Forget the Clinton pardons and forget Vice President Crashcart's latest heart attack. Forget, even, the tax-cut debate. If you truly want to understand where Washington is headed in these first months of the Bush administration, take a look at this legislation being rammed through Congress by the GOP, euphemistically described as "bankruptcy reform."
Thanks to assiduous efforts by credit card companies and banks, the House rushed through a bill on March 1, with scant media attention, that would make it radically more difficult for middle-class consumers to escape overwhelming consumer debt and make it a lot more likely that families will lose their homes and cars. The Senate is preparing for a rapid vote on the same measure.
Consider the assessment of these reforms by former federal bankruptcy judge Francis Conrad, an internationally regarded authority who has counseled the World Bank and helped the Czech Republic, Romania and the Philippines establish modern bankruptcy systems. Conrad is no sentimentalist. In 10 years on the federal bench, this hard-nosed jurist and financial analyst supervised the liquidation of the scandal-ridden junk-bond firm Drexel Burnham Lambert, and brought the New York Post back from the brink of extinction. What does Conrad think will happen if the brand of "bankruptcy reform" currently being peddled in Congress passes?
"People will be forced to pay the credit card companies -- instead of buying food, instead of paying alimony," he says. "You will create poverty."
Just how a bankruptcy bill that sticks it so thoroughly to the middle class came to be the No. 1 priority of the first Bush-era Congress is a study in influence-peddling. But the story is also deeper: The legislation before Congress this week is the culmination of a little-noticed campaign -- all the way up to Supreme Court Chief Justice William Rehnquist -- to fundamentally change the direction of America's bankruptcy courts.
Personal bankruptcy is not exactly an easy subject for political conversation. No one likes to think about how their finances are teetering -- or tanking. And yet it matters: 1.2 million households received bankruptcy protection last year, and another 15 million in the past decade, according to the Justice Department. And the bankruptcy safety-valve only grows in importance as the economy slows, with more families feeling the sudden pinch of joblessness.
Personal bankruptcy is a compassionate American tradition going back to the earliest days of the Republic, when debtors' prisons were replaced with an orderly legal process. As far back as 1831, this national commitment to giving overwhelmed individuals a fresh start won the admiration of Alexis de Tocqueville. "In America there is no law against fraudulent bankruptcies; not because they are few, but because there are a great number of bankruptcies," he wrote in "Democracy in America." "A sort of guilty tolerance is extended by the public conscience to an offence which everyone condemns in his individual capacity."
Banks and credit card companies -- which cannot collect consumer debt once courts grant families protection -- started lobbying heavily to change all of that more than two years ago, pumping millions into congressional coffers. Credit card companies and banks together gave $37.7 million to candidates and parties in 2000, according to Federal Elections Commission figures analyzed by Public Campaign, the campaign-finance-reform lobby. That's up 75 percent from 1998. And 61 percent of last year's donations went to Republicans.
President Bush -- who has indicated he'll sign the bankruptcy reform, unlike Bill Clinton, who vetoed it last year -- has his own special relationship with the credit industry. MBNA America, the nation's largest single credit-card issuer, was also the nation's single-largest single supporter of the George W. Bush campaign, with $240,700 in hard-money donations. And the company's CEO, George Cawley, was a Bush "pioneer" -- a select group whose members personally raised at least $100,000 early in the campaign.
And what, exactly, do we get with this express-track bankruptcy bill? It would give credit card companies first dibs on bankrupt consumers' debts -- ahead of any other bills except for child-support payments (an amendment tacked on in the House to placate reluctant moderates). It will establish for the first time an income-and-assets test for those applying for Chapter 7 bankruptcy, which dissolves most debts and allows families to keep their homes and other essential possessions. This "means test" would drive hundreds of thousands of families each year from Chapter 7 into Chapter 13. That requires repayment of many debts, and makes it more difficult to keep those essential assets.
In pushing bankruptcy reform forward, the industry's closest allies in Congress, including bill sponsors Rep. George Gekas, R-Pa., and Sen. Charles Grassley, R-Iowa, argue that consumer irresponsibility is at the root of the overwhelming number of filings. Grassley has gone so far as to declare that the recent rise in bankruptcy filings is "the result of the eroding moral values of some people."
