much money. Big surprise there, right? Here's the surprise, Consumer bankruptcy filers are not poor. They're middle, they generally are, if you're kind of typical portrait of a consumer bankruptcy filer's not someone who is in

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poverty on welfare. If you're really truly poor, you don't have any assets, so no one is going, your creditors aren't, it's just not worth your time to bother you. Instead, it's people who have an income,

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who are you know sort of on the low, your typical filer is kind of on the lower end of the middle class. And to some extent, bankruptcy has become an Eat social safety net for the lower middle class, that it kind of supplements things like unemployment

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benefits, and Social Security and Medicare as part of the social safety net for the middle class. Whether it's really meant to be that is another question. So 2005 amendments were amendments were meant to restrict access to Chapter

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seven. They don't seem to have had a huge effect, and you know, that's maybe something to talk about, whether those amendments were, were misguided or not. There, I should emphasize there were some important business changes in 2005. Those have generally outside of the business bankruptcy

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community, not gotten a lot of attention, and you know, if the panelists want to talk about those it'd be great to hear. So just last thing, to give you a little numerical sense of what's going on. Over the last year to date, so

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from September 2009 to September 2010, we had about almost 1.7 million bankruptcy petitions filed. But a bankruptcy petition is actually going to undercount the number of people involved in bankruptcy, because you would get joint petitions from a husband and wife, or

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you never count them, you never count children or other dependents in a petition. So we just looked at the number of individuals involved, we're talking about about 2.2.25 million people who filed for bankruptcy in the last year. Now, the United States, and

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these are adults who are filing for bankruptcy, so we chop off, you know your non-adult population. Your total US population is somewhere in the range of 300 million. Probably your adult US population is maybe closer to the 250 range, so we're looking

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at something close to 1% of the US population filing for bankruptcy in the last year. Now you run that out over a period of 10 years, and you're gonna get some people who file for bankruptcy multiple times, they're serial filers, but it also means that there's

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a there's a sizable minority of the population that does find their way in bankruptcy as consumers, and That's just something to be aware of, because they're usually not very visible, that this all happens in the courts, you know,

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other than your headline case event on Michael Vick, you don't usually see much about individuals filing for bankruptcy. But there's a large number of people. At any one point, and that's just something to be

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cognizant about. By comparison, you know, how many businesses end up in bankruptcy. Well, we had certainly that the number of commercial petitions is much lower, that in the last year, we had under 100,000 commercial petitions. But last

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critical point to make, not everyone who's in financial distress, be it a business or an individual, uses bankruptcy. Bankruptcy sees actually just a sliver of the financial distress in the country. There are a lot of people who won't file for bankruptcy. Because, you know, out of

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some moral objection to it, or that they think they have another solution that works better, be it debt settlement, some kind of credit counseling, debt consolidation, any number of non-bankruptcy possibilities. I suspect a lot of them eventually find their way

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into the bankruptcy system. And one other, going underground and simply not paying. Kind of going to Texas was the thing that people used to do at least the story goes that hanging on their door that

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"GTT" Gone To Texas because Texas had very generous debtor friendly laws. So there's a lot of people who never come into the system, and that might be something we're thinking about, why, should we actually want more people

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filing for bankruptcy, as an alternative to other ways of dealing with financial distress, and a lot of businesses don't, that are in financial distress don't file for bankruptcy, a lot of small businesses, they cut a deal with creditors and

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basically shut down quietly. So with that, let me turn it over to Steven Case who hopefully will share some thoughts about, you know, why bankruptcy. I propose to offer answers to the question why bankruptcy matters, and the two points that I'm going

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to expatiate briefly are that, A. for both individuals and businesses, it has proven to be a marvelously efficient way to end and clean up a mess. And for businesses it's, I view it as a chapter 11 is what I'm talking about is a tax on creditors to

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perpetuate jobs. So let me explain it's. When I was teaching consumer bankruptcy sometimes in this room. It was Important to get across to the students what happens when there is no relief in bankruptcy, and my favorite is a First Circuit decision in 2004. Let

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me just read you the first paragraph. Remember this decision is 2004 and Judge Lynch's opinion, which I'm not gonna read much of, says on July 1, 1993, a federal jury in Massachusetts awarded Jennifer Holt a $500,000 verdict against her father, David Holt for sexually abusing

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her throughout her childhood. The verdict was affirmed on appeal. This case arises from Jennifer's attempt to collect on that judgment which almost 11 years later has not been paid in full. And if you read the opinion, I don't have the federal cite, it's 02-2128 in the

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in the First Circuit, the father went through bankruptcy because of wilful misconduct. There was no discharge in bankruptcy, and here you have a case of just constant fighting and garnishing wages, the issue in this one was that they ruled that she couldn't get his Social Security

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benefits, but once he got his MIT pension payment and put it in his bank account, she could seize it even though ERISA says pensions are inalienable, but here is a situation where without bankruptcy relief there is an endless stream of litigation, and as Professor Levitin adverted

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to this obligor stayed home and within the reach of process. I can't say I ever saw an example of it, but if you're going to have your pay garnished forever, up to the 25% federal limit, why on earth should you just not skip town and change

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your name? And so Holt versus Holt was a mess with no bankruptcy relief to clean it up, and a good effective chapter 7 or chapter 13 will do a good job and get people back to work. And the other thing that I

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would talk about with the students is chapter 13 works, but it's tough. There appeared in the Chronicle of Higher Education in July 2005, a short article by a tenure track professor at an unnamed university who wrote under

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a pseudonym and the title of the article is the Bankrupt Professor. And she says, I am in the middle of a chapter 13 bankruptcy with about 2 years before my case is closed. The experience has been one of the most humiliating and illuminating experiences of my

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life as a tenure track professor with a stable job, I theoretically should not be in this position. But I am. And then she goes on and says, I'll bet there are a lot of other professors who are too, but - does that mean Georgetown should

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increase my salary? Yes. - And she goes on in this very interesting article about the difficulty she has. She can't get a credit card while she's in Chapter 13, but it works. She's accepting the discipline. Unlike many of the cases you see, I don't think she's going

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to get the car payments done and then come in and ask for the 13 to be dismissed. So we have a huge number of Americans filing for personal bankruptcy and Shelly and Ray see them in their courthouses all the time, but doggone it works

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and it works very well and, and people get started. On the business front, I like to tell a story. Murray and I we are the only ones in the room who knew Mr. Weintraub of Levin and Weintraub. Rich knew

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him. You know, Chapter 11 developed out of an equity receivership, and they would reorganize the business through a foreclosure sale, and it was mostly used for railroads. And one of the first things that happened in the Roosevelt administration when Ben Weintraub was a

