Bankruptcy

Congress to Outlaw Indiana Pension Funds

By Stephen Lubben

Not really, of course. But Felix Salmon does have an important new post about how, in the sovereign debt context, Congress is honestly considering preventing purchasers of distressed sovereign debt from collecting the full face amount of the debt. It is aimed at the "vulture funds" who buy distressed debt and then engage in aggressive collection tactics, often against countries that really have better uses for their money than defending lawsuits.

This is the sovereign equivalent of the Indiana Funds, who bought their Chrysler claims at a mere fraction of face value and then proceeded to make a fuss in the chapter 11 case. Indeed, they continue to do so, as their petition for cert. is still pending before the Supreme Court.

Vulture investors, foreign and domestic, can be a pain in the . . .  as we saw in the Chrysler case. But Congress' proposed legislation is a really bad idea. First of all, I don't know of you confine it to the sovereign debt context. They say they can do so, but is that going to pass with courts? Certainly if it applies to outstanding debt, there is a retroactivity/due process, takings, and perhaps even equal protection problem (why are some creditors subject to the act, but not others?).

And does Congress really want to kill the distressed debt market? Does this mean that whenever bond debt trades at below face value it implicitly trades without enforcement rights? That will do wonders for the high-yield market.  How much will you pay me for my unenforceable Ford bonds?

Paying transferred claims at full face value has been the law since at least Hamilton's first Report on Public Credit. I'd pause a bit before overruling a founding father, especially one who remains the one clearly good Treasury Secretary we've had.

Full post as published by Credit Slips on October 16, 2009 (boomark / email).