NEW YORK (Reuters) - There are likely to be a slew of bankruptcies this year, but the process will be more challenging and costly than ever as a drought in bankruptcy loans has changed the rules of the game. [...]

"DIP financings are either not available in any significant size, or if they are available the pricing is scary," said Henry Miller, co-chairman of turnaround advisory firm Miller Buckfire & Co LLC.

DIP financing, which allows bankrupt companies to pay suppliers and employees as they try to become profitable again, had long been a popular form of financing as DIP lenders are typically among the first creditors repaid in a bankruptcy.

However, tight lending markets now mean many companies must rely on existing lenders or other parties with a stake in the bankruptcy's outcome to provide the DIP.

"DIP financing is not easily available. It's expensive. It's scarce -- and that used to be the easiest part of a bankruptcy filing," said David Resnick, co-head of investment banking at Rothschild.

Well, that just means the "vultures" will have a field day. Indeed, if I had a lot of cash right now I'd seriously consider starting up a DIP lending fund. Because DIP lenders can charge more, and their loans are guaranteed to be paid back first, before anyone else, reducing their own risk and shifting it instead to the debtor company's other, existing creditors. Indeed, I expect DIP lending will be the one sector of the financial industry that does very well in the next few years:

"The fourth quarter was a very challenging one for the capital markets," said Rob McMahon, managing director for restructuring at GE Commercial Finance, noting it was difficult to obtain approval to make loans at that time.

But for 2009, McMahon says he is "very optimistic" and is also looking at DIP loans now.

"This is definitely a market to be in in 2009," he said. [...]

"I'm optimistic that we will see investors return to the DIP market in the first half of 2009 for the right return and the right structure," said Mark Cohen, global head of restructuring and workout at Deutsche Bank in New York.

I'll bet Warren Buffet, and other cash rich investors like him, is already positioned to make money off distressed companies bey getting into the field of DIP financing. That's how smart rich people make their money in an economic downturn. For you and me, however, things aren't so fortunate. When companies file for bankruptcy protection the first thing they do is look to shed costs. And that typically means cutting jobs, lots of them. It also means shafting smaller businesses who are their suppliers, which leads to more bankruptcies and insolvencies for smaller firms, and more job losses.

Another group that will be hit hard is anyone invested in the commercial real estate market, because as companies downsize, they typically abandon leases for commercial retail and office space. Indeed, that's one of the benefits of chapter 11: you get to shed any contracts or leases and turn your suppliers and landlords into unsecured creditors who will be lucky to get pennies on the dollar for the money owed to them. In fact, we are already seeing a number of large real estate firms who specialize in retail space going under, like the company that formed the basis of Tom Friedman's heiress wife's fortune.:

General Growth [Propeties] warned in a Securities and Exchange Commission filing Nov. 10 that it is in danger of default on $900 million in mortgage debt due Nov. 28, and another $58 million in corporate debt due Dec. 1, and may have to take legal steps to protect itself from its creditors. [...]

General Growth, which owns or has interests in more than 200 shopping centers, is the second-largest mall owner/operator in the United States. Only Indianapolis-based Simon Property Group is larger. [...]

Once one of the country’s highest-flying real-estate investment trusts, General Growth racked up debt with a buying spree that included the $12.6-billion purchase of rival mall operator Rouse Co. in late 2004.

“They took a big, big gamble, and it did not pay off,” said Rich Moore, of Cleveland-based RBC Capital Markets, in an interview.

Indeed, General Growth Properties may be filing for Chapter 11 any day now, which can't make Tommy Friedman very happy, seeing his billionaire status put at risk. However, when big commercial real estate firms go under, guess what? They don't pay their local taxes. And the stores that go out of business in the malls they own don't generate any sales taxes. Which means many local municipalities lose a large amount of the revenues they depend upon to finance schools, fire fighters, police and other essential services.

Which again brings the financial hurt back to you and me. Tom Friedman will manage just fine, trust me. It's our jobs, our families livelihoods and the future for our kids which are really in danger today. Which makes you wonder why any Democrat would continue to support extending Bush's tax cuts for the rich. I sure don't see any reason for letting the people who profited and partied off the decline of the middle class in America over the past three decades getting away scot free with their often ill earned gains.

But the tax-cut components of the package are hardly a clean break with the Bush years, presuming that is what Mr. Obama meant by the troubled past. To win the support of Republican lawmakers, the package is shaping up to include roughly $150 billion in business tax breaks, even though such breaks are widely recognized as packing very little bang for the buck when it comes to economic stimulus. [...]

The deteriorating job situation also calls for ensuring that states do not have to make unduly burdensome cuts in their own budgets. State and local governments are big employers in their own right, and money that is fed through them quickly reaches beneficiaries and contractors, as well as employees, helping to save and create jobs by supporting demand.

Every dollar spent on a politically expedient tax cut is money that is not spent where it could do more good. It also perpetuates the corrosive debate in which taxes are portrayed as basically evil and tax cuts as unmitigated good. That is not a debate that Mr. Obama should engage.

But what do I know? I'm only an ex-bankruptcy attorney who watched banks and rich folks (admittedly many of them my clients at the time) get away with losing their investors' and shareholder's monies right and left in the 1980's and 90's while still making out like bandits themselves. Maybe that's just the way the world works. But it sure isn't the change I voted for this past Fall. That much I do know.