Not everyone knows that Wall Street petitioned the Bush Administration pretty hard during the legislative process leading to the enactment of the 2005 Bankruptcy Reform Act. I’m surprised not much media attention has been given to this.
However, this has got to be one of the most profound moments in our nation’s history. This is when Wall Street lobbied our Congress into carving out a class of parties who are protected (e.g., themselves) under the Bankruptcy Code’s financial transaction provisions.
To give you some background, back in 2005, we were living in the hey-day of our real estate bubble. These wall street investment houses and our bankers wanted some protection if anyone should want to bail out from underneath a “securities transaction” or “swap” that they were holding.
So they lobbied Congress to enact a few scant paragraphs, Secions 555 (securities contracts), 556 (commodity or forward contracts), 559 (repurchase agreements) and 560 (swap agreements) of the 2005 Bankruptcy Code Amendment, that essentially says that if a party to a security transaction or swap files for bankruptcy, the non-affiliate holder of those securities can march right to the front of the line of all creditors (including secured creditors) and they can “foreclose” on whatever financial properties of the estate that are still liquid as collateral damages. Can you believe this?
So, the Trustee can absolutely do nothing but sit back and watch as the estate is robbed of any intrinsic value left by the holders of the financial tsunami instruments, the swaps, derivatives and all the weather derivative holders too (yes, ENRON created those). These are the financial instruments that were hedged over and again, then re-arbitraged five or six times more, and all were wrapped up, securitized and collateralized, before being traunched into AAA ratings.
To get back to the point where this has tail-spinned around and bit these bankers in their backside, is where we are today. For you see, these are the same bankers who are today hard-pressed to dump their own securitization assets that they lobbied Congress so hard in 2005 to prevent from occuring. They can’t dump this from their balance sheets because language exists in the master netting agreements that would put them in default and their good assets would be subject to seizure. They can’t dump it in Bankruptcy because of the 2005 Amendment to the Code that they lobbied for. Or, can they?
If the government is going to take over the banks anyway, why doesn’t Congress just repeal the 2005 Bankruptcy Code Amendments, then we could get the U.S. Supreme Court, sua sponte, to void that Code as well because of unconstitutional due process considerations. The banks can then safely file bankruptcy, and the government receivers can transfer their bad assets off their books to the bad banks. Then our lending institutions can quickly reorganize and re-emerge from the bankruptcy, all squeeky clean.
Could this work? Well, another reason for the banks to do it this way is that all the future lawsuits and shareholder derivitive actions against them would be extinguished in the Bankruptcy filing as well. Hum.
Julie Wade