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    The Shadow Bankruptcy System

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    Genre
    Journal article
    Date
    2009
    Author
    Lipson, Jonathan C.
    Subject
    Laws, regulations and rules
    Bankruptcy reorganizations
    Hedge funds
    Influence
    Investment banks
    Private equity funds
    Credit default swaps
    Permanent link to this record
    http://hdl.handle.net/20.500.12613/6664
    
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    DOI
    http://dx.doi.org/10.34944/dspace/6646
    Abstract
    This article exposes and explores a puzzle at the heart of the current economic crisis: The surprising under-use, and increasing misuse, of Chapter 11 of the United States Bankruptcy Code, the principal legal system for salvaging troubled businesses. The answer offered here: The rise of the shadow bankruptcy system. "Shadow bankruptcy" describes the severely under-regulated non-bank financial institutions (e.g., hedge funds, private equity funds and investment banks) that increasingly dominate and manipulate Chapter 11 reorganizations. Like the "shadow banking" system for which it is named, shadow bankruptcy thrives on and promotes opacity and undisclosed, possibly perverse, incentives. Shadow bankruptcy players exploit regulatory gaps to conceal their identities and motives, and so increase the uncertainty, complexity - and thus the cost - of negotiations to restructure distressed firms; they burden judicial resources through internecine fights of little benefit to reorganizing debtors; they have complex, multi-faceted hedging strategies that may effectively short-sell the debtor's reorganization effort, resulting in depressed asset values and the premature liquidation of otherwise viable firms. Shadow bankruptcy threatens Congress' basic aspiration in creating Chapter 11: preserving going concerns and jobs through negotiated reorganizations. Shadow bankruptcy thus promises to do for corporate reorganization what shadow banking did for the global financial system: privatize gains and socialize losses. This article explores the contours and costs of the shadow bankruptcy system. It also suggests some cures.
    Citation
    Jonathan C. Lipson, The Shadow Bankruptcy System, 89 B.U. L. Rev. 1609 (2009).
    Available at: https://www.bu.edu/law/journals-archive/bulr/volume89n5/documents/LIPSON.pdf
    Citation to related work
    Boston University School of Law
    Has part
    Boston University Law Review, Vol. 89
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