Bankruptcy Code perversions?
I’m reading Sheila Bair’s comments to the House Financial Services Committee. She says something provocative:
The priority protection given to secured creditors under both the bankruptcy code as well as the FDIC’s resolution mechanism creates incentives to rely excessively on short term, secured financing. Too many creditors have looked to the value of their collateral — as opposed to the credit worthiness of their counterparties — in making credit decisions.
I’m still in school, so I’m just now beginning to understand the struggle between secured and unsecured creditors, just now beginning to understand what a fascinating struggle it is.
But Ms. Bair’s comments add a new dimension for me: does the Bankruptcy Code encourage creditors to focus on the wrong aspects of the overall credit risk? By extension, did it help fuel the asset bubble?
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November 1st, 2009 at 7:02 pm
As I think about this, I think it might be a really interesting way to tweak the Bankruptcy Code. If allowed the Code to say, cram down the secured creditor’s interest (esp. with regard to home mortgages), even 10%, then the creditors might be more tightly focused on who they are lending money to.
That might be very productive indeed.