United States: The Year in Bankruptcy: 2011

January 4 The Roman Catholic Archdiocese of Milwaukee files for chapter 11 protection to manage sexual-abuse claims. Milwaukee is the eighth American diocese, out of 194, to file for bankruptcy protection.

January 7 U.S. Federal Reserve chairman Ben S. Bernanke tells senators that he expects the recovery to be "moderately stronger" in 2011. He also states that "[i]t could take four to five more years for the job market to normalize fully," noting that the sector has "improved only modestly at best."

The highest court in Massachusetts rules against Wells Fargo & Co. and U.S. Bancorp in two foreclosure cases that cast doubt over whether some home loans were properly handled when securitized. The defeat provides ammunition to mortgage-bond investors who have accused servicers of systematically shoddy loan documentation.

January 10 U.S. Federal Reserve chairman Ben Bernanke rules out a central bank bailout of state and local governments strapped with big municipal debt burdens, saying the Fed has limited legal authority to help and little will to use that authority.

January 12 In a desperate ploy reflecting the severity of the state's financial crisis, the Illinois state legislature votes to increase the income tax rate to 5% from its current rate of 3%, a 67% increase and the first increase in two decades. The rate for corporate taxes would rise to 7% from its current rate of 4.8%. Illinois faces a budget deficit of as much as $15 billion.

In its 2011 Global Risks report, the World Economic Forum reports that the risk that perilous government finances will trigger sovereign debt defaults remains one of the biggest threats facing the world in 2011.

January 18 The U.S. Financial Stability Oversight Council, the council of financial regulators created by the Dodd-Frank Act to oversee the stability of the U.S. financial system, takes its first big steps to set tentative guidelines to limit trading by banks for their own accounts and to restrict the growth of the biggest financial companies. It also proposes rules as to how large nonbank financial companies will be regulated by the Federal Reserve because they constitute a potential threat to the stability of the nation's financial system on the basis of their size.

The recommendations include a report on the Volcker Rule, the ban on trading by banks for their own accounts, and proposed rules on regulating nonbank financial companies.

January 25 After 19 days of hearings and interviews with more than 700 witnesses, the Financial Crisis Inquiry Commission issues a 545-page report concluding that the 2008 financial crisis was an "avoidable" disaster caused by widespread failures in government regulation, corporate mismanagement, and heedless risk taking by Wall Street.

According to the report, 12 of the 13 largest U.S. financial institutions "were at risk of failure" at the nadir of the 2008 financial crisis, while at least 50 hedge funds tried to capitalize on it.

The Standard & Poor's ("S&P")/Case-Shiller Home Price Indices report that a new slide in U.S. housing prices has begun in earnest, with averages in major cities across the country falling to their lowest point in many years.

Neil Barofsky, the Special Inspector General for TARP, reports that, after two years, many of the goals of the Home Affordable Modification Program, launched in March 2009 to provide mortgage servicers an incentive to modify mortgages on the verge of foreclosure, have been largely unmet.

January 26 The U.S. Congressional Budget Office projects that the government's budget deficit will soar to nearly $1.5 trillion in 2011, $414 billion higher than its previous estimate in August 2010. The deficit was $1.4 trillion in 2009 and $1.3 trillion in 2010.

February 1 The Dow Jones Industrial Average closes above 12,000 for the first time in 2.5 years, yet another sign that the U.S. economy is extending its recovery from the recession. The S&P 500 also reaches a milestone, closing above 1,300 for the first time since August 2008. The Dow fell to a low of 6,547 in March 2009.

February 2 The U.S. Treasury announces that it has collected nearly $243 billion of the $245 billion in TARP money it provided to financial firms in 2008 and 2009. The department expects eventually to receive a $20 billion profit on TARP funds it disbursed to banks through repayments, dividends on outstanding loans, and sales of warrants in banks.

February 3 A study released by Robert Novy-Marx of the University of Rochester and Joshua Rauh at Northwestern University shows that U.S. cities, counties, and states face a $3.6 trillion gap between their pension assets and pension obligations to retirees. It is also reported by the Center on Budget and Policy Priorities, a Washington research group, that states must contend with $140 billion of budget deficits next fiscal year. State pension plans cover 24 million active and retired workers, about 8% of the U.S. population of 309 million in 2010.