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young man was that they codified equity receiverships for railroads in something now long forgotten called Section 77 of the Bankruptcy Act. And Ben told me the story. Maybe you can correct me, Murray, because I'll bet he told you too. He said, we had

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a situation with Section 77 of the Bankruptcy Act where when a railroad missed a debt payment, they filed 77 and all the men kept their jobs and you worked out something with the creditors, he said, for all my clients with cut and sew shops in the

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garment industry, if they missed a payment, Chemical Bank was in 3 days later with an auction, and all the men were on the street. So he said, I got a bunch of the guys and we went to Brooklyn, and we went to see Congressman Celler and

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said, why can't we have for non-railroads what you just put through for railroads? And am I more or less correct, Murray, in your recollection? And that was what led to something equally long forgotten called Section 77B of the Bankruptcy Act, which morphed in 1938 into

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chapters X and XI, which then morphed in 1978 into chapter 11. And I really think that what keeps it going, the political benefit of it that prevents it from being destroyed by lobbying from creditor groups is that it protects jobs. At one time when I was

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doing legislative work for a committee of the National Bankruptcy Conference, Continental Airlines was in one of its several Chapter 11 cases. Crandall had lobbyists

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going all over the place saying that Chapter 11 gave an unfair competitive advantage to Continental Airlines because they had extra cash flow because they weren't making current payments on all their debt, and that this was therefore unfair to American Airlines and the committee that I was

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on, every congressman staff's office we went to we said, does Continental Airlines operate in your boss's district? And the answer was usually yes. We said, how many employees does Continental have in the district? And it was always a few, sometimes more. And then you could see

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the light bulb light up in the congressional staff people's head. Oh, if we accept what Mr. Crandall is pushing, all those people in my district will lose their jobs. So I think Chapter 11 is great. I think its source in federal statutory law was

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the Ben Weintraub and his friends trying to protect jobs against debt default. So to conclude, I'm offering the view that business bankruptcy matters. Personal bankruptcy matters because it cleans up a mess. Business bankruptcy matters because it cleans up a mess and it protects jobs. Thank you,

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Judge Chapman? Just by way of background as Denise said I've been on the bench for about 7 months. Prior to that, I was a bankruptcy lawyer in private practice primarily for the last 10 years doing large

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Chapter 11 debtor side representations, and for about 15 before that, I mostly worked on the creditor side back in the day when banks were really banks. I remember the first time I represented the agent in a bank group and I had,

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something called a fund in the bank group and it was a new experience and now of course funds pretty much dominate the landscape so my perspective is shaped by not just my short time on the bench but also

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the many years I spent practicing. And I've been thinking about the topic and I really wanted to answer it on three levels, the question of why bankruptcy matters. First, I'd like to talk about bankruptcy kind of as a meta concept,

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on a philosophical level, if you will. Then I wanted to talk about a little bit about the bankruptcy code. And finally, I want to talk a little bit about bankruptcy judges, including my friend to my new friend to my left, Judge, Judge Mullins, and things

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that I learned from him in judge school when I started out. First, and this may sound corny, but I really believe it. And it's really come home to me in the last 7 months. I think bankruptcy

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represents, notwithstanding the stigma that Professor Levitan, and Steve alluded to, bankruptcy represents, I think, the very best of what America really is about. It reflects a fundamental belief that people are good. Not that people are bad, that they go out and they buy boats

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when they can't afford them, or that they are engaging in all kinds of subterfuge to run up large credit card balances and avoid their debts. I think the most important thing about bankruptcy is it picks up on the most important and seminal documents

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in our history, Declaration of Independence, the Emancipation Proclamation, the Constitution, and it says, we believe that you are a good person. And if something bad happens to you, we're gonna give you another chance. Or if you make a mistake, we're gonna give you another chance. And

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I've seen this in addition to the large chapter 11 cases that I see, I do have the chapter 13 individual cases, and I see a full range of people who, this may be their only contact with the court system and the court process,

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and they shuffle in, and they sit down, and they look right into my eyes and deep into my soul, and I think that they feel embarrassed, and they feel that they're doing something that's may be morally wrong. But a lot of times they'll explain that they

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lost their job, or their mother got sick, or their house burned down, and you know, there's just this parade of things that happens to people. And the bankruptcy system, I think, reflects the notion that there but for the grace of God goes each of us,

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and it gives the individual cases, the opportunity for the person to say, OK, I'm gonna start over again, and I'm gonna do better. In the business context I guess we try not to think of

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businesses in terms of good and evil, although I think there is plenty of that. But it recognizes the concept that America was founded on the taking of risk. And the rewarding of taking of risk. And there has to be a safety net. Otherwise, we wouldn't

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have cellphones, and we wouldn't have electric cars, and we wouldn't have many of the wonderful things and advances that we have today. Because the alternative, as they say, is much worse. The alternative is you take a risk and you as an officer or director of a

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company that doesn't make it, you can be personally liable and you can go to jail. Not a good thing, would not be an environment in which entrepreneurship would flourish, in which venture capital would flow, and in which we would have many, many of the advances

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that we see. The second thing is the bankruptcy code itself, which is an extraordinary piece of legislation that I think many of us who are in the field have a love-hate relationship with. It's not perfect,

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it's not the Internal Revenue Code, thank God, but it is a code, and there's a lot of good stuff in there, and it turns out it's kind of a living and breathing document

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In many ways like the Constitution, because I think Steve, when it was drafted in '78, credit default swaps, I mean, maybe they were out there, but I don't think the average person on the street. Knew what a credit default swap was or

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CMBS or CDOs or all that good stuff that we now know has somehow brought the country almost to its knees. And yet the bankruptcy code, we've figured out a way to adopt that and certainly there have been amendments to the bankruptcy code

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that deal with some of the more complex financial instruments, but fundamentally, the bankruptcy code is like an organism that allows us to have progressed with the times and to apply it to situations and cases now that we didn't contemplate

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in 1978. If you're following what we're doing in the bankruptcy codes, what's all the rage now is the 363 sale. Some of you who are more familiar with it, what's a 363 sale? It's a provision of the bankruptcy code that says that instead of reorganizing

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under certain circumstances, you can sell all of your assets out of the ordinary course of business, and in about 45 minutes you're gonna hear from my former partner Matt Feldman, who was the architect behind the government using that provision to save General Motors

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and Chrysler, but it's being used more and more in the big cases and there's a debate raging over whether or not that's an appropriate use. Well, it's in there, it's in the bankruptcy code, and as our times have evolved, I think

