Icahn says bankruptcy reform could help banks

(Reuters) - Activist investor Carl Icahn called for changes in federal bankruptcy laws which he argues are thwarting the private investment which is more appropriate than public funds for reviving the banking system.

"Why should taxpayers foot the bill when there are trillions of dollars in private money on the sidelines in the world financial markets?" Icahn wrote in the Wall Street Journal.

"Private investment is a far more appropriate agent to revive these institutions, yet little is coming in," he said, the reason being that distressed assets on bank balance sheets have artificially low values because of bankruptcy laws.

In the bear market, the prospect of a bankruptcy puts a huge damper on investor appetite for debt securities in overleveraged companies, he wrote.

Icahn argues the situation can be improved by eliminating the bankruptcy rule which "unfairly gives managements, with court approval, a monopoly in drawing up a reorganization plan for a minimum of 18 months."

During the period, creditors languish in uncertainty as to what will happen to their investment, Icahn said.

"But why should the same management that got the company into trouble have the right to lock up its assets for an extended period of time?" he asked.

Without an exclusivity period, creditors and equity holders could propose different restructuring solutions, including the sale of assets overseen by a bankruptcy court, he said.

The rule change would help assets of a company in Chapter 11 to be priced as though they could be sold, he said, adding it would raise distressed loan prices, bolstering balance sheets of banks and other companies that hold these loans.

"Furthermore, such a change would slash the need for ... bankruptcy lawyers, restructuring firms and other advisers, who can reap tens of millions of dollars in fees -- often at the expense of creditors and company treasuries," Icahn wrote.

(Reporting by Ratul Ray Chaudhuri in Bangalore; Editing by David Holmes)