Chapter 14?

Submitted by Jen Jones on Fri, 12/11/2009 - 2:39pm

Chapter 14?

The debate about how to handle the failure of some of our nation's---and world's---largest companies helped define 2009. Cable news talking heads, government policy analysts and politicians went at each other like pit vipers, spitting political barbs, stabbing with historic precedent and twisting around each other in spastic, vocal tirades from atop whatever soapbox could sustain the weight of the blustering.

Come 2010, the wrangling is still not really over, even though companies were bailed out and the biggest of the big were not "allowed to fail." As a result of Washington's somewhat inconsistent and at times, utterly vague, interference with the financial system, much of Wall Street has quite a bit of trepidation about future government involvement. So much so that congressional lobbyists and staffers are circulating talk of creating a new bankruptcy chapter that will address the systematic dismantling of companies whose failure could contribute to the proverbial erosion of our financial system.

Currently dubbed, "Chapter 14 bankruptcy," this new plan would establish a legal process to specifically restructure crumbling, non-bank financial holding companies. One of the primary points of worry leading to this discussion stemmed from the government's "picking and choosing" of companies to rescue. For example, allowing Lehman Brothers to file bankruptcy but coming to the direct aid of Bear Stearns.

If these companies are in a position to have such an impact when they fail, then they should be treated as a separate class of corporation. Daniel Flores, the top Republican counsel for the House committee involved in this potential new component of the bankruptcy code said recently that the related activities of such companies plays into their potential to cause lasting damage to the economy. At a recent conference, he stated that the new governance would provide a "simple but effective set of reforms to help us handle the bankruptcies of large, interconnected firms."

Essentially, the effort would simply formalize, under an amended bankruptcy code, the process used earlier in the year to handle AIG, GM and Chrysler by bringing together the company in question, creditors and government regulators into an oversight board to discuss pre-bankruptcy issues. To many, this sounds like a Washington-backed, "pre-packaged" bankruptcy.

Flores, who made it clear that the plan should not encourage or tolerate additional bailouts, added that the bankruptcy system was not allowed to work. "We don't need to abandon bankruptcy, we need to abandon government intervention that can seem inconsistent and panicky."

The point to be made most clear by those in favor of the possible Chapter 14 is that it would remove any risk that Wall Street will continue to rely on government intervention (bailouts) when things go bad.

H.R. 3310, as it is formally deemed, would do what's needed to handle these risky situations, Georgetown professor Adam Levitin affirmed. However, he also communicated doubt about its passing because "Ultimately we're chicken."

The bankruptcy code, like many of our laws, can fluctuate with our economy. And while an entire new type of bankruptcy may not be the answer, these is no question something needs to change.

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