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the bankruptcy code has morphed and stretched with the help of the judges to accommodate the facts on the ground. Finally, I just want to say things, say a few things about my new job, which I think truly is the best job on the planet

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and in particular the mix of individual cases and and very large cases that I get to see. And I had a day a couple of weeks ago where I both rendered a decision in a billion dollar case, but that morning I had had

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100 chapter 13 debtors come before me and also some parties who were reaffirming debts. Under the bankruptcy code, there's a provision that you can voluntarily, notwithstanding getting a discharge, you can voluntarily reaffirm a debt. Now I would say voluntary is in quotes because often

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the credit company will call the debtor and say if you want to keep your car, if you want to keep your furniture, even though you may still be continuing to make payments, you have to sign a reaffirmation agreement. What the reaffirmation agreement does is it obligates

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that debtor more or less forever to have to pay that debt. They get into the kind of situation that Steve was alluding to. And the bankruptcy code is very interesting with respect to the role of the bankruptcy judge in a reaffirmation situation because it basically tells

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us it's the one time where we're supposed to act as a lawyer. We're supposed to really try to educate the party and make sure they understand what they're doing. And I'll share one story. I had a woman come in, she didn't speak English. She came in

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the first time, she sent her daughter. I said, not good enough. Mom has to come. Mom came back from the Dominican Republic and she came, she couldn't speak English. We got her an interpreter and what did she want to do? She wanted to reaffirm $2500 of

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debt for furniture that she had purchased, and the interest rate was 25.99%. So she wanted to agree to pay off that debt. At the rate of $48 a month for, I don't know, 3 or 4 years. So through the interpreter, I talked to her about what

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she was doing and why she was doing it and why was she doing it. Obviously, she wanted to keep the furniture. So maybe pushing the bounds of what Ray Mullins told me in judge school that I was allowed to do, I said to her

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through the interpreter, ma'am, so why don't you go back to Ray Moore and Flanagan and say you want a better deal and tell Ray Moore and Flanagan that instead of waiting to get $48 every month for 4 months, you'll give them some sum

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of money now and you can be done. So I wasn't sure she really understood, and the interpreter explained it to her, and I said, you come back in 2 weeks and tell me how that went. So two weeks later at the start of a large calendar

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in she comes and she has an envelope and she comes up to the front because she knows that she didn't know you're not supposed to do that, but she comes up to the front and my law clerk takes the envelope and we look at it

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and I'm quickly looking at it and lo and behold, it looks like she got the debt down by 2/3. So we get the interpreter, we get the interpreter back and I say is this correct what I'm seeing. So she explained, yes, I went back with

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my son, and we're giving them, I forget what it was, $700 and we're done. And she was saying gracias gracias, and I said to her, I said, you should be very proud of yourself and let this be a lesson to you, that you could always speak

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up for yourself, and you could always get yourself a better deal. They don't have to give it to you, but you can always try. And I think that that's the note that I'll close on is that I find as a bankruptcy judge. You can use the

00:32:56.680 - 00:33:17.119

bankruptcy code and the bankruptcy court to empower the humble. I would hope that that woman, going forward in her life, would feel that she can speak up for herself. But it also, I think, humbles the powerful because, you know, they come before us in

00:33:17.119 - 00:33:33.719

these billion-dollar cases, the hedge funds, and the banks, and the private equity firms, and they have to speak one at a time, and they have to try to talk to one another and they have to figure out how to whack it up when there's not enough

00:33:33.719 - 00:33:51.020

to go around and it's, it's just the side of a controlled mob, but it's controlled and the process works so I think that those two very different aspects of it and aspects of our job is to me at least 7 months into it

00:33:51.020 - 00:34:09.780

why bankruptcy matters. Judge Mullins? It's gonna be similar concepts to Stephen and Shelly talked about one of the things that,

00:34:09.790 - 00:34:23.870

you know, on a big level on a business cases and so forth is to reinforce the concept it's OK to fail as long as you try and I think that's one of the things that makes our bankruptcy system different from a lot of bankruptcy

00:34:23.870 - 00:34:36.919

systems around the world that it's OK to fail as long as you try and you want to encourage that and Shelly mentioned a lot of innovations we wouldn't have if we didn't. I came out of a large chapter 11 practice too and in

00:34:36.919 - 00:34:55.260

Atlanta, it's a heavily consumer practice. I have some large cases but not nearly what you see in Manhattan where Shelly sits or in Delaware. We are a large chapter 13 district and so my first day on the calendar being

00:34:55.550 - 00:35:13.840

chapter 11 lawyer for 15 years. My first calendar was 350 chapter 13, which I thought what in the hell have I got myself into, but I want to kind of make my comments on more on the consumer side and one

00:35:13.840 - 00:35:27.760

of the things - Shelly started off with meta and I'll go look that up, when I get back home just to show you that they might have invited the wrong person, you know how eloquent Steve is and Adam and then meta. My examples all come from

00:35:27.760 - 00:35:44.570

Superman comic books. I swear to God. So here I am at this highbrow law school and I'm talking about Superman comic books. OK, here it is, here's the story. When I was young, I read a lot of Superman comic books. And, there was a series

00:35:44.770 - 00:35:56.770

and they would go through different enemies and so forth, but there's this one series that the Superman comics was a bright color and there was a parallel universe. So you'll be reading the story and then all of a sudden it will flip from color to black

00:35:56.770 - 00:36:18.929

and white and there were two worlds that were going on simultaneous. I think in a lot of our consumers, there's a parallel universe right out my window in the Russell Building in Vine City which is mostly an African American, very poor community, and I can

00:36:18.929 - 00:36:33.800

look at all sides and see when I look out on one corner I see payday loans, on another one title pond, and then about 5 or 6 small car lots with 5 or 6 cars on what I call the ugly ducklings of

00:36:33.800 - 00:36:53.979

the car world and then I see folks that that live in here and I see little bodegas, no grocery stores, no fresh fruits, a lot of mothers and strollers with 3 or 4 folks in. And I often thought when I see that, that

00:36:53.979 - 00:37:07.100

I think there's a parallel universe. I think that most of us live in a world where if we go to a car lot ever when we do, what we're thinking about is, OK, I'm trying to get this interest rate down. I want to minimize the

00:37:07.100 - 00:37:20.459

time. I want to get these payments lower. There's a parallel universe. There's a lot of folks that come to our court. At the end of the month, they have $200. And when they walk onto the car lot, what they ask is, I want a car.

