Lawyers Split on "Chapter 14" Approach to Winding Down Too-Big-to-Fail Financial Institutions

Respondents to a recent Quick Poll conducted by the American Bankruptcy Institute (ABI) were divided over whether or not lawmakers should create a new Chapter of the Bankruptcy Code to reorganize too-big-to-fail financial institutions. An even 50% of respondents (24% "strongly" and "26% "somewhat) believed that a new Chapter 14 should be created for such institutions, while 42% (33% "strongly" and 9% "somewhat") disagreed. The remaining 8% didn't know or had no opinion on the matter.

Congress has recently wrestled with establishing a new means to unwind systemically-important financial institutions (SIFIs) that lies beyond the reach of federal regulators, or at least gives the institution itself the legal tools it would need to properly reorganize on its own accord. The goal of any effort to create a mechanism to safely liquidate struggling SIFIs would be to maximize value while minimizing the impact on the American economy and on American taxpayers, but how precisely to achieve these goals is the subject of a great deal of debate in the legislature, and in legal circles.

The debate centers around Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created an "orderly liquidation authority" that would, in the instance of a SIFI's imminent failure, provide a process outside of bankruptcy court for quickly and efficiently liquidating the entity in question. As written, Title II would have the Federal Deposit Insurance Corporation (FDIC) become the SIFI's appointed receiver, carrying out the liquidation of the company and winding it down quickly so as to minimize the risk of major financial disruption.

In contrast, a proposal introduced last year in the Senate, S. 1861, would repeal Title II and replace it with the aforementioned Chapter 14, excluding federal regulators altogether by creating a way for these institutions to reorganize within the court system. The bill would also explicitly ban government bailouts in the form of a credit support facility.

While respondents to ABI's poll were split on this policy option, a competing proposal was recently discussed in the House Judiciary Committee, seeking to bridge the gap between the federal government's involvement and the importance of judicial know-how in the delicate art of quickly reorganizing a complex financial institution. Learn more about this proposal in today's edition of NACM's eNews.

- Jacob Barron, CICP, NACM staff writer

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