Creative Destruction - Unfettered Free Markets

In one segment of their business models, Bain Capital and other venture capital investment firms seek profits from the environment where companies are heading toward the bankruptcy courts.

One must know that the bankruptcy process, Chapter 11 (reorganization) or Chapter 7 (dissolution), is not the free market system in action. The process is a man made. A legal judicial process through which ailing organizations are either reborn or die inside an established hierarchy and framework.

Bankruptcy in the United States is a matter placed under Federal jurisdiction in accordance with Article 1, Section 8, Clause 4 of our constitution, which allows Congress to enact "uniform laws on the subject of bankruptcies throughout the United States. Congress has enacted Title 11 of the United States Code, Bankruptcy Code.

As an aside from the corporate issue of bankruptcy. One has to reflect on the standard hypocritical line of the Republican Party. There go those big government liberals, sticking their nose into the workings of the free market system, again.

Even worse for the average citizen, in 2005, our Republican controlled congress enacted tougher judicial rules for bankruptcy filings for small time debtors (average citizens) while allowing the existing rules to remain in place for big time debtors (corporations). There is a case for lenient bankruptcy laws as it supports risk taking, but our Big Government Republicans now offers greater support for risk taking for corporations then it does for its individual citizens.

Back to corporate bankruptcy, in Chapter 11, the company retains ownership and control of assets and is re-termed a debtor in possession ("DIP"). The company in possession runs the day to day operations of the business while creditors and the company work with the Bankruptcy Court in order to negotiate and complete a plan. Upon meeting certain requirements (e.g. fairness among creditors, priority of certain creditors) creditors are permitted to vote on the proposed plan. If a plan is confirmed the debtor will continue to operate and pay its debts under the terms of the confirmed plan. If a specified majority of creditors do not vote to confirm a plan, additional requirements may be imposed by the court in order to confirm the plan.

When companies find them selves in financial trouble they seek alternatives to filing for bankruptcy,enter the Bain Capital type firms in our free market system. These investment companies offer to step-in, many times allowing senior (not always top) management to maintain positions with the ailing company while the venture capital firm situates itself as a senior debt holder, who offer their valuable advice and closely monitor the company performing all the tasks I have previously described here.

#Vote2012