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Building a PlanBuilding a PlanElements in a good NegotiationElements in a good Negotiation

The Brazilian ExperienceThe Brazilian Experience

55thth Annual IADI Conference Annual IADI Conference1515thth Nov. 2006 – Copacabana Palace Nov. 2006 – Copacabana Palace

Prof. Jairo SaddiProf. Jairo Saddi

Ibmec São Paulo, University of OxfordIbmec São Paulo, University of Oxford

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The proposed discussionThe proposed discussion

The dilemmaThe dilemma

The assumptions & requirementsThe assumptions & requirements

The PlanThe Plan

Elements in a Good NegotiationElements in a Good Negotiation

The (small) Brazilian ExperienceThe (small) Brazilian Experience

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The dilemmaThe dilemma

Each creditor has a fixed claim -- the unpaid debt.

If this claim can be satisfied out of the bank’s tangible assets, the creditor is indifferent to whether the bank is allowed to continue as an economic entity by the Regulator or is condemned to disappear and be liquidated.

– It is simply not his problem.

– Role of the State in Bank Liquidation ?

Each creditor has an incentive to seize assets sufficient to satisfy its claim, so long as assets exist.

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However, when there are no However, when there are no sufficient assets:sufficient assets:

The benefits that are drawn from each The benefits that are drawn from each creditor depends on the decision creditor depends on the decision arrangement that the other creditors arrangement that the other creditors adopt.adopt.– The best strategy for each ONE individual The best strategy for each ONE individual

creditor does not bring the best solution for allcreditor does not bring the best solution for all– The ideal, from each creditor’s standpoint, is

that his debt be paid, but that no other creditor executes his debt.

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Besides,Besides,

Creditors as a group would benefit from saving a viable bank and receiving shares in it because this would increase the creditors’ insolvency payoffs.

But there is an intrinsic conflict between the hedonistic wish & the collective view

In some cultures, there is also a desire to punish the bank owner.

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Furthermore,Furthermore,

There are two problems to be solved at There are two problems to be solved at the same time:the same time:– In what order should creditors receive their In what order should creditors receive their

credit ? (ie. What is the priority ?)credit ? (ie. What is the priority ?)– How to sell the assets ? (ie. How to turn the How to sell the assets ? (ie. How to turn the

failed bank assets into cash ?)failed bank assets into cash ?)

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What should be the ideal priority What should be the ideal priority order ?order ?

Good bankruptcy systems also were believed to follow absolute legal priority strictly.

The absolute legal priority rule requires creditors to be paid not in the order that the bank’s contracts were created but what is actually ruled by law.

An implication of the rule is that the bank’s residual claimants -- its owners -- should receive nothing because the residual claim on an insolvent firm is worth nothing.

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But..But..

Bank owners need to cooperateBank owners need to cooperate– Why ?Why ?

The have all the informationThe have all the informationThe may curtail any effortsThe may curtail any efforts

Or in other words, in order to achieve any Or in other words, in order to achieve any success, the Bank owner must be part of the success, the Bank owner must be part of the plan.plan.– Why this is not so easy ?Why this is not so easy ?

Probably he was the cause of the bank failureProbably he was the cause of the bank failureSome emotion in the process ?Some emotion in the process ?FraudFraud

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How to sell the assets ?How to sell the assets ?

If economic value would be maximized by a piecemeal liquidation, the highest bids will be for individual assets.

If continuing the bank as an economic entity would maximize value, then the highest bids would be for the institution as a whole.

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Therefore…Therefore…

Saving such a firm, however, often requires its creditors to coordinate their collection efforts and coordination costs can be high.

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What is a Plan ?What is a Plan ?

A set of ideasA set of ideas

An organized (and usually detailed) An organized (and usually detailed) proposal according to which something is proposal according to which something is to be doneto be done

A scheme of action; a strategy; a A scheme of action; a strategy; a programme, a schedule programme, a schedule

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““The good old rule… the simple and The good old rule… the simple and realistic plan, That they should take, who realistic plan, That they should take, who have the power to convince, and they have the power to convince, and they should keep who are convinced.”should keep who are convinced.”

William Woodsworth, 1803. “Rob Roy's GraveWilliam Woodsworth, 1803. “Rob Roy's Grave” ”

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Elements of a PlanElements of a Plan

Introduce your objectives, where you want to getIntroduce your objectives, where you want to get

Names of your solicitors and accountants you Names of your solicitors and accountants you want to bring on board. want to bring on board.

An outlined financial statements, balance sheet, An outlined financial statements, balance sheet, profit and loss account with cashflow profit and loss account with cashflow

Outline how creditors became involved in the Outline how creditors became involved in the business - and give details of their existing business - and give details of their existing business with the failed bankbusiness with the failed bank

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Elements of a Plan (Cont.)Elements of a Plan (Cont.)

Which creditors must be involved? What is their Which creditors must be involved? What is their background? Will they help ? Should a background? Will they help ? Should a Committee be set ?Committee be set ?

Outline which sector of the market that will Outline which sector of the market that will eventually buy the failed bank assetseventually buy the failed bank assets

Is an auction the best solution ?Is an auction the best solution ?

What is the estimated cost of such a venture ? What is the estimated cost of such a venture ?

What is the valuation of assets (credits) and of What is the valuation of assets (credits) and of the property, if there is suchthe property, if there is such

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Elements in a Good NegotiationElements in a Good Negotiation

Negotiation is a process through which Negotiation is a process through which parties move from their initially divergent parties move from their initially divergent positions to a point where agreement may positions to a point where agreement may be reached.be reached.

Terms such as compromise, trading, Terms such as compromise, trading, bargaining, trade-off etc. are not bargaining, trade-off etc. are not synonymous with negotiation but they are synonymous with negotiation but they are important parts of the process.important parts of the process.

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The central point is that negotiation implies The central point is that negotiation implies movement by both parties. Where the movement by both parties. Where the positions of the parties are truly positions of the parties are truly irreconcilable then there can be no useful irreconcilable then there can be no useful negotiation. negotiation. – This is rarer than one might think.This is rarer than one might think.– In most cases there is room for manoeuvre.In most cases there is room for manoeuvre.

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Some of these elements….Some of these elements….

Persuasiveness Persuasiveness Style (Collaboration or confrontation)Style (Collaboration or confrontation)Understanding of other's viewpoint Understanding of other's viewpoint (Creditors X Debtors) (Creditors X Debtors) ListeningListeningQuestioningQuestioningConcessions and CompromiseConcessions and CompromiseConcentrate on the issuesConcentrate on the issues

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The Brazilian ExperienceThe Brazilian Experience

The importance of The Brazilian FGCThe importance of The Brazilian FGC– ReputationReputation– Compromise & BargainingCompromise & Bargaining

The importance to do well with the Bank The importance to do well with the Bank OwnerOwner

The importance of discussions & The importance of discussions & transparency & disclosuretransparency & disclosure