Bankruptcy

Bob's Boyfriend (or Something that Won't Happen)

By Jonathan Lipson

I have to say that, while I have had many interesting introductions--and Bob has called me many interesting things over the years--"boyfriend"  (by implication) hasn't been one of them. (If you find the old Angel's version cloying checkout the Raveonettes'). 

Whether or not my return is trouble, I am happy to carry the theme forward, and try to scare off several unwanted suitors, in particular some misconceptions about what a state-bankruptcy amendment is really about.  In the next few days, I will also live-blog the LoPucki Big Bankruptcy Empirical Conference at UCLA.  I also hope to say a few words about the Chapter 11 filing of the Archdiocese of Milwaukee, both because it is sort of in my neighborhood, and because I've written about the church-bankruptcy cases before.

So, start with the biggest trouble of all:  State bankruptcy. 

We all know that this first attained memehood when Newt Gingrich suggested in a speech last fall that Congress should amend the Bankruptcy Code to permit states to go into bankruptcy.  The suggestion acquired some respectability when adopted by David Skeel, who advocates an amendment modeled on chapter 9.

Like Steve Lubben, who discussed this on this site, I am not reflexively pro or con.  As a general proposition, anything that  induces or forces over-leveraged parties and their creditors to renegotiate is probably better than most alternatives.  If a new "chapter 8" does that, maybe that's good.  There are, of course, legitimate concerns that it would be used only to stick-handle public employee unions.

Which leads to a question: If that's what it would do--shaft unions--why would anyone think it will be become law in any way that matters?  It is hard to imagine a Democratic Senate or a Democratic President supporting it.  It's also hard to imagine the Democratic governors of California and Illinois--among the more profligate states--using it. 

Republicans like Newt Gingrich are not naive.  They surely must understand this.  So, if it won't become law, who gains from all the talk about it?  It can't simply be a really good talking point in Gingrich's proto-presidential run.  Saying "no-state bailouts" is the way to get that point across in a more accessible (and saleable) way. 

I have a theory (and it's probably crazy), but before stirring up trouble, I'd be curious to know if anyone else can answer the question:  Why all the talk about something--state bankruptcy--so unlikely to happen?

Full post as published by Credit Slips on February 09, 2011 (boomark / email).