Abstract

http://ssrn.com/abstract=1542125
 
 

Footnotes (110)



 


 



The Costs of Liquidity Enhancement: Transparency, Risk Alteration and Coordination Problems


Edward J. Janger


Brooklyn Law School

January 25, 2010

Brooklyn Journal of Corporate, Financial, and Commercial Law, Vol. 34, p. 38, 2010
Brooklyn Law School, Legal Studies Paper No. 180

Abstract:     
Much of modern commercial law is devoted to the cause of enhancing the liquidity of debt. From the “holder in due course” doctrine for commercial paper to the laws designed to facilitate asset backed securitization, the advent of credit derivatives and the emergence of bankruptcy claims trading the focus has been on protecting liquidity.

Little attention has been paid to the fact that liquidity enhancement has costs. This Article takes a skeptical look at liquidity enhancement, seeking to catalogue the direct (transactional) and indirect (social) costs of enhancing liquidity, and then questioning certain assumptions about the justification for facilitating the post-petition trading of claims in bankruptcy. Part I describes the traditional doctrines used to enhance the liquidity of otherwise illiquid assets, and detail the modern transactional devices that are used to similar effect on new categories of assets, regardless of whether the traditional prerequisites for liquidity enhancement are met. Part II catalogues the various transparency, and other costs, associated with liquidity enhancement generally, and the novel liquidity enhancement devices in particular. Part III describes a number of contexts in bankruptcy where courts have been faced with a tension between liquidity enhancement and bankruptcy policies. In most of these cases, liquidity policies have won out over bankruptcy policies. The article concludes by arguing that the debate about post-bankruptcy claims trading operates from the wrong baseline. Regulation of claims trading is generally treated as liquidity harming, but actually, allowing any claims trading post-bankruptcy should be viewed as a liquidity enhancement doctrine, and its desirability as policy should be weighed against its effects on reorganization policy. In my view, bankruptcy policy and the market will be better served by close attention to the traditional limits on liquidity enhancement than by a mindless solicitude for debt markets.

Number of Pages in PDF File: 20

Keywords: bankruptcy, commercial law, contracts, securities, law and economics

Accepted Paper Series


Download This Paper

Date posted: January 27, 2010  

Suggested Citation

Janger, Edward J., The Costs of Liquidity Enhancement: Transparency, Risk Alteration and Coordination Problems (January 25, 2010). Brooklyn Journal of Corporate, Financial, and Commercial Law, Vol. 34, p. 38, 2010; Brooklyn Law School, Legal Studies Paper No. 180. Available at SSRN: http://ssrn.com/abstract=1542125

Contact Information

Edward J. Janger (Contact Author)
Brooklyn Law School ( email )
250 Joralemon Street
Brooklyn, NY 11201
United States
718-780-7995 (Phone)
718-780-0376 (Fax)

Feedback to SSRN


Paper statistics
Abstract Views: 668
Downloads: 128
Download Rank: 129,613
Footnotes:  110
Paper comments
No comments have been made on this paper

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo6 in 0.250 seconds