bruce0 said:
Ah... Well in Islam it is specifically forbidden, as is credit with interest. And there is a good reason.
So that's what the fed is up to with the near zero inter-bank rate... Shariah Law. ;D
However in the modern world the reorganization of a company protects the creditors by preserving the value of the asset, and as a result it often protects the employees as the asset is usually most valuable as an operating business. Chapter 11 can often be a "forced rightsizing", but it is better for the creditors (which include you personally in large cases via the debt held by your money market funds) and often the employees than a "forced closing".
Yes, in bankruptcy reorganization there is an orderly parsing of debt obligations with a trustee and court approval. Versus the first come first served free for all that would shut down the operation without court protection.
There is a hierarchy under bankruptcy of who gets paid and who doesn't. The IRS always gets paid first... Then secured debt, followed by unsecured debt (payables), equity (ownership) gets paid last.
When emerging from bankruptcy, ownership is usually transferred to debt holders who are still owed money. The previous stockholders/owners often get nada. Generally labor contracts are voided and re-negotiated.
Without the Chapter 11 rules creating a bubble inside which the laws of private property disappear, bad decisions would be made.
Arguably the bankruptcy system can be abused by sleazy business owners to scrape off obligations, but on the whole it does more good than bad for the economy and preservation of wealth generating assets..
The buy side guys are motivated by the opportunity, and come in to help fix the problem. Think hero not vulture. (This may be a prejudiced point of view).
An interesting example from recent history is the GM bankruptcy. Instead of letting this run the normal course through bankruptcy court that for a case as large and complex as GM would take years, the government got involved to short cut the process and influence the outcome, to benefit political supporters to the detriment of debt holders who would normally have priority. Contrary to arguments that the government saved GM, they just altered the shape of the outcome. A new GM would have still emerged, probably leaner and smarter with less old GM DNA.
We haven't heard the last of old GM as the ignition switch recall debacle has revealed switch related deaths spanning back before the bankruptcy, but in a normal bankruptcy the new GM would be insulated from any previous entity liability.
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Another interesting one to watch is Fannie Mae and Freddie Mac, these were put into government conservatorship during the Bush administration, and the stock was delisted in 2010, presumably worthless.. Now it sounds like the government wants to restore these in an attempt to pump up the housing market. Apparently they have short memories or poor grasp of where the last financial crisis came from.
JR
PS: I attended the Mark Levinson bankruptcy auction (New Haven CT) and bought two nice soundtech distortion analyzers. I did not get to take them with me. At the end of the auction, a group associated with the previous ownership made a bid for the entire thing, slightly larger than the piece meal auction raised.