Yet that argument is belied by the credit industry's own aggressive marketing. Even while complaining of consumer irresponsibility, credit card companies are marketing their Visas and MasterCards and Discovers ever more aggressively, extending consumer credit to unheard-of heights, and returning with unprecedented profits. According to the Consumer Federation of America, in the third quarter of 2000 alone, credit companies mailed out 2.5 billion solicitations, extended 13 percent more credit than a year earlier and enjoyed profits at a five-year high.
The legislative angle of the bankruptcy bill, however, is only one half of the campaign to change bankruptcy protections. As with so many other hot-button legal issues, this pivotal debate now playing out in Congress owes much to the long arm of Chief Justice William Rehnquist.
In 1994, amid growing concern over sharply rising personal bankruptcy filings, Congress created a federal Bankruptcy Commission to consider whether changes to the current system (which dates back to 1980) might be in order. Congress, the president and the chief justice each were allocated appointments to the nine-member panel. Rehnquist took the opportunity to name Judge Douglas Ginsburg of the U.S. Court of Appeals for the District of Columbia Circuit (Ronald Reagan's Supreme Court nominee who withdrew after admitting he'd smoked pot) and Judge Edith Jones, of the Fifth Circuit Court of Appeals. Both Ginsburg and Jones are prominent exponents of the so-called "Law and Economics" school of conservative judicial thinking, whose conferences and publications are routinely sponsored by large corporations and other business interests.
After two years of contentious hearings, a majority of the bankruptcy commission voted to support a report that declared the roots of the bankruptcy crisis caused by a growing rift between wages and debt. The commission supported a series of reforms widely regarded by consumer advocates and legal moderates, including President Clinton, as balanced. The reforms included measures such as clear rules on when the victims of corporate abuses (like women with Dow Corning breast implants) can join the line of creditors seeking part of a bankrupt corporation's assets.
But Rehnquist's commissioners, Ginsburg and Jones, along with two commissioners named by then-House Speaker Newt Gingrich, dissented from that analysis and those proposals. In particular, Jones -- as a Texan, now high on the list of possible Bush Supreme Court nominees -- became one of the most influential and acerbic voices in the bankruptcy debate, with the ear of bankruptcy reform sponsors Grassley and Gekas. In 1999, Jones told Congress that credit card companies are being "demonized" in the bankruptcy debate. What's really needed, she said last fall, is to send "an important moral signal" to consumers who are "violating their promises willy-nilly." Today's steep increase in bankruptcy filings, she wrote in a 1998 law review article, should be blamed not on the growth of consumer debt but on student loans, a higher minimum wage and high tax rates.
Jones accuses critics of pro-bank bankruptcy reform of "standing in the way of history." And she says middle-class consumers should "pay for the privilege" of bankruptcy protection by paying back a higher portion of their assets.
Jones does not limit her conservative bankruptcy agenda to lobbying Congress. As an appellate judge, Jones is periodically called upon to review the findings of bankruptcy court judges. While much of bankruptcy law rests on arcane procedures that do not easily translate into neat ideological categories, Jones, like some other conservative jurists, has had occasional opportunity to reinterpret bankruptcy law in creative fashion. Take the matter of child support. The current federal law allows bankruptcy judges to enforce child-support orders, even putting a lien on a deadbeat dad's home if necessary. But in 1999, Jones wrote a Fifth Circuit opinion declaring that a local Texas "homestead act" trumps the federal bankruptcy code's child-support protections. In effect, according to Jones's ruling, any deadbeat dad in the nation need only buy a home in Texas to keep it safe from the court's reach.
Jones' opinion amounted to an unprecedented intrusion of old-fashioned states' rights conservatism into the federal bankruptcy realm, eroding a national policy designed to protect single parents. If it were an isolated case of an activist conservative, that would be notable enough. But in New York, California and elsewhere, appellate courts dominated by Reagan and Bush nominees have followed Jones' lead, intervening in similar ways in bankruptcy cases. In some cases, they've made it harder for citizens poisoned by corporate pollution to collect settlements; in others, they've declared rulings by longtime bankruptcy judges too "debtor friendly," too soft on consumers.