00:37:21.659 - 00:37:38.929

Next question is, the car lot person says, how much can you afford a month? For any of us that would be a horrible that we'd probably turn around and walk away. To them that's the magic question. They say $200. They always drive off

00:37:38.929 - 00:37:55.199

the lot with a car, typically 7 or 8 years old, 29% and about 9 years later you got it for $200 a month. And that's what we see a lot in our reaffirmations as Shelly mentioned. We see a lot of folks that start off with

00:37:55.199 - 00:38:10.870

a $200 title loan. I had a woman first year on the bench, someone in the family had died. She left her a nice Volvo. She ran short, got a $200 title loan. By the time she filed the interest had run on it,

00:38:10.919 - 00:38:30.260

it was over $6000 because the effective interest rate was 675%, which is legal in Georgia on title bonds. And so when you examine it what you find is that that's their life. That's their life. Their life is if I run a little short and

00:38:30.260 - 00:38:46.409

I got a job and a paycheck, I go to the payday loan place because I need that $200 now. If it's gonna cost me 25% of my check Friday, I'll worry about that when Friday comes. Same thing on a car lot. Where's

00:38:46.409 - 00:39:00.949

that come from? It came from that's what their parents did. That's what their cousins did. As long as those families lived in Vine City, that's the life they live. If they couldn't get fresh fruit, if that's where the car lots were, that's where the

00:39:00.949 - 00:39:14.584

commerce was, that's what your life is. And so here I am and I go to church in that area and then but I live out in Marietta and so my wife works so we have a totally different view and so I got to thinking sometimes

00:39:14.764 - 00:39:26.250

I think we all kind of have a sense if we look up and I'm sure if you go through the streets of DC you probably see it too. There's a parallel universe. There's the way we run our financial lives and how we make our decisions. There's

00:39:26.250 - 00:39:41.290

a whole other swath of folks that don't know anything about that and our worlds never cross, and I think there's somewhat, in my view, they're invisible. We see them, but we don't see them. You know, we see them going to these places but you

00:39:41.290 - 00:39:57.310

really don't see it, so you go about your affairs. Well, sometimes they land in bankruptcy and so you have an opportunity. Oh, I've been on reaffirmation especially one of the things we did, I worked with a bar group in Atlanta we've set up

00:39:57.530 - 00:40:10.629

that we call it the pro se reaffirmation project and what happened is we took several lawyers who were interested, most of them came out of big firms and they just wanted an opportunity to get some experience, interview clients, get some advice, so we call a pro

00:40:10.629 - 00:40:26.310

se reaffirmation project. What happens is what we decided to do is there's 8 judges in Atlanta. I volunteered to hear all the reaffirmations for the whole court. So once a month I'll have a reaffirmation calendar where there might be 150 folks in there. I

00:40:26.310 - 00:40:39.669

separate out the lawyers, the ones who are represented, we do them first. And so at the end, the only folks in that audience are pro se and I can address them all. I address them first as a group and I address them individually and

00:40:39.669 - 00:40:54.340

the lawyers are trained to tell them that when you buy a car, when you buy furniture, it is a business transaction. No one's ever told them that. The lawyers will tell them what the difference in a 29% interest rate and a

00:40:54.340 - 00:41:07.340

15% is on what you pay. No one's ever told them that. So they come down from that and then they come into court and then I get a second chance to talk to them. And it's literally you're talking to grown-ups from anywhere from 20 to

00:41:07.340 - 00:41:22.520

60. And all of a sudden what you realize, which is kind of a scary thing, some of those folks they're looking at you, they've talked to a lawyer first of all, and these are really smart, bright young lawyers from big firms and they come

00:41:22.520 - 00:41:39.290

in with the kind of renewed sense and several of them have told me after calendar that is the first time someone with a shirt and tie ever looked them in the eye and talked to them. And they come into court. And I've had him stand up

00:41:39.290 - 00:41:53.270

and before I could call a case I called him. I don't want this car 29%. Where can I leave the keys? Can I leave the keys in the court? And it's just amazing or someone say, you know, they'll go and I say if you want to

00:41:53.270 - 00:42:05.100

reset and it's the same thing Shelley was saying, you don't have to sign what somebody puts in front of you. And we tell them, you know, tell them that they can have this car that's 10 years old with 200,000 miles on it. Just tell them

00:42:05.100 - 00:42:20.679

where to pick up the keys. Next calendar come back, I got the car for the 75% write down but it's again it's an opportunity I think why bankruptcy. Without that form, where would those people be? It would just perpetuate over and over and over

00:42:20.860 - 00:42:34.100

and that's the first time. Because I think there were surveys done for folks that a lot of times in a federal court system, folks are only there for one time. There's an overwhelming percentage that one time is gonna be in a bankruptcy court and so

00:42:34.100 - 00:42:45.040

they are not used to folks talking to them. They're not used to, in other words, they know how their world works. They don't know how our world works. And for a lot of us that don't interact, we don't know how their world works, so they

00:42:45.050 - 00:43:00.419

they intersect. You can learn a little bit about how they go through life and you have an opportunity to impact. Hopefully when they go out and maybe change a little bit like Shelly said maybe empower them to look at even a car as an economic decision

00:43:00.419 - 00:43:13.199

and that they have some say over it, that they can shop, that if they clean up their credit and make some smart decisions and then who knows, maybe their child won't pick up the same thing and all of a sudden they break that cycle because without

00:43:13.199 - 00:43:32.399

that, that's where you see the cycle repeat over and over and over. So I think that's one of the reasons why bankruptcy matters. Damon, when you get going last and you know, it's what's left on the table for you. Well, you all left me

00:43:32.399 - 00:43:48.689

a series of small questions to sort of wrap up that I'm supposed to address. Unlike all the distinguished folks on this panel to my right, I'm not a bankruptcy judge or even a bankruptcy practitioner or a bankruptcy scholar. I'm the policy

00:43:48.689 - 00:44:02.530

director of the AFL-CIO. I serve as the deputy chairman of the congressional Oversight panel for TARP, and I have to say, here on my own behalf and not on behalf of that panel or its staff. I was asked to talk, I think,

00:44:02.649 - 00:44:20.810

broadly about the impact of the economic crisis on working people. On some of the folks that Judge Mullins was talking about and Judge Chapman were talking about and what this has to do with my experience overseeing TARP and since we're

00:44:20.810 - 00:44:33.850

the sort of subject matter here is the importance of the bankruptcy system. I was sitting here thinking, you know, the importance of the bankruptcy system is completely interwoven into these experiences that I've had and into the broad nature of

00:44:33.850 - 00:44:49.409

what I've been asked to talk about, so much so that it's a little challenging within this, you know, limited framework to even begin to do it justice. But let me start where Judge Mullens left off about parallel

00:44:49.409 - 00:45:06.699

universes. I didn't read that many Superman comic books, but I watched a lot of TV. There was something about when we were

00:45:06.699 - 00:45:18.939

all in nursery school, the little boys run around saying, I'm Superman, I need to punch you. My mother was offended by that, so there's no comic books. But, there's always parallel universes and so stuff on like Bugs Bunny and the Flintstones and stuff like

00:45:18.939 - 00:45:31.030

that. So I know what the judge is talking about. And I think it's really important to begin. I don't think it's possible to understand anything that's going on right now in our country without starting at that point.