The United Nations Food and Agriculture Organization reports that its monthly food price index moved to a record high in January 2011 due to higher global prices of cereal, sugar, and vegetable oils.

February 7 For the first time since the onset of the credit crisis, Moody's Investors
Service records a month in which not a single company defaulted on its debt.

February 9 The U.S. Agriculture Department reports that reserves of corn in the U.S. have hit their lowest level in more than 15 years, reflecting tighter supplies that will lead to higher food prices in 2011. Increasing demand for corn from the ethanol industry is a major reason for the decline.

February 11 World stock markets end the day mostly higher, as 82-year-old President Hosni Mubarak of Egypt resigns his post and turns over all power to the military, ending his 30 years of autocratic rule and bowing to a historic 18-day popular uprising that has transformed politics in Egypt and around the Arab world, but at a cost, by some estimates, of more than $300 million per day to the Egyptian economy. The success of the popular protest in Egypt comes amid widespread and sometimes violent unrest throughout "MENA"—the Middle East and neighboring northern African countries, including Jordan, Syria, Iran, Bahrain, Saudi Arabia, Yemen, Algeria, Morocco, Libya, and Tunisia.

February 14 President Obama releases a fiscal year 2012 budget that projects an annual deficit of more than $1 trillion before government shortfalls decline to "sustainable" levels for the rest of the decade. The budget paints the bleakest picture yet of the current fiscal year, which is on track for a record federal deficit and will see the government's overall debt surpass the size of the total U.S. economy.

Financial and legal experts tell U.S. legislators that establishing a state bankruptcy option to address the risk of underfunded state pension plans would wreak havoc with municipal bond markets and could amount to an unconstitutional violation of state sovereignty.

February 28 Bank of America Merrill Lynch's Global Broad Market Index, which tracks the performance of more than 19,000 securities valued at about $39 trillion, reports that bond market investors are showing the greatest confidence in global economic growth since credit markets crashed three years ago.

The Institute for Supply Management reports that U.S. businesses unexpectedly grew in February at the fastest pace in two decades, indicating that manufacturing remains at the forefront of the recovery.

March 4 The U.S. Labor Department reports that the nation's employers added 192,000 jobs in February, pushing the unemployment rate down to 8.9%, the first time it has fallen below 9% in nearly two years.

March 7 As TARP winds down, the Congressional Oversight Panel ("COP"), the U.S. Treasury Department, and outside analysts agree that the government's unprecedented effort to prop up the financial system staved off major disaster and at far less cost than anticipated. The newest estimates put TARP's total cost between $25 billion and $50 billion.

March 8 In what prosecutors call the biggest insider-trading case in U.S. history, Raj Rajaratnam, cofounder of the N.Y.-based Galleon Group hedge fund, which at its peak managed nearly $7 billion in assets, goes on trial in federal district court for 14 counts of securities fraud and conspiracy. He is accused of making $45 million trading on illegal information scoured from a network of sources that spanned Wall Street and corporate America.

March 9 Forbes releases its list of world billionaires for 2011, the 25th year that it has been tracking global wealth. The 2011 Billionaires List breaks two records: total number of listees (1,210) and combined wealth ($4.5 trillion). BRICs led the way: Brazil, Russia, India, and China produced 108 of the 214 new names. These four nations are home to one in four members, up from one in 10 five years ago. Before this year, only the U.S. had ever produced more than 100 billionaires. China now has 115 and Russia 101.

Atop the heap is Mexican telecom mogul Carlos Slim Helú; with an estimated net worth of $74 billion, he has pulled far ahead of his two closest rivals. Bill Gates, No. 2, and Warren Buffett, No. 3, are now worth $56 billion and $50 billion, respectively.

March 11 World markets are shaken as Japan is devastated by an earthquake measuring 9.0 on the Richter scale, the fifth-largest recorded since 1900, and an ensuing tsunami that kills nearly 20,000 and displaces hundreds of thousands more in the northern part of the country near Sendai. Six of Japan's Fukushima Daiichi nuclear reactors operated by Tokyo Electric Power Company are damaged by the quake, in what later becomes the worst nuclear accident since Chernobyl in 1986. The plant will not be declared "stable" until December 16.

