October 28, 2010
Resolution Rules and Bankruptcy Reality
"The Federal Deposit Insurance Corporation is moving to exercise its newly granted authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act to become both the trustee and bankruptcy court for future distressed financial firms. Earlier this month the agency issued proposed regulations to structure resolution proceedings under the new law. Unfortunately, most of these regulations are little more than a grand exercise in reinventing the wheel."
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With all due respect, professor, the last savings and loan crisis demonstrated how important it is to have a liquidating authority that specializes in the rapid takeover and reorganization of financial institutions. In the late '80s and '90, the Resolution Trust Corporation (RTC) took over more than 700 S&Ls in its time, and did so on a model of "Close the doors on Friday, install the new management, and open up on Monday". While not perfect as a system, it averted the ensuing panic recently generated with the ill conceived filing of bankruptcy of Lehman Bros. and quick bailouts to the old management that had caused the problems of the remaining institutions. Of course, this last statement is an oversimplification of what has happened in the last couple of years. But an RTC type entity and similar rules is what is needed, rather than the crush at the bankruptcy court. I worked in both areas of the law at the time, and can tell you that bankruptcy court proceedings would take FAR too long to work out with each attorney grinding his own axe for his own client. A new resolution authority dedicated to financial institutions is exactly what is needed. And the lawyers will just have to wait their turn.
Posted by: Jeffgriffin | Nov 3, 2010 1:48:49 AM