17 March 2007

The Forces of Secrecy Gather

My entry one week ago was entitled "A Cheer for Bloomberg News." I want to return to the subject I discussed there, because there's been a new development.

A bit about corporate bankruptcies, though, as filler here. Whether it takes the form of liquidation or re-organization, there is a well establish order of precedence.

Imagine a newly bankrupt corporation as a see-saw with a much heavier weight at one end than at the other. The lighter end, accordingly, is up in the air. The heavy end on the ground.

In terms of the right to receive a payoff, the most senior or best secured debt instruments have first dibs, and after that payments follow in legally defined sequence with the owners of equity sitting on the ground. At some point, moving down the lever/see-saw, the tangible assets of the estate run out. But, if we're assuming that there is some good will for the ongoing enterprise, there is still some value to be distributed. The instruments that represent that point are, accordingly, sometimes called the "fulcrum securities."

A lot of jockeying goes into determining the placement of the teeter-tooter. Some interests don't want their own securities to be too high on the lever. They'd rather get equity in the re-organized company, in the hope of course that it'll prove more valuable. On the other hand, if you have a high position on the lever, and jockey to lower it in search of the fulcrum, you might miscalculate, end up below the fulcrum, and get ... nothing.

It's a very high stakes game. Further, its a game with consequences for the rest of us, because the system is supposed to work in a way that lets a productive corporation re-emerge into the higgle-haggle of the market again ready to serve customers, treat employees fairly, and otherwise embody quaint ideas of productivity. Since the public interest is involved, the process is supposed to have some transparency. Anyone ready to look through the court records (which are available on line through the wonderful PACER system) can figure out who ismaking what motion, and what they have at stake in it.

All that said: in the ongoing Northwest Airlines bankruptcy proceedings, certain Wall Street speculators have tried to operate an "ad hoc committee" to jockey for position without disclosing anything -- or very little -- about their own stakes. They want such information to the "under seal," which means that it won't be on PACER, it won't be available in paper form to somebody asking at the court clerk's desk, and the other parties to the action who do see this information will be sworn to secrecy.

As I observed last week, Bloomberg News and its counsels, to their undying credit, are fighting the good fight here, trying to obtain and make public information about the Northwest Airlines proceedings.

Unfortunately, the forces of secrecy are gathering. Two industry groups that between them represent much of Wall Street have joined in assisting the speculators in their efforts to (a) persuade the bankruptcy judge to reconsider his pro-disclosure ruling, and (b) appeal over his head if they can't.

In a memo they said that such disclosure of "proprietary and highly confidential information" will quite probably "erect a substantial obstacle to the participation of many stakeholders—in particular, those sophisticated stakeholders that are most likely to have the means and the experience to make a positive contribution toward reorganization."

Get that? The speculators want to keep their secrets because keeping secrets helps them win. They should be allowed to keep their secrets because they are so "sophisticated" that they can help the court in its goal of re-organizing.

Um, sorry. No sale. This is sounding a lot like military procurement. The bankruptcy court is like a little Pentagon, the "sophisticated" speculators are like contractors selling it weapons, uniforms, vehicles, or whatever. The greater the transparency, the less the threat that the rest of the country is being ripped off by cronyism, double-dealing, and other earmarks of the sophisticates of every age since record-keeping began.


Do you, dear reader, want to do something in the service of such transparecy? Okay. Write to judge Allan Gropper, of the U.S. Bankruptcy Court, Southern District of Manhattan. Tell him you approve of the stand he has taken, and he should stick with it, however many Wall Street purchased amicus briefs he receives the other way.

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Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.