The Posse List

Beware of shadow bankruptcy

bankruptcy-1

Financial actors such as hedge funds increasingly influence large Chapter 11 cases, such as Chrysler’s and GM’s.

With Chrysler LLC’s sale to Fiat SpA past the U.S. Supreme Court, and with General Motors Corp. commencing its own “surgical” bankruptcy on the Chrysler model, it may be tempting to think that we’ve turned a corner: Tentative deals with most major stakeholders of the automakers assure a quick trip through the Chapter 11 emergency room. Now, we might think, it is just a matter of convalescence. This sense of relief may help to explain why the S&P 500 stock market index reached a 2009 high the same day GM declared bankruptcy.

We should not, however, pop the champagne just yet. These companies are still extremely fragile. Bankruptcy may save them — but only if the operations are performed correctly. Plenty can still go disastrously wrong.

One problem is speed. President Obama has promised that both the Chrysler and GM bankruptcies will be quick, which seems likely. Yet those who study bankruptcy know that going through it hastily may simply result in a second or, as in the case of some airlines, a third bankruptcy. Just because a reorganization is fast does not mean it is successful. Repeat trips to the operating table are rarely good.

For the full article from the National Law Journal click here. 

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