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Lipson on The BS That Didn’t Bark: Why Didn’t (Doesn’t) Bear Stearns Go Into Bankruptcy

Dave Hoffman

Dave Hoffman is a James E. Beasley Professor of 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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9 Responses

  1. Mike says:

    Terrific post. A lot of interesting content. However, I’m not sure I follow your point about the swaps/repos. I think those transactions were the precise problem. In a bankruptcy, the automatic stay – one of chapter 11′s most valuable protections – would not help Bear. Counterparties to repo contracts could seize Bear’s assets. The chapter 11 would thus not have stopped Bear’s meltdown, because creditors would be free to grab Bear’s assets. Am I missing something? To me, this is one of the most critical reasons Bear didn’t file. Chapter 11 simply doesn’t work as well with large financial institutions as debtors.

  2. John says:

    Terrific post. A lot of interesting content. However, I’m not sure I follow your point about the swaps/repos. I think those transactions were the precise problem. In a bankruptcy, the automatic stay – one of chapter 11′s most valuable protections – would not help Bear. Counterparties to repo contracts could seize Bear’s assets. The chapter 11 would thus not have stopped Bear’s meltdown, because creditors would be free to grab Bear’s assets. Am I missing something? To me, this is one of the most critical reasons Bear didn’t file. Chapter 11 simply doesn’t work as well with large financial institutions as debtors.

  3. pwb says:

    Doesn’t common stock frequently go to (near-) zero in the event of bankruptc?

  4. c.o. says:

    “Doesn’t common stock frequently go to (near-) zero in the event of bankruptc?”

    Absolutely. While shareholder interests are a company’s top priority during solvency, it drops to the bottom of the list upon the filing of a bankruptcy petition. So, it might be safe to say that shareholders definitely get a better deal with an out-of-court restruturing with JPM than they would if BS filed for Chapter 11 protection.

  5. Jonathan Lipson says:

    Re: Mike’s comments: Yes, certain creditors would have been able to grab certain assets under the netting provisions. But I have seen no evidence that they didn’t do this already. In any case, there is no requirement that those entities go into bankruptcy at all. Moreover, in bankruptcy, the Fed could have provided whatever assurances were in fact provided to calm that corner of the financial market. The only difference would be that today we have little reliable information on what actually happened. A bankruptcy would likely force some of that into the open.

    Re: pwb’s question on the value of shares in bankruptcy. The shares are already junior in priority as a matter of both corporations law and common law rules on priority. Bankruptcy doesn’t cause that to happen-state law does. That said, nothing in bankruptcy strips shareholders of whatever equity there is. Thus, the fight in Johns-Manville was over the value of equity’s share. At least historically, LoPucki and Whitford’s work has shown, equity retained some interest more than general rules on solvency and priority would predict. So, if the “real” market value of BS common is $30, and JPM is paying $10, then bankruptcy transaction costs would have to eat $20/share to eliminate shareholders’ equity. Certainly not impossible, but not guaranteed, either.

    Having interferred with the operation of the “market”–as that term includes the procedure known as bankruptcy–the Fed has assured that we will likely never know.

  6. Rick says:

    If the common stock goes down to 0 during a Chapter 11 bankrupsy, how does that help the company going bankrupt? or does it?

  7. Rick says:

    If the common stock goes down to 0 during a Chapter 11 bankrupsy, how does that help the company afterwards that went Chapter 11 bankrupt? or does it?

  8. Rick says:

    If the common stock goes down to 0 during a Chapter 11 bankrupsy, how does that help the company afterwards that went Chapter 11 bankrupt? or does it? Also, what happens in the same situation if the company fails?

  9. Rick says:

    If the common stock goes down to 0 during a Chapter 11 bankrupsy, how does that help the company afterwards that went Chapter 11 bankrupt? or does it? Also, what happens in the same situation if the company fails?

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