Building a Plan Elements in a good Negotiation The Brazilian Experience

1. Building a PlanElements in a good NegotiationThe Brazilian Experience 5th Annual IADI Conference 15th Nov. 2006 – Copacabana Palace Prof. Jairo Saddi Ibmec São Paulo, University of Oxford

2. The proposed discussion • The dilemma • The assumptions & requirements • The Plan • Elements in a Good Negotiation • The (small) Brazilian Experience

3. The 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.

4. However, when there are no sufficient assets: • The benefits that are drawn from each creditor depends on the decision arrangement that the other creditors adopt. • The best strategy for each ONE individual creditor 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.

5. 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.

6. Furthermore, • There are two problems to be solved at the same time: • In what order should creditors receive their credit ? (ie. What is the priority ?) • How to sell the assets ? (ie. How to turn the failed bank assets into cash ?)

7. What should be the ideal priority 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.

8. But.. • Bank owners need to cooperate • Why ? • The have all the information • The may curtail any efforts • Or in other words, in order to achieve any success, the Bank owner must be part of the plan. • Why this is not so easy ? • Probably he was the cause of the bank failure • Some emotion in the process ? • Fraud

9. 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.

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

11. What is a Plan ? • A set of ideas • An organized (and usually detailed) proposal according to which something is to be done • A scheme of action; a strategy; a programme, a schedule

12. “The good old rule… the simple and realistic plan, That they should take, who have the power to convince, and they should keep who are convinced.” William Woodsworth, 1803. “Rob Roy's Grave”

13. Elements of a Plan • Introduce your objectives, where you want to get • Names of your solicitors and accountants you want to bring on board. • An outlined financial statements, balance sheet, profit and loss account with cashflow • Outline how creditors became involved in the business - and give details of their existing business with the failed bank

14. Elements of a Plan (Cont.) • Which creditors must be involved? What is their background? Will they help ? Should a Committee be set ? • Outline which sector of the market that will eventually buy the failed bank assets • Is an auction the best solution ? • What is the estimated cost of such a venture ? • What is the valuation of assets (credits) and of the property, if there is such

15. Elements in a Good Negotiation • Negotiation is a process through which parties move from their initially divergent positions to a point where agreement may be reached. • Terms such as compromise, trading, bargaining, trade-off etc. are not synonymous with negotiation but they are important parts of the process.

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

17. Some of these elements…. • Persuasiveness • Style (Collaboration or confrontation) • Understanding of other's viewpoint (Creditors X Debtors) • Listening • Questioning • Concessions and Compromise • Concentrate on the issues

18. The Brazilian Experience • The importance of The Brazilian FGC • Reputation • Compromise & Bargaining • The importance to do well with the Bank Owner • The importance of discussions & transparency & disclosure