Arguing that the public-funded bailout program has so far been ineffective, polemic activist investor Carl Icahn argues that a privately-funded bailout program could work if existing bankruptcy laws were changed. In an editorial in today’s Wall Street Journal, Icahn claims that a restructuring of bankruptcy would draw private investment dollars to the banks, obviating the need for Treasury funds.
Icahn proposes an elimination of the “exclusivity” period in the bankruptcy process, in which the management of a bankrupt company is given an 18-month window in which to reorganize their corporation however they see fit, generally by shifting around debt and selling assets. “During this period,” says Icahn, “nontrade creditors, like bank debt and bond holders, languish in uncertainty as to what will happen to their investment.”
Icahn’s argument runs along his historically anti-management lines, claiming that, “the exclusivity rule mainly benefits equity holders and managements, not creditors. But why should the same management that got the company into trouble have the right to lock-up its assets for an extended period of time?”
According to Icahn’s argument, allowing management free reign in the event of a bankruptcy hurts investors and makes them apprehensive about putting their money in what could be the next Lehman Brothers. It also makes Chapter 11 bankruptcy a “crutch for lackluster managements.” Icahn argues that a change in rules would prod bankers away from Chapter 11.