26 March 2014

The Bad News of Low Interest Rates

Among the courses I teach--and perhaps my favorite--is bankruptcy law. Bankruptcy is a great capstone course. When we study the Bankruptcy Code's definitions of a "claim" and "property of the estate," students get a chance to review what they learned about property, contracts, and torts in their first year. When we examine the intricacies of the jurisdiction of bankruptcy courts, we review parts of civil procedure and constitutional law. The ever-exciting doctrine of cramdown let's us talk about corporations and their capital structure. And last but hardly the least among law students, coverage of debts that are nondischargeable in bankruptcy reinforces that they'll have to repay their student loans. Really.

But something that lowers the study of bankruptcy law on the radar of course selection is the long-term decline in Chapter 11 reorganizations. Individual liquidations under Chapter 7 or wage-earner plans under Chapter 13 continue at a rate of about one million per year. But corporate filings are in the doldrums and have been for nearly a decade. And corporate filings are, well, sexy. (Or at least as sexy as bankruptcy can get.)

What gives? Why are corporate reorganizations nearly as scarce as hens' teeth? Here are two places to go to find the answer. The first is an address by Harvey Miller, dean of the American corporate reorganization bar, who describes some of the significant changes made to Chapter 11 since its enactment--all at the behest of organized lending interests--that place secured lenders in the drivers seat as corporations approach insolvency. The other is an op-ed in today's Wall Street Journal by Adam Levitin that attributes the decline to the Federal Reserve's long-standing policy of quantitative easing, in other words, keeping interest rates extremely low.

Both are correct but only one is likely to change. Neither political party has any interest in upsetting the corporate interests that provide support to their political ambitions. The Federal Reserve, however, has announced tentative plans to stop buying as many bonds as it has been. As interest rates rise, marginally successful businesses will become financially distressed. And well, you know, (I hope) Chapter 11 will be back in style and enrollment in my course in bankruptcy law will be bursting at the seams.

No comments:

Post a Comment