1. 1.to discover bankruptcy and common bankruptcy applications. 2.to discuss financial laws,...
TRANSCRIPT
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Objectives1. To discover bankruptcy and common
bankruptcy applications.
2. To discuss financial laws, policies and regulations in financial law.
3. To understand how company and industry policies affect industry practices.
4. To show major instances of noncompliance with financial laws, policies and regulations.
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Chapters
Bankruptcy
Financial Law
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Bankruptcy
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Bankruptcy• Is when a company or
individual declares their inability to pay debt, also known as debtors
• Allows individuals to seek protection from creditors
• Is thought of as “starting anew” financially
Debt – money owed
Creditors – people who try to collect unclaimed money from companies or individuals
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Creditors vs. Debtors
Debtors Creditors
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Steps in the Bankruptcy Process
• Starts with the debtor having financial trouble
• Includes the debtor deciding to file for bankruptcy
• May involve selling assets due to debt
Debtor – person who owes money
Asset - anything owned by
the company, such as
buildings, real estate
and products
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Steps in the Bankruptcy Process
• Is a continuous event, so a bankrupt company may still be able to conduct business
• Ends with the debtor having reduced debt
• Results in a company or individual having a history of bankruptcy that may follow them for up to twenty years
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Bankruptcy Process
financial trouble
bankruptcy filing
selling of assets /
splitting up debt among
creditors
reduced debt
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History of Bankruptcy
• The Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision:– [I]t gives to the honest but unfortunate
debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.o Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).
Directly quoted from: http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html
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History of Bankruptcy
• Began in Italy where businessmen traded on benches– when a businessman could not pay his
debts, he broke his trading bench• The word bankruptcy comes from the
Italian phrase “banca rotta”, meaning broken bench
• First bankruptcy law in the U.S. became official in 1800
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Frequent Causes of Individual Bankruptcy
• Poor money management such as lavish spending
• Uncontrollable circumstances such as medical bills or injuries
• Failed small or one person businesses
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Frequent Causes of Corporate Bankruptcy
• Poor money management and financial planning• Unforeseen circumstances such as an increase
in prices• Weak sales performance • Poor execution of business strategy
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Bankruptcy Proceedings
• Are governed by federal law• Are supervised by the United States
Bankruptcy Courts• Usually require the expertise of a
lawyer• Are divided into two common types:
– liquidation– rehabilitation
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Bankruptcy through Liquidation
• Is usually filed under Chapter 7 of bankruptcy law
• Involves a trustee selling some of the bankrupt party’s assets for cash and then distributing the money earned to creditors
• Allows the debtor to be immediately freed of debts
• Is used most often for personal cases
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Bankruptcy through Rehabilitation
• Allows debtors to keep ownership of their assets, but must pay off creditors periodically
• Is usually filed by individuals under what is known as chapter 13
• Is used by businesses under chapter 11• Does not immediately free debtor of debts
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Chapter 11 Bankruptcy
• Is the most well known type of bankruptcy for a business
• Allows the business to continue operating
• Involves the business consolidating debt • Results in the business having a more
manageable size of debt• Is often referred to as “business
reorganization”
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Liquidation vs. Rehabilitation
Bankruptcy through Liquidation• Include
s chapter 7
• Debtor immediately freed of debt
• Most common for personal debt
Bankruptcy through Rehabilitation• Include
s chapters 11 and 13
• Debtor may not be freed of debt in a short span of time
• Most common for business debt
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Bankruptcy in Business
• Is fairly common• Includes familiar businesses that have filed for
Chapter 11 such as the following:– Continental Airlines– Texaco– Macy’s– Zenith Electronics– Fruit of the Loom– Enron – Polaroid Corporation– Kmart Corporation
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Bankruptcy in Business
• Allows many of these companies to reduce debt and survive
• Helped many companies to be successful due to bankruptcy law
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Alternatives to Bankruptcy
• Are sometimes better than actually filing for bankruptcy
• Include the following options:– securing loans to pay off debt– more careful spending – seeking help from a debt counselor or
non-profit credit agency• Keep an individual’s credit rating high and
financial record clean
Credit rating – rating assigned to individuals based on their ability to repay obligations
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Downsides to Bankruptcy
• Must consult a lawyer to handle legal matters
• Lower credit rating for debtor• Bankruptcies remain on credit reports for
10 years• May not eliminate all debt (for example if
filing under chapter 13)• Debt may include high interest rates• Results in a lengthy and intense process
Interest rate – percentage rate that is charged for an individual to borrow money
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Future of Bankruptcy
• Is shaped by slight changes always occurring in the law
• May be formed by the newly signed Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA) – will make it more difficult for a
person or estate to file for Chapter 7 bankruptcy
– may affect filing for bankruptcy in small businesses
• Is uncertain due to changes in laws
Chapters
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Financial Law
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Financial law• Is defined as law dealing with savings
and investment channels such as the following:– banks– commodities– consumer lenders– insurance – mortgages– stocks and bonds
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Reasons Why Financial Law is Important
• To regulate and safeguard the economy – includes regulating interest rates
and overseeing government responses to financial issues
• To provide safe and efficient markets for investors and banks– keeping investor confidence high is
a high priority
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Reasons Why Financial Law is Important
• To make financial services available and accessible to consumers
• To assure that businesses and consumers can pay debts
• To ensure creditors can regain what they are owed
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Financial Organizations
• Are entities, such as:–Commodity Futures Trading
Commission–Securities and Exchange
Commission–Federal Trade Commission
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Financial Organizations• Are numerous because each has a
specific purpose• Are powerful over a small area of financial
law – allows each organization to have limited
power• Much like a system of checks and
balances, this insures the integrity of the financial world
Much of financial law was written to deal with the aftermath of the Great Depression and the stock market crash of 1929
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The National Bank Act
• Created in 1863 • Developed a national currency• Created the Office of the
Comptroller of the Currency (OCC) which regulates all banks
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Federal Reserve Act of 1913
• Created the Federal Reserve System– regulates money supply and interest
rates• Supervises banks• Develops and administers credit laws
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The Federal Deposit Insurance Corporation (FDIC)
• Formed in response to bank failures, Great Depression and stock market crash of 1929
• Insures bank money up to $100,000 per account for each bank
• Supervises about 5,250 banks in the United States
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Commodities• Are defined as raw inputs used to produce
goods, such as:– wheat, cotton, rice, grain, wool, peanuts,
livestock orange juice• Are sold on exchanges, similar to the Stock
Market, such as the Chicago Mercantile Exchange
• Are regulated within financial law by the 1936 Commodity Exchange Act– created the Commodity Futures Trading
Commission, which regulates commodities
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Consumer Lending Laws
• Refer loans made to consumers– this includes cars, home improvement
loans and student loans• Protect consumers from creditors• Deal with hot topic issues such as home
lending and credit cards
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Consumer Lending – Subprime Loans
• Loans given to high risk customers• Companies and consumers are in turmoil after
many companies offered subprime loans to consumers. The subprime loans were given most often to people of low-income households. Many of these individuals could not repay their loans. The consumer lending laws governing these loans will continue to be news in the future.
