The House Judiciary Committee will hold a hearing Tuesday afternoon on bipartisan legislation ("The Financial Institution Bankruptcy Act of 2014") designed to use the Bankruptcy Code for the purpose of an orderly liquidation of a large financial institution. ABI members can get a preview of the new bill during a live webinar today at 1 pm (ET). Speakers for the webinar include Profs. Thomas Jackson of the University of Rochester and Stephen Lubben of Seton Hall Law School), both of whom will be testifying before the Committee. To register for today’s webinar, please click here: http://www.abiworld.org/webinars/2014/LEGIS/index.html
The bill would create a new subchapter V of chapter 11, where the assets of the financially-troubled institution would be transferred to a bridge company, while leaving its stock and long-term unsecured debt behind in the old institution, in a process referred to as "single point of entry” (SPOE). Work would begin to transfer ownership of the bridge holding company to the private sector. The left-behind subordinated debt of the troubled firm would be used as the immediate source of capital for the new entity. Remaining debt claims would be converted into equity claims that would also serve to capitalize the new private-sector entity.
The SPOE strategy is, in essence, a "bail-in" strategy because it implements a resolution process that imposes losses on shareholders and unsecured creditors, rather than on the deposit insurance fund, the government or the taxpayers. More specifically, holding company shareholders would bear the losses first and one would expect that they will be wiped out; holding company creditors will likely bear losses as well, and would receive equity in the newly reorganized holding company in place of the debt, reflecting the value of what remains in the holding company. A new board and management would be put in place.
The difference between a bailout and a bail-in is the source of funding. In a bail-out, the funds essentially come from outside the institution, usually in the form of taxpayer assistance via a direct intervention by the sovereign government. Conversely, in a bail-in, rescue funds come from within the institution as shareholders and unsecured creditors bear the losses.
The bill is an alternative to the Orderly Liquidation Authority of the Dodd-Frank Act, while not explicitly repealing it. OLA is controversial because some critics believe it could lead to a Federal bailout of systemically important financial institutions. The new bill does not provide explicit liquidity guarantees, such as a credit support facility, and is in this way similar to S. 1861. However the Senate bill also repeals Title II of Dodd-Frank. Speakers at the ABI webinar will compare and contrast the Senate bill as well.
The webinar, "Proposed Chapter 14 and the Future of Large Financial Institution Resolution," hosted by ABI's Legislation Committee, is a rare chance to hear leading experts on this important policy, now under active consideration in Congress.
http://www.abiworld.org/webinars/2014/LEGIS/index.html