March 14 Japan's $5 trillion economy, the third-largest in the world, is threatened with severe disruptions and partial paralysis, and the collective anxiety from the earthquake and tsunami causes a rout in the Japanese stock market. The main Nikkei index falls 6.2%, the worst drop in three years. The broader TOPIX, or Tokyo Stock Price Index, drops 7.4%. Worried about the severe strains on banking and financial systems, the Bank of Japan pumps about $180 billion into the economy, and the government considers an emergency tax increase to help finance relief and recovery work.

Economics research firm IHS Global Insight reports that China, ending a 110-year run for the U.S. as the world's dominant producer, has overtaken the U.S. as the world's largest manufacturer. China manufactured 19.9% of the world's goods in 2010, while the U.S. accounted for 19.4%. This marks the first time since 1850 that China has held the crown as the world's largest manufacturer, the latest sign of the nation's economic resurgence.

March 16 The Federal Deposit Insurance Corporation ("FDIC") reports that it paid out nearly $9 billion to cover losses on loans and other assets at 165 failed institutions that were sold to stronger companies during the financial crisis. FDIC officials expect to make an additional $21.5 billion in payments from 2011 to 2014.

March 17 The G-7 join in a highly unusual effort to stabilize the value of the yen by intervening in currency markets. It is the first time since 2000 (to stabilize the euro) that the G-7 have made a coordinated intervention into the currency markets. During the 1990s, the yen and the dollar were also the targets of similar coordinated interventions.

March 29 The FDIC, as mandated by Dodd-Frank, votes unanimously to propose new rules that would prohibit Wall Street banks from selling packages of risky mortgages to investors without holding on to a stake in the loans. The proposed rule would require banks to retain at least 5% of the credit risk on securities backed by mortgages on all but the safest loans, leaving the banks with "skin in the game." So-called qualified residential mortgages, conservative loans that meet strict underwriting criteria, are eligible for an exemption. The proposal does not apply to securities carrying a government guarantee, which represent more than 90% of the market.

The FDIC also spells out details on what information "systemically significant" banks and nonbank financial companies must include in resolution plans—so-called living wills—and credit exposure reports required under Dodd-Frank.

April 1
The U.S. Department of Labor reports that the unemployment rate dipped to 8.8%, the lowest since March 2009.

April 6 Portugal's caretaker government gives in to market pressures and joins Greece and Ireland in seeking an emergency bailout of as much as €100 billion as the government is forced to pay much higher rates to sell more debt.

April 8 With less than two hours to spare, U.S. congressional leaders and President Obama head off a shutdown of the government that would have shuttered federal facilities and furloughed thousands of workers under a tentative budget deal that would cut $38 billion from federal spending in 2011.

The Organisation for Economic Co-operation and Development ("OECD") issues a report finding that the U.S. spends far more on health care than any of the other 29 OECD nations and gets less health for its money. Annual public and private health-care spending in the U.S. stands at $7,538 per person, 2.41 times the OECD average and 51% more than the second-biggest spender, Norway. Meanwhile, average U.S. life expectancy is 77.9 years, less than the OECD average of 79.4.

April 11 FinAid.org and Fastweb.com, which compile estimates of student debt, including federal and private loans, report that U.S. student-loan debt outpaced credit-card debt in 2010 for the first time and is likely to top $1 trillion in 2011, as more students go to college and a growing share borrow money to do so.

April 21 The U.S. Federal Reserve Board announces it is launching two studies examining whether the Bankruptcy Code needs revisions in order to better handle failures of big financial companies, as required by Dodd-Frank.

One study will examine the adequacy of chapter 7 and chapter 11 for facilitating bankruptcies of systemically important financial companies. Questions the study will explore include whether a new chapter or subchapter of the Bankruptcy Code should be created to address unique issues raised by financial-firm failures.

April 25 The International Monetary Fund ("IMF") forecasts that China's economy will surpass the economy of the U.S. in 2016, more than a decade earlier than most forecasters suggest. The IMF predicts that China's economy will increase from $11.2 trillion in 2011 to $19 trillion in 2016, while the U.S. economy will expand at a slower pace—from $15.2 trillion to $18.8 trillion during that period.

