by Mark Roe, for The Harvard Law School Forum at Harvard Law School, October 28, 2009.
In a recent working paper Assessing the Chrysler Bankruptcy, which I presented at the Law and Economics seminar here at Harvard Law School, David Skeel and I evaluate the Chrysler bankruptcy. Chrysler entered bankruptcy as a company widely thought to be ripe for liquidation if left on its own, obtained massive funding from the United States Treasury, and exited via a transaction that transferred its auto business and most of its preexisting creditors to a new company principally owned by some of Chrysler’s old creditors.
The transaction proved controversial in capital markets, as some lenders — those left behind with claims on the shell company that had owned the auto business — complained that their entitlement to priority wasn’t honored. Warren Buffett wondered out loud that there would be “a whole lot of consequences” if the transaction was approved, as it was, because it could “disrupt lending practices in the future.”
Our overall conclusions are not favorable to the process and results. The Chrysler bankruptcy process used undesirable mechanisms that federal courts and Congress struggled for decades to suppress at the end of the 19th and first half of the 20th centuries, ultimately successfully. If the mechanisms are not firmly rejected, either explicitly or via judicial (or legislative) distinction or via a collective forgetting of the event among bankruptcy institutions, then future reorganizations in chapter 11 will be at risk, in ways that could potentially affect capital markets…(continue reading)
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