00:45:31.649 - 00:45:49.810

And let me ask you to think about the following fact. Different people put different breakpoints on it, but I think it's widely acknowledged and agreed that the top 5 to 10% of our population in terms of income and assets have

00:45:49.810 - 00:46:08.570

just had the most fabulous time for the last 30 years. And that in particular, people like ourselves, people whose real sort of content of our economic identity is our human capital, at least I

00:46:08.570 - 00:46:21.169

think that's most of us. There may be people here who are trust fund babies, but, I'm not gonna ask you to identify yourselves. We've in particular had a really fabulous time. And by that, I mean, I just reflect at my own life. I

00:46:21.169 - 00:46:33.969

mean I work for a labor union, I get paid a good salary, but nothing particularly fantastic in relationship to what my classmates in law school and business school are making. And my wife works

00:46:33.969 - 00:46:50.110

and our family's material circumstances are dramatically better than my parents who were who were better educated than us. Right, who, who were both university trained academics my mother had a master's and my father had a

00:46:50.110 - 00:47:04.429

PhD. I mean, truly scholarly people. Our lives are just like in another dimension, you know, fly to Europe, vacation homes, you know, all this stuff, financial security in a way that our family did not enjoy

00:47:04.429 - 00:47:20.479

when I was a child, although we were middle class. So anyway, 5, 10% of the country just doing fabulously. But what does that mean? We're a nation of 300 million people. So 5 to 10% of the country is somewhere between 15 and 30 million people. That's

00:47:20.479 - 00:47:31.080

a big country. That country of the people who are having a great time, it's a big country. Think about it anytime you're like at the beach or driving by the ocean, look at all those yacht basins. Think, where, where do all those people with

00:47:31.080 - 00:47:45.320

all those yachts? Well, let me tell you, top 5% of the country is 15 million people, right? It is possible to live a life easily, in which that's all you ever see or do, except for the folks, you drive by at the

00:47:45.419 - 00:47:59.979

car lots and the folks who do the dirty work for you. Right, I mean, you know, now, and it's particularly true because we've shifted all the production of the material circumstances of our lives someplace far, far away, which is very different

00:47:59.979 - 00:48:12.020

from the way things were in 1970, right? Where, you know, the things that we all rely to live upon were actually made in our own - at least in our country, if not in our own community. And

00:48:12.020 - 00:48:24.469

the people who made them were close to hand. Now, so here's a parallel uni, so there may be three parallel universes, right? There's the folks in our country and I think most of

00:48:24.469 - 00:48:41.770

us are among them, who've really just done fabulously. There are the folks in our country and the majority of our country who either have been on the bottom all along, or who are slowly and inexorably sliding there. And then we

00:48:41.770 - 00:48:58.540

have to understand that our economic circumstances include hundreds of millions of people that we never see who make everything that we rely upon. Right, in India, in China, in Southeast Asia, and Central America and Caribbean, the

00:48:58.580 - 00:49:18.899

invisible necessities. So that's our world. That's the world before the economic crisis. And, just to put a couple of points on this that people don't generally understand. Let's just talk for a moment about ownership of things. And

00:49:18.899 - 00:49:36.010

again, it's before the economic crisis. President Bush used to talk a lot about the ownership society. Here's a statistic about the ownership society that's roughly accurate, and was accurate before the financial crisis and the economic crisis. The ownership of America's public corporations,

00:49:36.090 - 00:49:52.520

both debt and equity, to the extent that it is in the hands of Americans, which it's increasingly not, but that's OK. I mean, globalized capital markets. The ownership of America's public companies is divided in the following way. The top 5% of our country

00:49:52.520 - 00:50:11.790

one way or another, directly and indirectly, owns 50% of it. The next 45% owns the other 50%. Right, and in a declining way, so that if you split it out in 5.5% increments, you'd see that most of that ownership is concentrated among the top 20%

00:50:11.790 - 00:50:33.709

of our society, and the ownership in America's public corporations, meaning stocks and bonds in every form, mutual funds directly held pension funds, 401ks, etc. annuities. Almost entirely in the top 25% of the population because the bottom 50% of our country owns zero. OK. Now, when

00:50:33.709 - 00:50:48.699

you hear people talk about on TV about stockholders and how important stockholders are and all that stuff, realize they're only talking about the top 20% of our country and really only the top 5% in terms of serious economic interests, you know

00:50:48.750 - 00:51:06.209

in relation to our system. So, that's the kind of, and I think many people may have seen statistics about income inequality and how income inequality is now at levels not seen since the 1920s. So that was before the economic crisis. Now,

00:51:06.409 - 00:51:24.250

what's the impact of the economic crisis? I'll just run some numbers by you. 13 million people formerly unemployed. If you then look at underemployment, meaning people who are working part-time, want to work full-time, the numbers roughly

00:51:24.250 - 00:51:40.739

twice as big. There are 7 million families in some stage of foreclosure. If you assume 4 people per household, that's 28 million people. We have falling real wages. Now, truthfully, we've had falling real wages for a long time but now it's falling, now they

00:51:40.739 - 00:51:58.429

are falling faster. Pension coverage we used to have an economy in which roughly 50% of the private sector workforce had a real pension plan, meaning a pension plan with insurance features, so that guarantee insurance against capital market risk, insurance against longevity risk. That was

00:51:58.429 - 00:52:12.540

the state of affairs in roughly 1980. Today, something less than 15% of the private sector workforce has such a pension. Those pensions are commonplace in the public sector, but as you may have noticed, a large number of the wealthiest people in the country feel

00:52:12.540 - 00:52:25.590

that there's something wrong with that and are buying politicians and newspaper editorials and the like seeking to make sure that firefighters and cops and teachers don't have real pensions. It seems to be very, very important to people like Warren Buffett that that be stopped.