The Pew Center on the States releases a report showing that the gap between the promises U.S. states have made for public employees' retirement benefits and the money they have set aside grew to at least $1.26 trillion in fiscal year 2009, resulting in a 26% increase in one year.

The Widening Gap: The Great Recession's Impact on State Pension and Retiree Health Care Costs finds that state pension plans represented slightly more than half of this shortfall, with $2.28 trillion stowed away to cover $2.94 trillion in long-term liabilities—leaving about a $660 billion gap. Retiree health care and other nonpension benefits accounted for the remaining $604 billion. States have amassed $635 billion in nonpension liabilities but saved just $31 billion to pay for them—slightly less than 5% of the total cost.

April 28 The Special Inspector General for TARP ("SIGTARP") reports that roughly $146 billion in bank bailout money has not yet been repaid to the U.S. Treasury Department as of the end of March 2011, and the return on those investments remains "unknowable." More than 550 banks have not repaid their bailout funds.

SIGTARP is the program's remaining watchdog after the COP closed in April. The Congressional Budget Office continues to drop its estimate of TARP's eventual cost, lowering it to $19 billion in March. The Public-Private Investment Program, which buys up toxic mortgage-backed securities, earned $1.2 billion for the Treasury in the first quarter and is scheduled to last at least seven more years.

April 29 The Financial Accounting Standards Board modifies its rules on repurchase agreements designed in part to prohibit the types of abuses in the Lehman Brothers' "Repo 105" repurchase agreements that helped hide the firm's quarterly obligations and contributed to its downfall in the 2008 financial crisis.

May 1 World markets open higher as news is released that U.S. troops and CIA operatives shot and killed Osama bin Laden in Abbottabad, Pakistan, a city of 500,000 people that houses a military base and a military academy.

May 2 Japan's Parliament passes a ¥4 trillion ($49 billion) disaster relief budget as ruling and opposition lawmakers put aside their differences and seek to quickly launch efforts to rebuild the country's quake-hit northeast.

Chrysler Group LLC announces that rising vehicle sales led to a small net profit for the first quarter, the automaker's first since exiting bankruptcy almost two years ago.

May 6 Student-aid web sites Fastweb.com and FinAid.org report that the average student debt of newly minted U.S. college graduates in 2011 is $22,900, the most ever and 47% more than a decade ago.

May 10 The U.S. Postal Service announces that it lost $2.2 billion for the quarter that ended March 31, warning of defaults on payments to the government if a law forcing it to prepay into a massive employee health fund is not changed. As an agency under the executive branch, the post office cannot technically go bankrupt, but it has to fund its own operations and could become insolvent, which could create havoc inside the federal government and impact its obligations to pay other agencies, such as the U.S. Office of Personnel Management.

May 11 Billionaire investor Raj Rajaratnam, who once ran the Galleon Group, one of the world's largest hedge funds, is found guilty of fraud and conspiracy, becoming the most prominent figure convicted in the government's crackdown on insider trading on Wall Street. A federal jury in Manhattan convicted Mr. Rajaratnam of all 14 counts he faced. He could face as much as 19.5 years in prison under federal sentencing guidelines.

May 16 The U.S. government reaches its $14.3 trillion debt limit and begins taking what Treasury Secretary Timothy Geithner calls "extraordinary measures" to meet obligations while lawmakers and President Obama seek a budget deal to raise the limit.

May 17 The U.S. Securities & Exchange Commission ("SEC") proposes rules meant to improve the system by which such firms as Moody's Investors Service and S&P assign ratings to bonds and other securities. Some of the proposals advanced are intended to address conflicts of interest that can compromise the objectivity of the ratings. However, the proposals would not change what some say is the rating industry's fundamental conflict of interest. Rating firms would still be selected and paid by the very companies they are rating or whose investment products they grade.

May 24 Chrysler repays nearly $5.9 billion in U.S. government loans (with interest) extended in March 2009 as part of a $12.5 billion government bailout. It also repays Canadian taxpayers approximately $1.6 billion in loans (with interest).

