1997 Articles

Strategy and Force in the Liquidation of Secured Debt

Mann, Ronald

My analysis proceeds in two steps. Part I presents the empirical part of my study -- the data from the three case studies. For each lender, I outline the types of transactions in which it engages, the mechanisms the lender uses for identifying problem loans, the way in which it responds to problem loans, and the ultimate outcomes those responses produce. Part II assesses two separate theoretical implications of my evidence. The first part of the theoretical discussion addresses the direct implications of my evidence for the economics of distressed debt. In particular, I show how the mechanisms evidenced in my case studies generally allow debtors to protect any equity they have in assets that they have given as collateral. Having explained why foreclosure is so rare in my studies, I close that section by explaining the comparatively high rate of foreclosures that seem to occur in consumer loans for motor vehicles and homes. The second part of the theoretical discussion addresses broader questions about the relation between the market for distressed debt and the larger market for the initial issuance of debt. That discussion closes by addressing the long-standing concern that rules hindering creditors' collection efforts will affect the willingness of lenders to issue new loans. My evidence of the low frequency of business failure and bankruptcy strongly suggests that the concern is for the most part unfounded, at least in the context of commercial finance.