Bankruptcy & Bailouts, Subsidies & Stimulus: The Government Toolset for Responding to Market Distress

University of Chicago Legal Forum Volume 2021 Article 17 2021 Bankruptcy & Bailouts, Subsidies & Stimulus: The Government Toolset for Responding to Market Distress Anthony Casey University of Chicago Follow this and additional works at: https://chicagounbound.uchicago.edu/uclf Part of the Law Commons Recommended Citation Casey, Anthony (2021) "Bankruptcy & Bailouts, Subsidies & Stimulus: The Government Toolset for Responding to Market Distress," University of Chicago Legal Forum: Vol. 2021 , Article 17. Available at: https://chicagounbound.uchicago.edu/uclf/vol2021/iss1/17 This Article is brought to you for free and open access by Chicago Unbound. It has been accepted for inclusion in University of Chicago Legal Forum by an authorized editor of Chicago Unbound. For more information, please contact . Bankruptcy & Bailouts, Subsidies & Stimulus: The Government Toolset for Responding to Market Distress Anthony J. Casey† In the spring of 2020, as the COVID-19 pandemic shut down economies around the world, pressure arose for governments to respond to the growing threat of pandemic-related market distress.1 In addition to responding to the direct public health emergency, governments were expected to stabilize markets—both financial and economic—and provide relief to those harmed by the pandemic’s market effects. In the United States,2 the initial proposals for government action varied in nature and focus. Some proposals targeted the financial system,3 while some targeted small businesses4 and individuals.5 Others † Donald M. Ephraim Professor of Law and Economics; Faculty Director of The Center on Law and Finance. I thank Madeline Prebil and Leonor Suarez for excellent research assistance. The Richard Weil Faculty Research Fund and the Paul H. Leffman Fund provided generous support. 1 I use the term “market distress” as a general term that includes both economic and financial distress. The distinction between financial and economic distress, and its importance, is discussed throughout this article. 2 I focus on the United States. While the analysis applies more generally, the specifics with regard to institutions, existing laws, proposals, and government actions differ across jurisdictions. 3 See, e.g., Kevin P. Gallagher et al., Safety First: Expanding the Global Financial Safety Net in Response to COVID-19, 12 GLOBAL POL’Y 140 (2021), https://onlinelibrary.wiley.com/doi/10.1111/1758-5899.12871 [https://perma.cc/AA33-M9FG]. 4 See, e.g., Shaun Shuxun Wang, Government Support for SMEs in Response to COVID-19: Theoretical Model Using Wang Transform (Swiss Fin. Inst. Res. Paper Series, Working Paper No. 20-59, 2020), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3608646 [https://perma.cc/K3AS-6YHC]; Hal Scott, The Fed Needs to Move Faster, WALL ST. J. (Apr. 10, 2020), https://www.wsj.com/articles/the-fed-needs-to-move-faster-11586557721 [https://perma.cc/ASH9-VCQZ]. 5 See, e.g., Phil Lord, Incentivising Employment During the COVID-19 Pandemic, 8 THEORY & PRAC. LEGIS. 355 (2020), https://doi.org/10.1080/20508840.2020.1792635 [https://perma.cc/UU9J-XZDW]; Peter Conti-Brown & David Skeel, Bankruptcy and the Discount Window (Nov. 15, 2020) (preliminary draft). 63 64 THE UNIVERSITY OF CHICAGO LEGAL FORUM [2021 were intended to bail out large businesses6 and specific industries.7 Still other proposals took a more institutional focus.8 In the context of bankruptcy law, many imagined building up the bankruptcy system as a primary bulwark against a seemingly imminent wave of economic and financial distress.9 With the exception of measures related to financial markets, the actual responses formed a chaotic mix of disconnected half measures that neither stabilized the economy nor provided meaningful relief to those most affected.10 While that failure may be attributed in part to general government dysfunction and legislative gridlock, a large part of the problem arises from the lack of a clearly identified purpose and framework to guide government responses. To prepare for the next crisis, we must use this failure to better understand the toolset available to governments dealing with economic and financial threats. The main lessons to take away are that the choice of tools deployed by governments to alleviate a crisis should depend on the nature of the specific problem at hand and that scattershot approaches are unlikely to work. 6 See, e.g., Ken Judd & Karl Schmedders, Why the U.S. Government Needs a New Corporate Bailout Structure—One That Doesn’t Rely on Loans, FORTUNE (Apr. 16, 2020), https://fortune.com /2020/04/16/coronavirus-economic-impact-government-bailout-business-loans-preferred-stock/ [https://perma.cc/45FP-PGEY]. 7 See, e.g., Megersa Abate et al., Government Support to Airlines in the Aftermath of the COVID-19 Pandemic, 89 J. AIR TRANSPORT MGMT. 101931 (2020), https://www.sciencedirect.com/science/article/pii/S0969699720305147 [https://perma.cc/2EC9-UB5W] (endorsing government support for the airlines industry); see also Fabian Stephany et al., The Corisk-Index: A Data-Mining Approach to Identify Industry-Specific Risk Assessments Related to COVID-19 in Real-Time (Working Paper No. 2003.12432v3, 2020), https://ideas.repec.org/p/arx/papers/2003.12432.html [https://perma.cc/NY5S-V9VB] (creating an online index to identify industries most in need of government support due to economic shocks from COVID-19). 8 See, e.g., Philip Rocco et al., Stuck In Neutral? Federalism, Policy Instruments, And CounterCyclical Responses to COVID-19 in the United States, 39 POL’Y & SOC’Y 458 (2020), https://www.tandfonline.com/doi/full/10.1080/14494035.2020.1783793 [https://perma.cc/6JT84PWU]; Stuti Khemani, An Opportunity to Build Legitimacy and Trust in Public Institutions in the Time of COVID-19 (World Bank: Rsch & Pol’y, Brief No. 148256, 2020), https://ssrn.com/abstract=3602352 [https://perma.cc/DJL9-Z6FQ]. 9 See, e.g., Benjamin Iverson et al., Estimating the Need for Additional Bankruptcy Judges in Light of the COVID-19 Pandemic, 11 HARV. BUS. L. REV. ONLINE (2020), https://www.hblr.org/wpcontent/uploads/sites/18/2021/01/HBLR-Estimating-the-Need-for-Additional-Bankruptcy-JudgesProof_2.pdf [https://perma.cc/9T2J-PFUQ]; see also Robin Greenwood et al., Sizing up Corporate Restructuring in the COVID Crisis (Nat’l Bureau of Econ. Rsch., Working Paper No. 28104, 2020), https://ssrn.com/abstract=3731274 [https://perma.cc/TAQ7-C62G]; Edward Morrison & Andrea C. Saavedra, Bankruptcy’s Role in the COVID-19 Crisis (Colum. L. & Econ., Working Paper No. 624, 2020), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3567127 [https://perma.cc/JRE4KEHR]. 10 I focus on the events and actions taken in 2020 at the beginning of the pandemic. The narrative of these events will necessarily become incomplete as the pandemic continues and further government measures are adopted. For example, in 2021, the American Rescue Plan Act of 2021 provided an additional $1.9 trillion in stimulus an (...truncated)