TARP oversight boss Elizabeth Warren: Mexico has a better bankruptcy code

[Winehole23]

I will admit I have not met the SpursTalk Austin cohort in meatspace. Then again, I never met anyone from SR either. I'd like to change that. There should be an Austin GTG.

[clambake]

not with a face like that.

[LnGrrrR]

Every business is a risk, and the employees share very little of it. Those who are going to shoulder the most risk are the ones who need the most protection in bankruptcy. There shouldn't be an equitable split of the leftovers because there wasn't an equitable share of the risk. You can agree or disagree whether or not that's fair, but it's irrelevant. For companies that rely on borrowed money to continue operating the lenders get to dictate the terms. Because without the lenders, those companies don't exist. Don't like it? Find a way to run your company without having to borrow money. Or even better, if you're a pension fund, be the one to loan your company the money. That way you and your pensioners come first.

Those who invest also get the greater share of the profits. They're shouldering the most risk in order to possibly gain the most benefits. The ratio is risk/reward, not no risk/reward.

And of course, I'm not running a business. I'm sure that lenders WILL make up the rules. However, given that our entire system collapsed due to functions performed by lenders, I'm not sure I'm ready to give them much credibility.

Lenders understandably want to have their cake and eat it too. However, if an employer makes agreements to an employee, they should not be allowed to renege on them because the lender wants to downplay their risk.

[LnGrrrR]

It's not about fair. It's about reality. In a bankruptcy situation the company's survival depends on being able to produce wealth rather than consume wealth. Unfortunately for pensioners they are a non-revenue producing liability in that situation. Sure, there was a time when they added value to that company, but now they're just an expense to a company whose survival depends on reducing expenses.

The solution to this is to get rid of these ponzi scheme retirement plans entirely. Get rid of pensions entirely and go strictly with 401k's or some other system where whatever money is taken from each individual employee is set aside in an account where only that employee can touch it. If we're too nervous about trusting the stock market (which is certainly justified) then take money out of people's checks and buy nothing but treasury notes and stick 'em in a dedicated account for that employee.

That way you're giving employees 100% of their compensation for today's work today instead of giving them some percentage today and an IOU for the remainder some time down the road. That keeps the employees from being dragged down with the company if bankruptcy occurs, and reduces the likelihood the company is ever faced with bankruptcy resulting from pension obligation costs which they can't control.

I have a 401k. My retirement benefit is delivered to me by real money placed in an account with my name on it. It's my money, I'm physically in possession of it, only I can touch it. My employer and I square up every two weeks and if they ever go under I'm still guaranteed to get 100% of what was promised to me for the work I performed. If you have a pension your retirement benefit is just an IOU which your company may or may not be able to deliver on several decades down the road. If your company goes under you're at serious risk of getting screwed badly.

Better not take away the military retirement... alot of us have guns.

I mean, I don't, but I have enough friends with a few guns to spare.

Agreed about the pensions, but if a company has AGREED to pay for said pensionee, I don't see why the pensionee shouldn't expect that money.

There's a big moral hazard at play here too. What's to stop companies from promising retirement funds to young workers, knowing that they'll be long gone when the bill comes due?

[Winehole23]

Better?

[clambake]

Better?

thank you. now that creepy feeling has disappeared.

[Winehole23]

thank you. now that creepy feeling has disappeared.

If only George Gervin had been around to kick the Mavs asses a little longer, the feeling might not have subsided so quickly.

[clambake]

If only George Gervin had been around to kick the Mavs asses a little longer, the feeling might not have subsided so quickly.

what are you talking about?

he could do that right now.

[Winehole23]

[march11piscesrule]

The best way to understand the financial crisis is to understand the meltdown at AIG. AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror. This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders — people who wear seat belts and build houses on high ground — and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people's money would make his bigger.

http://www.rollingstone.com/politics..._big_takeover/

[Winehole23]

The Matt Taibbi piece should get its own thread IMO.

[mogrovejo]

The major problem with Taibbi's piece is that he gives Glass-Steagall way more importance than it deserves. Things wouldn't change drastically because if Glass-Steagall wasn't overridden. Plus, the takeover has been going on for decades now. In a better world, this crisis would serve to make people start paying attention to Public Choice theorists; instead, they're focusing on Keynesianism and utopianisms. Regardless, it's a very good article.

[mogrovejo]

James Madison writes about the purpose of why including a bankruptcy clause in the COTUS in the Federalists. Their purpose was to avoid the states to enforce, democratically, bankruptcy laws protecting the debtor (it was current in rural states, where farmers had a large majority of the votes). The original purpose was to protect the creditor - because the last thing a commercial republic needs are legal incentives to increase the cost of lending.

Chapter 11, with its leniency towards debtors, completely frustrated and perverted the original purpose of the clause. That's the biggest problem with US bankruptcy laws, not the pecking order of the creditors.

Anyway, during more than a century there were no federal bankruptcy laws and they weren't needed. This should be a subject of corporate law.

[coyotes_geek]

Isn't it common for employees of publicly traded companies to be vested in the common stock? If so, this vitiates your point somewhat.

Besides contributing their bodies and minds to their employers, workers also contribute to pension funds. If the minimum due diligence for investors seeks guarantees for risk, why is there no corresponding fiduciary responsibility for the equity stake of workers in bankruptcy?

