Monday, July 26, 2010

Bankruptcy and Dodd-Frank

Does the new Dodd-Frank bill have anything to say about corporate bankruptcies?

Yes, and to say myself the trouble of paraphrasing, I'll simply link you to a fine listing of direct and indirect consequences.

None of it seems to address the core dysfunction of our corporate bankruptcy system, though.

Back in March 2008, Judge Posner, of the 7th circuit court of appeals, suggested the key dysfunction -- out-of-control bankruptcy trustees. Posner wrote, “While the management of a going concern has many other duties besides bringing lawsuits, the trustee of a defunct business has little to do besides filing claims that if resisted he may decide to sue to enforce.”

In particular, trustees had become very aggressive by that time (BEFORE the worst of the credit crunch that autumn) in pressing claims for fraudulent conveyance. The result was that counter-parties to any institution that might even have been close to bankruptcy, which may even be rumored to be close to bankruptcy, have got very jittery. Why set one’s self up to be the defendant in a lawsuit brought by the next aggressive trustee?

It was and still is a legal climate that encourages “runs on the bank,” and that is what we have gotten.

It is more than a pity that neither Dodd nor Frank nor any of the many cooks that shared the legislative kitchen creating this crazy soup saw fit to address that problem head on. It is more than a pity, it is a symptom.

1 comment:

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