The financial crisis that hit the United States and the international community in the early 21st century disrupted lives, ended careers, and depleted personal fortunes. It also led to a “bail-out” mentality that insulated some financial institutions as untouchable while dooming others as expendable. This entire scene could have been avoided (not the crisis itself, but the bailouts) had the government “allowed” ordinary bankruptcy law to stay the course. This is the opinion offered by Michele Paige, a managing member of Paige-Capital Management, who in a Barron’s article entitled, “A Most Useful Tool: Bankruptcy,” argues quite convincingly, that the American system of bankruptcy has served us well over the decades and should be allowed to do so again. This is a rather curious statement that deserves some clarification. Bankruptcy laws, Paige argues, are designed to encourage individuals to run businesses in an aggressive way that benefits not only the entrepreneur but also suppliers, customers, employees, and the community as a whole. Sometimes these businesses fail, it’s true, but when they do, bankruptcy law gives them a second chance. This does mean that there are no victims—businesses that fall and never rise again. However, these failures testify to the effectiveness of a law that weeds out firms that probably should not have been formed in the first place. Paige contends that bankruptcy law, with a few minor tweaks, would work well in the current climate because the law would permit the owners of financial firms to operate the institution while the judicial system divides the losses among the firm’s creditors. Should the court run into an institution so troubled that it cannot meet its obligations even using bankruptcy, then the government could step in as a last resort. Paige offers the savings and loan crisis in the 1990s as an example of how well bankruptcy can work when it is permitted to do so. The bankruptcy alternative is better than the current situation which burdens a financial institution with one of two fates: federal control or benign neglect, leading inevitably to failure.

Question 

1. Do you agree or disagree with the premise that the purpose of bankruptcy law is to stimulate business? Explain.
2. Should financial institutions be forced into bankruptcy by the government or is the current strategy (federal control or benign neglect) the correct one to take? Explain.
3. What changes in the bankruptcy law would have to take place to implement the plan outlined above? Explain.
4. If you were a creditor of a financial institution which solution would you prefer? A bailout, failure, or bankruptcy? Explain.
5. If you were a shareholder of a financial institution which solution would you prefer—a bailout, failure, or bankruptcy? Explain.