Re: Bankruptcy

["Devine, James" <jdevine@xxxxxxx>]

Michael writes:
>> One question that intrigues me is the class nature of bankruptcy.  PG&E
>> seems to be coming out of bankruptcy smelling like a rose.  WorldCom and
>> Enron seem to get quite lenient rulings lately.  I confess that I am not
>> an expert and would like to see such companies get spanked.

David answers:
The fundamental philosophical problem is, who is PGE, Worldcom, Enron?  If the company is insolvent, the shareholders are out of the money and the company is now owned by the creditors.  Therefore, if you spank the corporation (and not individuals who committed wrongdoing), you are effectively punishing the creditors, who are presumably innocent of any wrongdoing.

------------------

weren't the bankers consciously taking a risk by lending to Enron? if they're automatically bailed out, doesn't that encourage moral hazard, i.e., a willingness to lend to similar miscreants? 

(It's amazing, by the way, how little economics books talk about bankruptcy.)

Jim