00:52:26.169 - 00:52:42.590

The healthcare employer provision of healthcare is diminishing dramatically, and that it seems to be the case that the president's healthcare reform, which does a lot of good things if on the whole, doesn't seem to be doing anything

00:52:42.590 - 00:52:59.540

to slow that in certain respects, maybe accelerating it, unintentionally. Now, how can it be? If you look at all of these things these broader trends that have been going on for a long time,

00:52:59.659 - 00:53:17.790

for decades, were accelerated dramatically by the economic crisis. Now, how can it be that we as a society are as wealthy as we are. In aggregate terms, we've had enormous economic growth. We are fantastically more productive as a society in terms

00:53:17.790 - 00:53:35.280

of our workforce than we were in 1980. And yet we have a lot more cheap plastic stuff than we did in 1980. Certain types of things are way more affordable than they used to be. People just don't

00:53:35.280 - 00:53:48.429

make a living like they used to stealing televisions. And the reason why that is, because TVs are just not that expensive, except the really big ones that you kind of can't move. We have

00:53:48.429 - 00:54:02.080

all these things, but yet the things that really matter in life have become really, really much more difficult for the typical American, the median household, to obtain. What I mean by the things that matter most in life, education

00:54:02.080 - 00:54:19.580

for your children, housing, healthcare, and time. And the things that don't matter very much have become much easier to obtain. Now, what, what is going on here? What is going on in our economy? Why is this so? And

00:54:19.590 - 00:54:37.229

I guess I'll say one more thing about the current, what's happened in the economic crisis, and I'm gonna shift from households to the larger economic picture. We have a crisis of aggregate demand in our economy. When President Obama came into office, Christina

00:54:37.229 - 00:54:49.399

Romer, the chair of the Council of Economic Advisors, estimated that the gap in demand in our economy, meaning the difference between what we can produce and what we have people willing to pay for, right, was, and by what we can produce, I mean all

00:54:49.399 - 00:55:04.989

the capacity of our labor force, the capacity of our of the capital invested in our economy, that the gap was somewhere between 1.5 and $2 trillion on an annualized basis. Then the political team said we can only get $700 billion of stimulus, and so

00:55:04.989 - 00:55:20.260

we declared that the administration made the very foolish decision to declare the need to be $700 billion which is what they could get, rather than declare the need to be what it actually was, which was 1.5 to $2 trillion. Now, why is it that

00:55:20.260 - 00:55:38.120

we have an aggregate demand crisis? Why is it that we have long-term falling wages, evaporated pensions, collapsing employer-provided healthcare? Why is this situation in place? There is a long, complicated story which I've not been given enough time to go into, but I want to

00:55:38.120 - 00:55:53.010

just put one thing in front of you. And why are these, things true when we have become an aggregate so much wealthier as a society? And I'll tell you, at Harvard Business School in the finance class when I was there in the mid-nineties,

00:55:53.270 - 00:56:07.739

what the smartest person that I knew was on the faculty said the answer was. Although he didn't pose the question that way, the question he posed was, why is the stock market going up so much? And he literally, he closed the door, he

00:56:07.739 - 00:56:19.459

turned out the lights, he put a slide on the wall. And you'd think, well, you know, senior academic at Harvard Business School speaking to a class of finance geeks on the verge of graduating, you'd figure what were the data that he was gonna get, that he

00:56:19.459 - 00:56:31.030

was gonna put on the wall would be from, you know, some, some McKinsey study or something, but it wasn't. He put a slide on the wall from an organization called the Economic Policy Institute, which is a think tank funded by the labor movement.

00:56:31.340 - 00:56:46.979

And what the slide is, what the slide was, was a graph of the relationship between wages and productivity between 1945 and 1995. And what it showed was up until 1980, wages and productivity moved in lockstep together, as a neoclassical economist would tell you they would, and

00:56:46.979 - 00:57:04.560

starting in 1980, they start to diverge. Right? And productivity goes way up as IT kicks, as IT kicks in, as digitalization kicks in, as a whole bunch of process things kick in, and wages go down. Wages flatline and go down slowly. Now,

00:57:04.639 - 00:57:14.840

you know, this was just amazing to me. So I knew that slide. I think alone of all the people in that classroom, I knew that slide. And this was like learning that there really is a

00:57:14.840 - 00:57:33.669

great capitalist conspiracy, to have this slide put up on the wall in this classroom, and to these people, and there's a fact that will seem self-serving for me to say, but it's a fact nonetheless. What happened in

00:57:33.669 - 00:57:52.110

American society in 1980, was that the federal government changed its orientation toward collective bargaining as a means of determining wage levels in the private sector. Between 1945 and 1980 in Republican and Democratic administrations the position of the United States

00:57:52.110 - 00:58:05.689

government was that collective bargaining was the appropriate way to determine wage levels in the economy. And strangely enough, this was President Eisenhower's view and President Nixon's view, as well as President Kennedy and President Johnson's view, and kind of grudgingly President Carter's view.

00:58:05.949 - 00:58:17.669

But in an episode called the PTO strike, Ronald Reagan changed that policy. And although it may be the case that President Obama is rethinking that, I would say that that has been the policy of the United States government since

00:58:17.669 - 00:58:35.479

1980. And the result of that policy, predictably, if you had read, say, John Maynard Keynes, is that we have a giant demand problem, a profoundly unequal society, and a society increasingly in which if you're not in that 5 or 10%, you

00:58:35.479 - 00:58:50.600

don't have any power. You don't have any political power, you don't have any economic power, you don't have any cultural power, you don't have any power. And, where increasingly the public debate, right, is dominated by different factions of that top 10%, right? There's the humanist

00:58:50.600 - 00:59:04.929

faction, there's the Tea Party faction, there are different factions of that top 10%, and if you're not in it, you don't exist socially, politically, or in certain respects economically. Now, what does this have to do with bankruptcy? Well, let me tell you the tale of bankruptcy.

00:59:06.280 - 00:59:25.820

In the economic crisis, there are two profound ways in which it turns out it's not in anybody's interest who counts. To allow the economic crisis to be managed through the bankruptcy system. And in significant part, that is

00:59:25.820 - 00:59:39.020

why the economic crisis is so persistent. I'm gonna say there's 2 ways in which this is true, and then I'm going to stop because I've used up more time than I was given. The

00:59:39.020 - 00:59:52.010

first way in which this is true, and I think all of you are familiar with this and are trying to probably wiggle your way around it in your courtrooms, is that you cannot use the bankruptcy system to

00:59:52.020 - 01:00:04.889

restructure a home mortgage. And various efforts have been made to fix that by members of Congress. The defeat of one such effort led Senator Durbin to proclaim that it was amazing to him after that the banks had destroyed America but still owned the Congress.

