David Cameron, leader of Britain's opposition Conservative Party, pledged that he wants to introduce bankruptcy laws modeled after the U.S. system to give struggling businesses time to recover during the economic downturn.

“We will consult on taking the best aspects of the American Chapter 11 system and give good companies breathing space to allow them to rescue or restructure the business in the face of the credit crunch,'' Cameron said.

The Conservative Party claims that “current insolvency rules in the U.K. focus on closing down failing companies and paying off creditors.” Instead, Cameron wants “businesses to be able to freeze debt payments and to offer priority status to backers who are willing to extend more loans.”

In his speech on Tuesday, Cameron said, "We want to make sure sound companies don't go into liquidation unnecessarily. We all know what liquidation normally means - closure. That isn't good for the companies, many of which are actually fundamentally sound. This isn't good for the banks, who lend them money. And it's not good for employees, who face being laid off."

Here is a link to the article:
http://uk.news.yahoo.com/rtrs/20080715/tpl-uk-britain-bankruptcy-conservatives-20b2d2f.html

Additional link:
http://www.bloomberg.com/apps/news?pid=20601102&sid=a33A8nChNNZE

Yameena

The Federal Reserve's actions (exponentially increase the money supply) have reduced the value of the dollar. One of the unintended (but known) consequences of a devalued dollar is that foreigners, mainly foreign governments, will seek to reduce their exposure to the falling dollar by moving away from the US currency. This has already been quietly happening with some countries quietly seeking to be paid for oil, for example, in Euros rather than in dollars. These countries are under pressure to either not make these moves or to do so quietly so as to avoid a world wide "dump the dollar" campaign which would drive the value of the dollar down further. Here is a quote from an article on this subject from the online Financial Times:

Quote:
Some of the world’s largest sovereign wealth funds are seeking to scale back their exposure to the US dollar in a sign of global concern about the currency.

One big sovereign fund in the Gulf has cut its dollar-denominated holdings from more than 80 per cent a year ago to less than 60 per cent, while China’s State Administration of Foreign Exchange (SAFE) has been looking to strike deals with private equity firms in Europe as a part of a strategy to reduce its dollar holdings.
…
The shift at China’s SAFE is significant because it holds the majority of the country’s $1,600bn in foreign currency reserves in dollar instruments and has lagged behind other governments, such as Singapore, in diversifying its currency exposure. SAFE has been holding talks with Europe-based private equity firms about putting billions of dollars into their latest funds, precisely because these funds are not dollar-denominated, say people familiar with the matter.
By allocating money to Europe-based private equity firms, SAFE could diversify away from the dollar, at least at the margin, without spooking the currency markets and driving the dollar down in a disorderly manner.

In addition, SAFE is encouraging the private equity firms with which it has relationships to make investments in natural resources companies in markets outside the US – in part, to hedge its exposure to the dollar.
…
Kuwait last year ended its currency link to the dollar, raising questions about whether other oil-rich Gulf states with similar arrangements would follow.

The largest of the sovereign wealth funds, the Abu Dhabi Investment Authority, is still committed to the dollar. ADIA’s subsidiaries make their investments without taking into account currency risks. A separate ADIA division then decides whether to hedge or not.

As long as the United Arab Emirates – which includes Abu Dhabi – pegs its currency to the dollar, a major departure from the current investment policy is unlikely. Moreover, ADIA staff say they worry that the euro may be at a peak against the dollar.

Still, dissatisfaction with the dollar peg is growing at the Abu Dhabi fund. “We are suffering. We are importing inflation for no reason,” says one ADIA staffer.

Here is a link to the whole article:
http://www.ft.com/cms/s/0/fc250ac2-5361-11dd-8dd2-000077b07658.html?nclick_check=1

Michael

These two bond insurers have had a rough time and now are in the aftermath of being downgraded by the large credit agencies. Specifically, Moody's downgraded MBIA in mid June from AAA to A2. Other agencies had also taken similar action. However, what is interesting is that investors had already "voiced" their opinion by the time of the downgrade such that the company's share prices had fallen significantly prior to the downgrade. The company's stock has a 52 week high of $68.89 and it currently trades for $3.90!

