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This article considers the economic and legal issues surrounding the treatment of firms in financial distress, with a particular focus on the challenges posed by large complex financial organizations (LCFOs).
and elsewhere and considers whether the structure and complexity of LCFOs have evolved beyond simplistic corporate structures and contract types historically anticipated in our insolvency legislation and common law traditions.
Because LCFOs operate across different legal jurisdictions, the insolvency process itself creates a coordination problem across the very agents (usually courts) charged with solving the coordination problem amongst creditors.
As a result, LCFOs present a number of challenges that affect the resolution process.
This neat picture of the problem of insolvency and its solutions becomes less reassuring when we consider LCFOs. The first issue to come to grips with is the philosophy underlying the treatment of creditors--whether and how contracts and contractual provisions will be honored by the courts in different jurisdictions.
Resolution of LCFOs is further complicated because in the U.S.
As I discussed in the introduction, a particular area of concern in the resolution of LCFOs is the treatment of special financial instruments, specifically the ability to terminate and net contracts.
Next, I discuss some additional issues complicating the bankruptcy process for LCFOs. These issues fall into two general categories--opacity and time.
LCFOs tend to be informationally opaque to outsiders because accounting methods are not designed to provide detailed information about contingent liabilities embedded in off-balance-sheet activities and nontraditional financial instrument portfolios.
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