6 ms·

> (Chapter 11" in the US), and most of the other creative stuff seen in US debt finance. Now companies in China can try all the stupid debt side stuff we see in

by avar 8y ago

> (Chapter 11" in the US), and most of the other creative stuff seen in US debt finance. Now companies in China can try all the stupid debt side stuff we see in the US. In the wake of the recovery of the 2008 financial crisis much was written about how these sorts of structural bankruptcies in the US left everyone better off than the bankruptcy laws in e.g. much of Europe. Here's one such article: https://www.forbes.com/sites/hbsworkingknowledge/2013/03/25/how-chapter-11-saved-the-us-economy/ https://www.forbes.com/sites/hbsworkingknowledge/2013/03/25/... Why do you think policies like chapter 11 are stupid?

8ytecoder 8y ago
Chapter 11 bankruptcy is probably the single most factor at the forefront of American entrepreneurship and how the US propelled to be the strongest economy in the world. I have a feeling GP is talking about the lack of expertise in China to handle it correctly.
- Judgmentality 8y ago
  > Chapter 11 bankruptcy is probably the single most factor at the forefront American entrepreneurship and how the US propelled to be the strongest economy in the world. I'm not saying it isn't important, but that is a bold claim. I would love to hear your argument as to why.
  - wnevets 8y ago
    Not OP but the argument is probably that it allows people to experiment, try new things and fail while still allowing entrepreneurs to try again. For example Henry Ford went bankrupt multiple times before creating one of America's greatest(at least in terms of age) companies.
  - scott_s 8y ago
    I'm not the original commenter, but I've heard similar things in the past. I did some googling, found an article discussing the concept: How Chapter 11 Saved the US Economy, https://www.forbes.com/sites/hbsworkingknowledge/2013/03/25/how-chapter-11-saved-the-us-economy/#48bd2dc71520 https://www.forbes.com/sites/hbsworkingknowledge/2013/03/25/... Choice quote: "Because of Chapter 11 and the expertise of US restructuring professionals who advise troubled companies, Gilson says America's economic recovery has been far speedier than Europe's, where bankruptcy laws tend to favor immediate payback of creditors. "Many countries around the world have bankruptcy laws that primarily seek to liquidate distressed companies," he says. "The emphasis is on reimbursing creditors, or protecting particular stakeholders such as employees, rather than doing what's necessary to rehabilitate the business."
    - isoskeles 8y ago
      > "The emphasis is on reimbursing creditors, or protecting particular stakeholders such as employees, rather than doing what's necessary to rehabilitate the business." Don't mean to go far off-topic here, but I can't help but think why we can't try to apply similar principles when operating the corrections system (e.g. rehabilitate the criminal rather than focusing on punishment / appeasing stakeholders like family of the victim), and whether that would yield similar success or is even possible.
      - nradov 8y ago
        The actual focus is on crime prevention. While criminals are incarcerated they aren't out victimizing other people. More rehabilitation would probably improve the situation in the long term, though.
  - 8ytecoder 8y ago
    (IANAL. I'm not even from the US. Some of this information may not be very accurate) I'm not sure I can do it full justice either but here it goes - US bankruptcy laws are the oldest in the world. During a time when it's not uncommon for people to go to jail and be indentured to their debtors for their inability to repay the debts, US made a bold law that allowed for debt forgiveness and gradual repayment. US bankruptcy laws also made it possible to separate the property and responsibility of the company and that of the individual managing the company. This allowed for greater experimentation - because it's OK to fail without fear of persecution or losing all of the entrepreneur's property when a company fails. One more important factor is the ability of a company to declare bankruptcy and continue to operate - instead of getting divvied up to pay for the creditors. This resulted in companies that would otherwise be shutdown a second chance with restructuring and delayed debt payment. This is a long term view and is good for both the company and the creditors. It prevents short-term creditors from carving up the assets and closing down the company.
    - roel_v 8y ago
      No they're not. The first 'corporation' as we'd recognize it today was the Dutch East India Corporation, which was founded before the US even existed. It already split liability of the corporation from that of the officers running it.
      - HillRat 8y ago
        Yeah, but you had to get a Royal charter to create a limited liability company in those days. New York passed the first modern legislation allowing individuals to create LLCs/PLCs; the UK followed suit some decades later.
        roel_v 8y ago