The downgrade of these companies also causes a ripple effect on the debt insured by these companies. Certainly their failure would have an incalculable impact on the US company.

Michael

In the past, Bankruptcy courts have allowed real estate sales certain state stamp or transfer taxes exemptions even if the sale took place prior to confirmation of a reorganization plan. This is based on a broad interpretation of 11 U.S.C. §1146(a) of the Bankruptcy Code, and is usually done to expedite bankruptcy cases. This practice will no longer be acceptable due to a recent case.

On June 16, 2008, in Florida Department of Revenue v. Piccadilly Cafeterias Inc., the Supreme Court ruled that §1146(a) does not allow for real estate transactions that take place prior to confirmation of a reorganization plan to be exempt from state stamp taxes.

Justice Thomas wrote the opinion for the Court. He based his decision upon on two attributes of §1146(a), its ambiguous language, and the subchapter heading (“Postconfirmation Matters”) under which §1146(a) appears.

Justice Thomas noted that §1146(a) provides that the exemption applied to “the issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan confirmed under section 1129…”

Starting with the issue of ambiguity, both sides disagreed upon the meaning of the phrase “under a plan confirmed under”. The Court agreed, that “under a plan confirmed” should be read to mean “with the authorization of.” In following with this, the Court said that a transfer, which takes place before confirmation plan, cannot be said to have the “authority” of the plan.

Piccadilly had argued that the language actually meant “in accordance with.” But Justice Thomas added that “if the Court were to rule in favor of Piccadilly that it would result in an unfair burden on the states and courts because by obligating states to exempt such sales from taxation, the states and the courts would be saddled with the unnecessary burden of ensuring that a plan of reorganization is confirmed at some point.”

Florida also argued that the timing of the exemption was governed by the title of the subchapter “Postconfirmation Matters” under which §1146(a) appears.

Justice Thomas wrote that based on the placement of the statute within the Bankruptcy Code, “the most natural reading of §1146(a)’s text…affords a stamp-tax exemption only to a Chapter 11 plan that has been confirmed.” The Court concluded that because it is found under the subchapter “Postconfirmation Matters,” §1146(a) should be applicable after plan confirmation, and there should be no pre-confirmation exemption from tax.

Here is a link to the article:
http://www.abiworld.org/e-news/PiccadillyOpinions.pdf

Yameena

Insolvency concerns have driven the share prices for the once venerable firms of Freddie Mac and Fannie Mae almost into the ground. Today, share prices for these two have fallen substantially. Freddie Mac's 52 week high is $67.20 and it closed yesterday at $8.00 and today's low share price (as of noon CST) was $3.90 although it has crept "up" to the $5 to 6 dollar range. The fear is that the Federal government might have to put these companies into a conservatorship based on a law set up in 1992. This "credit crunch" or "bumpy period" as some have called it is not limited to the mortgage business and is far from over.

Quote:
The two firms, which have no explicit government backing despite their government charter, provide liquidity to the housing market by buying mortgages and repackaging them into securities sold to investors. But the horrific housing slump has led to billions of dollars in losses for the firms.

Freddie Mac has a loan portfolio of 1.5 trillion dollars and Fannie Mae's is over 700 billion. Together they own or guarantee some 5.2 trillion dollars in loans, or about 40 percent of the total value of home loans in the United States.

The prospect of insolvency for the so-called government-sponsored entities or GSEs could send more shockwaves through the global financial system because of the size of the companies, and the notion of a bailout has prompted heated debate.

"The markets are concerned that these GSEs would default on their five trillion dollars of debt," said Andrew Busch at BMO Capital Markets.

Michael