Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
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BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005
AMENDMENT NO. 83
Mr. CRAPO. Mr. President, I stand to speak in opposition to the pending amendment. The pending amendment has been discussed as if it were seeking to stop investment banking interests who are involved in working with companies that face bankruptcy from continuing some kind of fraud or inappropriate conduct that helped to lead to the bankruptcy by prohibiting them from serving as investment bankers or investment advisers following the bankruptcy proceedings or during the pendency of the bankruptcy proceedings.
The fact is, however, section 414 of the bankruptcy bill and of the bankruptcy law does not eliminate the disinterested test for investment banks. Let me explain the way the law works at this point.
For whatever reason, when our current bankruptcy laws were put into place, a complete bar was put in place, so when a company goes into bankruptcy, its investment bankers cannot then function on behalf of the company. They cannot be appointed by the judge to continue to work as the company that works out its bankruptcy difficulties, whether it be in some kind of an ongoing bankruptcy proceeding or in a chapter 7 proceeding. Therefore, the disinterested test simply never applied because there was never any opportunity for an investment bank to serve in this role if it had had any relationship whatsoever to the company going into bankruptcy.
That posed a couple very serious problems. The first one is that investment banks that have no current relationship with the company and are possibly best suited to help them through their financial difficulties are conflicted due to having some minor role in the underwriting or some underwriting relating to the company years and years and years ago. That is under current law. What this bankruptcy reform we are trying to put through is seeking to do is to address that problem.
Similarly, investment banks that are most familiar with the issues facing a distressed company and are actually working with that company in an attempt to avoid bankruptcy are then compelled to walk away from their clients in their biggest hour of need if bankruptcy becomes necessary and the company has to make the bankruptcy filings. That is what this legislation that is being proposed is seeking to address.
The amendment would strike that and, instead of having a perpetual ban, would have a 5-year ban. Now, admittedly, the 5-year ban would solve one problem because it would make it so a company that 20, 30, 40, 50 years ago was involved in an underwriting would not be disqualified, but it still leaves disqualified all of the investment banks that may have been involved even in a bundled underwriting or in some effort to help this company in its financial dealings over the last 5 years prior to bankruptcy. It eliminates those investment banks, their expertise, and their knowledge of the failing company, from consideration in helping that company as it seeks to work through a bankruptcy.
Let me make it very clear: The proposed change in the statute does not eliminate the disinterested test. In other words, a question was posed a moment ago on the floor as to whether, in the case of Enron, an investment bank that had been involved in an underwriting for Enron could then have been appointed by the court, under the change in the law proposed here, to continue working with Enron after it went into bankruptcy proceedings. And the answer that was given on the floor was, yes, that is a possibility.
Well, first of all, the question assumes that any investment bank that had been involved with Enron was somehow involved in fraud because Enron was involved in fraud. We do not necessarily know that. But that gets to the point of what the bill we are proposing is seeking to do.
The bill maintains current bankruptcy law requirements that if an investment bank is to be appointed by the court to work with the bankrupt company, the court must make a determination that this investment bank is disinterested, that it passes the disinterested test. I would presume that if there were a participant in fraud, the court would not consider that to pass the disinterested test.
But the key point here is that what the proposal in the underlying bill seeks to accomplish is to have a judge take evidence, evaluate the issue, and make the determination of which investment bank is the best suited, passing a disinterested test, to help this company as it seeks to work through the bankruptcy issues. And there will be many cases when the best suited financial advisers are those who have a history of working with the company, of knowing the company's business, and of knowing the company's financial dealings, and being able to work with them.
In fact, in many cases, I would assume it might be a financial adviser, an investment bank that has been working with the company for the last 3 or 4 years to help them try to work through their problems, and for some reason, with what I consider to be a cookie-cutter solution being proposed by this amendment, they would be disqualified simply because they tried to help or were hired to help beforehand.
In fact, what we see here in this amendment is a chilling impact on companies going out and seeking investment bank advice before bankruptcy, if they know that bankruptcy is a possible outcome they may face, because they have a choice: Do we seek the best competent investment banking advice we can get before the bankruptcy, knowing that the bankruptcy law will prohibit us from ever having that advice if we do end up having to file or do they say: ``We may have to file and, therefore, we will seek less competent advice or our second alternative so we can have our first alternative when we file bankruptcy''? Why put companies into that kind of a complex problem?
