Chairman Tom Marino (P-10) (center) calls the meeting of the Subcommittee on Regulatory Reform, Commercial And Antitrust Law to order. (Credit: Sara Winegardner
By Sara Winegardner
Washington, DC – Bankruptcy experts from various backgrounds voiced their opinions on a bill that could prevent future government bailouts of financial institutions to the House of Representatives’ Subcommittee on Regulatory Reform, Commercial and Antitrust Law last Thursday.
The Financial Institution Bankruptcy Act of 2017, also known as FIBA, was drafted with the intention of facilitating the resolution of insolvent financial institutions. The Subcommittee’s Chairman, Representative Tom Marino (PA-10), reintroduced the bill last week, and held the hearing to “take one more opportunity to further examine it.”
Representatives Bob Goodlatte (VA-6), John Conyers Jr. (MI-13) and David Cicilline (RI-1), cosponsors to the bill, believe that the current United States Code was not built to handle the bankruptcy of powerful financial institutions, leading to crises like the crash of the financial crisis of 2008.
Representative Cicilline remarked that the holes in the code were a major factor in the government bailouts that became commonplace during the financial crisis.
“With the financial system in near collapse, large financial institutions were essentially able to blackmail the government because these banks are so large that there was no way to break them apart,” Cicilline said.
Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2009, which was meant to improve accountability and transparency while also ending government bailouts and protecting the American taxpayer. Chairman Marino noted that it did not actually fix the problems that come with the dissolving of these financial powerhouses that would be saved by bailouts.
“While the Dodd-Frank Act created a regulatory process for such an event, the Act states the preferred method of resolution for a financial institution was through bankruptcy processes,” Marino explained in his opening statement. “It did not make any amendments to the bankruptcy code to account for the unique characteristics of a financial institution.”
According to Representative Cicilline, FIBA would “establish a process where a distressed financial institution could voluntarily seek bankruptcy relief while its subsidiaries continued operating.”
Honorable Mary Walrath, Esq., a U.S. bankruptcy judge and the first of the four witnesses to speak at the hearing, was enthusiastic about the bill’s intentions.
“A bill that allows for voluntary bankruptcy proceedings involving holding companies of financial institutions, even systemically important ones, before the financial institution is seized and sold is a laudable goal,” Walrath stated.
John Taylor, Ph.D., who serves as a professor at Stanford University, was also positive in his testimony, calling the Financial Institution Bankruptcy Act an “essential element of a good pro-growth economic program.”
Both Walrath and Taylor noted that there were a number of positives to Chapter 11 of the U.S. Bankruptcy Code, including its reliance on the rule of law. However, the system outlined has proved to be too slow and cumbersome to handle the challenges that come with dismantling systemically important financial institutions.
Taylor noted that FIBA would have the benefits of also relying on the law, but would expedite the bankruptcy process significantly, allowing it to occur “over a weekend” while a company’s subsidiaries are still operating.
“In my view, reform of the bankruptcy law, such as with the Financial Institution Bankruptcy Act, is essential for ending government bailouts and for creating a robust financial system, and would also create financial stability and growth,” Taylor remarked.
Steven Hessler, Esq., a partner at Kirkland & Ellis, LLP, made his third appearance as a witness to FIBA since 2014, and chose to focus his arguments on a few of the key points of contention.
Opponents to FIBA have taken issue with a section stating the board of directors of a company that enters into its voluntary bankruptcy process would be under no liability from its shareholders, creditors or other interest groups as long as they acted in good faith with their filing.
FIBA has been criticized for purposefully protecting the board of directors regardless of their actions or inactions. Hessler, on the other hand, found this provision of the bill to be completely reasonable.
“In my view, this provision is highly justifiable,” Hessler said, adding that, in his experience, a dedicated and committed board of directors acting in good faith was a vital part of getting an institution to successfully enter into a voluntary bankruptcy.
“FIBA incentivizes such conduct by removing the specter of legal liability for actions taken as responsible fiduciaries,” Hessler advocated.
Bruce Grohsgal, Esq., a professor at Widener University and Delaware Law School, was the first to take a firm stance against five parts of FIBA, including the no liability provision.
“The no liabilities safe harbor is highly likely to encourage directors to take actions that are risky, self-serving, and unnecessarily hard on mainstream creditors,” Grohsgal criticized.
Grohsgal also found FIBA’s 48-hour time limit for the bankrupt company to transfer its assets and liabilities to a bridge company to be completely unreasonable, citing J.P. Morgan Chase’s claims that “it would take 18 months to unwind” its $50 trillion in dividends.
Grohsgal claimed the 48-hour turnaround would only hurt the bridge company, forcing it to take on unfavorable contracts and debt and weakening the company as a whole, making the possibility of a government bailout more likely rather than less.
Walrath stood firm in her belief that the transfer of all assets could be done in this period of time, saying that bankruptcy judges are used to handling these relocations.
“What needs to be done can be done in 48 hours,” Walrath affirmed when questioned by Chairman Marino.
Overall, opinions on FIBA seemed favorable. But, as it was only introduced last week, it still has a long road ahead before it will find itself on the House floor.