Weakening the Strong: Banks and Secured Lenders
By Bruce G. Carruthers, Terence C. Halliday, J. Scott Parrott
A large scholarly literature attributes considerable economic and political power to banks. They do not simply collect deposits and make loans, so the argument goes, but help to co-ordinate investment, influence markets, and shape the overall direction of economic development. Mintz and Schwartz, for example, argue that: ". . . a substantial proportion of the discretionary decision making of the most significant enterprises in our economy is conditioned by decisions made by the leadership of financial companies" ( Mintz and Schwartz 1985: 70).1 They go on to claim that banks exert themselves most vigorously during corporate bankruptcies, when they can dominate a creditor's committee and shape the reorganization of troubled firms: ". . . chapter 11 bankruptcy is a legally mandated form of bank control involving the subordination of corporate policy to bank dictation" ( Mintz and Schwartz 1985: 83). In their view, bankruptcy is a crucial setting for the exercise of bank power.
Of all the organizations in the credit network, financial institutions are among the most sophisticated at crafting debtor-creditor relationships in order to protect their own interests. Consequently, they usually possess the strongest and most enforceable property rights.
For banks, freely negotiated contracts set property rights. The property rights held by financial institutions are primarily determined in financial agreements that lenders and debtor-corporations negotiate privately and consensually, within a statutory framework of contract and debtor-creditor law. Rarely do legal statutes directly specify such property rights. As Bratton describes it, "contracts governing corporate debt instruments--trust indentures in the case of bonds and debentures, and loan agreements in the case of privately placed notes and long-term bank loans--are generally viewed as the only meaningful source of rights and duties in corporate debtor-creditor relationships." ( Bratton 1984: 371).____________________