Do you think Salomon Smith Barney, the brokerage firm that bankrolled WorldCom and advised it on a business and financial strategy that failed rather spectacularly, should be allowed to represent the interests of the company's employees, bondholders and other creditors while WorldCom is in bankruptcy?
If you answered no, you win a gold star for common sense and for knowing right from wrong. If you answered yes, you must be either an investment banker looking for work or a member of Congress looking to fill campaign coffers.
On March 19, when it passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2003, the House voted to remove a significant restriction from the bankruptcy code that has barred so-called interested parties from advising a company during bankruptcy. Interested parties include any employee or investment banking firm that has sold a company's securities during the three years before it entered bankruptcy.
The restriction on interested parties has been in the bankruptcy code since 1898. Understandably. Why should a firm earn fees advising a company that it may have helped push into bankruptcy by, say, loading on too much debt?
Jeff Lungren, a spokesman for the House Judiciary Committee, whose chairman introduced the bill, said barring investment bankers who are familiar with a company's inner workings from advising it in bankruptcy is inefficient and costly. "You've got people who are intimately involved with a company that files for bankruptcy, and all of a sudden it has to hire new people and pay them to get up to speed on the company," Lungren explained. "That takes time; that takes money." He added that the change would expand the advisers available to a bankrupt company.
Stock and bond issuance is down, and so are banking fees. Financial firms are naturally eager to earn money from bankruptcy advice, and their lobbyists have been working the issue hard in Washington. For the 12 months ended June 2002, the Securities Industry Association and the Financial Services Roundtable, two big industry groups, spent US$10.5 million pleading their views.
"There is a reason why the professionals who have worked for a business that collapses into bankruptcy are not permitted to stay on," said Elizabeth Warren, a professor at Harvard Law School. "The company must go back after bankruptcy and re-examine its old transactions. Having the same professionals review their own work is not likely to yield the most searching inquiry."
Arthur Levitt, the former chairman of the Securities and Exchange Commission, said: "I haven't read a single argument made by the investment banks that would persuade me that that prohibition should be changed. What we're talking about is a significant potential conflict of interest, and I think it is outrageous that investment banks would even try to go down this road."
Outrageous, perhaps, but not surprising. Investment banks and corporate America want investors to get over the dreary corporate governance craze already. Failures at Enron and WorldCom are so five-minutes-ago.
The bankruptcy bill awaits Senate action. "Someone needs to ask the justification for this," Warren said. "It's not a provision to ensure investor confidence or to enhance protection for employees, pensioners or creditors of failing companies. This is a provision to enrich an already-wealthy interest group, nothing more."