Part Three Begins

Part Three of my book will have the heading "Some Policy Consequences."

Some transitional material. In chapter 10 we asked ourselves: what keeps those hungry piranha alive in the liquid marketplace? After all, they can't perform their function of continuing to eat up raw meat (profitable inefficiencies) unless there is a fresh supply of raw meat. We identified some of the sources of inefficiency. One of these is bankruptcy law, and the opportunity it affords to those willing to buy up distressed debt and maneuver their way through the system.

But of course it is not the job of public policy to make life easy for such piranha. Indeed, I propose in the following four chapters to work on the presump-tion that it is the job of public policy to make their life more difficult, to narrow the ecological niche that piranha fill.

Its first chapter, 13, concerns "Bankruptcies and Rescues."

Within US laws that now govern corporate bankruptcies, there are at least two great sources of inefficiency. The first is the degree of secrecy the system allows, and the second is the skewed incentives that it creates for trustees. We'll look at those in that order, and then we'll ask a broader question: does the U.S. really need a voluntary system of corporate reorganization at all? What might happen if the only corporate bankruptcies were the involuntary sort sought by creditors?

The Federal Rules of Bankruptcy Procedure in their current form [though amendments are scheduled to take effect this December], prescribe disclosure by an "entity or committee representing more than one credit" of the identity of the creditor involved, the nature and amount of its interest, the dates on which the separate interests were acquired, and even the amounts paid for them. If rigorously enforced, that would make life rather difficult for speculators, who depend upon the opacity of the proprietary strategies. They have resisted rigorous enforcement of that rule, creating committees that aren't really committees, for example.

In the case of Northwest Airlines (2007), this technical-sounding issue received a burst of publicity. The condition of the US airlines industry made this bankruptcy of especial interest to a broad public.