5 ms·

There is a middle path, where creditors are converted to shareholders and shareholders are massively diluted. Effective control of the company will be placed i

There is a middle path, where creditors are converted to shareholders and shareholders are massively diluted. Effective control of the company will be placed in the hands of people who re-capitalize the company, and they will definitely not let the old management stick around. Relative to bankruptcy, this has the benefit of allowing the company to continue operating. It also deters future recklessness. Probably should have happened in 2009, but didn't.

extralegos 7y ago
Great point, and very relevant to 2009, wherein the automakers would have likely not been replaced by American companies. But, in the case of United States airline companies, they would very likely be replaced by other American companies if they were not adopted by the creditors.
- dantheman 7y ago
  Foreign airlines are not allowed to provide domestic routes.
ace32229 7y ago
It did happen in the UK. Banks that took bailouts traded shares for cash with the Treasury (this is a layman's understanding at least). RBS notably became 84% publicly owned. The real scandal is the government selling back the shares for less than they paid for them (when RBS was on the brink of collapse).
- joey_bob 7y ago
  Did the Treasury improve the bank operations for the better? It’s difficult to imagine that they’d do the same jobs as private creditors, considering 1. The Treasury decision makers stake in the longer term performance of the banks is low 2. The Treasury has money as an institution of government, even in a downturn, and has come to possess through political means. Private creditors have some come to possess, and more importantly keep/remain solvent during a downturn, the money they have to lend through means and methods more closely related to the effective operations of the banks. Not that every private creditor who ended up in control would do a better job, but on the whole firms would be more effectively run in the long term. Especially when it comes to avoiding risky leveraging situation as we’re in now. Not a britbong, so my understanding of how everything works over there might be wrong
  - EdwardDiego 7y ago
    I respectfully disagree with point 1 - our Treasury, at least, which I imagine works along similar lines to the HM Treasury, realises the important social role healthy, and well-capitalised banks play.
- rmrfstar 7y ago
  A piece is missing. RBS creditors were not "bailed-in" by having their debt converted to equity. Instead, they were offered guarantees (functionally, though not in name). RBS was a classic bail out. Creditors were fully protected, and shareholders retained a substantial interest in the surviving entity (in this case 20%). [1] https://www.theguardian.com/business/2010/aug/06/royal-bank-of-scotland-profits-analysis https://www.theguardian.com/business/2010/aug/06/royal-bank-...
lokar 7y ago
bankruptcy != liquidation Liquidation (shut it down, fire everyone, sell all the stuff) is one (rare) outcome of bankruptcy. The more common is some form of reorganization, debt re-structuring, etc. The "middle path" you mention. Bankruptcy is good. It generally prevents un-needed and chaotic liquidations.
- rmrfstar 7y ago
  Thanks. I wanted to avoid getting into the weeds on Chapter 7 (liquidation) vs. Chapter 11 (reorganization). Both are so disruptive and costly that threatening to invoke them can be (and has been) used to force a public bailout. A good example is the case of California Edison and Dynergy from 2001. [1] https://www.latimes.com/archives/la-xpm-2001-jan-16-mn-12864-story.html https://www.latimes.com/archives/la-xpm-2001-jan-16-mn-12864...
clairity 7y ago
that's interesting, but it's unclear whether or not that would target the wrongdoers precisely enough. executives, some (maybe all) board members, and some principal shareholders (maybe all principals) are the likely instigators of decisions like this. those are the folks to punish. and on the flipside, it's not clear that all creditors deserve potential upside beyond their promised fixed income (and many probably don't want the added risk and responsibility of equity over debt). you'd also want to claw back related gains from executives, board members, and principal shareholders. maybe the benefits should accrue to non-executive employees and to customers instead.
Jare 7y ago
> creditors are converted to shareholders and shareholders are massively diluted I don't know much about large-scale economy and business, but if I ever decided to learn it would be to learn why this is not completely the norm. I simply cannot comprehend the existence of "free" bailouts.
- rmrfstar 7y ago
  Dodd-Frank included a thing called "TLAC", which is this. A lot of politics happened. In the US we have a "notice and comment" process on proposed regulations. You can see the politics play out in the comments on the Fed's proposed TLAC rules. If you read them, you run the risk of becoming cynical about our political process.
marcosdumay 7y ago
Bankruptcy courts almost always try something similar to that before closing a company. Both kinds are called "bankruptcy", but they have completely different results, what makes this all very confusing. Anyway, it's not a new idea, and not something that needs any pushing, it's the usual way to handle company failures.
- rmrfstar 7y ago
  I'm largely mirroring a comment I made below. Re-organization under Chapter 11 is so costly and disruptive that threatening it has been used to extract public bailouts [1]. This is one of the reasons that Dodd-Frank included a TLAC provision, which was heavily watered down throughout the Fed's implementation process. The bankruptcy code is really boring, but a lot of high-stakes politics plays out there. Like the tax code. [1] https://www.latimes.com/archives/la-xpm-2001-jan-16-mn-12864-story.html https://www.latimes.com/archives/la-xpm-2001-jan-16-mn-12864...

