Tuesday, March 18, 2008

Bear's Bankruptcy Alternative

(Credit Slips) Would a bankruptcy have been better for Bear than a $2/share sale? We don't know. But I think a comment made by Alan Blinder, the noted Princeton economist, on the News Hour with Jim Lehrer this evening is telling precisely because it was wrong.

Blinder noted that the sale was basically the same result as a bankruptcy because equity was largely wiped out. That's true, but misses a very important point about bankruptcy: process matters.

There is tremendous process value to bankruptcy. There are safeguards to ensure fairness, claims are scrutinized, liens inspected, and assets are valued. To be sure, the process has large costs, but the process value is often missed in results-oriented analyses of bankruptcy that propose replacing the current system with less costly systems.

There is no guarantee that Bear's shareholders would have gotten $2/share in bankruptcy. They might have gotten less...and they might have gotten more. At the very least, though, they would have had a seat at the table, and given that about a third of Bear is employee-owned, the shareholders might have had a significant role.

We might also wonder what was drove the Bear's board decision. Did the board act solely on a cold, calculated comparison of sale and chapter 11 valuations? They knew the sale price being offered; I doubt they had a very good sense of whether a reorganization was possible in bankruptcy and how shareholders would fare. Lousy isn't really a good answer, as the issue is whether it would be more or less than $2. Is it possible that the stigma of bankruptcy played a role? Perhaps the board members preferred to sell the company than be known as the people who lead Bear to bankruptcy. Presiding over the collapse of a major investment bank is bad. Presiding over its bankruptcy might be worse.

One final thought on a Bear bankruptcy: would a trustee or examiner have been appointed? There would certainly have been that risk, and perhaps the Bear board and executives didn't want to risk losing their attorney-client privilege to the trustee or have the scrutiny of an examiner.

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