U.S. Treasury Secretary Paulson is wrong  by Luigi Zingales
CHICAGO — When a profitable company is hit by a very large
liability, the solution is not to have the government buy its
assets at inflated prices. The solution, instead, is protection
under bankruptcy law, which in the United States means Chapter
11.  Under Chapter 11, companies with a solid underlying
business generally swap debt for equity. Old equity holders are
wiped out and old debt claims are transformed into equity claims
in the new entity which continues operating with a new capital
structure. Alternatively, the debt-holders can agree to reduce
the face value of debt, in exchange for some warrants. So why
not use this well-established approach to solve the financial
sector’s current problems?  The obvious answer is that we do not
have time; Chapter 11 procedures are generally long and complex,
and the current crisis has reached a point where time is of the
essence. But we are in extraordinary times, and the government
has taken and is prepa