In October, Clayton Gillette, Max E. Greenberg Professor of Contract Law, was the keynote speaker at the 2012 annual Bond Attorneys Workshop (BAW) of the National Association of Bond Lawyers in Chicago. The BAW is the largest gathering of bond lawyers in the country with more than 900 attendees. Gillette’s remarks focused on the allocation of risks between bondholders and residents when municipalities face fiscal distress. Courts and legislatures have historically been ambivalent about whether to impose the risk of fiscal distress on creditors or residents. In his address, Gillette argued that the question should be addressed by asking which group is best positioned to avoid fiscal crisis in the first instance. Perhaps counterintuitively, he concluded that bondholders are better able than residents to monitor the fiscal behavior of municipalities. He then contended that bondholders should bear much of the risk of distress in order to induce them to deploy their monitoring capacity.
Posted November 14, 2012