January 10, 2010

Speed Bankruptcy: A Firewall to Future Crises

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In light of the 2007-2008 financial crisis, policymakers are reforming financial regulations in order to create a resolution system for large failing financial institutions. This paper advocates that speed bankruptcy, specifically overnight debt-to-equity conversions be considered as a viable option to recapitalize troubled financial institutions. At the very least, overnight debt-to-equity conversions could have been used to provide hundreds of billions of dollars of extra equity to weak firms in 2008, and could still be used the next time a firm that is ostensibly “too big to fail” comes close to going bust.