DAVID GREENE, HOST:
When J.Crew filed for bankruptcy yesterday, it got a lot of attention in part because it's the first major retailer to fall prey to this pandemic. The company was forced to close 500 stores and furlough all but 2,000 of its 13,000 employees. But this might not be the end. Other companies are very likely to go under in these times.
And let's turn to David Wessel, director of the Hutchins Center at the Brookings Institution. Hi, David. Hope you're well.
DAVID WESSEL: Good morning.
GREENE: So talk to me about J.Crew going to bankruptcy court and what exactly the company is going to be experiencing here.
WESSEL: Well, when a company files for protection of the bankruptcy court under Chapter 11 of the law, it's allowed to not pay its debts so it can continue to operate in business. In the case of J.Crew, which also owns a company called Madewell, it worked out a deal with its creditors before it went to court. People who'd lent the company nearly $2 billion essentially get control of the company, squeezing out the shareholders. Then it borrows more money, about $400 million, so it can keep going. Its online business is functioning, and it's planning to open at least some of its stores when the coronavirus recedes. The whole point of Chapter 11 is to allow a debt-laden company to reorganize and stay in business.
GREENE: So is this an option that other retailers, other companies are going to follow? Are we going to see more companies seeking protection?
WESSEL: Absolutely. American businesses borrowed a lot of money - $15 trillion by one recent estimate - when times were good. Many of them are going to have trouble keeping up the payments. It's hard to stay current on your debt when your revenues drive up. Gold's Gym filed for bankruptcy this week already. The Wall Street Journal says that both Neiman Marcus and JCPenney have missed some interest payments, and they're talking to lenders about a bankruptcy filing. Hertz, the car rental company, has hired advisers. And in the oil and gas industry, low oil prices are pushing a lot of the little companies towards the bankruptcy court as well.
GREENE: I mean, David, you've talked on our program about the hundreds of billions of dollars that Congress approved to try and help small businesses. Wasn't that supposed to try and avoid this?
WESSEL: It was, and all that aid is going to keep some companies out of bankruptcy. But it's not enough for all of them, particularly companies that were already kind of overborrowed before the coronavirus hit. And the problem here is this is going to overwhelm the bankruptcy courts, and that's going to have unfortunate side effects. Some companies are going to have trouble finding the money you need to borrow temporarily to keep going while you're in bankruptcy.
And history suggests when there are lots of business bankruptcies, as I expect there will be, the courts tend to put their attention on reorganizing the big ones, and that means little people, little companies that have filed for bankruptcy, just end up liquidated. They sell off their assets with the court's supervision and, essentially, go out of business.
GREENE: What other options are out there, David, to try and save a company in these times?
WESSEL: Well, the best option, of course, would get the economy going when the virus recedes so they can start selling again.
GREENE: Yeah.
WESSEL: Joe Stiglitz, a Nobel laureate, suggests a super Chapter 11, a kind of one-size-fits-all plan. David Skeel, a law professor at Penn, has suggested that Congress legislate a moratorium on debt payments, giving companies and even some families the immediate benefits of bankruptcy without having to go through the court. And Peter Orszag, who was the White House budget director in the Obama administration, says that because bankruptcy can have such a big effect on suppliers, he suggests government lending to what he calls firms that are too connected to fail, doing essentially what the government did for GM and Chrysler during the Great Recession. But none of this is painless.
GREENE: Indeed. That is true, as we know. David Wessel from the Hutchins Center at Brookings. Thanks so much.
WESSEL: You're welcome. Transcript provided by NPR, Copyright NPR.
