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Back in 1983, Kansas City Royals third baseman George Brett hit a two-run home run off of Yankee closer Goose Gossage to put his team ahead 5-4 in the ninth inning. Yankee Manager Billy Martin challenged the home run because Brett’s bat violated long-standing rules on the amount of pine tar used. The umpires enforced the rule, disqualified the bat and, as a result, the home run didn’t count. It was out number three, game over.
Of course, the Royals contested the ruling. Several days later, American League President Lee McPhail overturned the decision and allowed the home run to stand. The Yankees eventually lost the game when it was finished at a later date.
Any system based on rules and precedents needs certainty to operate and for enforcement to happen on an even-handed basis. For the Yankees, who thought they were playing by the rules, the wind went out of their sails and their run for the playoffs ended.
The same is true for capital markets.
Rules and the certainty they provide create the foundation needed for efficient capital markets. By having a set of rules that are evenly applied, investors can make appropriate decisions to deploy capital allowing growth and job creation to flourish.
Now suddenly, just like the pine tar incident, someone is trying to change the rules mid-stream.
The Trust Indenture Act, a little known but important law, has been in place for 75 years. It sets up a system of rules that allows companies to raise capital through debt financing. If a company runs into financial trouble, the Trust Indenture Act allows creditors to be repaid and incentivizes restructuring deals that help preserve businesses and jobs at the same time. Because of this certainty, investors are willing to lend to companies allowing them to grow and prosper. This system is why the corporate debt markets dwarf the stock markets.
Unfortunately, two judges in New York are upending the operation of the Trust Indenture Act. The decisions in the Marblegate and Meehan Combs cases overrides the terms of the Trust Indenture Act and calls into question the ability of a company to pay its debts. Instead of a system of rules that everyone understands, the debt markets will be governed by the whims of judges that can change at any time.
The result? For some businesses financing will be more expensive, while other businesses may be cut off from capital altogether. Less capital, less growth and fewer jobs all because of judicial decisions that go against a 75 year system that has been the envy of the world.
Hopefully the courts can get this right before our capital markets crack. If not, will Congress come to the rescue? Billy Martin threw in the towel when they had to finish the Pine Tar game. For American businesses and workers the stakes are too high and we have to make sure that this wrong is corrected before it’s too late.