On Bankruptcy as Metaphor (or, Chapter 11 and Verse)

As a so-called investment professional who hunts for opportunity in the securities of highly leveraged or financially distressed companies, I spend a fair amount of time contemplating corporate bankruptcy.

I developed an instinctive aversion to bankruptcy at an early age, thanks to “Wheel of Fortune” and that dreadful slide whistle sound effect.  It was heart-wrenching!  All that money lost, those dreams dashed; all too often as the morality-play outcome of the promise to take “just one more spin…”  Few perils ranked higher than bankruptcy in my young, impressionable, game-show-watching mind; but of course the Whammy was the undisputed king of the peril kindgom, since it was ‘Bankrupt’ anthropomorphized into a terrifying little gremlin.  A small amount of strategic (if not moral) ambiguity was introduced by the board game of Life, where the last refuge of the hopelessly behind was to bet the game on one number out of ten and spin the wheel.  Nine times out of ten, you’d be consigned to the ignominious “Bankrupt” space, permanently neutered for the duration.  But, if you got lucky, you’d automatically win, no matter how diligently your competitors accumulated their wealth.  In any event, these games gave me the intuition that bankruptcy was a bad outcome of risk-taking that rarely happened to prudent and conservative people.  So it is a rather remarkable reversal for me to consider its virtues, and even moreso for me to become an investor in distressed credit.  But I digress.

The objective of bankruptcy, in a nutshell, is to attempt to make the best of a bad situation — i.e., an individual or business who has an unsustainable amount of debt that it cannot realistically hope to repay.  In America, the bankruptcy process consists of general rules that lend predictability to an endeavor that could easily devolve into a chaos of competing claims; but it also affords some amount of discretion to the stakeholders, and ultimately the judge overseeing the proceedings, to adapt to the facts and circumstances of each case.  It is, in my view, a pretty elegant solution (or, more precisely, a pretty elegant process for arriving at a solution).  This is not to say that bankruptcy cannot be exceedingly painful for many stakeholders, including a company’s employees, business partners, and communities.  But by the time a person or company chooses or is forced to declare bankruptcy, it is well past the point of avoiding pain and arguably does the most justice to its stakeholders by focusing on how to minimize it.  As medical practice has it, sometimes it is necessary to amputate a limb to save the patient.

I will probably gloss over some relevant concepts in the rest of this post, for which I apologize in advance.  It may be helpful to peruse Megan McArdle’s piece from about two years ago, in which she gives a layperson’s overview of various regimes for resolving insolvency.  I don’t think the ‘opinion’  portion of the piece represents her strongest work (and, for the sake of (my) convenience, I’ll punt for now on substantiating this view) but I also think it will resonate with many of my readers, which will perhaps make the medicine of bankruptcy education go down in a more delightful way.

I find bankruptcy a useful metaphor because there are often situations where one can only realistically play for the least-bad outcome.  And I mean this for very mundane matters in one’s personal life, not the sort of mammoth political problems that can actually push societies to the brink of insolvency.  I’m amused to read of e-mail bankruptcy and laundry bankruptcy as strategies for coping with an overabundance of communication and clothing, respectively.  The metaphor isn’t quite right in the instances I’ve chosen, but it seems to capture closely enough the simplicity, starkness, and (one hopes) finality of the remedy.

What I add to this metaphor – and I think this is an important element of its generality – is the notion that there are different classes of ‘stakeholders’ in many complex problems.  In a corporate bankruptcy, for instance, different lenders may have different elements of priority to their claims.  Some creditors, for instance, have specific assets that serve as collateral for their loan, whereas others may just have a general claim on the assets of the estate after higher-priority creditors have been fully satisfied.  The groups of stakeholders will certainly fight for as much value as they can, but the notions of priority and collateral make it relatively straightforward to determine broadly which groups will be more or less heavily impaired (if at all) as a result of the process.

To apply this framework to the case of “e-mail bankruptcy,” it would seem like family and close friends (your senior secured creditors, if you will) should at least receive some sort of personalized apology or acknowledgement for any dropped correspondence.  Perhaps there is a class of your unsecured creditors — your acquaintances; facebook-friends; and figures from your past with whom you sincerely intend to get coffee, but it never quite works out — where a general apology and declaration of bankruptcy is sufficient, at least to give them the courtesy of lodging a protest, or to give them instructions for how to resume dialogue with your post-reorganization self.  And it may be the most efficient path to wipe out your equity-holders without any further consideration — friends-of-facebook-friends, people who only write to ask for favors, random business contacts with whom you at one point felt it advisable to ‘network’ — because they must recognize that their claim on your attention is pretty heavily subordinated.

Could there be a way to declare emotional bankruptcy about specific personal demons, unresolved conflicts, feelings of guilt, anxiety over injustices inflicted or received?  To assert that one’s baggage (either in general, or in particular) is unsustainable and to commit to giving oneself the freedom to start fresh once it has been emptied and divvied up among one’s stakeholders, however one defines them?  The canonical twelve-step program reads somewhat like a playbook for emotional bankruptcy, with a Higher Power as the judge, and a sincere effort required of the indebted party to make whole all his or her senior secured creditors.  The self-help literature has its own way (N.B. I’m extrapolating from a few examples) of defining and encouraging various paths to closure and a clean slate.  There may be different recommendations for how to identify and appropriately compensate one’s stakeholders, but the objective is to give one license to disclaim any further liability for unwanted baggage and to reinvest one’s emotional capital in more rewarding and fulfilling pursuits.

There is another concept that shows up in the world of bankruptcy and adds a wrinkle to the analysis: moral hazard.  The more painless is bankruptcy, the more tempting it is to simply walk away from debts, which has dire consequences for the financial system if replicated on a large scale.  This is why I don’t like the idea that one can simply wash away one’s sense of obligation simply because one wants to.  A plan for emotional bankruptcy should be somewhat incrementally painful up front, while also being healthy and sustainable for the long-term.

I’ve not exactly applied this concept to my own life, and thankfully I don’t have any specific concerns or personal dramas that I expect might compel me to do so.  But as I prepare to celebrate my birthday today, I plan to take an inventory of my emotional liabilities and make sure that I’m at least conscious of the cost of defeasing them.

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