Transcript Debt Enforcement around the World

Bankruptcy and the financial
crisis
Andrei Shleifer
IMF presentation
May 26, 2009
• Reorganization of insolvent firms is a
crucial institution of a market economy
• It works poorly in most countries,
especially developing ones
• The problem is critical now, in the middle
of the crisis
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• Discuss a study of insolvency in 88
countries conducted with S. Djankov, O.
Hart, C. McLeish (JPE 2008)
• Consider some implications for insolvency
laws
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Setup
Hypothetical Case
Respondents: Insolvency Practioners from
International Bar Association Committee on
Bankruptcy
Date: January 2006 (several rounds before)
Total: 344 lawyers
All countries with: GDP per capita > $1000
Population > 1.5 million
Total: 88 countries
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Case Facts
Insolvent Firm called “Mirage”
Limited liability, domestically owned, mediumsized hotel
Located in most populous city
201 employees
50 suppliers (each owed money)
Five years ago, borrowed from Bizbank
Loan has collateral, i.e., is secured
Loan has 10 year term
Mirage has met all obligations until now
Loan has seniority
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Case Facts (cont’d)
Mirage owned 51% by Mr. Douglas
No other shareholder has > 5%
Mirage has a manager, with no special human capital
Mirage has 136 units of debt
Suppliers, Tax Authorities, employees each owed 12
These are unsecured creditors
Bizbank is owed 100
All normalized to country’s GDP per capita
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Case Facts (cont’d)
Mirage has been losing money and
is about to default due to industry shock
Assume going forward can cover costs
But cannot cover debt payments
Version A: Going concern worth 100
Piecemeal liquidation worth 70
Version B: Going concern worth 70
Piecemeal liquidation worth 100
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Data
Time = T
Cost = C
Whether get the efficient outcome: EO = 1
100
*
EO

70
*
(
1

EO
)

C
*
100
Efficiency =
(1  r )T
Assume zero net revenue during procedure and costs
incurred at end (but robust)
Also get structural features of procedure
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3 Procedures
2 Outcomes
Foreclosure
Going Concern
Reorganization
first
Piecemeal sale
Liquidation
Figure 1: Options for Mirage
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Limitations of the Case
1. No informal workouts allowed
2. Capital structure does not adjust to law
3. Only one secured creditor
Complex conflicts minimized
(Indeed, foreclosure has correct incentives)
4. Respondents know what is efficient from the start
5. Do not need new financing
6. No public interest, politics involved
7. No tunneling (looting)
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(Tentative) Conclusions
• Lots of inefficiency in a very simple case: wrong
outcome, slow, high administrative costs
• How to do better?




Encourage foreclosure and floating charge
Circumscribe Appeals
Discourage automatic cessation of operations
Don’t allow suppliers/customers to rescind contracts
• Reorganization seems a bad idea in poor
countries, where, arguably, institutions are not
good enough to support complex procedures.
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• What are the implications for today?
• Assume bankruptcy reform cannot be
done on short notice
• Massive bankruptcies would be terrible for
efficiency
• Fire sale liquidations are bad for everyone
• But also do not want debt forgiveness
• Suggestion: encourage private
renegotiation, perhaps even subsidize it
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