As U.S. businesses struggle to rebuild after the tragic events of September 11, Washington, D.C., is auditioning for the role of economic savior. So far, Congress has responded by giving the airline industry, which was acutely and immediately affected by the terrorist attacks, a massive $15 billion bailout.
Legislators would do well to listen to University of Pennsylvania Law Professor David Skeel, who has just published Debt's Dominion: A History of Bankruptcy Law in America (Princeton). His book describes how American populism helped create a body of bankruptcy law that's unique in the world. U.S. law gives the debtor the benefit of the doubt—including the opportunity to conduct business as usual until he either restructures his way to solvency or decides to truly pack it in. This "fresh-start" approach, argues Skeel, makes American companies ideally prepared to withstand crisis—without taxpayers' billions. Assistant Editor Sara Rimensnyder spoke with Skeel by telephone in October.
Q: Your book explains that U.S. bankruptcy laws were forged in disaster. How?
A: Bankruptcy laws originated in the 19th century, when a series of devastating financial panics caused many railroads to fail. Everyone agreed they had to be saved, but Constitutional limitations made it impossible for lawmakers to step in. Judges came to the rescue by devising a procedure for reorganizing troubled corporations.
Q: How will the "fresh-start" aspect of U.S. bankruptcy law help companies weather the economic fall-out of September 11?
A: Our system is designed to give companies a second chance. Its reorganization-based approach is precisely what you want in a catastrophe, where businesses are failing for reasons perhaps unrelated to their underlying viability.
Q: Using the airlines as an example, what's better for the consumer: bailout or bankruptcy?
A: Bankruptcy is much better from everyone's point of view. Bankruptcy sorts out the firms, so that the ones that ought to fail will eventually fail. A bailout tends to be quite indiscriminate. You end up trying to save all the airlines, even those that would have failed without Sept. 11. Bailouts just don't work as effectively as having the parties with a direct stake making the decision about whether to keep the company going.
Q: As this goes to press, an insurance industry bailout appears likely. Is that justified?
A: My initial instincts are against it, but it's more complicated. The insurance plan isn't really a bailout, since the goal is to encourage insurers to write insurance for possible terrorist actions. They might otherwise simply refuse. Insurance arguably undergirds everything else. Businesses depend on their ability to insure against possible risks. Still, I worry about the effects of having the government run an industry.