Enron decision shakes up Wall Street

An earthquake or a comet headed straight for Earth couldn’t have rattled people more. A decision by the judge overseeing Enron Corp.'s bankruptcy has generated alarm across Wall Street, prompting warnings from investment banks, bond traders and stock investors that it could do broad harm to U.S. capital markets.

The Bond Market Association, the International Swaps & Derivatives Association, the Loan Syndications & Trading Association, and the Securities Industry Association have already filed court papers criticizing the judge's ruling. Merrill Lynch & Co., Citibank and Barclays Bank PLC joined a growing list of objectors.

The ruling, by U.S. Bankruptcy Judge Arthur Gonzalez, held that holders of claims against a bankrupt company could see those claims wiped out even if they did nothing wrong in their relationship with the company. Under the ruling, holders of bankruptcy claims could be at risk if they merely bought a claim from another creditor who may have engaged in "inequitable conduct."

In papers filed with the U.S. Bankruptcy Court in Manhattan, Merrill and other investment banks said the ruling would not only "devastate" the country's $500-billion distressed-debt market but also "spill over into the regular capital markets." They said a federal district judge should review the bankruptcy judge's ruling.

The judge's interpretation had an immediate effect on the trading of bankruptcy claims, a market of at least $300 billion in which hedge funds and other sophisticated investors buy the right to pursue claims on behalf of creditors. Such creditors typically sell their claims against bankrupt companies either because they want an immediate payoff or because they don't have the time to recover the money themselves.

http://www.chron.com/disp/story.mpl/ap/fn/4124562.html