Last week, when all that was on the table was the mere collapse of a few investment banks and one large insurance holding company, I posted Jonathan Lipson’s lucid analysis, identifying the “selective socialism” of A.I.G.’s bailout as a consequence of the Bankruptcy Amendments of 2005.
Now that we’re frying bigger fish, I wondered what Lipson would say. His comments follow:
There are many options for a bailout. One that has received surprisingly little (if any) attention in Washington is reorganization under Chapter 11 of the United States Bankruptcy Code.
Strictly speaking, Chapter 11—which governs business reorganizations—would not apply in any meaningful way to many of the entities that are concerned here. Nor should it. But its general approach may, by analogy, be instructive.
Chapter 11 is a response to the collective action problem presented by a company’s general default. It is designed to enable parties to work out—restructure—legal and economic relationships with a mix of market incentives and government oversight. Some features of that system might, by analogy, help to avoid the growing stalemate in Washington while also creating mechanisms that actually resolve the underlying financial problems.
What, then, might a Financial Systems Restructuring Act of 2008 modeled on Chapter 11 do?