I am responding to a critique of my last blog post's characterization of a point (the final landing point) on the x1-x2 plane as an equilibrium. I still posit that is an equilibrium, and I will build out the game that is bankruptcy, restructuring, and distressed debt, and briefly introduce its game theory to show not only that this past example reached an equilibrium, but furthermore that every bankruptcy ends in an equilibrium. After all, that's why they exist.
The players of the game are investors, employees, and other third party players. All players fight on a multidimensional plane to maximize internal rate of return. US Chapter 11 bankruptcy and the broader legal infrastructure function to meet two main goals of stability in the US credit markets and the turnaround of failing corporations. They collectively are the master agenda-setter that exists to expediently "right-size" the balance sheet of the debtor and reach a stable equilibrium.
Mr. Coppock has described an equilibrium as an outcome where no player is incentivized to change behavior. The players in this game consider their ex-ante expected probabilities of outcomes (often regarding who gets to vote) and find a balanced solution that fits their respective risk preferences. The rounds of strategic moves by players influence and clarify the probabilities of these outcomes. The players play the game until an agreement is found at which point the game is played no more: there is no incentive for the players to make any more moves, and an equilibrium is found.
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For those that read this series and understand it to some extent, there has been a major development that alters the trading value of debt and the outcomes of several bankruptcies- SDTX Judge Jones has effectively resigned following the revelation that he had an ongoing relationship with a partner of a law firm that appeared quite frequently in his court.
In fact, he had spearheaded the charge for the "complex cases" board in the Southern Distract of Texas, which was created to "steal" BK cases from the likes of SDNY and Delaware. He issued many inflammatory and groundbreaking opinions, and this generally benefitted the law firms, investment bankers, and the debtors seen in his court. It can be argued that different court jurisdictions compete for BK cases in a Tiebout-like manner. In my humble opinion, it's a bit of a "race to the bottom" as opposed to a "race to justice." I'd go as far as calling it a form of rent seeking- I mean really, firms have filed in SDTX when their sole geographic claim was a literal PO box in Houston. Really?
Safe to say, his actions generally benefited his partner and her firm. But no longer! His removal has extreme ramifications for the industry and its equilibria. Expect to see many chess moves as the probabilities for different outcomes shift and ex-post equilibria may shift. We may see landmark cases like Serta Simmons and/or Incora "unwound." This is a major win for creditors en large, arguably in competition with the outcome of the Caesar's Palace case.
To read more:
Caesar's
https://www.amazon.com/Caesars-Palace-Coup-Billionaire-Corruption/dp/163576677X
Judge Jones
https://news.bloomberglaw.com/bankruptcy-law/top-texas-judge-shocked-by-resignation-of-bankruptcy-colleague
Serta Simmons
https://restructuringinterviews.com/blogs/restructuring/serta-chapter-11
Banks justifying themselves as doing God's work
https://www.reuters.com/article/us-goldmansachs-blankfein/goldman-sachs-boss-says-banks-do-gods-work-idUSTRE5A719520091108
Their subsequent high fees
https://restructuringinterviews.com/blogs/restructuring/chapter-11-fees
TLDR: Judge had a previously unknown affair. He resigned. It is a big deal.
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