Chapters – All Except Those Covering New Revision (Chapter 15 Bnkrpty)
In-Class Mid-Term – Will Not Be Graded (Model for Final Exam)
Final Exam – Open Book 9am-4pm – 6 questions (each should be no longer than 3 pages)
February 7, 2007
Bankruptcy is very analytical
Make sure if using online version of code that it includes red underlined amendments
Analyzing the History of Modern Debt:
– Consumption Smoothing – constant need for expenditures that results in borrowing (i.e. not saving)
– Reduction in Information Cost – debtor’s promise to repay results in uncertainty for the creditor
– (aside) Because of FDIC, there’s a moral hazard on part of banker because they do not have to worry about what they do with your money – that’s the govt’s problem because they guarantee the money.
– According to Contract Law, a debt is more than a bill – it’s a bundle of promises (promise to repay, personal liability, precedent conditions, covenants, etc.)
– Where did bankruptcy come from? Theory, it stemmed from Roman culture – a creditor would come up to a merchant’s table that had his products on it and “break the table” because of non-payment.
– The Corporation & its constituents are at constant odds (Agent/Principal Factor)
– The entity has a focus, while the manager, or agent, is responsible for maintaining that focus. However, as the manager’s ownership changes due to changes in ownership equity, his inherent goals can conflict with the entity’s focus.
– Debt is a solution to maintaining a favorable ownership ratio for the manager (as opposed to raising capital by issuing stock). Leads to the argument that a debt laden company isn’t any more risky than a company with large retained earnings because the owner’s money is still tied up in the entity. In other words, the business and its respective industry ultimately determine the risk involved because there is always someone’s money tied up in the business, either directly or through lending.
– This is why Banks, Insurance Companies & Railroads are exempt from the Bankruptcy Code.
What Makes a Debt?
– A Borrowed Amount
– Interest (either fixed or floating rates)
– Base Rate (o
– Saving $5 per week vs. joining your local bank’s “Christmas Club”
– Life-Cycle Spending Theory vs. Fungibility (def. – the property of financial instruments that makes them exchangeable or equivalent with other financial instruments.)
– Life-Cycle Theory states all money is spent equally over time, but assumes fungibility – The problem here, is that people do not treat all forms of money as interchangeable (actually, there really aren’t “all” or different forms of money – it’s all fungible, or interchangeable)
– A reason why people experience such financial trouble is because they do not treat money as fungible (i.e. all forms of money, or income, are exchangeable – e.g. debit card money is treated different then cash, cash is treated different then money in an account, yet it all has the same residual outcome)