AIG, whose near-collapse in the fall of 2008 led to one of the biggest bailouts of the financial crisis, has its first new stock offering since then, pricing 300 million shares at $29 each to raise a total of $8.7 billion. The sale includes 200 million shares held by the federal government, which realized $5.8 billion―a small profit of about $60 million―and lowered U.S. taxpayers' stake in the company to 77% from 92%.

May 31 According to the S&P/Case-Shiller Home Price Indices, U.S. home prices fell 4.2% in the first quarter, hitting a new post-bubble low after falling 3.6% in the fourth quarter of 2010.

June 3 The U.S. Labor Department reports that the U.S. unemployment rate ticked up to 9.1% from 9.0% in April.

June 7 Real estate data firm CoreLogic Inc. reports that nearly 40% of U.S. homeowners who took out second mortgages are underwater on their loans, more than twice the rate of owners who did not take out such loans.

Online real estate database Zillow reports that sales of U.S. homes foreclosed on in the previous 12 months made up 24% of the market in April, up from 16% one year ago. It is the 10th straight month of increases and yet another record high.

June 9 The U.S. Federal Reserve surpasses China as the single largest creditor of the U.S. government. As a result of its asset purchase program (QE2), the Federal Reserve at the end of the first quarter of 2011 held about 14% of total outstanding federal debt (debt held by the public). China is ranked second. In late March, it owned Treasuries worth $1.145 trillion, slightly less than 12% of the total amount outstanding.

June 21 JPMorgan Chase agrees to pay $153.6 million to settle federal civil accusations that it misled investors in a complex mortgage securities transaction in 2007, just as the housing market was beginning to plummet. In a case simultaneously brought and settled, the SEC asserts that JPMorgan's investment bank had structured and marketed a security known as a "synthetic collateralized debt obligation" without informing buyers that a hedge fund which helped select the assets in the portfolio stood to gain, in most cases, if the investment lost value. The settlement comes after a $550 million agreement the SEC reached with Goldman Sachs last year to resolve similar claims.

June 28 French Finance Minister Christine Lagarde becomes the first woman to be appointed to the helm of the IMF, taking on one of the most powerful positions in global finance as a worsening crisis in Greece threatens the euro currency union and rattles financial markets worldwide. Her appointment follows the resignation last month of Dominique Strauss-Kahn due to a sexual-assault charge.

June 29 Bank of America announces plans to set aside $14 billion to pay investors who bought securities it assembled from mortgages that later soured, generating an anticipated second-quarter loss of as much as $9.1 billion. The charge represents the banking industry's biggest single settlement tied to the subprime-mortgage boom and the subsequent financial crisis of 2008. The losses stem largely from mortgages underwritten by Countrywide Financial, the subprime-mortgage lender that Bank of America bought in 2008.

June 30 The U.S. Federal Reserve ends its $600 billion bond-buying program, known as QE2, without offering any hints of more monetary easing to come.

A federal judge sentences Lee B. Farkas, a former mortgage-industry executive accused of masterminding one of the largest bank fraud schemes in history, to 30 years in prison. The case against Mr. Farkas, the former chairman of the mortgage firm Taylor, Bean & Whitaker, stands as the single biggest prosecution stemming from the financial crisis. As chairman of Taylor Bean, Mr. Farkas orchestrated a plot that caused the demise of Colonial Bank and cheated investors and the government out of billions of dollars. Colonial filed for bankruptcy in August 2009, making it the sixth-largest bank failure in history.

July 1 Russian regulators avert the collapse of one of the largest Russian banks by providing a bailout package of 395 billion rubles ($14.15 billion) to Bank of Moscow, suggesting the bank's problems with bad loans are more severe than previously acknowledged. The bailout raises the specter of balance-sheet problems at other Russian banks, which had a tendency during the recession to roll over loans to struggling companies, rather than force them into bankruptcy courts.

Minnesota encounters its second government shutdown in six years as Democratic governor Mark Dayton and Republican lawmakers fail to reach a compromise on closing the state's $5 billion budget gap.

July 5 Thomson Reuters data reports that M&A deals totaling about $1.4 trillion were announced in the first half of 2011, a 35% increase over the same time last year. It is the strongest start to dealmaking since the financial crisis, as corporate boards, armed with cash and cheap financing, felt comfortable enough to seek out growth by acquisitions.

