What happens when a financial-services firm declares bankruptcy?

Lehman's Chapter 11 may be more about buying time, suggests Columbia law professor Edward Morrison. Financial-services firms are not railways or phone companies; they own fixed assets that can generate streams of income if managed better. While Lehman may own some real estate, computers, and proprietary software, it's fundamentally a group of skilled people-people who made some bad decisions.

Thus, bankruptcy protection alone can't help a firm saddled by bad deals perform the alchemy required to turn things around. According to a paper by Morrison and Kenneth Ayotte, two-thirds of a sample of corporate Chapter 11s from 2001 ended in a liquidation of the business. So even though Chapter 11 appears to be the safer harbor than Chapter 7, in the end the difference may not amount to much.

Explainer thanks University of Chicago law professor Douglas G. Baird and Columbia University law professor Edward Morrison.