Posts Tagged ‘Icelandic bankruptcy’

Understanding Bankruptcy as the World Collapses Around You (1)

Saturday, June 9th, 2012

We have seen the dire economic consequences of excessive consumer, corporate, financial, and sovereign leverage of the past 5 years. Our global economy has been a punching bag for corporate greed, political incompetency, and poor central bank planning. From shadow banking and derivatives (“weapons of mass destruction” according to Mr. Buffet) in the United States to Greece’s fraudulent attempt to the enter the Eurozone, world markets have been whipsawed every year since 2007. I cannot help but feel deep remorse after witnessing multiple occasions of the VIX above 40, sovereign CDS making multi-year highs, and political uprising. Five years later, we have yet to learn that leverage is the primary cause of our pain.

Despite an Icelandic bankruptcy, 2 Greek bailouts, a Portuguese bailout, and Irish bailout, and a U.S. bank bailout, 35% of U.S. homes underwater, and 20%+ unemployment rates in certain Western nations, student loans have emerged as yet another bubble, the U.S. consumer savings rate remains below 4%, European banks are levered 26x on average, and countries continue to borrow at astronomical rates. Are we doomed to repeat our mistakes? Sadly, the answer seems to be yes.

Every 2 generations (70-80 years), individuals tend to forget the pain that their forefathers felt in a deep economic contraction. The Great Depression certainly did its job. Maybe we need a constant painful reminder to reign in our tendency to express “irrational exuberance?” Luckily, for learning purposes, a global debt deleveraging cycle is the most painful type of contraction. Hopefully, our children and grandchildren can learn from our mistakes.


Until then, I have started this series to explain the BANKRUPTCY process, specifically the U.S. Ch. 11 process, as I continue to do my part to clean up the riff-raff, the banksters, the incompetent politicians, and the corrupt corporate bureaucrats holding back true capitalism.

  • Bankruptcy is governed by federal statute (11 U.S.C., Section 101):
    • For the equitable distribution among creditors and shareholders of a debtor’s estate in accordance with either the principle of absolute priorities or the vote of bankruptcy majorities of holders of claims
    • To provide a reasonable opportunity, under Chapter 11, to effect a reorganization of business
    • For the opportunity to make a “fresh start” through, among other things, the discharge of debts

  • The goals of bankruptcy are:
    • To afford the greatest possibility of resolution for the estate as a whole, while maintaining the balance of power as between all creditors and the debtor as of the petition date
  • Debtor’s rights and protections include:
    • Automatic stay: an automatic injunction to halt action by creditors
    • Exclusivity to formulate/propose plan of reorganization
    • Continued control and management of the Company
    • Assumption/rejection of executor contracts and unexpired leases
    • Asset sale decisions
    • Avoidance actions
    • Discharge of claims
  • Secured creditor’s rights and protections:
    • Secured to extent of value of collateral
    • Limitations on debtor’s ability to use proceeds/profits of collateral (“cash collateral”)
    • Entitled to “adequate protection” for use of collateral or diminution thereof
    • Entitled to relief from automatic stay for cause shown
    • Entitled to interest and reasonable legal fees when collateral value exceeds debt
    • Entitled to be paid in full in cash or to retain lien to the extent of its allowed claim and receive deferred cash payments totaling at least the allowed amount of such claim

  • Unsecured creditors’ rights and protections include:
    • Majority voting controls
    • Improved and mandated disclosure by debtor
    • Committee representation at debtor’s expense
    • Ability to challenge business judgment of debtor
    • Absolute priority rule generally ensures payment before distribution to existing equity security holders
    • Ability to examine/challenge validity and enforceability of liens and, if debtor refuses, to obtain authority to bring fraudulent conveyance, preference and other actions
    • May continue to exercise corporate governance subject to limitations
    • Valuation as the fulcrum and equalizer of debt and creditor powers
  • Equity may also seek committee representation under certain circumstances and thereby obtain leverage similar to that of creditors’ committee

~Xavier, Leverage Academy Instructor

(All similar entries are in LA’s “Bankruptcy” folder on the right of the blog.)