extralegos 7y ago

Great point, and very relevant to 2009, wherein the automakers would have likely not been replaced by American companies. But, in the case of United States airline companies, they would very likely be replaced by other American companies if they were not adopted by the creditors.

dantheman 7y ago
Foreign airlines are not allowed to provide domestic routes.

ace32229 7y ago

It did happen in the UK. Banks that took bailouts traded shares for cash with the Treasury (this is a layman's understanding at least). RBS notably became 84% publicly owned. The real scandal is the government selling back the shares for less than they paid for them (when RBS was on the brink of collapse).

joey_bob 7y ago
Did the Treasury improve the bank operations for the better? It’s difficult to imagine that they’d do the same jobs as private creditors, considering 1. The Treasury decision makers stake in the longer term performance of the banks is low 2. The Treasury has money as an institution of government, even in a downturn, and has come to possess through political means. Private creditors have some come to possess, and more importantly keep/remain solvent during a downturn, the money they have to lend through means and methods more closely related to the effective operations of the banks. Not that every private creditor who ended up in control would do a better job, but on the whole firms would be more effectively run in the long term. Especially when it comes to avoiding risky leveraging situation as we’re in now. Not a britbong, so my understanding of how everything works over there might be wrong
- EdwardDiego 7y ago
  I respectfully disagree with point 1 - our Treasury, at least, which I imagine works along similar lines to the HM Treasury, realises the important social role healthy, and well-capitalised banks play.
rmrfstar 7y ago
A piece is missing. RBS creditors were not "bailed-in" by having their debt converted to equity. Instead, they were offered guarantees (functionally, though not in name). RBS was a classic bail out. Creditors were fully protected, and shareholders retained a substantial interest in the surviving entity (in this case 20%). [1] https://www.theguardian.com/business/2010/aug/06/royal-bank-of-scotland-profits-analysis https://www.theguardian.com/business/2010/aug/06/royal-bank-...

lokar 7y ago

bankruptcy != liquidation Liquidation (shut it down, fire everyone, sell all the stuff) is one (rare) outcome of bankruptcy. The more common is some form of reorganization, debt re-structuring, etc. The "middle path" you mention. Bankruptcy is good. It generally prevents un-needed and chaotic liquidations.

rmrfstar 7y ago
Thanks. I wanted to avoid getting into the weeds on Chapter 7 (liquidation) vs. Chapter 11 (reorganization). Both are so disruptive and costly that threatening to invoke them can be (and has been) used to force a public bailout. A good example is the case of California Edison and Dynergy from 2001. [1] https://www.latimes.com/archives/la-xpm-2001-jan-16-mn-12864-story.html https://www.latimes.com/archives/la-xpm-2001-jan-16-mn-12864...

clairity 7y ago

that's interesting, but it's unclear whether or not that would target the wrongdoers precisely enough. executives, some (maybe all) board members, and some principal shareholders (maybe all principals) are the likely instigators of decisions like this. those are the folks to punish. and on the flipside, it's not clear that all creditors deserve potential upside beyond their promised fixed income (and many probably don't want the added risk and responsibility of equity over debt). you'd also want to claw back related gains from executives, board members, and principal shareholders. maybe the benefits should accrue to non-executive employees and to customers instead.

Jare 7y ago

> creditors are converted to shareholders and shareholders are massively diluted I don't know much about large-scale economy and business, but if I ever decided to learn it would be to learn why this is not completely the norm. I simply cannot comprehend the existence of "free" bailouts.

rmrfstar 7y ago
Dodd-Frank included a thing called "TLAC", which is this. A lot of politics happened. In the US we have a "notice and comment" process on proposed regulations. You can see the politics play out in the comments on the Fed's proposed TLAC rules. If you read them, you run the risk of becoming cynical about our political process.

marcosdumay 7y ago

Bankruptcy courts almost always try something similar to that before closing a company. Both kinds are called "bankruptcy", but they have completely different results, what makes this all very confusing. Anyway, it's not a new idea, and not something that needs any pushing, it's the usual way to handle company failures.

rmrfstar 7y ago
I'm largely mirroring a comment I made below. Re-organization under Chapter 11 is so costly and disruptive that threatening it has been used to extract public bailouts [1]. This is one of the reasons that Dodd-Frank included a TLAC provision, which was heavily watered down throughout the Fed's implementation process. The bankruptcy code is really boring, but a lot of high-stakes politics plays out there. Like the tax code. [1] https://www.latimes.com/archives/la-xpm-2001-jan-16-mn-12864-story.html https://www.latimes.com/archives/la-xpm-2001-jan-16-mn-12864...