Legislation to make the bankruptcy of a big bank more feasible is gaining steam on Capitol Hill, a development that could help the largest U.S. financial firms counter criticism that they remain “too big to fail” without a taxpayer bailout, the Wall Street Journal reported today. Changes to the Bankruptcy Code were included in a financial-services budget bill the House passed yesterday, along with other regulatory provisions such as congressional oversight of the Consumer Financial Protection Bureau’s budget. The “Financial Institutions Bankruptcy Act” would establish a section of the Bankruptcy Code specifically for large financial firms. It is designed to prevent a repeat of the 2008 Lehman Brothers debacle, when that investment bank’s bankruptcy filing caused widespread financial panic that brought the global economy to its knees. Under the bill, regulators and bankruptcy judges would have more power and flexibility to sort out the liabilities of a failing firm and to stabilize its continuing operations. The bill has already passed the House Judiciary Committee unanimously, and passed the House by voice vote. By including it in a budget bill, it becomes more likely to clear Congress this year. The White House said last month, regarding the House bill, that “revisions to the Bankruptcy Code have no place in an appropriations bill.” But the statement didn’t oppose the substance of the bankruptcy code changes, and many regulators have previously supported reworking the bankruptcy code to better handle large financial firms.
