Inauguration is still about 2 months away, but it is not too early to begin thinking about what the Trump Administration will mean for commercial lawyers in general and bankruptcy lawyers in particular.
Bankruptcy Reform?
We are not hearing anything about a push for bankruptcy reform as part of the new administration’s agenda. Two potential exceptions are the fate of the proposed Financial Institution Bankruptcy Act of 2016, H.R. 2947, 114th Cong. (2016), which would add a new chapter to the Bankruptcy Code dealing with large financial institutions. Another is the potential for the new administration to take a different position than the Obama administration on Czyzewski v Jevic Holding Corp., which is now pending before the United States Supreme Court. To date, the Solicitor General has argued that the Third Circuit was wrong to affirm the Bankruptcy Court’s approval of the “structured settlement” which resolved that case.[i] With so many other issues swirling about, it does not seem likely that bankruptcy reform per se is in the offing. However, a number of other potential policies may impact bankruptcy practices.
Infrastructure Spending
Early word is that the administration will attempt to get some sort of very significant infrastructure spending package through Congress, including with a “public-private” aspect. On the one hand, this kind of spending might keep the economy humming along, forestalling any significant increase in bankruptcy work. However, to the extent that some of these large projects involve private funds, significant structuring issues may have to be addressed. This might especially be true if new special districts or authorities are created to fund public works projects. As always, the greater the complexity, the greater the need for lawyers. On the other hand, this spending is already leading to an increase in inflation expectations, which in turn has dramatically increased bond yields in the weeks since the election.[ii]
Potential for Higher Interest Rates
Any bankruptcy and restructuring professional knows that the biggest reason for the decrease in bankruptcy filings is the availability of cheap and plentiful credit. If inflation picks up and interests rates rise, many companies dependent on cheap sources of funding may rapidly find that their business models are “upside down.” We have been hearing for years that any rise in interest rates may have a dramatic effect on the economy,[iii] and we may soon be able to see whether these predictions are correct.
A Decrease in Property Values Is Not Impossible
It is no secret that an important driver of the Southern California economy is property values, both commercial and residential. Higher property values allow for continued construction spending, and ever increasing home values give everyone the confidence to spend on that extra purchase. This economic churn in turn helps state and municipal budgets because of the
increased tax revenue they receive when the economy is doing well. It has been a while since this economic feedback-loop has been thrown into reverse, but higher interest rates certainly have the potential to cause market conditions to change.
Repeal or Modification of Dodd-Frank Protections
Early signs are that the Trump Administration and a Republican Congress may try to roll back some of the more onerous reporting and regulatory requirements imposed under the Dodd-Frank financial reforms enacted after the 2008 recession. If these changes make the business environment more investment friendly, as we presume they will be intended to do, the increased economic activity is likely to be a boon for the economy.
Tax Reform
A number of tax reform proposals are floating around, including potential corporate and individual tax cuts,[i] and changes to the estate tax system.[ii] Again, these efforts will be undertaken to stimulate the economy. Although these changes are not likely to directly impact bankruptcy lawyers in terms of increased bankruptcy work, any change in the legal environment may lead to increased planning and counseling assignments as old assumptions are challenged.
Consumer Financial Protection Bureau
Another reform perceived to be business-friendly would be a cutback in the power of the Consumer Financial Protection Bureau (or the “CFPB”). The CFPB has been a target of Republican ire since it was created, and it seems possible that in a Trump Administration the CFPB’s work will be curtailed.[iii] If this were to occur, it is hard to see how it would have an immediate impact on bankruptcy filings. However, we recently learned that for the first time ever, in the third quarter of 2016 more than one-half of all residential mortgages nationwide were originated by non-bank companies.[iv] And, student loan debt is at an all-time high as consumer credit amounts begin to climb.[v] Given the huge portion of our economy that is consumer-driven, the economic health of America’s consumers is the most important drivers of economic activity. Stay tuned…
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[1] Woolley, Richard, “Trump Takes the White House, Lawyers Take Stock,” Global Restructuring Review, November 14, 2016.
[2] Kim, Narae, “These Charts Show That Trump Is Bringing the 1990s Back to Markets,” Bloomberg News, November 22, 2016.
[3] Noble, Kenneth, “Bankruptcies Soaring as High Interest Rates Cause Cash Shortages,” New York Times, March 30, 1981.
[4] Reuters, “Trump Adviser Calls for Tax Reform as Bipartisan ‘Jobs’ Bill,” New York Times, November 16, 2016.
[5] Sullivan, Paul, “A Wider Path to Dynastic Wealth,” New York Times, November 12, 2016.
[6] Reuters, “Donald Trump Could Defang This Consumer Financial Protection Agency,” Fortune, November 11, 2016.
[7] Andriotis, Annamaria, “Banks No Longer Make the Bulk of U.S. Mortgages,” Wall Street Journal, November 2, 2016; Nuiry, Octavio, “Big Banks Cede Market Share to Nonbanks,” Inman, November 1, 2016.
[8] Kirk, Chris, “Five Charts That Show Americans Families’ Debt Crisis,” Slate, May 12, 2016.
