far in the deregulatory direction? That is, did the rush to trash the New Dealer’ s inelegant solutions reopen the door to the real problems that they had identified? I suggest the answer is“ yes.”
Chapter 11 has undoubtedly become extremely economically important. The chapter 11 cases of Lehman Brothers, Washington Mutual, J. Crew, Sears, Enron, Owens Corning, Pan Am, General Motors, Chrysler, United Airlines, Texaco, Neiman Marcus, and Pacific Gas & Electric( twice), all attest to the central role of corporate bankruptcy in modern America.
The predominate explanation for corporate bankruptcy is that chapter 11 exists to promote the efficiency of the American economy. By providing an agreeable structure for addressing overindebted companies, chapter 11 reduces the finance costs of all companies. At its best, the common wisdom is to view chapter 11 as a government provided framework for negotiation that protects the American economy from the failure of big firms. Chapter 11 is often painted as a kind of“ win-win,” in which everyone benefits from improved capital markets.
This understanding of business bankruptcy is also rooted in the prevailing popular history which( as noted) designates J. Pierpont Morgan as the craftsman of the modern system, rehearsing that in the 1890s the financier established the deal-based format that we still use today. The consensus view adopts Morgan’ s own framing of his firm’ s role as leading a noble effort to protect bondholders from the depravations of corporate insiders. The acceptance of this account has the practical effect of dismissing the reform efforts of New Dealers, who moved to replace the nineteenth century restructuring process with a new statute, while also legitimizing the current chapter 11 system( modeled on the nineteenth century form), which features judicial deference to insider negotiated deals.
In the book, I instead argue that corporate restructuring has always been about buying
consent from those who could stop you, and imposing your will on those who could not. That is, corporate bankruptcy is mostly about control. And while the New Dealers might have been misguided in their remedies, they correctly identified key problems with the roots of modern corporate restructuring that persist to this day. Only by understanding the history of corporate restructuring – stripped of the mythology of the magnanimous J. P. Morgan, putting down his cigar to rescue pitiful, oppressed English bondholders – can we understand the reasons for the defects of today’ s chapter 11, which recent commentators have deemed“ lawless.”
Corporate restructuring indeed evolved from a lawless origin. It was designed by Jay Gould not as the efficient bondholder protection continued on page 59
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