Vanderbilt Law Review


Alan Schwartz

First Page



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 that security is a good thing. Professor Saul Levmore and Professor James Whites produced ambitious efforts to support this belief since I wrote. This Article shows that both efforts are unsuccessful.

Part II begins by discussing the Modigliani/Miller ("MM") hypothesis that was intellectual background to my initial article. Part III shows that Professor Levmore's defense of security is unpersuasive under either of its two plausible interpretations: under one interpretation, the phenomena to which he advances security as a response can exist only by happenstance, not systematically; and under the second interpretation, it is impossible to make claims about the purposes of security because it is impossible to know how markets would function in its absence. Part IV shows that Professor White's two efforts at explaining and justifying personal property security fail because they are theoretically incomplete and generate predictions that the facts contradict. Part V briefly discusses current responses to the issues that the MM hypothesis posed, in the hope of suggesting where answers to the secured debt puzzle might be found.