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The President and members of Congress are considering proposals that would give the government broad authority to rescue financial institutions whose failure might threaten market stability. These systemically important institutions include bank and insurance holding companies, investment banks, and other "large, highly leveraged, and interconnected" entities that are not currently subject to federal resolution authority. Interest in these proposals stems from the credit crisis, particularly the bankruptcy of Lehman Brothers. That bankruptcy, according to some observers, caused massive destabilization in credit markets for two reasons. First, market participants were surprised that the government would permit a massive market player to undergo a costly Chapter 11 proceeding. A very different policy had been applied to other systemically important institutions such as Bear Steams, Fannie Mae, and Freddie Mac. Second, the bankruptcy filing triggered fire sales of Lehman assets. Fire sales were harmful to other non-distressed institutions that held similar assets, which suddenly plummeted in value. They were also harmful to any institution holding Lehman's commercial paper, which functioned as a store of value for entities such as the Primary Reserve Fund. Fire sales destroyed Lehman's ability to honor these claims. Lehman's experience and the various bailouts (of AIG, Bear Steams, and other distressed institutions) have produced two kinds of policy proposals. One calls for wholesale reform, including creation of a systemic risk regulator with authority to seize and stabilize systemically important institutions. Another is more modest and calls for targeted amendments to the Bankruptcy Code and greater government monitoring of market risks. This approach would retain bankruptcy as the principal mechanism for resolving distress at non-bank institutions, systemically important or not. Put differently, current debates hinge on one question: is the Bankruptcy Code an adequate mechanism for resolving the distress of systemically important institutions? One view says "no," and advances wholesale reform. Another view says "yes, with some adjustments." This Essay evaluates these competing views: Section II discusses the current structure of the Bankruptcy Code and its limited ability to protect markets from failing systemically important institutions. Section III outlines policy responses. In Section IV, I conclude that the Code is indeed inadequate for dealing with failures of systemically important institutions. A systemic risk regulator is needed because a judicially administered process cannot move with sufficient speed and expertise in response to rapidly changing economic conditions.

Lehman's bankruptcy has triggered calls for new approaches to rescuing systemically important institutions. This essay assesses and confirms the need for a new approach. It identifies the inadequacies of the Bankruptcy Code and advocates an approach modeled on the current regime governing commercial banks. That regime includes both close monitoring when a bank is healthy and aggressive intervention when it is distressed. The two tasks – monitoring and intervention – are closely tied, ensuring that intervention occurs only when there is a well-established need for it. The same approach should be applied to all systemically important institutions. President Obama and the Congress are now considering such an approach, though it is unclear whether it will establish a sufficiently close connection between the power to intervene and the duty to monitor. The proposed legislation is unwise if it gives the government power to seize an institution regardless of whether it was previously subject to monitoring and other regulations.

Although they caused great controversy, the Chrysler and GM bankruptcies broke no new ground. They invoked procedures that are commonly observed in modern Chapter 11 reorganization cases. Government involvement did not distort the bankruptcy process; it instead exposed the reality that Chapter 11 offers secured creditors – especially those that supply financing during the bankruptcy case – control over the fate of distressed firms. Because the federal government supplied financing in the Chrysler and GM cases, it possessed the creditor control normally exercised by private lenders. The Treasury Department found itself with virtually the same, unchecked power that the FDIC exercises with respect to failing banks. The Chrysler and GM bankruptcies are cautionary tales about Chapter 11, not about government intervention. It may be time to entertain longstanding proposals for reforming the reorganization process.

Federal bankruptcy law is rarely used by distressed small businesses. For every 100 that suspend operations, at most 20 file for bankruptcy. The rest use state law procedures to liquidate or reorganize. This paper documents the importance of these procedures and the conditions under which they are chosen using firm-level data on Chicago-area small businesses. I show that business owners bargain with senior lenders over the resolution of financial distress. Federal bankruptcy law is invoked only when bargaining fails. This tends to occur when there is more than one senior lender or when the debtor has defaulted on senior debt (harming trust-based relationships with lenders). These findings raise questions about the design of and need for federal bankruptcy law.

Most nations have enacted statutes governing business liquidation and reorganization. These statutes are the primary focus when policymakers and scholars discuss ways to improve laws governing business failure. This focus is misplaced, at least for distressed small businesses in the United States. Evidence from a major credit bureau shows that over eighty percent of these businesses liquidate or reorganize without invoking the formal Bankruptcy Code. The businesses instead invoke procedures derived from the laws of contracts, secured lending, and trusts. These procedures can be cheaper and speedier than a formal bankruptcy filing, but they typically require unanimous consent of senior, secured lenders. This essay identifies the conditions under which a business owner is able to obtain lender consent. The empirical findings point to an important balance between a nation's formal insolvency statutes and alternative modes of liquidation and reorganization. This balance, the essay argues, should play a central role in any discussion of insolvency-law reform.

The Supreme Court's decision in Timbers of Inwood Forest occupies an unhappy position in bankruptcy case law. It is often remembered as a troubled interpretation of the Code, denying undersecured creditors compensation for an important source of depreciation – depreciation in the real value of a creditor's claim during a lengthy reorganization process. But Timbers was not a simple case in which a bank was denied adequate protection for lost investment opportunities. It was instead a case in which the bank tried to opt out of the bankruptcy process itself. The debtor was an apartment complex. After it entered bankruptcy, it assigned the apartment rents to the bank. These rents, economic theory tells us, closely approximated compensation for physical depreciation as well as lost investment opportunities. Yet the bank wanted more: it requested a second helping of compensation for lost investment opportunities, citing the Code's provision for adequate protection. Surprisingly, the bankruptcy court agreed; so did the Court of Appeals. But by the time the case reached the Supreme Court, it had morphed into something altogether different. Instead of an illustration of bank over-reaching, the case had become a vehicle for testing an abstract question – whether the phrase adequate protection encompasses compensation for lost investment opportunities. The Court may have decided that question incorrectly, but the end result – preventing bank over-reaching – was probably the right one. Indeed, Timbers' long-run impact may not go far beyond the parties to the case itself. The past fifteen years have seen legislative reforms, speedier cases, relatively low interest rates, and creditor control over the bankruptcy process, all of which have effectively neutralized Timbers' impact on most secured creditors.

