House and Senate Subcommittees Spar Over TBTF Resolution Rules — Part I

Thursday, 16 May 2013 02:14 PM

By Robert Feinberg

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On May 15, the House Financial Services Committee's Subcommittee on Oversight and Investigations, chaired by Patrick McHenry, R-N.C., held a hearing titled "Who Is Too Big to Fail: Does Title II of the Dodd-Frank Act Enshrine Taxpayer-Funded Bailouts?"

The able witness list included David Skeel, a distinguished professor at the University of Pennsylvania Law School; John Taylor, a professor at Stanford and one of the nation's leading monetary economists; Josh Rosner, a prominent financial analyst who co-authored one of the best of the hundreds of books on the 2008 episode of the financial crisis; and Michael Krimminger, a former general counsel of the FDIC, now practicing at Cleary Gottlieb, which seems to be the go-to firm for former FDIC general counsels. Krimminger has said that while in private practice, he helped design some of the off-balance-sheet structures that later proved so problematic for investors.

The combination of this article and the following one on a counterpart hearing by a Senate subcommittee make it possible to sketch at an early stage the outlines of a bitter controversy that is taking shape between House Republicans and Senate Democrats, with some legislators up for grabs based on their political leanings and client interests.

McHenry, his Republican colleagues and the Republican witnesses developed the theme that Title II of Dodd-Frank is a stalking horse for another round of bailouts whenever another episode of the ongoing financial crisis occurs. They charge that the bridge financial company option would be employed to rescue failing banks and provide access to cheap government funding, while the companies are restructured by conferring arbitrary favors on some creditors at the expense of others.

On the other hand, the Democrats, led by Al Green, D-Texas, and their chosen witness, Krimminger, repeated the narrative purveyed by the Bush and Obama administrations that the Troubled Asset Relief Program (TARP) bailouts were necessary to rescue the economy in 2008 from another Great Depression, because no other options were available. If megabanks fail again, they argue, the authorities will need to have an alternative to bankruptcy, the so-called "orderly liquidation" process, in order to ensure that essential functions performed by the largest banks can continue.

Republicans propose that features of Dodd-Frank be reconsidered in order to mitigate what they contend are unintended consequences. Democrats insist that they are willing to consider changing the bankruptcy laws so that the bankruptcy process could be used to resolve the largest banks, but they warn that to repeal Title II would invite a repetition of the circumstance in which authorities would have no tools other than another massive bailout.

Republicans charge that another round of bailouts is exactly what the Democrats have in store for the same Wall Street interests that benefited from the bailouts. Neither side trusts the other.

It is theoretically possible that a bill could be put together based on a combination of bankruptcy reform and a version of the Brown-Vitter proposal to force the largest banks to increase their capital and reduce their size.

However, any legislation affecting the bankruptcy code would have to involve both the banking and judiciary committees of both the House and the Senate.

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