Yet Another Bankruptcy Update

Sunday, May 21, 2006 at 05:14 PM

Here's an update to Six's recent bankruptcy posting and my comment on the fact that bankruptcy is soaring in many of the developed economies.

More Countries

++In Japan, business bankruptcies were up 16% in April of 2006, compared to April, 2005 (involving debts totaling 426.78 billion yen).

++Scotland experienced an all-time high for personal bankruptcies in the first quarter of 2006 (in addition to a rise in the number of cases of "protected trust deed" repayment plans, which serve as an alternative to bankruptcy).

++Romania announced that bankruptcies (it appears to be business bankruptcies) in 2005 were up 61% over 2004 (the gov't there blames this on a new, easier bankruptcy law).

More Excuses

See if this UK explanation of their bankruptcy problem prompts visions of what you hear from the American business press:

The bigger picture suggested by these figures is that of a distressed and troubled household sector buckling under the combined weight of high debt and soaring heating and energy bills. But while consumer spending is subdued, there are still record amounts being spent on services, entertainment, foreign travel and "retail" in the broad sense, including internet shopping.

For the record, UK households have been enjoying a wealth surge. This is largely due to the continuing rise in house prices - now climbing at an annual average rate of 8% according to the Halifax last week - and a buoyant London stock market. The FTSE100 Index closed on Friday at a whisker under 6100, taking the gain from the dark days of early 2003 to 82%.

According to Lombard Street Research, the net wealth of the household sector (the sum of financial and tangible assets less total debt) rose by 8.9% in 2005, and by a further 3.5% in the first quarter. The firm's latest estimate puts net household wealth at £7,064bn as at end March, 11.2% higher than a year ago. As for the ratio of household sector wealth to income, this now stands at a record eight and a half times.

Much has been made of the phenomenon of mortgage equity withdrawal (MEW) - households realising some of the increase in the value of their homes by taking out bigger mortgages. Data for the fourth quarter of last year show MEW at £11.8bn, equivalent to 5.6% of gross disposable income, up from £8.3bn in the previous quarter. Lombard economists reckon that a significant proportion of MEW was invested in financial assets or used to repay unsecured debt. This would explain why the savings ratio has shown stability at its recent, albeit low, level, rather than falling even further.

So while there are doubtless households under severe debt strain, this is not true for the vast majority, given the substantial rises in the value of assets - property and equity holdings in particular. What else could sustain the latest surge in mortgage approvals? In the first quarter of this year the number of mortgage approvals for house purchase was up 35% on the same period last year. So ironically, it is the very strength of household finances that explains the latest surge in mortgage lending. This may be sharply curtailed if there is a big correction to the stock market later this year. But for the present, rising numbers of personal insolvency do not tell anything like the whole story of the way we live now.

Right.  I'll check back with you in about three years.

And Who Gets Rich?
This is America, land of the roaming capitalist and corner cutter.  You know that all these bankruptcies can't happen without someone getting rich off the calamity.  When it comes to large business bankruptcies, the major winners appear to be: (1) the lawyers who take the company through bankruptcy, and (2) the officers of the bankrupt corporation.  The biggest losers?  Usually the employees.

WTW has already chronicled how modern American corporations are using bankruptcy as a tool to dump American employees.  But check out this ABC News story:

April 30, 2006 -- Former Enron CEO Ken Lay's defense team at his criminal trial in Houston is trying to portray him as an ordinary man -- raised on a farm, living the American dream -- who lost everything.

But for some CEOs, bankruptcy can be big business.

When Sony Wilson was laid off by Enron in 2001, she lost not only her job, but $800,000 from her 401(k).

"We were down to our savings," Wilson said. "It was a very scary time."

But even as the company laid off over 4,500 employees like Wilson, Enron began paying lawyers, accountants, and consultants what would amount to more than $750 million.

"The fees in absolute dollars are astonishingly large amounts of money," said Lynn Lopucki of the University of California-Los Angeles Law School.

'An Awful Lot of Money'

One New York law firm, Weil, Gotshal & Manges, billed Enron for more than 390,000 hours. That's the equivalent of 44 years of nonstop work.

Brian Rosen, an Enron bankruptcy attorney, said people shouldn't be outraged when they hear about the numbers involved, "because they need to take a look at the bigger picture about how many jobs were saved, how much money or value is being provided to creditors."

John Marquess, who audited Enron's bankruptcy litigation bills, disagrees.

"I do not think the costs were justified," Marquess said. "An awful lot of people made an awful lot of money off this bankruptcy, and unfortunately the employees and shareholders of Enron were not among those people."

It isn't just lawyers and advisers who profit when a big company goes bankrupt. It is increasingly common for top executives to make millions even while their companies lay off workers and lose billions of dollars.

A judge just approved as much as $38 million in bonuses for executives at bankrupt auto parts manufacturer Delphi. Executives at bankrupt United Airlines could make upward of $146 million in stock options.

"Generally, the reason given for that is the need to retain top management," Lopucki said. "But very often the top managers are the people who got the company in trouble in the first place."

While Ken Lay is on trial, the man who took over as acting CEO after Enron's bankruptcy was just awarded a $12.5 million bonus.

It is a bitter irony to Wilson, who lost her life savings.

"It's money that could have gone and paid back the employees and shareholders 10 times," she said. "And it's probably money that, you know, we'll never see."