Garett Jones talks about speed bankruptcy as an alternative to bank bailouts. I like this idea—especially if the alternative is bank bailouts.
When a corporation’s assets appear to be worth less than its liabilities—for whatever reason—the economists’ normal solution (as discussed last week) is for the bankruptcy judge to legally convert the bank’s rigid debt claims into flexible equity claims. That’s corporate bankruptcy in one sentence.
In a financial crisis, when megabanks are supposedly too big and too complicated and interconnected to wait for a formal, years-long bankruptcy process, I recommend doing the debt-to-equity conversion of the course of a weekend: I call this speed bankruptcy. I wrote a short piece on this in Fall 2008 here, a later academic version here.