Moody's Investors Service cuts Portugal's debt rating to junk status, ratcheting up the pressure on eurozone governments to work out a lasting solution to their financial woes.

Media mogul Rupert Murdoch's News Corporation announces that 168-year-old tabloid News of the World will close after revelation of a widespread phone-hacking scandal involving prominent politicians, celebrities, police, and murder and terrorist victims, among others. The "Hackgate" scandal will shake media giant News Corporation to its core, leading to the abandonment of a $12 billion bid for the satellite company British Sky Broadcasting, the resignation of several top executives (including the publisher of The Wall Street Journal) as well as the commissioner and assistant commissioner of Scotland Yard, and a full blown investigation by the English Parliament, with scathing criticism directed toward Prime Minister David Cameron for his close ties to the News Corporation executives involved.

July 6 The FDIC implements a rule allowing regulators to recover up to two years of Wall Street executives' pay if, through "negligence," they are found responsible for the collapse of a major financial firm. The provision is part of a broader FDIC rule detailing how creditors would be handled when the agency unwinds a failed nonbank financial institution under the orderly liquidation provisions of Dodd-Frank.

July 7 Federal regulators adopt the first in a series of new rules for the derivatives market, giving the government broad new authority over the $600 trillion industry that played a central role in the financial crisis. The rules, approved unanimously by the Commodity Futures Trading Commission (the "CFTC"), greatly expand the government's ability to police insider trading and other fraud. Another crucial rule requires hedge funds and other large firms to disclose details about their derivatives trading to the CFTC.

July 13 A bill that would punish Pennsylvania's financially troubled capital, Harrisburg, and dozens of other small- to medium-sized cities for seeking federal bankruptcy protection is signed by Governor Tom Corbett. Under the law, any of more than 50 cities within a certain population range—third-class cities that include Allentown, Erie, Reading, Bethlehem, Lancaster, and Wilkes-Barre—that is deemed by the state to be financially distressed would lose all state aid if it files for bankruptcy protection before July 1, 2012.

July 15 European regulators unveil the results of their banking "stress tests," but the small number of lenders that flunked the exams provokes skepticism. Eight banks failed the tests, with a combined shortfall of €2.5 billion ($3.54 billion) in capital under a simulated worst-case economic scenario, according to the European Banking Authority. The EU regulators say another 16 banks narrowly passed the tests, which examined the abilities of 90 top lenders across Europe to endure a deteriorating economy and strained financial system.

The Italian Parliament gives the green light to a draconian austerity budget designed to cut the country's soaring deficit by 2014 and reassure nervous financial markets. The Parliament approved a €48 billion ($68 billion) austerity package aimed at averting a full-blown financial crisis. The plan is designed to signal to financial markets that the world's eighth-largest economy is serious about staying out of the debt crisis engulfing Europe.

July 19 The U.S. Government Accountability Office issues a report entitled Bankruptcy: Complex Financial Institutions and International Coordination Pose Challenges, explaining that the effectiveness of winding down failed complex financial institutions through the Bankruptcy Code, compared to winding down institutions through other processes such as FDIC receivership under the Orderly Liquidation Authority created by Dodd-Frank, is unclear. According to the report, measuring the effectiveness of the Bankruptcy Code for facilitating orderly liquidations or reorganizations of complex and internationally active financial institutions is difficult because there have been few large-scale bankruptcies, there is a lack of data, and many times there is government involvement. In addition, the complex activities and organizational structures of financial institutions make analysis more difficult.

July 21 Fiat SpA acquires the remaining Chrysler Group LLC shares held by the U.S. and Canadian governments, returning the Detroit automaker to private ownership. The U.S. Treasury says the closing of the transaction leaves the government with a $1.3 billion loss on its investment in Chrysler, an amount it is "unlikely to fully recover."

European leaders agree to reduce Greece's debt burden in a last-ditch effort to preserve the euro and stem a broader financial panic. The pact, negotiated in Brussels, is part of a rescue package of €109 billion, or $157 billion, for Greece, the most troubled economy in the eurozone. It will force many investors in Greek debt to accept some losses on their bonds. The deal will also provide substantial debt relief for Ireland and Portugal.

To view full article click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.