One of the most important keys to America's economic success has been its corporate bankruptcy code, which effectively transfers ownership and control of assets from people who can't make effective economic use of them to people who can.

Whether the asset is a house, a car, a widget-making machine, or an entire company, if the indebted owner of an asset fails to put it to good economic use, i.e., make money, bankruptcy will move those assets along.

The great reset button
It's that structured give and take enforced by the bankruptcy code that keeps the capital market flowing smoothly.

The right to repossess keeps lenders willing to loan money, even to those with less than perfect repayment histories. The ability to discharge their debts from failed attempts enables entrepreneurs to dust themselves off and try again.

And as long as both of these things keep happening, entrepreneurs will keep trying -- and eventually someone, somewhere, will succeed.

But that's if it's working properly
But what's happening today in the United States in the name of economic rescue looks more and more like the exact opposite of the structured give and take of the bankruptcy code.

The multitrillion-dollar bailouts are bad enough, but it's the absolute destruction of the ownership rights conferred by bankruptcy that may well signal the utter death of America's economy.

In at least one highly publicized case, well-connected JPMorgan Chase (NYSE: JPM) picked up an entire bank without compensation to the former company's bondholders. More recently, Uncle Sam used the bailout funds it put into Chrysler as a justification for forcing the terms of the automaker's bankruptcy over the objections of its bondholders.

Building on that awful precedent, General Motors bondholders were entitled to only 10% of that company in its bankruptcy filing. The other 90% went to the U.S. and Canadian governments and the union health fund.          

Now, these government-dictated terms may not seem like a big deal -- but in fact they undermine the concept of private property, the rule of law, and the protections of bankruptcy that are the foundation of a functioning capital market.

Is it really that bad?
It is, and here's why: Nobody forces bond investors to lend money to companies. They do so for the reasonable expectation of a return.

The way they ensure that return -- and the reason they're willing to lend at such low rates -- is through their right to assume control of a company should it go bankrupt. That's how Eddie Lampert picked up Kmart, eventually parlaying that investment into what is now Sears Holdings (Nasdaq: SHLD).

Take that right of control away, and you take away bondholders' incentive to loan money at anything below usurious rates.

That doesn't spell the end of debt financing, but it does spell the end of cheap money -- and the end of companies that relied on it to fuel their growth. General Growth Properties , for instance, was forced to declare bankruptcy earlier this year, despite having both positive operating cash flows and balance sheet equity, because it couldn't refinance its debt.

The big problem
Companies took on significant amounts of debt with the expectation that they could roll over that debt when it matured. And under normal circumstances, as long as they maintained a decent balance sheet and solid cash flows, that was true.

These days, though, chances are good that more companies will wind up like General Growth Properties: bankrupt not because their businesses were failing, but because they couldn't pay off or refinance their debt when it came due.

Chances are even better that the cost of borrowing will increase because bondholders can no longer be assured of getting their due in bankruptcy. From the bondholders' perspective, after all, it's the rightto collect on the assets, not the actof collecting, that matters.

So who are we talking about?
Here are just a few companies that may face substantially higher debt costs in the future -- with all that implies for the underlying businesses.

Company

Operating Cash Flow
(in Millions)

Net Income
(in Millions)

Total Debt
(in Millions)

Shareholders' Equity
(in Millions)

Time Warner (NYSE: TWX)

$16,939

($13,785)

$39,683

$42,288

Boston Scientific (NYSE: BSX)

$1,372

($2,311)

$6,745

$13,174

Northrop Grumman (NYSE: NOC)

$3,068 Continued...