The Continuing Puzzle of Secured Debt

Abstract

In 1981, I wrote an article showing that no good answer had been given to the question why corporations issue some debt on a secured basis and other debt on an unsecured basis. This showing had normative implications because claims that the institution of personal property security is efficient or otherwise desirable must be impeached if the actual purposes that security serves are unknown. Consequently, the law's favorable treatment of secured debt—for example, giving it first place in bankruptcy distributions—is without plausible support. My article did not advocate repealing the privileges attached to secured debt, however, because then-current knowledge also did not permit very precise predictions about repeal's effects. Rather, I claimed, the appropriate response to ignorance is enlightenment through research. This article caused a stir among lawyers but, for reasons that will become clear, not among economists. A generation of lawyers has been taught *1052 that security is a good thing. Professor Saul Levmore and Professor James White produced ambitious efforts to support this belief since I wrote. This Article shows that both efforts are unsuccessful.