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THE BANKRUPTCY OF BANKRUPTCY

August 26, 2013

THE BANKRUPTCY OF BANKRUPTCY

As noted by Joseph Stiglitz in his 2012 book, The Price of Inequality, bankruptcy law is designed to give individuals a fresh start when they cannot pay back what they owe. (I will address corporations later, who can currently enjoy bankruptcy protection even when they CAN pay back what they owe.) The tradition of debt forgiveness is not new; it goes back to or perhaps beyond the book of Leviticus, where debts were forgiven in the Jubilee year.

That was not a state tradition, however; the recognition of debt forgiveness (as set forth in bankruptcy statutes) is of fairly recent vintage and may have come into vogue as a result of the tyranny of English creditors exemplified by their threats of debtor’s prisons and bonded servitude as means of collection. My followers will recall that I have written earlier of the humiliation of Charles Dickens when his father was imprisoned for a year in debtor’s prison and young Charles was taken out of school and worked as a bootblack in London during his father’s tenure in jail.

With the maturing of the Industrial Revolution and the uptick in financing both in domestic and international commerce and investments in European colonies in Asia and Africa, there were, of course, winners and losers, and it became clear that some formal procedures were necessary to facilitate an orderly division of assets and an order of priority among secured and unsecured creditors for those individuals and corporations whose businesses failed and could not pay their debts as they matured. Hence, bankruptcy laws, laws that nearly every modern economy now has.

Modern bankruptcy laws are now in the hands of politicians who can and do fashion such laws to accord with the interests of those they represent. Over time, bankruptcy laws have been either more creditor or more debtor friendly, depending upon who had the political pull to shape their provisions.

As of today, it is clear that the bankruptcy act in its latest reincarnation represents banking and creditors over ordinary Americans. The law, for instance, after 2005 amendments passed during the Bush administration, makes it impossible for borrowers on real estate to obtain discharge of the debt arising from such an obligation; the same set of amendments passed during a friendly Republican administration also made it impossible for students to discharge tuition debt.

A casual observer might not think much of these harsh provisions against discharge for homeowners and students if the law were rounded, but it isn’t. Corporations (see American Airlines) in Chapter 11 of the Act do not even have to be technically insolvent; American and every other major airline has had at least one trip through Chapter 11 and is either merged or still in business. American even has the supreme brass to attempt a merger with US Airways at present, and WHILE STILL IN BANKRUPTCY! (Thank goodness the Obama Administration has filed a Sherman objection (the merger would cause monopoly).

Bankruptcy judges under Chapter 11 have enormous authority. They can break labor contracts, reduce wages, rid or curtail pensions to employees, approve engineered buyouts by vulture corporations and hedge funds etc. etc. etc. Chapter 11 has become a corporate playground for divesting corporate responsibilities owed to employees and creditors, a legalized means of cover for the corporate culture to break contracts, curtail or end pensions of employees etc., and STILL STAY IN BUSINESS. These are the same people who pontificated about “moral risk” when testifying before congressional committees about how students and homeowners could not be trusted to keep their word(s). Save me from such hypocrisy from the bailout recipients, who are walking examples of moral risk, a risk ignored and even rewarded by the terms of Chapter 11 of the bankruptcy act!

The Act’s impact is clearly asymmetrical – it is pro bank and pro corporation and anti student and homeowner, as I have blogged repeatedly in the past. Its terms need a housecleaning; it is unfair, unjust, and strays for miles away from the original intent of bankruptcy, which was to afford people and corporations an opportunity for a discharge of their debts in a fair and orderly fashion among creditors of such debtors on debts that may have been accrued not as a result of having failed some test of moral risk but rather through natural catastrophe (see Sandy) or sickness or death (55% of all bankruptcy filings are the result of inability to pay medical bills). We all know where the moral risks reside.

It is noteworthy that the subprime crisis started to bloom at or about the same time as the bankruptcy act was amended in 2005. I suspect that the amendments of 2005 gave the banks good reason to lend recklessly to unsophisticated borrowers. Why not? The borrowers could not take bankruptcy, so the element of risk was greatly degraded; it was additional and undeserved security for the banks. All of the risks associated with performance of the transaction were transferred to debtors, a bonus to banking lenders as a matter of law (as though Wall Street needed additional collateral for its survival).

Thus if the borrowers didn’t pay, the banks could effectively reinstate the pre-bankruptcy milieu of the days of Charles Dickens with involuntary servitude of a sort (though without debtor’s prisons – so far). Further emboldened, deceptive practices of fraud and misrepresentation in the mortgage market were next on the banks’ agenda, culminating in bailouts and a return to business as usual for the banks and public penury (social security, medical care, education, infrastructure cuts etc.) for the rest of us. We must pay for our sins, you know. OUR SINS? Did you sell credit derivatives or deceive borrowers? I didn’t. Did you make loans to unqualified people when you knew better in order to collect fees and commissions to fatten your bottom line? I didn’t. It is plain that we are paying for Wall Street’s sins.

So what are you and I going to do about this over-expansion of giveaways to banks and corporations while these recipients of our largesse work toward ruining our lives with unforgiven bills we can neither pay nor have discharged in bankruptcy? Will the late night calls from collection agencies never end? Am I to continue to believe in the myth that a legislative act signed by the president represents the “will of the people” in a democracy and not just another handout to greedy bankers? Can democracy survive these private raids on the public till? Just who does Congress represent? Where is our chapter 11? There are many questions and few honest answers, but our democracy is itself imperiled by such antics.

Is this legislative travesty the “will of the people?” I hope not. As I have blogged many times before, the bankruptcy act desperately needs amendment. This essay does not treat dozens of other reasons to amend the act, but the reader will, I hope, get the idea from this short discussion. I urge any who read this essay to contact their senators and representatives to amend this disastrous piece of legislation, even though Wall Street with its deep pockets is on the other side. You start from where you are.

The bankruptcy act is itself bankrupt. Let’s make it official and have a Jubilee year of our own. GERALD  E

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