WASHINGTON (HedgeWorld.com)–As the members of Congress flee Washington for their August break, they leave behind a stalled bankruptcy bill, and the issue of financial netting reform remains in abeyance.
Negotiators for the House of Representatives and the Senate reached an agreement last week on a bill resolving the differences that had held up the sort of bankruptcy reform that has been urgently pursued by credit card companies, banks and the finance divisions of the automobile manufacturers for five years.
Both houses have long agreed on the need for netting reform–i.e. a provision that would deny an automatic stay to set-offs under swap or netting agreements and would restrict the authority of a bankruptcy trustee in regard to such transfers. There is some concern that, in the absence of such provisions, the insolvency of a large financial institution and its effort to renege on swaps and netting agreements could cause a liquidity crisis in the world financial system.
Scott Duncan, a spokesman for the Financial Services Committee of the House, said Tuesday “everybody understands the importance of netting, especially since the collapse of Enron.” He added that “everybody is still in shock over the sudden collapse of the deal,” to push through an omnibus bankruptcy reform, which would have included netting improvements, this week.
Netting improvements have been the subject of a good deal of discussion since the fall of 1998, when officials of the Federal Reserve had to step in and negotiate a winding-down of the positions of Long-Term Capital Management.
Although there have been some efforts to pass netting reform on a stand-alone basis, for the most part this has been but one piece within the larger bankruptcy puzzle, and the delays in its enactment have resulted from that status. President Clinton pocket-vetoed a previous incarnation of bankruptcy reform, in December 2000, because he believed its consumer provisions unfair to insolvent consumers.
In early 2001, there arose a distinction between the two chambers over the treatment of the American investors (or “names”) in Lloyd’s of London, the market that in the 17th century pioneered the very idea of insurance. (Previous HedgeWorld Story) The House was determined to protect the American names, blocking the enforcement of judgments in foreign courts by the U.S. courts if the U.S. creditors could show that they had been the victims of fraud between 1975 and 1993. The Senate initially included a similar provision but quickly backed off, after White House lobbying concerning the potential diplomatic repercussions of such a move. The House, in conference this year, likewise backed off, so the finished bill as of last week did nothing for the names.
The last snag, it seemed, was abortion. The Senate version of the bill prohibited abortion-clinic protestors who incur civil liabilities as a result of those activities from discharging those liabilities in bankruptcy. The House version did not. The conferees drafted language limiting the exclusion to those protestors who intentionally or knowingly violate the law.
Both chambers were set to vote on the bill this week. But the House leadership faced a rebellion by some members of its rank and file, such as by Christopher Smith (R – N.J.). Rep. Smith believes that the bill’s language could still lead to injustices at the expense of peaceful protestors concerned with what he and they regard as a vital moral issue.
Mr. Duncan declined to say whether the issue would be revived later in the session, as that was “pure speculation.” Members will return to work Sept. 4, and they will probably stay for longer than a month, despite their need to return to their home districts for their re-election campaigns because there are “a number of appropriations bills that have to be cleared.”