Senate Minority Leader Harry Reid is seeking to attach a rider to a $1.1 trillion spending bill. The move would upend federal bankruptcy law, protecting some of the Nevada Democrat’s casino interests, while potentially throwing pension and retirement funds under the bus.
Critics say it is an example of special interests running rampant in Congress’ omnibus spending bill negotiations, and a group of 20 House Republicans are pressing the leadership to make sure it doesn’t get added.
The law the Reid amendment seeks to change has been on the books since the Great Depression to protect investors. The changes he proposes have not been vetted through the congressional committee process. Republicans and academics alike admit that the regulations may need to be updated, but they say doing so through a rider in a 2015 end-of-year spending bill is not appropriate, especially given the potential for it to erode investor protections.
The law in question, the Trust Indenture Act, was passed in 1939 to protect small bondholders such as pension funds from large investors’ mistakes and abuses. Reid wants the amendment included to help one of the largest casino companies in his state, Caesars Entertainment Corp., avoid bankruptcy court and continue restructuring its own debt that calvinayre.com, an online publication covering the gambling industry, reports would “screw junior creditors.”
A letter sent by a group of 20 Republicans to House Speaker Paul Ryan, R-Wis., and House Majority Leader Kevin McCarthy, R-Calif., warned of the precedent the amendment could set by ignoring the need for regular order and debate, and bypassing congressional oversight through the hearing process.
“Specifically, several members of Congress are supporting inserting a policy rider that would retroactively narrow the rights of bondholders under the Trust Indenture Act under the guise of providing flexibility for corporate restructures,” the letter reads.
“While updating this Depression-era law might be warranted, to do so through an unvetted appropriations rider would be inappropriate,” the letter says. “It is our firm belief that any modification to the [law], particularly an amendment that would suddenly disrupt the settled expectations of creditors who in good faith relied upon long-established features of federal securities law, should take place only after legislative hearings pursuant to regular order within the appropriate committee of jurisdiction.”
Reid floated the measure first in a national highway bill, but was rejected. He has moved to include it in an $1.1 trillion spending bill that Congress is working on this week.
One lobbyist said Reid is trying to change the rules to help Caesars, which has fallen on hard times recently and had to sell off casinos in Atlantic City, N.J., to restructure its debt.
The lobbyist, who wanted to be cited on background, says lifting the rule at this point would be moot, given that Caesars has already completed some aspects of its restructuring and has closed casinos. So, to argue that the rider is needed to save jobs, as is being touted, is not true, the lobbyist says. A finance professor from Caltech echoed a similar assessment in a memo that said passing the amendment would not be wise without examining its implications for the financial sector.
A memo issued by professor Bradford Cornell of Caltech University argues that the change in the law would erode investor confidence in the securities market, “if they fear their rights can be expropriated without warning.” He said the proposed amendment “contemplates retroactive removal of mandatory contractual protections that impose minimum standards for the benefit of investors.”
A group of law professors, including Georgetown University, sent a letter to House and Senate leaders advising them not to pass the Reid amendment. They said the law Reid is looking to roll back was intended to protect bondholders in bankruptcy and restructuring cases. It guarantees that all bond payments, or lawsuits for nonpayment cannot be altered without a bondpayer’s consent. The amendment would take away those rights.
In the case of Caesars, the proposed amendment would seek to “narrowly define” what constitutes the right to payment under the law and the right to sue. The law professors say that would help Caesars in litigation that is on appeal before the 2nd Circuit Court of Appeals over its debt repayment plan.
They said that even though they have differing views on changing the Trust Indenture Act, they all agree that the law should be left untouched until properly vetted.
“The amendment of federal securities laws is not something that should be undertaken lightly,” the legal scholars said. “A hasty amendment of the Trust Indenture Act could have broad negative unintended consequences in the securities markets. Accordingly, we urge you to postpone any amendment of the Trust Indenture Act until after legislative hearings.”
