GAO Issues Report Examining Legislative Proposals and International Coordination Regarding Bankruptcies of Large Financial Institutions (with Lofchie Comment)
The Government Accountability Office ("GAO") issued the fourth report in its ongoing series examining ways to make the U.S. Bankruptcy Code ("Code") more effective in resolving certain failed financial companies. The report addressed recent changes to the Code, as well as efforts to improve cross-border coordination to facilitate the liquidation or reorganization of large financial companies under bankruptcy.
According to the report, a number of bills that were introduced in the previous Congress would, if reintroduced and passed, make broad changes to the Code that are relevant to financial companies' bankruptcies. These bills include the Financial Institution Bankruptcy Act and the Taxpayer Protection and Responsible Resolution Act, which would expand the powers of the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation and impose a temporary stay on financial derivatives that are exempt from the automatic stay under the Code.
If reintroduced and passed, the bills would add provisions to the Code to enable the resolution of large, complex financial companies, such as allowing for the creation of a bridge company in which certain assets and financial contracts of the holding company would be transferred, which in turn would allow certain subsidiaries to continue their operations.
In addition, the GAO found that certain structural challenges remain in the judicial bankruptcy process used in the United States to resolve failed large financial companies with cross-border operations. One of the main challenges involves how conflicting regulatory regimes treat financial contracts between parties in different countries when a firm enters bankruptcy. However, the GAO reported, efforts are underway to address these challenges, including a January 2015 stay protocol for derivatives contracts developed by ISDA with the intention of giving regulators enough time to facilitate the orderly resolution of a troubled firm.
Lofchie Comment: The GAO report offers an even-handed overview of existing law, proposals and problems. Further in-depth analysis could serve as the basis for consideration of material changes to the bankruptcy laws. For example, though the report provides a brief summary of developments with respect to the Lehman insolvency, further detail concerning substantial problems that have arisen in that bankruptcy is warranted. A deep dive into the process of unwinding Lehman might serve as a practical guide to the problems that arise in the liquidation of a large financial institution and, thus, could serve as the basis for a discussion of useful changes to the law.