Section 414 would subject investment banks to the same disinterested test as other professionals. This is important to know. A company's legal advisers are not subjected to an automatic ban; they are subjected to a disinterested test. A company's accounting advisers are not subjected to an automatic ban; they are subjected to a disinterested test. And yet the effort here seems to say that for some reason we do not want to let the investment bank advisers be subjected to the same disinterested test. Instead, we want to presume that they are guilty of some inappropriate conduct because the company has not financially made it, and ban them from being able to work with the company once a bankruptcy filing takes place.
It is another one of those one-size-fits-all cookie cutter solutions that is coming from Washington, DC that is telling every bankruptcy judge across the country that they have no alternative in terms of their choice of who can be the investment bank advisers and supporters for a company that goes into bankruptcy, if there is any connection in the last 5 years between that investment bank and the company that had to file.
Bankruptcy courts currently review disinterestedness for all professionals, and 414 would allow judges the same discretion with investment banks as they have for attorneys and accountants. The current law has created a market, frankly, in which a small club of restructuring boutiques dominates the market for restructuring services in bankruptcy. In other words, they realize that if they even get close to a company before bankruptcy, then they won't be able to serve as a part of the restructuring effort for that company coming out of bankruptcy. So this sort of boutique business has developed where the only alternatives the judge has to turn to are those companies that specifically don't help until after the bankruptcy filing.
That is the issue we need to address. Do we want to create a system of investment bank advice for companies that are facing financial difficulties in which those companies have to make a choice as to who they will contact for support before the bankruptcy filing, knowing that whoever they choose to help them in their investment banking will be automatically prohibited from helping them if they do end up having to go into a bankruptcy?
Professionals are required to perform a firmwide review and disclose all actual and potential conflicts in their application to the court to be retained by the debtor. All parties in interest, including debtholders and shareholders, have the opportunity to make their position known before the judge.
Another important point is, somewhere in the debate that has been going on today, we heard: The judge may not know; the judge may make a mistake; the judge may not be aware of all the facts; it is going to be very expensive for the judge to have to go through and look at these investment banks to be sure that he knows whether they are culpable or whether they are simply competent investment advisors.
The fact is, the costs that are being put onto the system now by these blanket bans on investment banks are generating more costs to the restructuring process than any cost that could be generated by having the judge make a disinterested analysis. But even if the judge somehow made a mistake, even if we want to hypothesize that judges are going to make mistakes and bad actors might be allowed to be an investment bank adviser or participant in a bankruptcy, any time information becomes available to make it evident that the disinterested test was not satisfied, the judge can change that ruling and terminate the professional's engagement.
It seems to me what we need to do in our bankruptcy laws is to promote more flexibility. We need to give opportunities for all investment banks to participate with those companies in our economy, whether they be strong or facing financial difficulties, and help them to the maximum of their abilities. And if it turns out some of those companies end up having to make a bankruptcy filing, then it is important that we protect the flexibility for the bankruptcy judge to select the most qualified investment bank support to work out that bankruptcy circumstance.
That is what is in the best interest of our shareholders, in the best interest of our economy, and in the best interest of the debtor and the creditors. We must make certain that we don't allow one more very rigid Federal standard to continue to create this kind of difficulty in the bankruptcy process.
Two other points. First, all Senators have received a copy of this letter. There is a letter that was sent out which was signed by those in the industry who are involved in this, who very strongly indicate that the reform and the flexibility this bankruptcy proposal promotes should be supported. That includes the American Bankers Association, the Bond Market Association, the Financial Services Roundtable, the Futures Industry Association, and the Securities Industry Association.
Frankly, although I know Chairman Donaldson has been quoted here, I am not aware that the SEC itself has ever taken a position on this issue. If that is the case, I stand corrected.
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Mr. CRAPO. Reclaiming my time, I stand corrected on that.
This will not be the first time, even in recent months, that I have disagreed with the SEC. Although I understand that your letter does speak for the SEC, the fact is, there is one other point I want to make. That is, as is the case with a number of the amendments we have dealt with in debate over the bankruptcy bill, which we have been trying to move forward for 8-plus years, we face a situation in which we are trying to keep this bankruptcy bill clean and not have amendments that are objectionable to the House included in it so that we again run into the problem of not being able to move the legislation. This is one of those amendments. I am confident and I have an understanding that this is one of the amendments the House would not allow and would cause us to then have to go into conference and bring down the bill.
The bottom line is, it is bad policy. We have bad policy in current law. The bill seeks to create the flexibility that will allow a judicial determination as to the best and most highly qualified and disinterested investment bank advice for companies involved in bankruptcy. We should not change the underlying bill by substituting a rigid 5-year ban prohibiting many companies that are in the best position possible to do the best good for the company that needs their help at this point from being able to serve.
I yield the floor.
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