Shareholders of Dynegy Raid Subsidiary Before Placing it in Bankruptcy

Just Another Day in American Business

The rule of capitalism is that there are two classes of investors, those who lend money to the business in return for a fixed return and those who invest money in the company in return for profits which may or may not materialize.  Another aspect of capitalism is that in the event of problems the bond holders, the folks who loaned money stand in land ahead of the shareholders. 

But some capitalists, being what they are don’t like the rules, so they play to break them.  Such is the case with the Dynegy Corporation.

Dynegy Inc.'s holding company filed for Chapter 11 bankruptcy protection in a way that could cause losses for bondholders without harming parent-company shareholders that include Carl Icahn and hedge fund Seneca Capital.

How did they accomplish this?

But Dynegy has reorganized its corporate structure in a way that protects shareholders from a bankruptcy filing. In September, for example, it transferred assets related to coal-powered plants from Dynegy Holdings to the parent company. That left the holding company without a claim on those assets and just holding Dynegy's bond debt.

In regular folks’ language, this means that the parent company took a bunch of assets out of its subsidiary, leaving the debt in the subsidiary and no assets to pay the creditors once the subsidiary filed for bankruptcy.

If anyone thinks that this is unfair, wrong, unethical etc, look back at who it said the shareholders were.  Does that explain things?