High risk- customers who have a poor credit history; are more likely to not be prompt in paying off their loans.
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Federal Trade Commission
• Is a governmental organization responsible for the protection of consumers
• Includes oversight of consumer lending and subprime loans
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Mergers and Acquisitions
• Are increasingly more important in the business world
• Can be worth billions of dollars– America Online and Time
Warner merged to be worth an estimated $350 billion
Merger – when one company combines with another and the two operate as equals Acquisition – when one company buys
another and integrates the company into their business
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Stocks and Bonds Law
• Includes the Securities Act of 1933 – assures investment information is
subject to specific guidelines • Prevents fraud in securities such as
stocks and bonds• Is regulated by the Securities and
Exchange Commission (SEC)
Securities – investment vehicles such as stocks and bonds
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Securities and Exchange Commission
• Regulates the content of financial statements and the financial markets
• Serves to protect investors • Was created in 1934 by the Securities and
Exchange Act– provides better information and regulation– part of government’s response to the
Great Depression• Headquartered in Washington, DC• www.sec.gov
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SEC Regulation
Example:• Michael Smirlock was sent to prison
for 37 months for fraud after he hid $12 million in losses from his business, Long-Term Capital Management. The Securities and Exchange Commission caught and prosecuted him.
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SEC Regulation
Example:• Another businessman, Mark Yagalla,
stole more than $30 million from Ashbury Capital Partners to buy helicopters and second homes. He was also caught by the Securities and Exchange Commission and charged with securities fraud.
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Financial Law Example - Sarbanes-Oxley
• The Sarbanes-Oxley Act of 2002 created a new set of mandatory rules for all public U.S. businesses to follow. It was written to help correct corporate ethical scandals, such as Enron. It is widely disputed for being very expensive for companies to implement and was controversial as being bad for business. However, it greatly benefited accounting companies because their services were needed more than ever. As you can see, financial law affect business in many ways.
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How Financial Law Affects Business
• Forming and changing financial laws – Sarbanes-Oxley changed financial law by
creating a new set of mandatory rules• Creating industry winners and losers
– Sarbanes-Oxley is generally regarded as helping the accounting industry and financial law firms while hurting entrepreneurs
• Imposing new standards– under Sarbanes-Oxley, companies were
required to follow new standards, including the creation of new regulating boards for every company
Chapters
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Assessment1. Bankruptcy
a. is a legal proceeding in which a company seeks protection from creditors while they try to survive
b. is commonly thought of as starting anew financially
c. applies also to individuals and businesses
d. all of the above
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Assessment2. Chapter 11 Bankruptcy
a. is the most common form of bankruptcy businesses
b. takes 11 months to complete
c. is most common for personal cases
d. all of the above
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Assessment3. Mergers and acquisitions are
regulated by the Federal Trade Commissions _______________.
a. Bureau of Competition
b. Bureau of Investigation
c. Bureau of M&A
d. Board of Trustees
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Assessment4. The Sarbanes-Oxley Act of 2002
a. is very controversial
b. was written to help correct corporate scandals
c. has benefited accounting companies
d. all of the above
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Assessment5. ________ is a big downside to
bankruptcy
a. must consult a lawyer to handle the legal expertise
b. debtor may end up with much higher credit rating
c. may not clear all debt
d. a and c
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Assessment6. Which of the following companies
emerged successfully from bankruptcy?
a. Fruit of the Loom
b. Macy’s
c. Polaroid Corporation
d. Kmart Corporation
e. all of the above
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Assessment7. Which of the following are
commodities?
a. wheat
b. orange juice
c. water
d. a and b
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Assessment8. Bankruptcy is divided into two
common types: liquidation and rehabilitation.
a. true
b. false
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Assessment9. Much of financial law was written
to deal with the Stock Market Crash of 1987.
a. true
b. false
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Assessment10. The Federal Deposit Insurance
Corporation
a. insures bank money
b. protects consumers from fraud
c. regulates the sale of commodities
d. controls the law of car insurance
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References• FDIC Mission, Vision, and Values. (2007, April 19).
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References• CEI Staff. (2007, July 25). Sarbanes-Oxley Fifth
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Acknowledgements
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