With the emergence of modern reorganization law in the 1930s, the absolute priority rule came into being. In contrast to what proceeded it, this priority regime cashed out the value of everyone’s stake in the firm at the time of the reorganization. The fifth chapter shows that this idea emerged in large reorganizations not because of any belief in the intrinsic merit of recognizing absolute priority but only because New Deal reformers thought that such a priority rule best protected passive and unsophisticated investors from insiders. Giving each individual creditor the right to insist on being paid in full before anyone junior received anything, however, proved to be incompatible with achieving the mutually beneficial bargains that justified reorganization law in the first instance.

The sixth chapter looks at reorganization practice after the Second World War. The heavy regulatory oversight that New Deal reforms imposed on large firms was unsuccessful. Government regulators showed themselves to be insufficiently nimble. And the law depended too much on judicial valuations that proved too malleable and too uncertain. Moreover, although the norms of the credit men and the emphasis on accommodating worthy debtors worked tolerably well for small businesses, these norms offered judges no easy way to find their bearings elsewhere. Nowhere was this more evident than in real estate insolvencies.