ACCEPTANCE REMARKS OF
PROFESSOR ELIZABETH WARREN
Atlanta judges, community, Emory Bankruptcy Developments Journal, this
is not a celebration of a person. This is a celebration of a law journal and of
the lawyers, judges, law students, and others who make up the world of
bankruptcy. I’m just the excuse this year to get together.
We come together as people in a field as a way to affirm our community.
And as we do that, we affirm an idea—an idea born more than 220 years ago.
The basic idea is that in a new country, a country founded on the ideas of
liberty and opportunity, that bankruptcy—a law of failure—would hold a
As our founding fathers (and they were all fathers) put together the central
elements of a government that would help this young country take flight, they
saw the importance of a role for a law of bankruptcy. Before they drafted the
amendments to protect free speech, freedom of religion or freedom from self-
incrimination, the founders put in place the mechanism by which a person
could free himself of debts that were no longer payable.
Why was bankruptcy so important? Why did it deserve a place in the
Constitution? Because it was bankruptcy that shaped a central question of
capitalism: When risk takers fail, what happens to them? Do we grind them
into the ground, seize all their assets, imprison them, hold them hostage for
friends and relatives to try to rescue them? Do we send in the government to
bail them out? Or do we see value in orderly dissolutions, followed by
discharge, and keep the losses—and the distribution of the losses—private?
The founders were progressive. They believed in order, in dissolution, in
discharge, and in keeping profits and losses private.
Our country’s relationship to bankruptcy has always been uneasy. We have
struggled collectively and individually with the ethical dimensions of walking
away from promises. We argue now, as we argued more than 200 years ago,
about whether bankruptcy reflects a moral failure or an economic one. The
founders ultimately embraced the idea of economic failure—errors that could
be forgiven, losses acknowledged, and all the parties could move on. They did
so reluctantly, sometimes uneasily, but they embraced it nonetheless.
Bankruptcy was a central part of capitalism, an effort to encourage risk and to
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deal with failure in a way that balanced the interests of various creditors and
that returned the debtor to a productive life.
Now we meet at the time of the biggest financial crisis of our lives. Even
with a tough new law in place, with higher filing fees, higher lawyer fees, more
bankruptcy hurdles and less bankrupt protection, more families have turned to
bankruptcy. More than a million families filed for bankruptcy last year, and
the numbers are growing rapidly. Businesses are also headed to the
bankruptcy courts. From small outfits that cannot get financing to
multinationals that seek the shelter of Chapter 11, their numbers are also rising.
But the dramas unfolding at center stage in this crisis are playing out with
bankruptcy laws only at the periphery. There are three reasons for this:
1. Bankruptcy does not apply. The failing companies that threaten us
most are banks—institutions that were regulated, and therefore not
supposed to fail in large numbers, and for whom the dance of failure is
already choreographed by other federal laws.
2. Bankruptcy does not work. The bankruptcy laws have been crippled,
with holes torn in the automatic stay for certain financial products, so
that the laws are ineffective to deal with failure of financial companies
such as Lehman. In other cases, the bankruptcy laws were never
written broadly enough to encompass the needs of this hour. There is,
for example, no effective tool to deal with underwater mortgages and to
stop foreclosures that destroy wealthy for both consumer and lender.
3. Bankruptcy does not solve the biggest problem. The failure of certain
private companies (such as AIG) is now deemed to pose a systematic
risk, and many fear that bankruptcy may not have the tools to deal with
failure in the context of systemic risk.
So we have a financial crisis without the bankruptcy tools to solve central
problems. Without bankruptcy, where do we stand? Without a workable
bankruptcy alternative, the government is bailing out companies, committing
billions of taxpayer dollars to pay off private obligations, billions to prop up
capital, billions to repay speculative debts—all with no end in sight, with no
clear path back to health for our economy.
Without a workable bankruptcy alternative, the government is offering
bribes to mortgage loan servicers in the hopes that they will work out deals that
benefit both borrowers and lenders.
2009] ACCEPTANCE REMARKS 3
Without a workable bankruptcy alternative, the new watchword is “moral
hazard,” and moral hazard it is. Businesses—banks, insurance companies,
heavy industry—understand that if they can structure their businesses so that
their failure would take down many other businesses, then they have just found
the new American sweet spot—all the profits when times are good, with the
taxpayer picking up the tab when the business loses money.
Without a workable bankruptcy alternative, there is no bankruptcy judge to
review the ongoing activities of the debtor and no obligations imposed on a
debtor-in-possession to rein in management. There are no disclosure
requirements and no investigations into past behavior.
Without a workable bankruptcy alternative, the specter of a government
bailout makes the private deals that should be done impossible. What financial
institution would negotiate to take a write-down on a mortgage now if their
1) wholesale write-downs will leave the institution visibly, unarguably
insolvent, and 2) if the government might offer another bailout—tomorrow? It
seems better to wait instead of finding a sensible, private solution today.
The Founders had it right: A world without bankruptcy is a dangerous
place. The reasons have changed, but the need for a strong, workable
bankruptcy system is clearer now than ever in our history. The lesson from
this crisis is clear—principles of bankruptcy protect us all.
As our country emerged from the Great Depression, it put laws in place to
try to protect us from repeating the misery of that time. For banks, there was
Glass-Steagall and FDIC insurance. For the stock market, there was a newly
invigorated Securities and Exchange Commission. And for the private
companies, there were reorganization chapters—Chapter X, Chapter XI,
Chapter XII, and Chapter XIII of the Bankruptcy Act. These innovations
expanded the tools of the bankruptcy courts and strengthened the role
bankruptcy laws play in the economy.
We all have our roles to play in history. For those of us who understand
bankruptcy, now is the time to use the tools of bankruptcy to bring order to
chaos, to preserve wealth and increase security, to end destruction and put
assets—and people—back to work.
But now is also the time to think about the role of bankruptcy in the larger
economy. The economy has outgrown the old regulatory tools. As we
consider reform, as we consider what laws we need to prevent this catastrophe
from visiting us again in ten or fifteen years, we need to think much harder
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about the role bankruptcy plays in our economy and in our collective security.
We need to think creatively about how our bankruptcy system can help us all.
Thank you for tonight. I am grateful for your kind thoughts and good
words. But most of all, I am grateful to have the excuse to be here with old
friends and new friends to talk about something that we all care deeply about.