Bankruptcy Index

In the spirit of the highly successful University of Oregon Index of Economic Indicators, I decided to start work on an Oregon Bankruptcy Index.

The goal of this index would be to provide a summary of the vast available economic data as it pertains to bankruptcy filing and bankruptcy risk in Oregon.

The method behind this index might gauge unemployment levels, interest rates, business loans, and other economic criteria.  The data I review and include will depend highly on how my econometric analysis from earlier posts turns out.  Data with a large correlation would be prime for more research and possible addition into the index.  A solid index of numbers might then allow for prediction of future bankruptcy filings.

The obvious benefit of this index could be for real estate companies, banks and investors.  The index might help gauge economic and legal/litigation risk levels.  After the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, bankruptcies went down significantly only to rise up slowly towards the current economic downturn.  Bankruptcy lawyers have learned the law and are now better at getting their clients though the new regulations with five years of experience against the 2005 legal changes.  The index might be able to include and factor in such changes in the regulatory environment.

Icelandic Debt Problems and Vote

http://www.economist.com/businessfinance/displayStory.cfm?story_id=15213705

The economist has a great article on the Icelandic debt woes.  It outlines the possibility of a future flood of government and international defaults.

My analysis of this is that the investors took the risk in this case.  The “savers” in this case should have exercised more caution in picking their accounts.  A higher rate of return should be assumed to come with a higher rate of risk or volatility.  My suggestion?

• Consider any investment/savings in a foreign country with “high returns” to be a risky investment, even if it is a “savings” account.
• Never use a savings account without a Government or Government corporation (ie FDIC) guarantee.  In the case of Icesave, even the savings insurance plan failed investors and savers.

Below are some links that illustrate how much we underestimate endemic risk.

http://www.moneyweek.com/personal-finance/which-bank-will-give-you-52-on-your-savings.aspx

http://www.lovemoney.com/news/manage-your-finances/is-saving-with-icelandic-banks-safe-2954.aspx

An investor or saver reading one of the above articles might think they were secured by a government guarantee.  However the Economist article clarifies in the text I copied below.

“Landsbanki’s products were not covered by the domestic deposit-insurance schemes of the target countries. Under a passport system covering the European Economic Area (a broader, watered-down version of the European Union), investors were supposedly covered by the Icelandic deposit-insurance scheme.”

Clearly now that the European countries paid back their savers and they now want to money from Iceland.  Now a vote will decide the issue.  I think there is serious confusion on how savers are protected domestically and internationally.  Clearly there is confusion and misinformation about international savings.  Governments need to better inform, outline and legislate how transnational investments are covered under Deposit Insurance plans.

My advice to savers? Find a good domestic Credit Union or established bank.

Bankruptcy Surge

http://www.huffingtonpost.com/2010/01/04/bankruptcies-surge-32-per_n_410824.html

I copied relevant portions of the text from the article above below.  There is some really good analysis of the 2005 Bankruptcy law.  John Pottow, the bankruptcy professor from the University of Michigan is correct in his points that the law just made more paperwork while not changing the dynamics of people in serious debt.

Its also really fascinating that Alaska and Nebraska, the states with the lowest bankruptcy increases saw bankruptcies grown by 12%.  Thats still a big jump in bankruptcies.

“For three years, filings have been steadily rising back toward levels reached early in the decade before Congress overhauled the nation’s bankruptcy laws. The 2005 alterations made bankruptcy filings more cumbersome, a move that followed fears from lenders that some consumers were abusing the system to wipe away debts.

Bankruptcies surged to slightly more than 2 million in 2005 as consumers rushed to file before the new law took effect but then plummeted to 600,000 in 2006. They’ve been climbing ever since and in 2009 became the seventh-highest year on record, behind only the years 1998 and 2001-2005.

The 2005 spike had been preceded by a steady climb from 1.5 million in 2001 to 1.6 million in 2005.

John Pottow, a bankruptcy professor at the University of Michigan, said the return to the highs of earlier this decade illustrates the failures of the 2005 overhaul bill. He said the measure largely made filings more costly and time-consuming by forcing consumers to undergo a paperwork-heavy test to determine eligibility for Chapter 7 bankruptcy and adding liability for attorneys who provide help.

“It never made sense in the first place that you could change the laws and make all these bankruptcies go away,” said Pottow, who would like to see the 2005 law changes repealed. “If people are encountering financial distress, you can only scare them away for so long before they come back again.”

While every state saw a rise in bankruptcies, Alaska (up 12 percent), Nebraska (12 percent) and North Dakota (14 percent) performed best.”

I have an Equation

For my bankruptcy project I intend to study the relationship of Oregon and/or nationwide bankruptcy filings against a series of factors.  I became curious of this subject in my bankruptcy work.

This is a continuation of an earlier post on an economic project I am working on.

The main variable being The number of Bankruptcy filings in a region every month for a series of years. The realtion of this value will be tested relatively to the following variables (each according to monthly numbers).

• The Federal Funds rate, the interest rates that which banks offer each other loans.
• Regional unemployment statistics.
• Home prices (ie median value, assessed value or market prices).

Those three are the primary values I expect to have significant relationships to bankruptcy filings.  There is however an additional “wild card” variable:  Divorce data.  I will include divorce filings by state to include them in the equation.

Hopefully when the data is compiled we can see if there is a meaningful correlation between bankruptcy and divorce filings.  Expect more to come on this subject.  There is quite a bit of data to mine.

American Debt Levels

NYT Interactive Feature on American Debt

The NYT has a great piece on American debt levels.    This picture should be a flashing red warning light to anybody.  Debt can be a useful tool in buying a home, or car.  However there is clearly not enough saving by Americans.  When credit is in high demand or short supply, interest rates go up.  So when individuals, business, and governments all seek credit, it drives up interest rates.  However one might note that US real interest rates are extremely low.  The world economy is an open system and when other nations save it allows the United States to keep interest rates low by borrowing internationally.

This chart puts the increasing US Debt levels into perspective.  The chart shows the falling US historic capital formation.  Investment is extremely  cyclical.  Companies typically don’t make huge investments when cash and credit are in short supply.  Greg Mankiw also has a great article on economic investment.

The WJS has a great piece I quoted below on this subject.  Mr Varian is the chief economist at Google as well.  His article scores the need for private investment.

“Unfortunately, savings are currently not getting translated into investment for three reasons. First, one of the largest categories of physical capital is real estate, and we have already overinvested in that area. Second, businesses are reluctant to invest in new plant and equipment due to the weakening economy. Third, the sorry condition of bank balance sheets has made them reluctant to lend. The net result is that money is piling up in ultrasafe assets like Treasury bills, without being invested in ways that would build a more productive economy.”

Clearly there is a need for more long term investment in the US economy.  This is where the government needs to promote infrastructure spending by businesses and states.  Encouraging them to do that is the tricky part.

Creditor-Debtor tip #2:

Learn your states debt statutes.  What does that mean to you? If you don’t not make payment on an old unsecured debt for X years, the debt is often NOT COLLECTABLE.  Of course this does not apply to many forms of debt like Student loans and mortgages.  Each states has its own set of rules for how long creditors can collect old debts.  So each payment you make can establish the debt as valid for another X number of years.  As always make sure you consult with a lawyer regarding legal matters.