        While the Wikipedia article for 'limited liability' somewhat hints at NY being the first place where 'limited liability' was a legal concept accessible to all (although I'm not sure why that article does that - it's probably an unintended side effect of its main point being a history of Anglo-Saxon law regarding limited liability companies as we know them today), the French 'Ordonnance de Commerce' of 1673 (!) already codified limited liability partnerships in which investors were not liable for more than their contribution in the company. They could be founded by mere 'notarial deed' (although this translation doesn't really capture the nuances of the concept in civil law). Of course those were not the same as today's (Anglo-Saxon) LLC's and PLC's, but my point was that protection of investors in bankruptcy was something that emerged in the 17th century, at the very dawn of 'capitalism' as we know it today, and it's not something the English invented. I've thrown out most of my law school books on legal history and I don't remember all that much about the details, but any law school library has literally 100's of books on this exact topic, it's not like this is something controversial.
  - VintageCool 8y ago
    Planet Money did an episode on this subject in 2017: https://www.npr.org/sections/money/2017/10/04/555646290/episode-648-the-benefits-of-bankruptcy https://www.npr.org/sections/money/2017/10/04/555646290/epis...
- btilly 8y ago
  That is a strong claim, and one that directly opposes my understanding of the situation. As a classic example, consider the US airline industry. Being in Chapter 11 bankruptcy is a competitive advantage, so one airline after another goes bankrupt, becomes competitive, and comes out, having driven another bankrupt in turn. This race to the bottom continues indefinitely. Everyone knows that the industry would be better off if it lost a couple of airlines, but Chapter 11 keeps that from ever happening.
  - addicted 8y ago
    There are like 2 airlines in the world that are profitable. Nearly every airline is either supported by the state or losing money. I don’t think airlines losing a ton of money is unique to the US and so I don’t think the US airline industry’s state tells us much about the effect of US bankruptcy laws at all.
    - gruez 8y ago
      >There are like 2 airlines in the world that are profitable What? random search: https://en.wikipedia.org/wiki/World%27s_largest_airlines https://en.wikipedia.org/wiki/World%27s_largest_airlines at least 10 that are profitable
      - nostrademons 8y ago
        Under what time horizon? Of the top 10: American Airlines went bankrupt in 2012 US Airways (took over American) went bankrupt in 2002, 2004, Delta went bankrupt in 2005 Continental went bankrupt in 2010 Lufthansa, Air France, IAM (British Airways + Iberia), China Southern, and China Eastern are state-supported. That leaves Southwest and ANA as the only ones on the list that have neither been bankrupt in the last 15 years nor are state-supported. It's pretty strong support for the GP's point.
        btilly 8y ago
        Add JetBlue, Ryanair, Cathay Pacific, IndiGo...there are a lot more than 2 profitable airlines worldwide. But it is hard to compete with a rival that has explicit support from a state. Whether that be owned by the state, or with negotiating advantages from an arrangement like Chapter 11.
AngryData 8y ago
Everybody better off, or just those who were holding ownership of unsafe businesses? Isn't the whole point of capitalism that failing businesses fail so that new and better businesses can take their place? Yeah it sucks for those people that failed, but their continued existence, despite not being profitable or stable, stands in the way of new and better business rising in it's place.
- snowwrestler 8y ago
  > Isn't the whole point of capitalism that failing businesses fail so that new and better businesses can take their place? Yes, and that's why Chapter 7 bankruptcy exists. Not every failing business can opt for Chapter 11. Chapter 11 gives businesses that can still succeed an opportunity to do so, without having to make the time-consuming full round trip through liquidation to startup to scaling to functioning business again. If it works, it benefits employees and customers who depend on the operations of the business, and it benefits the creditors and investors, since a profitable business will generate more money for them over time than a one-time liquidation would.
- jackcosgrove 8y ago
  If you could underline a single event in world history that could be called "the birth of capitalism", it would be the invention of the LLC by the Dutch Republic. Historically there has been no shortage of creditors using the long arm of the law to guard against moral hazard. Capitalism took off because of limited liability and bankruptcy law. Feudalism is an economy stuck in a local minimum because there's not enough new blood being entrusted with capital. Mix up the capital distribution a bit more, and yes there will be more business failures. But that capital will also find its way into the hands of entrepreneurs who are more skilled than the creditors. It's VC investing writ large: lose a little on most, make a lot on a few.

