Still, the declines in equity recoveries are instructive if one is trying to get a handle on causation of declines in recoveries. Even if one subscribes to the dogma that secured debt takes away from unsecureds’ recoveries and blames increases in the former for declines in the latter, one must recognize that secured debt does not take away from equity any more than unsecured debt does, so shifts in the mix of secured debt vs. unsecured debt should not change equity recoveries (yes, if you are a good soldier in the war against secured creditors, you can conjure up Rube Goldbergian sequences of causation, where being secured makes a lender act differently and that changes the case dynamics and that causes losses, but in the real world, no: it’s valuation that determines the recoveries.). Since Wood’s data show declines in equity recoveries, so it seems fairly obvious that there is another explanation for pervasive declines throughout the capital structure, i.e., valuations were different.
In sum, even if declines in unsecured recoveries have happened, and are not the result of bad data, or artifacts of methodological decisions or mistakes, one cannot explain them with confidence as the result of developments in secured debt, if one has not analyzed the recoveries of secured debt! This seems incredibly obvious but is completely missing from the Wood analysis. However, an understanding of the specific business dynamics of the cases in his sample informs one that the quantity of secured debt was irrelevant in many cases to unsecureds’ recoveries.