Auction Design for Claims Trading

Abstract

This essay explores the benefits of having a court-facilitated auction (or auctions) of claims in bankruptcy where the court oversees the exclusive auction of claims on the estate just as it does with estates and their assets. I argue that this court-facilitated auction will reduce many of the costs inherent in a claims-trading market; and it will do so with minimal regulation of the market participants and minimal disruption of pre-bankruptcy entitlements. Moreover, the introduction of a central auction house provides for previously unrecognized solutions to some of the more stubborn problems of modern bankruptcy. Chief among those are the empty-voting and empty-core problems that – according to some scholars and practitioners – arise from the increasing involvement of hedge funds in the process.

Keywords: bankruptcy, hedge funds, investment