Many small businesses attempt to reorganize under Chapter 11 of the U.S. Bankruptcy Code, but most are ultimately liquidated instead. Little is known about this shutdown decision. It is widely suspected that the bankruptcy process exhibits a continuation bias, allowing failing businesses to linger under the protection of the court, which resists liquidation even when it is optimal. This paper examines the shutdown decision in a sample of Chapter 11 bankruptcy cases filed in a typical bankruptcy court over the course of a year. The presence of continuation bias is tested along several dimensions—the extent of managerial control over the bankruptcy process, the accuracy and speed with which viable and nonviable businesses are distinguished, and the characteristics of the hazard of shutdown compared with the predictions of a formal model. Contrary to conventional wisdom, the paper finds that continuation bias is either absent or empirically unimportant.

Executive orders, statutes, and precedent increasingly require cost-benefit analysis of regulations. Presidential executive orders have long required executive agencies to submit regulatory impact analyses to the Office of Management and Budget ("OMB") before issuing regulations, and recent federal legislation exhibits a trend toward mandatory cost-benefit analysis. For example, the Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the recent Safe Drinking Water Act Amendments require the Environmental Protection Agency to balance costs and benefits in regulating chemicals and pesticides. In 1995, Congress passed the Unfunded Mandates Act, requiring cost-benefit analysis of all significant federal regulations that require expenditures by state, local, or tribal governments. Additionally, Congress has proposed several bills that would require federal agencies to apply cost-benefit analysis to all rules. This trend raises important questions about the methods agencies use to conduct cost-benefit analysis. To perform the analysis, an agency must first quantify the stream of costs and benefits that a regulation will generate in current and future periods. Quantification, however, is not enough. Because of the time value of money (that is, a dollar today can be invested to yield more than a dollar tomorrow), costs and benefits in different periods are different "goods" and are not strictly comparable. Therefore, the agency must choose a discount rate that will convert future sums into present values. It can then use these present values to compute the net benefit (or "net present value") of the regulation.

The discount rate is a critical element of cost-benefit analysis. The value of cost-benefit analysis in improving regulatory decisions depends, in large part, on the reasonableness of the discount rate. Small variations in the discount rate can significantly bias the analysis. Despite the importance of the discount rate, courts have failed to develop a standard of review for agency discount rate choices. this is particularly troubling in light of evidence that agency practice exhibits wide-ranging, and generally unexplained, variation in discount rates. Not only do different agencies employ different rates, but the same agency will sometimes apply different rates to different regulations without explanation. This comment seeks to strengthen cost-benefit analysis by providing a framework for judicial review of agency discount rates. As a threshold matter, courts should find, as a matter of law, that an agency acts unreasonably if it fails to discount future costs and benefits, even if they accrue to future generations. Additionally, courts should take a "hard look" at agency discount rates and ask three basic questions: Is there a record for the agency's choice? Did the agency explain its choice between the alternative approaches to discounting, the SRTP and OCC? Did the agency consider the relevant factors in applying the chosen method? While these questions are standard fare in hard look review, they would represent a significant advance in judicial review of discount rates. More importantly, hard look review would provide strong incentives for agencies to adopt morally and economically sensible discount rates.

Barak D. Richman and Steven L. Schwarcz argue that healthcare providers played a central – and failing – role in stemming the fallout from the COVID-19 pandemic. Analogizing to the financial crisis of 2008, they view our healthcare system as a collection of providers, each maximizing returns to its own stakeholders in a laissez-faire regulatory environment that ignored the essential interconnectedness of providers. Because neither hospitals nor regulators were attuned to this interconnectedness, our healthcare system was unprepared for the pandemic, resulting in a reduced standard of care. Just as Dodd-Frank and related legislation view financial institutions as part of a larger, interconnected system that must be regulated to minimize exposure to and build robustness against shocks, so too must federal regulators approach our healthcare providers as a "system" that can work as a collective to mitigate the fallout from shocks.

Policymakers have minimized the role of bankruptcy law in mitigating the financial fallout from COVID-19. Scholars too are unsure about the merits of bankruptcy, especially Chapter 11, in resolving business distress. We argue that Chapter 11 complements current stimulus policies for large corporations, such as the airlines, and that Treasury should consider making it a precondition for receiving government-backed financing. Chapter 11 offers a flexible, speedy, and crisis-tested tool for preserving businesses, financing them with government funds (if necessary), and ensuring that the costs of distress are borne primarily by investors, not taxpayers. Chapter 11 saves businesses and employment, not shareholders. For consumers and small businesses, however, bankruptcy should serve as a backstop to other policies, such as the CARES Act. Consumer bankruptcy law's primary goal is to discharge debts, but that's not what most consumers need right now. What they need is bridge financing, and perhaps forbearance, until the crisis ends, they get back to work, and they regain their ability to pay their debts again. These key policy levers – bridge financing and forbearance – are available in theory to small businesses in Chapter 11, especially if the government supplies the bridge financing when credit markets are dysfunctional. The practical reality is that bankruptcy is expensive for small businesses, which may deter them from using it in the first place. Equally important, our courts will be flooded if Chapter 11 is the primary rescue policy for small businesses.