Daily Archives: February 29, 2004

Bankruptcy Court competition for big business reorganization cases

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This Atlanta Jounal Constitution article discusses an issue that UCLA law professor Lynn LoPucki characterizes as a “race to the bottom” — i.e., bankruptcy courts in certain jurisdictions bending federal bankruptcy law to market themselves to debtors’ lawyers who often are instrumental in choosing the venue of big business reorganization cases. The cost attributable to this “race to the bottom” is considerable because the two main bankruptcy venues — Delaware and the New York City — commonly approve professional fees in big reorganization cases that are at the highest level of the profession. In comparison, the high hourly rates being charged and routinely approved in the Enron reorganization case in New York would likely not have been approved if the case had been filed in Houston where Enron is based and which is a far more convenient venue for the vast majority of Enron creditors.

The similiarities between Enron and U.S. Govt. financing

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A substantial part of the Justice Department‘s criminal cases against former Enron executives Jeff Skilling and Richard Causey involves their complicity in Enron’s liberal use of “off-balance sheet” partnerships that Enron used to shift risk on debt that otherwise would have diluted Enron’s net worth. In an ironic twist, history professor Niall Ferguson and economist Laurence Kotlikoff explain in this insightful paper how the United States Government uses the same off balance sheet liabilities in accounting for its Medicare and Social Security liabilities to mask the true financial condition of the Government. The entire paper is well worth reading, and here are a couple of tidbits:

During the Clinton Administration, the CBO routinely projected that, regardless of inflation or economic growth, the federal government would spend precisely the same number of dollars, year in and year out, on everything apart from . . . entitlements. At the same time, the CBO confidently assumed federal taxes would grow at roughly 6 percent each year. As a result, it was able to make dizzying forecasts of budget surpluses . . . These phantom surpluses were the money Al Gore promised to spend on voters and George W. Bush promised to return to them during the 2000 election.
[T]he crisis of the American welfare state remains a latent one. Few people, least of all in the government, wish to believe it is real. But the crisis could manifest itself with dramatic suddenness if there is a significant shift in the expectations of financial markets at home or abroad. And when the finances of the United States “go critical,” there will inevitably be moves to cut back any federal program that lacks strong popular support. Though relatively inexpensive, and not in themselves a cause of American overstretch, “nation-building” projects in far-away countries will surely be among the first things to be axed.

Messrs. Ferguson and Laurence Kotlikoff also argue that our politicial leaders, the public, and bond market investors are all in denial about the large future liabilities that the government faces. This is provocative economic analysis and essential reading for anyone interested in understanding the financing of our government’s future liabilities.