by avar 8y ago

8ytecoder 8y ago

Chapter 11 bankruptcy is probably the single most factor at the forefront of American entrepreneurship and how the US propelled to be the strongest economy in the world. I have a feeling GP is talking about the lack of expertise in China to handle it correctly.

Judgmentality 8y ago
> Chapter 11 bankruptcy is probably the single most factor at the forefront American entrepreneurship and how the US propelled to be the strongest economy in the world. I'm not saying it isn't important, but that is a bold claim. I would love to hear your argument as to why.
- wnevets 8y ago
  Not OP but the argument is probably that it allows people to experiment, try new things and fail while still allowing entrepreneurs to try again. For example Henry Ford went bankrupt multiple times before creating one of America's greatest(at least in terms of age) companies.
- scott_s 8y ago
  I'm not the original commenter, but I've heard similar things in the past. I did some googling, found an article discussing the concept: How Chapter 11 Saved the US Economy, https://www.forbes.com/sites/hbsworkingknowledge/2013/03/25/how-chapter-11-saved-the-us-economy/#48bd2dc71520 https://www.forbes.com/sites/hbsworkingknowledge/2013/03/25/... Choice quote: "Because of Chapter 11 and the expertise of US restructuring professionals who advise troubled companies, Gilson says America's economic recovery has been far speedier than Europe's, where bankruptcy laws tend to favor immediate payback of creditors. "Many countries around the world have bankruptcy laws that primarily seek to liquidate distressed companies," he says. "The emphasis is on reimbursing creditors, or protecting particular stakeholders such as employees, rather than doing what's necessary to rehabilitate the business."
  - isoskeles 8y ago
    > "The emphasis is on reimbursing creditors, or protecting particular stakeholders such as employees, rather than doing what's necessary to rehabilitate the business." Don't mean to go far off-topic here, but I can't help but think why we can't try to apply similar principles when operating the corrections system (e.g. rehabilitate the criminal rather than focusing on punishment / appeasing stakeholders like family of the victim), and whether that would yield similar success or is even possible.
    - nradov 8y ago
      The actual focus is on crime prevention. While criminals are incarcerated they aren't out victimizing other people. More rehabilitation would probably improve the situation in the long term, though.
- 8ytecoder 8y ago
  (IANAL. I'm not even from the US. Some of this information may not be very accurate) I'm not sure I can do it full justice either but here it goes - US bankruptcy laws are the oldest in the world. During a time when it's not uncommon for people to go to jail and be indentured to their debtors for their inability to repay the debts, US made a bold law that allowed for debt forgiveness and gradual repayment. US bankruptcy laws also made it possible to separate the property and responsibility of the company and that of the individual managing the company. This allowed for greater experimentation - because it's OK to fail without fear of persecution or losing all of the entrepreneur's property when a company fails. One more important factor is the ability of a company to declare bankruptcy and continue to operate - instead of getting divvied up to pay for the creditors. This resulted in companies that would otherwise be shutdown a second chance with restructuring and delayed debt payment. This is a long term view and is good for both the company and the creditors. It prevents short-term creditors from carving up the assets and closing down the company.
  - roel_v 8y ago
    No they're not. The first 'corporation' as we'd recognize it today was the Dutch East India Corporation, which was founded before the US even existed. It already split liability of the corporation from that of the officers running it.
    - HillRat 8y ago
      Yeah, but you had to get a Royal charter to create a limited liability company in those days. New York passed the first modern legislation allowing individuals to create LLCs/PLCs; the UK followed suit some decades later.
      - roel_v 8y ago
        While the Wikipedia article for 'limited liability' somewhat hints at NY being the first place where 'limited liability' was a legal concept accessible to all (although I'm not sure why that article does that - it's probably an unintended side effect of its main point being a history of Anglo-Saxon law regarding limited liability companies as we know them today), the French 'Ordonnance de Commerce' of 1673 (!) already codified limited liability partnerships in which investors were not liable for more than their contribution in the company. They could be founded by mere 'notarial deed' (although this translation doesn't really capture the nuances of the concept in civil law). Of course those were not the same as today's (Anglo-Saxon) LLC's and PLC's, but my point was that protection of investors in bankruptcy was something that emerged in the 17th century, at the very dawn of 'capitalism' as we know it today, and it's not something the English invented. I've thrown out most of my law school books on legal history and I don't remember all that much about the details, but any law school library has literally 100's of books on this exact topic, it's not like this is something controversial.
- VintageCool 8y ago
  Planet Money did an episode on this subject in 2017: https://www.npr.org/sections/money/2017/10/04/555646290/episode-648-the-benefits-of-bankruptcy https://www.npr.org/sections/money/2017/10/04/555646290/epis...
btilly 8y ago
That is a strong claim, and one that directly opposes my understanding of the situation. As a classic example, consider the US airline industry. Being in Chapter 11 bankruptcy is a competitive advantage, so one airline after another goes bankrupt, becomes competitive, and comes out, having driven another bankrupt in turn. This race to the bottom continues indefinitely. Everyone knows that the industry would be better off if it lost a couple of airlines, but Chapter 11 keeps that from ever happening.
- addicted 8y ago
  There are like 2 airlines in the world that are profitable. Nearly every airline is either supported by the state or losing money. I don’t think airlines losing a ton of money is unique to the US and so I don’t think the US airline industry’s state tells us much about the effect of US bankruptcy laws at all.
  - gruez 8y ago
    >There are like 2 airlines in the world that are profitable What? random search: https://en.wikipedia.org/wiki/World%27s_largest_airlines https://en.wikipedia.org/wiki/World%27s_largest_airlines at least 10 that are profitable
    - nostrademons 8y ago
      Under what time horizon? Of the top 10: American Airlines went bankrupt in 2012 US Airways (took over American) went bankrupt in 2002, 2004, Delta went bankrupt in 2005 Continental went bankrupt in 2010 Lufthansa, Air France, IAM (British Airways + Iberia), China Southern, and China Eastern are state-supported. That leaves Southwest and ANA as the only ones on the list that have neither been bankrupt in the last 15 years nor are state-supported. It's pretty strong support for the GP's point.
      - btilly 8y ago
        Add JetBlue, Ryanair, Cathay Pacific, IndiGo...there are a lot more than 2 profitable airlines worldwide. But it is hard to compete with a rival that has explicit support from a state. Whether that be owned by the state, or with negotiating advantages from an arrangement like Chapter 11.

