11 August 2007

Corporate (Voluntary) Bankruptcies

On June 23 I wrote in this blog about corporate bankruptcies, chiefly to make the point that the chapter 11 "process is and should be a very public, very transparent one."

But today I'm wondering why that piece was so timid. Maybe I should've called for the abolution of any such process, insofar as it can as now be voluntarily chosen by the debtor.

There should be a procedure for the orderly liquidation of chronically insolvent corporations. I concede that. But wouldn't it make more sense to expect that the creditors themselves would initiate the process in the normative situation? If the creditors decide there is no other way they'll get much of their money back, they'll be the ones to petition for an orderly wrap-up.

The company management represents the owners of equity. In principle they should always care more about seeing to it that the stock retains some value than they care about anything else -- even the payment of their bonds. They aren't working in the first instance for the bondholders. Bondholders don't have proxies.

If a corporation's management is the party that initiates a bankruptcy proceeding, there is already a prima facie case that they think it possible they'll survive, to be the managers of the re-organized company. As, often. they are. They can do this either while assuring that the original stockholders still get some share of the new company, or despite their failure to ensure that. Logically there is no third choice.

So, logically, it seems that whenever a corporate voluntarily files for bankruptcy either the decision-making management is hoping to help the stockholders cheat the bondholders, creditors, etc., or it is planning to cheat those stockholders. Neither is a good thing, or even a policy-defensible thing.

So ... down with voluntary bankruptcies and re-organizations! That is my new view of the matter until something or someone persuades me otherwise.

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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.