Chapter 11 as Metaphor: The Financial Systems Restructuring Act of 2008?

Dave Hoffman

Dave Hoffman is the Murray Shusterman Professor of Transactional and Business Law at Temple Law School. He specializes in law and psychology, contracts, and quantitative analysis of civil procedure. He currently teaches contracts, civil procedure, corporations, and law and economics.

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2 Responses

  1. dave hoffman says:

    Responding to Jonathan’s metaphor/analogy/proposal, I’ve several questions. One that hopefully will spark discussion is this: doesn’t bankruptcy’s success as a system, to the extent it is successful, turn on the availability of experienced & competent judges to administer individual debtors through the application of lots of time and attention? To the extent that’s true, why would we think that the Fed could quickly acquire that kind of situation sense & judgment?

  2. Jonathan Lipson says:

    Fair question.

    I am not sure anybody really can. We’re dealt the hand we have.

    My hope is that the Fed and Treasury and the folks who might populate the sort of oversight board conemplated by the Dodd proposal would have expertise about this crisis comparable to the expertise bankruptcy judges usually have about the more modest failures they address. But of course there is no guarantee. The recent performance of some of these officials could certainly give you pause.

    The value of bankruptcy as a metaphor is not that it creates expertise where there is none–no system could–but that it might by analogy create structures that better align incentives.

    What does this mean in plain English? That bankruptcy reorganization temprarily addresses the most serious problems (or at least it usually does–cf credit default swaps) while those in trouble catch their breath and figure out how to solve the deeper problems.

    The Paulson proposal wants to do it all now–sort of a “prepackaged bankruptcy” in the form of a blank check. That’s obviously not been Paulson’s most popular move.

    Traditional notions of reorganization also rely on guided market mechanisms to try to maximize asset values. These mechanisms are hardly perfect. But they break problems of financial failure down into more manageable chunks while distributing oversight and market participation in ways that seem better than the realistic alternatives.