AngryData 8y ago

Everybody better off, or just those who were holding ownership of unsafe businesses? Isn't the whole point of capitalism that failing businesses fail so that new and better businesses can take their place? Yeah it sucks for those people that failed, but their continued existence, despite not being profitable or stable, stands in the way of new and better business rising in it's place.

snowwrestler 8y ago
> Isn't the whole point of capitalism that failing businesses fail so that new and better businesses can take their place? Yes, and that's why Chapter 7 bankruptcy exists. Not every failing business can opt for Chapter 11. Chapter 11 gives businesses that can still succeed an opportunity to do so, without having to make the time-consuming full round trip through liquidation to startup to scaling to functioning business again. If it works, it benefits employees and customers who depend on the operations of the business, and it benefits the creditors and investors, since a profitable business will generate more money for them over time than a one-time liquidation would.
jackcosgrove 8y ago
If you could underline a single event in world history that could be called "the birth of capitalism", it would be the invention of the LLC by the Dutch Republic. Historically there has been no shortage of creditors using the long arm of the law to guard against moral hazard. Capitalism took off because of limited liability and bankruptcy law. Feudalism is an economy stuck in a local minimum because there's not enough new blood being entrusted with capital. Mix up the capital distribution a bit more, and yes there will be more business failures. But that capital will also find its way into the hands of entrepreneurs who are more skilled than the creditors. It's VC investing writ large: lose a little on most, make a lot on a few.