Financial Bailouts - A Letter To Congressman Brian Bilbray

Dear Sir:

The goal of federally financed bailouts should only be to augment feasible plans of reorganization, not to prolong the life of businesses beyond hope.

Bailout recipients should be required to devise and execute a feasible "Plan of Reorganization" as in Chapter 11 of the Bankruptcy Code. The financing could be in 2 parts: 1) the first part can provide interim financing while a Plan of Reorganization is developed; and 2) the second part will be "Exit Financing" that should only be provided to companies that can prove a that they have a feasible Plan of Reorganization.

All of the laws to administer the process are present in the Bankruptcy Code, with the exception of any legislation needed to let the government step into the shoes of the provider of the money. The Bankruptcy Courts also provide the only forum where certain issues can be dealt with (renegotiation or cancelation of existing contracts, protection for warrantee holders, etc.).

To handout money without conditions is not fair to the taxpayers, however given the seriousness of the financial problems we are faced as a nation perhaps a structure that requires responsible action by the recipients (with a recovery for the government) makes sense.


Richard Feferman, Certified Insolvency and Restructuring Advisor
Corporate Recovery Associates
3830 Valley Centre Drive, Suite 705-152
San Diego, CA 92130
Tel: (858) 792-7473


Alternative Sources of Recovery: Lehman Brothers' Directors & Officers

 A couple of articles in the Wall Street Journal here and here are the basis for my bet that we are going see claims against Lehman's directors and officers insurance coverage. Perhaps even a fight over who is entitled to make claims against any policies. See Kimberly Melvin's article for background on D&O Policy Proceeds as Bankruptcy Estate Assets.

Bankruptcy Preferences - An Introduction

Today I spoke to a credit manager with an interesting problem. He called to discuss a letter he received demanding the payment of almost $400,000 from a customer that is in bankruptcy. Adding insult to injury, the customer still owes over $75,000 on its account. What a paradox! What my credit manager friend just received is called a Preference Demand Letter.  Dealing with preferences is one of the most common encounters with the bankruptcy process for today’s Credit Professional, and preference litigation is the most common type of adversarial proceeding in bankruptcy court.

Certain payments within 90 days (1 year if the payee was an insider) of the date of the filing of a bankruptcy petition may be considered preferential and are potentially recoverable by the bankruptcy estate.

The whole notion of the return of preferential payments under the Bankruptcy Code is the “fair and equal” treatment of all unsecured creditors. This is accomplished in a “Water Leveling” process in which property (money) is recovered from the recipients of preferential payments for the benefit of the estate. It does not seem very fair when you’re the one asked to pay back money from a company that still owes money.

I am going to discuss this subject on a regular basis here, so continue to check back if it is of interest. We will be discussing the elements of a preference as well as how they are prosecuted and defended.

If you’ve received a demand, don’t ignore it, be proactive and seek the advise of counsel experienced in these matters.  If you like, please call my office.  We are experienced in the analysis of these matters and can possibly refer you to experienced legal counsel.

Credit Markets Frozen As Mortgage Market Melts Down - Commercial Bankruptcy Filings Rise

    What started as a residential real estate crisis is causing a shortage of funds throughout the Capital Markets. The Federal Reserve is doing an effective job regulating risk free rates, but businesses don’t borrow at these rates. Today the Federal Funds Rate is 2.20%. Unfortunately this is not solving the problem of providing dollars to businesses. Capital providers are scared and sitting on the sidelines. Commercial bankruptcy filings are on the rise. In fact bankruptcy filings of all types are on the rise.

    In order to induce lenders to invest in alternatives to the Treasury’s Risk Free Securities, Businesses pay a risk premium on borrowed funds; this Risk Premium is the difference between the Risk Free Rate and the actual rate paid. The Risk Premium is the compensation for lending to you instead of buying US Treasury Securities (Risk-Free). Commercial loan rates are not going down. The fact is lenders are scared; Risk Premiums are expanding and underwriting criteria is tightening up. A year ago when a middle market company needed to restructure financially it was much easier to recapitalize whether it was bank financing or selling securities. On top of that, you had plenty of private capital investors with money burning a hole in their pockets; commercial bankruptcy filings were at a low. The world is different today and the problem is at a point that the government is going to have to step up and provide risk capital. The downside of this is who knows what the unintended consequences of government intervention will be.

    Remember during the last banking crisis during the first half of the 1990s things were not resolved until the government formed the Resolution Trust Corporation which took over (and subsequently liquidated) the portfolios of bankrupt lenders. If the holders of today’s pools of loans cannot efficiently liquidate problem assets the country is in for a painful digestion period that this analyst believes will last through 2010 perhaps through 2012.

    We may have just seen the tip of an iceberg. News reports today included the revelation that credit default swaps (insurance against a bad receivable) on the debt of CIT Group (the largest independent commercial finance company in the U.S.) are more expensively priced than the Bear Stearns' swaps were just before the government arranged rescue of Bear Stearns.