01:00:05.830 - 01:00:24.350

Dick Durbin, of course, is the 2nd ranking member of the Senate under the Majority Leader Harry Reid. So you can't restructure mortgage mortgages in bankruptcy. And it appears that many officials of our government feel that restructuring mortgages, which would

01:00:24.350 - 01:00:41.760

of course involve not foreclosing on people, is somehow not in the national interest. I find this rather striking because just a few weeks ago, an arm of the United States government, the Federal Reserve Bank of New York, restructured a mortgage in anticipation of

01:00:41.760 - 01:01:00.010

bankruptcy. Right. Of course, it wasn't a home mortgage. It was only indirectly a mortgage. What it was, was the debt of the leveraged buyout of the Hilton Corporation which

01:01:00.010 - 01:01:15.199

was essentially, again, indirectly an obligation of the Blackstone Group, in which the Federal Reserve helpfully restructured at about 50% of its face value. To the great benefit of the Blackstone Group, a private equity

01:01:15.199 - 01:01:34.429

firm, whose principals will be able to pay 15% capital gains tax on the benefit that they were conferred on by the Federal Reserve whereas, you know, all of us will pay 25, 30, 35% taxes on our income. Now,

01:01:34.969 - 01:01:50.689

in any case, it's clear that our government and its wisdom and so forth does not want the bankruptcy system to take up the restructuring of home mortgages. There's another thing that we don't want the bankruptcy system to

01:01:50.689 - 01:02:06.469

do. All right, and that is to deal with the fact that our banks are bankrupt. By bankrupt, I mean, obviously that they haven't, filed Chapter 11, they haven't even been put through the FDIC's resolution process or the new resolution process created

01:02:06.469 - 01:02:18.610

by Dodd-Frank. But they are nonetheless bankrupt. And what do I mean by that? I mean that if you went in today and did what was done in all prior banking crises in the United States that were successfully managed,

01:02:18.889 - 01:02:31.610

which is to do a hard audit of their assets, you would find that they were less than their liabilities. And that's before the events of the last two weeks where it appears that they have contingent liabilities that amount to

01:02:31.610 - 01:02:52.600

the entirety of the housing finance system. Right, because essentially they guaranteed the integrity of the paperwork associated with the securitizations. But they have not been put through any form of bankruptcy or resolution process whatsoever because it, again has

01:02:52.600 - 01:03:09.250

been the judgment of two administrations that it would not be in the national interest to do so. The failure to use some kind of bankruptcy process - maybe not chapter 11, maybe not chapter 13 - some kind of bankruptcy process, some kind of restructuring process to deal

01:03:09.250 - 01:03:28.649

with home mortgages on the one hand and banks on the other is pushing our economy down the path that Japan trod in the 1990s, inexorably and with increasing seriousness and without the export engine that Japan had to keep itself afloat during that period.

01:03:29.459 - 01:03:51.000

And so what I'm going to conclude by saying is the relevance of bankruptcy is that it's absent. Wow, wonderful. I'd like to, just sort of open up the discussion to questions from the audience at this point. So

01:03:51.120 - 01:04:06.320

please just make clear who you are directing questions or comments at, and if you want to use your microphone I think these will have a little button on them. Can I try to connect

01:04:06.320 - 01:04:26.010

up what Damon just said with what I think Professor Levitt and you were quoted about in the paper? This week and the foreclosure crisis and the latest iteration of the foreclosure crisis being these robo signings and the debate about moratorium on the

01:04:26.010 - 01:04:42.010

banks and what's going on because Judge Mullins and I see this all the time. The paperwork comes in and the lender wants relief from the automatic stay. And a program that we are pioneering in the Southern District of New York, it's called the Loss Mitigation

01:04:42.330 - 01:04:58.100

Program. And we're actually going to have the opportunity to meet with some folks from Congress to talk about it, and it's not quite giving us the power to restructure home mortgages, but it's giving us the power, and we've given ourselves the power to at least make

01:04:58.100 - 01:05:18.239

the banks have a conversation with the homeowner because just as Ray Mullins was talking about the first time someone in a suit had a conversation with a fella about what it means economically to buy a car. These banks, they don't want to be in

01:05:18.239 - 01:05:34.560

the real estate business, but yet they're forced to be in the real estate business. I had a debtor come in the other day who lo and behold, he thought he had surrendered his condo. And you know what, he hadn't because the bank won't take it. OK,

01:05:35.100 - 01:05:50.459

the bank won't take it, so he's still on the hook for the taxes and the condo fees. So what's he supposed to do? This is not fair. Well, it's in the bank's interest and the homeowner's interest to talk to each other because if you

01:05:50.459 - 01:06:07.030

can take the arrearage. And you pluck it onto the principal, you amortize it over the loan. It's a win-win. The homeowner gets to keep the home. The bank gets to be repaid, doesn't get to have to take a fire sale price for the home. And the

01:06:07.030 - 01:06:25.840

person who owns the home gets to not have to relocate their family, scramble and pay a higher rent, have the dislocation costs, etc. So it's a win-win, and this and the bankruptcy court is the forum in which you can facilitate that conversation. Now some people think

01:06:25.989 - 01:06:45.100

that's unconstitutional. I don't think there's anything unconstitutional about telling people that you have to sit down and have a conversation and see if you can work it out. I mean that's kind of the essence of the entire system. So I'm hoping that that gets

01:06:45.100 - 01:07:00.080

some traction. I don't know if it will, but certainly I think the banks are taking a little bit of heat for the lack of process, and these homeowners, I think people think, well, what do they want? Do they want to just get the

01:07:00.080 - 01:07:14.800

home for free? No, they don't, but they're entitled to a process that looks right and that feels right. And that's fair and so that they're not at risk that the person, the entity that forecloses on their home turns out to not

01:07:14.800 - 01:07:31.360

be the entity that actually owns the paper. So I think that picking up on what Damon said this crisis is creating, you know, Rahm Emanuel's line, right? Never waste a crisis. The crisis is creating an opportunity where we could fix the system

01:07:31.360 - 01:08:49.329

in a way that's a win-win for the homeowners, for the small folks, and for the banks. So we have first question here. Thank you first to Professor Ellenberg and Professor Kate.

