something people seem to forget about corporate bankruptcies

[unblock]

productive assets of bankrupt corporations don't just vanish. money gets distributed to creditors and capital assets get sold. depending on the nature of the bankruptcy, the corporation may or may not emerge and continue to run and operate some or all of the capital assets.

what gets damaged are the equity shareholders; to a lesser extent, the creditors; and of course, the name of the company itself. the company itself may cease to exist.

HOWEVER, the productive BUSINESS of the company goes on.

if a bankrupt airline has working planes and profitable routes, these will be purchased by competitors. the economy will go on, the same planes will fly, customers will continue to be served. only the name will have changed.



if bp were to go bankrupt (a rather unlikely scenario, imho, however much they deserve it), all their gas stations and refineries and drilling rights and oil rigs and whatever else they own would be sold to someone else. oil would still get pumped out of the ground. whether or not offshore oil drilling continues has NOTHING TO DO with bp going bankrupt or not. only if the government yanks permits will it stop.

the only effect the financial damages to bp would have on actual drilling is that competitors would revalue the financial risk and (a) pay more for insurance and (b) take more safety precautions to prevent blowouts like this one. but that doesn't mean the drilling would stop. only get slightly more expensive, a cost which they'll be happy to pass along to customers.



i say all this because i often hear people talk as if a corporate bankruptcy is like a death sentence. this is to anthropomorphize corporations in a way the supremes haven't even contemplated. a bankruptcy is just a way of settling debts and expediting a reorganization of productive assets, often to other companies. the only thing that general comes to a halt in a bankruptcy are the UNproductive assets, which is most likely the right outcome anyway.

[taught_me_patience]

1. Many DUers were here claiming the BK of GM would cause millions of jobs to be lost

and didn't understand anything about chapter 11 bankruptcy.

[doc03]

3. They were right maybe millions of jobs wouldn't have been lost

but in a bankruptcy the creditors can pretty much dictate the terms of any union contract. The employees would have been forced to work for whatever wages the courts dictated and the work force would have been severely cut. They would have lost their health care and their pensions would have been dumped on the PBGC and many people would have had their pensions benefits cut drastically.

[doc03]

2. Who gets hurt most in a bankruptcy? The employees

Everyone gets their piece of the pie and last in the pecking order are the employees. I've been through two of them and we were forced by the creditors to take brutal concessions and we lost two pension plans.

[unblock]

5. that's true, particularly if there were effective unions

my main point was that if the plants were themeselves profitable, they'll continue in operation one way or another.
i agree that the exact terms may be less attractive for many involved, particularly employees.

certainly one outcome of bankruptcy is that the employee ALL lost their jobs and they are replaced with employees at a competitor's location, which may be on the other side of the country. depends on how moveable the operation is, among other factors.


i'm just astounded that some people can mourn or fear the "death" of a corporation and simply not think to the realities behind it.

[doc03]

6. Sometimes it is beneficial for a company to go bankrupt

like all the companies that manufactured or used asbestos in their products. They filed bankruptcy and the courts limited their liabilities and they went on to be profitable enterprises. The people who go hurt, employees and all the thousands of people with mesothelioma. I worked in the steel industry and practically all the steel producers went bankrupt in the late 90's. They renegotiated contracts, paid their creditors pennies on the dollar, dumped thousands of employees, dumped their legacy costs and consolidated operations.

[unblock]

7. in fact, the airlines have it down to a science; it's now a standard part of their strategy

they actively seek to remain near bankruptcy, the better to negotiate with unions; or to enter bankruptcy, the better to really hurt unions and employees. they take on debt knowing they may well not have to repay in full.

[RUMMYisFROSTED]

4. I love when the creditors get paid.

:loveya:

[TexasObserver]

8. Well said. The assets move on. Creditors get paid by priority. Equity holders eat it.

Some creditors and claimants lose out. Some get paid less than they had coming. Some get paid nothing.

But as you note, the BP stockholders likely lose the value of their stock, or most of it, before the process is completed.

It's possible that BP could go into chapter 11 and emerge eventually as the same company intact, but the overwhelming number of chapter 11 filings are eventually converted to Chapter 7 liquidations.

[Scurrilous]

9. Meanwhile...

BofA to limit duration of trades with BP

<snip>

"Bank of America Merrill Lynch (BAC.N) has ordered its traders not to enter into oil trades with BP Plc (BP.L) that extend beyond June 2011, a market source familiar with the directive told Reuters.

The order to the bank's traders came from a high-level executive and was made on Monday, according to a source familiar with it. It told traders not to engage in trade with BP for contracts beyond one year from this month.

The directive didn't state a reason for the limit on longer-duration trades with the oil company, which comes as the British oil giant scrambles to stop an oil spill in the U.S. Gulf of Mexico for which it could eventually face billions of dollars in economic liabilities.

Limiting the duration of trades with a counterparty is one way in which banks can seek to protect themselves against risk that a company will be unable to meet its long-term obligations."

http://www.reuters.com/article/idUSTRE65E5W520100615