The bankruptcy world just got its own financial transaction Tobin tax. Just like France. Sort of.
Starting this month, there is a new $25 fee to file a notice that a debtor claim in a Chapter 11 case has been sold. The requirement to file the notice is the result of Federal Rule of Bankruptcy Procedure 3001(e).
The precise size of the market in bankruptcy claims is a bit hard to pin down. Recent estimates make it robust. For example, according to SecondMarket, a marketplace for private shares, there were 1,237 trades valued at $4.9 billion during December. But trading was dominated by claims in Lehman Brothers Holdings and MF Global, which together had 838 trades with a combined face value of $4.4 billion. That number appears likely to shrink as the Lehman case winds down. But it does seem that the market has grown over the last few decades, and the new fee is an apparent attempt by the courts to recover some of the cost associated with that trend.
But rule 3001(e), and thus the new fee, is rather limited in its scope. First, it applies only to sales of claims happening after the original proof of claim was filed. Next, the rule does not really apply to bonds and notes because a trustee files the claim on behalf of all holders.
There is an odd exception in the rule for public debt, which does tend to distract even bankruptcy experts, but it’s really beside the point. Noteholders can trade with wild abandon because the trustee’s original claim remains filed with the bankruptcy court, which is unaware of any trading going on in individual notes.
Thus, this new fee is only going to work as a kind of Tobin tax on a part of the market: namely, trading in nonstandardized debts. These could include, for example, customer claims against MF Global for account shortfalls that exceeded insurance under the Securities Investor Protection Corporation, or auto dealer claims against General Motors or Chrysler for rejection of their franchise agreements.
The market for this kind of distressed debt is probably not that efficient to begin with. To properly value a nonstandard claim in a bankruptcy proceeding requires both a deep understanding of the debtor’s capital structure and a strong understanding of bankruptcy law. An understanding of how that law works in practice, rather than as described by academics, helps, too.
This is the real reason why distressed debt traders can make such large returns: only a few people can be bothered to amass all of these skills.
The $25 fee will make the market a bit more inefficient, but you can bet the buyers of these claims will simply extract the fee from the seller. Whether the seller will notice is another thing altogether.