If conservative jurists like Jones are remaking bankruptcy with their rulings and policy proposals, they are also quite literally changing the face of bankruptcy courtrooms. Under law, the country's bankruptcy judges are appointed by the federal appeals courts for the region in which they sit. Who gets chosen, it turns out, is very much a matter of politics -- in particular, the bankruptcy politics of increasingly conservative, anti-consumer appellate benches, and the politics of the banking and credit industries.
Consider what happened to Judge Conrad, who served in Vermont and New York bankruptcy court from 1986 through last summer. Unlike most federal jurists, bankruptcy judges like Conrad are not appointed by the president and do not serve for life. Instead, under the Bankruptcy Reform Act of 1978, the nation's 12 circuits of the U.S. Courts of Appeals appoint bankruptcy judges for each state under their jurisdictions. Vermont falls under the Second Circuit, which also covers eastern New York and Connecticut. Bankruptcy judges serve 14-year terms; they are routinely reappointed by a majority vote of the same appellate court after a brief period of "public comment."
Conrad, in short, had every reason to expect he'd keep his job for another term. But in June of last year, Conrad arrived in his chambers to learn that the Second Circuit Court of Appeals had unexpectedly voted to deny him reappointment.
Judges of the Second Circuit refused to elaborate upon their one-line rejection announcement (bankruptcy court appoints are routinely kept secret). But two key facts seem relevant. First, Conrad had issued a string of rulings hostile to Vermont banks and other influential financial-service interests. Nationally, he is among the most visible and blunt critics of any bankruptcy reforms that would make it harder for poor and middle-class consumers to find relief.
Meanwhile the Second Circuit -- at the time of his appointment 14 years ago still dominated by liberal judges serving since the 1960s and 1970s -- is today in the hands of Reagan-Bush judges, and presided over by Chief Judge Ralph Winter, like Jones and Ginsburg a prominent law-and-economics conservative.
There is also the question of politics. In Vermont legal circles, conjecture about Conrad's eviction from the bench focused immediately upon whether the Second Circuit had been influenced by any of the legion of corporate and banking officials at whom Conrad had sometimes taken aim. In the courtroom, he was known for a populist impatience with the prerogatives of corporate power; He once threatened to send federal marshals after the CEO of Sears for failing to appear in his Rutland, Vt., courtroom, and in another case compared leading Vermont bankers to Times Square shell-gamers. He has criticized federal banking regulators for permitting abusive debt collection practices, and slammed the IRS for trying to collect a bankrupt citizen's taxes in defiance of a court order.
Whatever the reasons for Conrad's ouster, it speaks volumes about the politics of bankruptcy. First, during the "public comment" period prior to Conrad's firing, it turns out, Merchants Bank, Vermont's largest financial institution, had actively solicited letters to the Second Circuit from prominent Vermont banking attorneys critical of Conrad, according to Vermont attorneys who have litigated against the bank. Chief Judge Winter named a partner in a Vermont law firm that provides that same bank's legal counsel to chair the "merit selection" committee to recommend Conrad's replacement. And, in December, the Second Circuit announced its choice to replace Judge Conrad: the former in-house counsel to another large bank, this one in New York. If nothing else, the fate of Vermont's sole bankruptcy judge is a parable for how the financial-service industry can promote its interests even amid the supposed insulation of the judicial system.
Conrad is not the only federal bankruptcy judge to fall victim to this growing rift in bankruptcy philosophy. Last year at least one other respected, relatively progressive bankruptcy judge, John Pearson of Kansas, was passed over for renomination, while two other bankruptcy judges reportedly came close to losing their jobs. "This is a completely new slate of judges. It's a different universe on bankruptcy," one veteran bankruptcy attorney said to me recently.
This, then, is where Washington is headed in the first weeks of the Bush era. In the federal judiciary and in Congress, the drive is on to turn America's bankruptcy courts from a consumer safety valve into taxpayer-supported collection agencies -- for the same credit companies that have sold Americans a crushing mountain of personal debt. No system of commerce, as Conrad is fond of saying, can long survive without a debt-relief mechanism. But now American bankruptcy law has become just another beachhead in corporations' long drive to deregulate greed.