The American system of bankruptcy is quite efficient at handling the disappointment of parties to whom much is owed and little may be coming. The bankruptcy code sets up a hierarchy of the unpaid in which any sums of cash given to those highest on the ladder mean less money for those on the bottom rungs. Frequently, stockholders are simply wiped out, and the value they once held goes to creditors.
When a business is relatively simple—a shoe retailer—or when many of the discussions and arguments about how to restructure debts have taken place before the formal filing, companies can get in and out of bankruptcy relatively quickly. Circuit City filed for bankruptcy on Nov. 10, 2008. The store liquidations were completed by March. In May, Systemax acquired the Circuit City brand and Web site. Done. Chrysler filed for bankruptcy on April 30, and reports suggests the new Chrysler could emerge from bankruptcy next month.
But not all bankruptcies are efficient, short, and sweet. When the proceedings are contentious, or if there's a lot of financial and industrial spaghetti to be untangled, the proceedings can go on for many months, even years, in which case the system grows somewhat less efficient. The creditors and debtors are joined by a third set of wily players—the suits, lawyers, accountants, and financing wizards required to fix, defend, wind down, and restructure a failed company.
Most of these people, of course, bill by the hour. And thanks to the transparency of our legal system, we know precisely how much they bill. Each quarter, law firms, turnaround consultants, and accountants apply to the bankruptcy court, detailing the services they rendered and precisely how much they cost. Creditors can raise objections to the fees—after all, every penny a law firm gets is one less available for bondholders. But they usually don't object too strenuously. And the firms don't offer discounts to companies just because they are bankrupt.
The bankruptcy of Enron generated fees of about $750 million. Lehman Bros., which filed for Chapter 11 protection last September, is proving to be a similarly expensive failure. In the first four months of Lehman's sojourn in bankruptcy protection, a host of firms requested about $100 million in fees. The law firm Weil Gotshal asked for $55 million in fees for the period between Sept. 15, 2008, and the end of January 2009. During that period, Weil Gotshal's Harvey Miller, a leading bankruptcy attorney, billed 794.8 hours at $950 per hour, while associates' time was billed at $495 to $600 per hour; paralegals and other support staff were billed out at $150 to $210 per hour. In addition to detailing precisely how much each attorney and staffer costs, the firm also detailed the list of tasks: selling assets, dealing with litigation, unwinding derivatives. And the meter is still running. Last fall, experts projected Lehman could generate $1.4 billion in bankruptcy-related fees.
In the early 1990s, when I covered bankruptcy court, I enjoyed scouring through the applications for bankruptcy fees. The best were those produced by the most anal-retentive of the professionals, the accountants. They meticulously counted the precise number of minutes each worked on the matter—and then calculated the precise number of minutes it took them to count the precise number of minutes each professional worked on the matter. I remember a line item, more than $10,000, that was the bill for preparing the bill.
Many professionals toiling in Midtown Manhattan skyscrapers are wondering whether GM will be more like Chrysler (short, sweet, a nice bit of business but nothing to make a year) or more like Lehman (booyah!). GM's workers, managers, and dealers hope that it's a Chrysler-esque pit stop. But Chrysler was a relatively small company compared with GM. Its operations were almost exclusively in the United States. And in Fiat, it had a large, decently capitalized auto company ready to step in. GM, by contrast, has much larger liabilities, has operations that need to be unwound or sold all over the world, and doesn't have an obvious buyer or merger partner. It's going to have to restructure on its own, and that takes time. And that means GM's bankruptcy is likely to be longer and potentially more contentious than that of Chrysler. A Bloomberg report from February, via the Huffington Post, suggested that a GM bankruptcy could generate fees of $1.2 billion.
That's good news for the professional services firms that stand to profit. But it's bad news for bondholders and other investors to whom GM owes money. Every penny spent on shrewd legal advice and high-end accountants is one penny fewer they can recover. Plenty of cash that could be spent repaying creditors will wind up going to pay the bill of the people who prepare the bills.