A Foreclosure Fix

A Foreclosure Fix

You might think it unfair that a bankruptcy court that has the power to tear up labor contracts or pension obligations of companies in reorganization cannot order adjustments to mortgage loans for homeowners who file for bankruptcy protection.

The rationale is that bankruptcy law makes a big distinction between obligations that are secured by particular assets, as a mortgage is by a house, and unsecured debts that must compete for a share of the debtor's unsecured assets.

For obvious reasons, some Democrats in Congress want to give the bankruptcy courts the power to change the terms of mortgage loans. The mortgage industry, naturally, sees that as the end of civilization as we know it.

So how about this compromise: The bankruptcy court would have the right to lower monthly payments to an affordable level by reducing by up to 35 percent the outstanding principal amount on the loan. In return, the homeowner would have to agree to give the lender 65 percent of any equity that is left in the house when it is sold, up to the amount of foregone principal plus interest.

That's the kind of debt-for-equity swap that bankruptcy courts deal with all the time. And considering that lenders typically take a loss of 35 percent on foreclosed mortgages, they might eventually wind up with more money by exercising a bit of forbearance.

Booz Without Allen

After years of touting the cross-fertilization that came with the marriage of a government contracting firm with a corporate consulting business, Booz Allen is considering a divorce. A note sent around by chief executive Ralph Schrader spoke of the "different needs" of the two divisions, and how the "long term success of our two major businesses . . . could be enhanced by complete focus on their distinct markets."

Call me cynical, but I suspect this has nothing to do with customers and everything to do with dividing up the loot. It's a good guess that the partners in the consulting division are grumpy about having to share their higher margins with the partners in the low-margin contracting business in Tysons Corner. And should the government partners want to take their division public at the top of the next contracting cycle, they might not want to split the proceeds with those overpaid consultants in New York.

Can't we all just get along?

Fraud? What Fraud?

Enron, WorldCom, Adelphia, Qwest. Isn't it amazing that with all the questionable transactions those companies engaged in, prosecutors couldn't find even one outside attorney who had an inkling that he might have been helping to defraud shareholders and creditors?

So it was something of a historic occasion last week when federal prosecutors in Manhattan brought an 11-count indictment against Joseph Collins, on leave from Mayer Brown, for his work in preparing the documents for a series of sham transactions designed to hide the bad debt of Refco, the commodities and derivatives firm whose collapse cost investors $2.4 billion.

Until now, the only lawyers the Justice Department seemed interested in putting in jail were class-action plaintiffs' attorneys. But in this case, prosecutors had almost no choice after the Refco bankruptcy examiner pretty much handed them the case on a platter.

But don't hold your breath waiting for the state bar association to launch its own inquiry. After all, if engaging in "affirmative misrepresentation," "material omissions" and "deceptive half-truths" was to suddenly became grounds for disbarment, you could clear out entire corridors in corporate law firms from New York to Los Angeles.