Letter from the President

The Wall Street Journal’s On Line News Alert on Thursday, October 29, 2009, reported that U.S. gross domestic product rose by a seasonally adjusted 3.5% annual rate from July through September . . . . Economists had forecast 3.2% growth. The Alert continued to notes that: The economy's growth was the first since the second quarter of 2008 and serves as an unofficial confirmation that the longest and deepest recession since the Great Depression has ended. The GDP gain was driven by consumer spending, which rose by 3.4%. Economists said the massive stimulus injected by the U.S. government, such as the cash for clunkers program, helped boost consumer spending.

The next day the FDIC closed 9 more banks located in California, Illinois, Arizona, and Texas, bringing the total for the year to 115, and the Dow Jones Industrial Average dropped 249.85 points (it has since recovered a bit to again be over 10,000). Wilbur Ross reportedly told Bloomberg Radio on October 30 that a huge crash in commercial real estate is beginning.1 A cynic might say that we have been living that reality for some time now. The Atlanta Journal-Constitution reported on November 8 that another 50 banks could be closed, in Georgia alone.

Just before all of these developments, Thomas R. Keene, of Bloomberg, spoke at the National Conference of Bankruptcy Judges at the end of October and commented on the fact that GDP numbers were about to be issued that would reflect a boom economy in which unemployment would continue to decline. He described this structural unemployment in a way I had not considered it before. It is one thing to have movement from one area to another as the economy changes such as occurred when we moved from a rural economy to a manufacturing economy, or even from a manufacturing economy to a service based economy where technology and intellectual capital were the driving forces of change and growth. It is another thing to have a change in the economy that portends a permanent and higher level of unemployment, and this is what I understood his point to be. Keene noted that it was a politically untenable situation.

Where this all leads for us as insolvency professionals is easier to predict than where it will go next. In the same way no one could say when the economy was going to cycle downward as it has, it is equally difficult to project when real and lasting economic change will occur that will pull us out. The hope is that the rise in the economy will create a politically acceptable circumstance where jobs are created in new sectors as part of both U.S. and international economic innovation and entrepreneurship. But, if Keene is correct, that is not in the future, at least not domestically because of the structural unemployment he foresees.

As insolvency professionals we work in a system that is calculated to lead to debt restructuring, and preservation of jobs through preservation of going concern values. Unfortunately, that does not always work. The sheer volume of bad news often overwhelms lenders, some of whom seem paralyzed and who appear unable to think outside of the box to allow for turnaround preferring instead to incur immediate losses on their debt and of jobs. Is this simply the natural economic cycle in mature and overcrowded industries trying to do things the same way where margins have been squeezed beyond what will allow for profits. Workout are focused on getting around the corner to the recovery, and yet, if the recovery is based on government bailout instead of traditional capitalism, is that really recovery. The impact of cash for clunkers and other incentives such as the recent extension of tax credits for homebuyers is a positive in trying to prime the pump, but is it sufficient to lead to anything sustained. Then again, if the real key to the recovery is returning our financial institutions to liquidity and viability, has that been accomplished in large part, albeit without a willingness to take the risks that will spur new lending and economic growth. Unfortunately, as this column reflects, I have a lot of questions but do not have the answers. To use the trite phrase, time will tell. In the interim, we will continue to provide our services with the hope that our efforts will make a positive difference on a broader stage than any one of us acts on individually.

Author Bio:

Grant Stein is a partner in Alston & Bird’s Bankruptcy, Reorganization and Workouts Group. His diverse practice includes the representation of debtors, secured and unsecured creditors, creditors’ committees, and fiduciaries in complex and difficult out-of-court workouts, debt restructurings, bankruptcy cases, and financial transactions throughout the United States and internationally. He also regularly represents officers, directors, and other parties in bankruptcy litigation of all kinds. His restructuring experience includes manufacturing, real estate, wholesale, retail, distribution companies, health care, communications, technology and intellectual property issues.

Mr. Stein is a Fellow of the American College of Bankruptcy and is identified as a top practitioner in Chambers USA: America’s Leading Lawyers for Business, The Best Lawyers in America and Super Lawyers magazine. He serves as a director and president-elect of the Association of Insolvency and Restructuring Advisors (AIRA). He also is a director and president-elect for the Southeastern Bankruptcy Law Institute. He recently served as a Member of the executive committee of Emory University’s Board of Visitors. He has written numerous articles on bankruptcy and workout issues and regularly lectures around the country. Mr. Stein served as law clerk to The Honorable W. Homer Drake, the senior judge of the United States Bankruptcy Court for the Northern District of Georgia, following his graduation, with honors, from the University of Georgia School of Law in 1981. He received his B.B.A., with high honors, from Emory University in 1978.