The Bear is Dead
The Fed's extraordinary step in propping up Bear Stearns, followed by
Morgan Stanley's JP Morgan's purchase of the company at a fire-sale price, has everyone reeling. But for Credit Slipsters there's an odd little irony worth noting: Why didn't the Bear file for Chapter 11?
In the be-careful-what-you-wish-for category, the Wall Street Journal noted: "Bankruptcy experts said filing for bankruptcy protection wouldn't have been an attractive option for Bear Stearns, partly due to recent changes in the federal Bankruptcy Code relating to financial instruments like derivatives and repurchasing trades. Unlike most parties in bankruptcy, lenders in such transactions aren't stayed or prevented from acting to seize or control the assets involved in those deals."
David Levine, HBS/HLS 2010, sent the WSJ quote my way this morning. Thanks, David.
Of course, it is possible that Bear could not have survived in Chapter 11. It is also possible that the imposing a broad automatic stay would have created more chaos in the market. We can have a long debate on whether the Bear might have survived in a pre-amendment Chapter 11 world and whether the Fed would have been required to put in billions of taxpayer guarantees to prop up an investment company.
But before that debate starts, we need a minute to focus on the implications of amending the bankruptcy code to make some transactions--and hence some companies--essentially bankruptcy-remote. I would be willing to bet a sizeable sum of money that Bear Sterns was one of those Wall Street giants that pushed for the amendments that ultimately cut off their last hope of survival.
Bankruptcy is one of those pieces of infrastructure that an economy needs in place all the time. Everyone wants to pick away at the pieces that make it work--right up until they need to use those laws. Then, of course, it is too late.