01:08:50.009 - 01:09:09.609

Alright, so the Dodd-Frank bill has two types of resolution authority. One is a resolution authority that provides essentially for Bridge Bank to to restructure a failed systemically significant institution, and the other is essentially a liquidation process that you alluded to. Like a

01:09:09.609 - 01:09:23.839

lot of things in Dodd-Frank, a great deal of discretion has been given to regulators, both to make rules about to flesh out the statute and also to decide when and how to use it. And in no area is the discretion greater than in resolution authority

01:09:23.839 - 01:09:37.790

because there's no particular, unlike say, in the FDIC's resolution authority where there are if you blow through certain capital requirements, they're going to take you over as soon as they have time and staff to get to you. But that little

01:09:37.790 - 01:09:55.858

caveat is by no means trivial these days. The resolution authority in Dodd-Frank has no such triggers, right? And the and what constitutes systemically significant is undefined. And then then I think your question

01:09:55.858 - 01:10:12.439

question breaks down into two questions beyond that. One is, will will that ever be used before we are in a catastrophe? Right, so to take the example of Lehman Brothers, everyone knew that Lehman Brothers was doomed, and everyone knew that at least 6

01:10:12.439 - 01:10:30.089

months before Lehman Brothers actually filed. So if we were in another situation like that, say with Bank of America, say, right? Which one regulator referred to me as that 3 days ago that Bank of America was becoming Citigroup, and if you understand

01:10:30.100 - 01:10:45.700

that's code for something, which means an institution that is a zombie, a dead man walking. So say really smart people know that Bank of America is a zombie. I'm just hypothesizing this.

01:10:45.700 - 01:10:59.529

I'm not going anywhere. Your accounts are what are guaranteed, that's the only thing that's good there. On the other hand

01:10:59.529 - 01:11:08.850

if you run out of this room and sell your stock, you may have to talk to the SEC. Your accounts are fine. People used to ask me during the height of the financial crisis, where should I put my

01:11:08.850 - 01:11:20.785

bank account? And I said, well, my opinion is the Bank of America is insolvent, but that's where my money is, and I'm not, worried because by the way if the FDIC fund is in solvent, you've got other problems.

01:11:20.825 - 01:11:37.265

But I'm coming to an answer to your question. So the first part of your question is, is anybody going to have the courage to act in such a situation before we have a full-on catastrophe? What's a full-on catastrophe? Interbank lending rates at 500

01:11:37.265 - 01:11:54.850

basis points above Treasury, you know, that was what we had in October 2008. Commercial paper markets freezing up, money market funds breaking the buck, you know, if a major systemically significant institution experiences a run, right, we will have a

01:11:54.850 - 01:12:05.890

full-on catastrophe. And it'll happen very fast. So does anybody have the courage to do that before we have a catastrophe? Because now we have the power, or at least the President of the United States told a bunch of us that we had that

01:12:05.890 - 01:12:19.790

power when he signed Dodd-Frank, right? The second question, and I think that the answer to the first question, I'm not optimistic about the answer to the first question. You know, even look at AIG, right? Look at all the

01:12:19.790 - 01:12:32.609

trouble that is being gone to around AIG. I think most people who've taken a hard look at AIG think that AIG is not much above the waterline itself, and probably we probably ought to use this power to clean

01:12:32.609 - 01:12:43.620

it up instead of, you know, playing around with the Hong Kong Stock Exchange for the next 10 years, waiting for something for the next shoe to drop. But we're not doing that. And so I got my doubts about whether or not anyone's gonna have the courage

01:12:43.620 - 01:13:00.790

to do that. The next question is, so what happens when the full-on catastrophe hits? Right. Are we really gonna do what the statute says? And I had this disconcerting experience. It has nothing to do with resolution authority, but

01:13:00.790 - 01:13:16.000

it's actually all about whether or not we're gonna do what the law says yesterday. Yesterday, the congressional oversight panel held a hearing on executive pay and TARP. And we had Ken Feinberg, appear before us, who is the man that

01:13:16.000 - 01:13:30.779

our society turns to whenever there's a really difficult problem involving a lot of money. And I just can't resist noting that courtesy of you all, I was in a bar in New Orleans about a week ago, at 10 o'clock at night

01:13:30.779 - 01:13:43.939

trying to trying to eat some food and the dishwashers there were, and the bartender were all talking about Ken Feinberg. And so I said to them, having had a couple of beers, I said, so what do you think about Ken Feinberg?

01:13:43.950 - 01:13:58.009

I'm seeing him on Thursday, you got a message? And they said, you know, boy, that's a generous man. Apparently, at least as far insofar as the dishwashers and part-time shrimpers of the French Quarter are concerned, Ken Feinberg is like, you know, a prince among men.

01:13:58.459 - 01:14:14.259

But anyway, at this hearing, Ken Feinberg was tasked with by Congress with determining whether or not pay that was executive pay

01:14:14.259 - 01:14:29.359

paid out to TARP recipients from October to February, October 2008, February 2009, was in the public interest. Remember, this is during a full-on liquidity crisis, when we've handed over a couple $100 billion of public of cash to the banks, and they went and

01:14:29.359 - 01:14:42.669

a number of them went and handed it out to themselves. Congress was upset. They tasked the Treasury Department with determining was this in the public interest. Ken Feinberg was given that job because it was a tough job, apparently. And so then

01:14:42.669 - 01:14:59.319

he came out with a report about a month ago. And his report had this wild, bizarre finding. It found that these payments were in that these $3 billion in payments were quote inappropriate. And yet in the public interest. And I couldn't figure out -

01:14:59.509 - 01:15:16.680

by the way, if you found it wasn't in the public interest, that triggered a statutory requirement to demand the money back. So I said to him yesterday morning, so explain to me, Mr. Feinberg, how can something be inappropriate and yet in the public interest? And

01:15:16.680 - 01:15:31.830

I said, let's start with why was it inappropriate? And he said what it was inappropriate because they were feathering their own nests. And I said to him, well, why is that in the public interest? And he said to me, I did not think

01:15:31.830 - 01:15:49.319

it was in the public interest to trigger the payback requirement. Now, we're all people of the law here. The law did not say was the payback requirement in the public interest or not. It said to Mr. Feinberg, determine whether or not the payments were in the

01:15:49.319 - 01:16:08.459

public interest, and then this thing operates mechanically. Much as Dodd-Frank says, if you're an insolvent systemically significant institution, we're going to wipe you out. And yet Mr. Feinberg felt that it was not prudent to follow the law. And I actually have a

01:16:08.459 - 01:16:25.310

great deal of respect for him. And so I don't actually blame him. In fact, I credit him for being candid. But I think that tells you a lot about the answer to your question. Well, since we've clearly resolved all the issues, I hate

01:16:25.549 - 01:16:30.640

to close this panel, but please join me in thanking these panelists. Thank you.