a “section 1405 transfer”(as defined in our section- by- section proposal that forms an appendix to this chapter) within the first forty- eight hours of a bankruptcy case. If the court approves such a section 1405 transfer, then the covered financial corporation’s operations (and ownership of subsidiaries) shift to a new bridge company that is not in bankruptcy, in exchange for all its stock.
Pointer from John Taylor, who is optimistic about the prospects for enacting legislation along these lines.
This sounds like Garett Jones’ idea for speed bankruptcy. The point is to make it possible for financial institutions to fail quickly and gracefully, without threatening catastrophic spillovers. The idea starts with a bank that is financed in part by subordinated debt. The bankruptcy process consists of changing the debt into equity in the remainder of the firm, which is now solvent because it does not have the debt on its books.
I think a nice fat layer of convertible bonds would ensure no financial institution needs a bailout or needs to cease operations at all.
The right analogy is to Probate vs. Trust. Probate is a full, expensive, time-consuming, and often contested judicial process with uncertain results. Trusts (or other automatically vesting structures intended to avoid probate like Joint Tenancy with Right of Survivorship) are created specifically to prevent those difficulties and have things happen as smoothly, cheaply, quickly, automatically, and predicatably as possible.
No one proposes “speedy probate”, because there is really no way short of hardly-ever-uesd jurisdiction stripping to prevent people from suing to maximize their interests. The point is to avoid it altogether, with completely different arrangements and structures.
So, instead of “speed bankruptcy”, why not just avoid bankruptcy altogether, and create corporate financial forms and structures that periodically and automatically adjust to maintain or restore solvency, in ways that are clear, transparent, and predictable by market participants who can trade and price accordingly.
One such device proposed almost 30 years ago is the CoCo – Contingent convertible bond (or “enhanced capital note”), but there are other clever proposals that would likely accomplish the intended effect.
Bankruptcy, especially of financial institutions, is like Probate, in that it does not have a few fixable problems, it is the problem: irreperable and irredeemable. Don’t fix bankruptcy, make it unnecessary.
Yes to speedy bankruptcy — almost automatic conversion of debt into lower-valued equity, with a big reduction in value to the equity holders.
I have long wanted much higher capital reserves — but understand how the Big Banks fight against them. Them fighting against speedy bankruptcy will inevitably be much weaker, because their fight against higher capital is based on them never needed either higher capital nor speedy bankruptcy.
In the case of never needing it, requiring higher capital certainly reduces their ROI without any measurable benefits. A speedy bankruptcy law, which is never needed nor used, is merely one more unused law and allows continued “maximum ROI” decisions without much consideration for systemic risk.
I think higher capital is a bit better — speedy bankruptcy far far far far easier to get passed.
Knowing bankruptcy really will be painful to the equity holders, no bailout from taxpayers coming, will minimize the probability of bankruptcy by those who would lose the most with a speedy bankruptcy.
Unfortunately, I’m sure such procedures, if passed, will be used within the 30 year foreseeable future; probably 20 year; possibly 10 year. Especially if climate change means a new Global Cooling (see Zharkova) from the sun reduced magnetism.