Sunday, February 1, 2009
"The epic financial crisis afflicting the banking industry over the past 18 months is largely the result of cratering loan and other asset values stuck on bank balance sheets. When the market for such loans stalled, banks couldn't sell them and had to take billions in writedowns. ... Why should taxpayers foot the bill when there are trillions of dollars in private money on the sidelines in the world financial markets? Private investment is a far more appropriate agent to revive these institutions, yet there is little coming in. ... This state of affairs could be improved by eliminating the bankruptcy rule known as the 'exclusivity' period. This rule gives managements, with court approval, a monopoly in drawing up a reorganization plan for a minimum of 18 months. ... The exclusivity rule mainly benefits equity holders and managements, not creditors. ... Without an exclusivity period, different classes of creditors and equity holders could immediately propose different restructuring solutions, including the sale of assets overseen by a bankruptcy court. ... This change would cause many distressed loan prices to rise--bolstering the balance sheets of banks and other companies that hold these loans--without public money. Furthermore, such a change would slash the need for expensive bankruptcy lawyers, restructuring firms, and other advisers, who can reap tens of millions of dollars in fees --often at the expense of creditors and company treasuries. ... Few are helped by the exclusivity rule, other than desperate equity holders and top managers clinging to the helm of companies that faltered on their watch. Eliminating exclusivity would not necessarily lead to more company liquidations, but it would take away the monopoly management has on formulating restructuring proposals. ... Today, troubled assets are stuck in a quagmire and will be for years unless bankruptcy laws are changed", Carl Icahn (CI) at the WSJ, 9 January 2009.
I agree with CI and proposed ending the exclusivity period in 1992! In 1992 I read 101 Yale Law Journal 1043-1095, "The Untenable Case for Chapter 11", Bradley, Michael and Rosenzweig, Michael (1992) which advocated auctioning a debtor's assets It's time. Having seen $500 million paid to lawyers, CPAs and experts in Macy's 1992 bankruptcy, I wondered what good did these "vultures" did for Macy's shareholders or creditors.