Excuse Me?

Barry Ritholtz has a generally sensible column about the ten-year anniversary of the financial crisis, but the bankruptcy stuff really makes no sense at all. Start with this proposition:

I believed then (and still believe) that the best course of action would have been prepackaged bankruptcies for all the insolvent institutions instead of bailouts.

How precisely would that work? A prepack involves pre-bankruptcy solicitation of votes from creditors – largely bondholders if we are talking about a SIFI's holding company. Under the securities laws, the solicitation will take at least 20 days. That is about 19 days more than will be required for the run on the SIFI to be fully commenced.

And then we have:

I would have had the federal government provide debtor-in-possession financing, allowed qualified private institutional investors to bid on the assets thereby letting markets set the valuations, with the government picking up the rest.

So this is not a prepack at all. If we are bidding on assets post-bankruptcy, there is no pre-bankruptcy plan for creditors to vote on. Indeed, until we see how the sale goes, there is no plan at all.

In short, we are just doing chapter 11, Lehman style. Maybe with a bit more pre-planning, which could not hurt. But if you assume better facts, you are bound to think you have found a better way. 

I continue to doubt that bankruptcy has much to offer with regard to a SIFI failure – which is really much more a question of ex ante regulation, and post default politics.

Comments

[Adam]

Another victim of Bankruptcy Derangement Syndrome.

[Knute Rife]

We should have had a series of liquidation plans (either through the bankruptcy process or by new statute) with the US as the white knight buyer for each. I saw a paper at the time that showed the market caps of the top 20 problem children (across all industries) as being less than the bailout. The companies could have been repackaged and sold, returning something to the Treasury. In the meantime DOJ would have had direct access to the companies' records to investigate just who caused the mess. But that assumes the Powers That Be actually wanted to obtain this information and solve anything.

[FJP]

"I would have had the federal government provide debtor-in-possession financing, allowed qualified private institutional investors to bid on the assets thereby letting markets set the valuations, with the government picking up the rest."

If the government is both the DIP lender and the backstop asset buyer, wouldn't that have just been a bailout by another name?