Now you're talking about stockholders, not lenders. Two different beasts, two different sets of risks and rewards. The potential reward for stockholders is unlimited whereas the potential reward for lenders is limited to whatever interest rate they agreed to loan out their money at. Conversely, the downside for stockholders is also unlimited. If they company goes bankrupt, they lose everything. Since the lenders are restricted to a limited upside, their downside also needs to be limited, which is what the bankruptcy laws do.

We also need to keep in mind that the pension funds are separate from the company itself. If the pension fund invests in company stock, they get the same rights as any other stockholder. If the pension fund acts as a lender and invests in company bonds, then they get the same rights as any bank or other lender. But in and of itself, the pension fund from the company's perspective is just a place they agree to send a portion of their employees compensation to, just like a regular paycheck.

In the larger sense, you're right. Markets are amoral. The little guy will continue to get screwed, while the guys who did it to him get another bailout. In the short term the economy will not suffer from it and there's a case to be made that this has always been somewhat the case anyway.

Whatever makes the banks feel better, right?

I don't like it, but yeah, that's exactly right. It's up to the little guy to do whatever he can to protect himself, because no one else is going to do it for him. If we learn anything from this crisis it needs to be this. Banks are more important than people. We, as people, don't want to hear that, but it's the truth. We're seeing now that when banks freak out it all falls apart. The best we can do is try to insulate ourselves by not placing huge debt burdens on ourselves. Which is why we should all be worried about the debt our government is running up. If (when) it comes time for our government to choose between paying the interest on our debt or honoring the promises made by social security and medicare, make no mistake, the banks are going to get their money. If that means millions of Americans have to grow old in poverty and without healthcare, then so be it. That's exactly what's going to happen. Because the alternative is causing another global financial crisis where far more people end up hurt.

[Winehole23]

Now you're talking about stockholders, not lenders. Two different beasts, two different sets of risks and rewards. The potential reward for stockholders is unlimited whereas the potential reward for lenders is limited to whatever interest rate they agreed to loan out their money at. Conversely, the downside for stockholders is also unlimited. If they company goes bankrupt, they lose everything. Since the lenders are restricted to a limited upside, their downside also needs to be limited, which is what the bankruptcy laws do.

Thanks for the thoughtful reply, CG.

We also need to keep in mind that the pension funds are separate from the company itself. If the pension fund invests in company stock, they get the same rights as any other stockholder. If the pension fund acts as a lender and invests in company bonds, then they get the same rights as any bank or other lender. But in and of itself, the pension fund from the company's perspective is just a place they agree to send a portion of their employees compensation to, just like a regular paycheck.

Sometimes funny things happen to the pension, as TDMVPDPOY pointed out, but I agree completely. The pensioner depends upon somebody else to make the contribution faithfully.

I don't like it, but yeah, that's exactly right. It's up to the little guy to do whatever he can to protect himself, because no one else is going to do it for him. If we learn anything from this crisis it needs to be this. Banks are more important than people. We, as people, don't want to hear that, but it's the truth. We're seeing now that when banks freak out it all falls apart. The best we can do is try to insulate ourselves by not placing huge debt burdens on ourselves. Which is why we should all be worried about the debt our government is running up. If (when) it comes time for our government to choose between paying the interest on our debt or honoring the promises made by social security and medicare, make no mistake, the banks are going to get their money. If that means millions of Americans have to grow old in poverty and without healthcare, then so be it. That's exactly what's going to happen. Because the alternative is causing another global financial crisis where far more people end up hurt.

I hope everybody heard this. It ain't no freaky 20th century no more.

I don't know it for a fact that we can't afford the promises we made ourselves, because nobody can know the future. The optics aren't too good..

[Winehole23]

James Madison writes about the purpose of why including a bankruptcy clause in the COTUS in the Federalists. Their purpose was to avoid the states to enforce, democratically, bankruptcy laws protecting the debtor (it was current in rural states, where farmers had a large majority of the votes). The original purpose was to protect the creditor - because the last thing a commercial republic needs are legal incentives to increase the cost of lending.

We are still important agriculturally, but very few of our citizens are farmers...there is an effective currency now...and how the equities lie as b/w creditor and debtor has somewhat changed IMO.

Chapter 11, with its leniency towards debtors, ...That's the biggest problem with US bankruptcy laws, not the pecking order of the creditors.

Bankruptcy strives to keep the debtor whole within his obligations, rather than torn asunder by them. Perhaps there is still wisdom in this arrangement, even though it rends the creditor.

Unlike Prometheus, debtors' livers don't grow back overnight. So in bankruptcy the court oversees the orderly destruction of the wealth of the pe ioner and his creditors both, that they all might eventually survive to fight each other another day in court.

Anyway, during more than a century there were no federal bankruptcy laws and they weren't needed. This should be a subject of corporate law.

Does corporate law overlook it? I would assume it does not but confess to knowing bupkis.

Anyway, your emphasis on the US Cons ution was germane and helped keep the discussion within reasonable bounds. Nice post, mogrovejo.

[Winehole23]

In America, we are still getting plastered by the knock-on from abusive lending.