Change the Bankruptcy Laws

Carl Icahn, chairman of the diversified Icahn Enterprises, put forth an interesting idea in a Wall Street Journal op-ed today, recommending a change in bankruptcy law to help encourage private equity investment:

This state of affairs could be improved by eliminating the bankruptcy rule known as the “exclusivity” period. This rule unfairly gives managements, with court approval, a monopoly in drawing up a reorganization plan for a minimum of 18 months. Generally that plan includes proposals to restructure debt, sell assets and void onerous contracts. During this period nontrade creditors, like bank debt and bond holders, languish in uncertainty as to what will happen to their investment. The exclusivity rule mainly benefits equity holders and managements, not creditors. But why should the same management that got the company into trouble have the right to lock-up its assets for an extended period of time? Without an exclusivity period, different classes of creditors and equity holders could immediately propose different restructuring solutions, including the sale of assets overseen by a bankruptcy court. The biggest impact of such a rule change would be that the assets of a company in Chapter 11 would be priced as though they could be sold — in effect giving them a “mergers & acquisitions premium” — rather than be shackled for years in a bankruptcy court.

Here is an example of how simple regulation adjustment, active instead of static thinking, could help recession woes without stimulus spending. Admittedly this would not be the single fix and would really only help on the margin, but coupled with other reforms such as tax cuts and forth coming transportation policy proposals could be enough to turn the tide without going into deeper stimulus bred debt.