U.S. Senator John Cornyn (R-Texas) on Tuesday re-introduced the Taxpayer Protection and Responsible Resolution Act to replace taxpayer-funded bailouts for large financial institutions, according to a report on CFO.com. The bill provides for a new bankruptcy chapter just for banks, replacing some of the provisions for failed banks in the Dodd-Frank Act. In a press release, Cornyn said, “This legislation abolishes Dodd-Frank’s bailout authority and replaces it with an orderly bankruptcy process that imposes losses on banks — not taxpayers.” The legislation, cosponsored by Sen. Pat Toomey (R-Pa.), creates a new, specialized bankruptcy chapter, to be called Chapter 14, for certain financial corporations and eliminates the “orderly liquidation authority” in Title II of Dodd-Frank — “an ad hoc process ripe for political manipulation that provides for yet another bailout,” according to the press release. Under Chapter 14, a failed bank would go bankrupt, leaving its owners and unsecured creditors on the hook for its bad decisions, not taxpayers, say the bill’s co-sponsors. To avoid systemic risk to the financial system, which is what has led the government to use bailouts in the past, Chapter 14 would enable all the failed bank’s assets and the liabilities that pose systemic risk to be transferred to a new “bridge” company. This new, solvent, company would go on meeting the failed bank’s obligations, while all losses would be incurred by the owners of the failed bank.
