I’m hardly an expert on bankruptcy or bankruptcy law (thankfully), so it is that I find the following article by David Skeel to fill in some gaps in my understanding very nicely:
In the early 20th century, large troubled corporations did not file for Chapter 11 like they do today. They used a process known as “equity receivership,” which involved an artificial “sale” of the company to a new entity set up by the debtor and the investment banks who represented its bondholders and stockholders. The new entity was the only bidder at the sale, and creditors who were unhappy with the terms of the reorganization had very little opportunity to interfere.
New Dealers hated the process, which they saw as opaque and designed to foist a deal crafted by the insiders on everyone else. Jerome Frank, a lawyer who later headed an important New Deal agency and became a federal judge, complained in 1933 that the judicial sale in these cases “was a mockery and a sham.” He said, “A sale at which there can be only one bidder, is a sale in name only.” In 1938, thanks to the handiwork of another prominent New Dealer, future Supreme Court Justice and then-SEC Chairman William Douglas, Congress dramatically altered the bankruptcy laws, eliminating the former practice.
The Obama administration blueprint for Chrysler’s bankruptcy looks startlingly like the artificial sales that the New Dealers so abhorred.
The entire article is well worth reading. My only complaint was that I would have liked it to be more detailed.