CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 993
B. Dodd-Frank Establishes a Special Resolution Regime for
Systemically Important Financial Institutions but Allows the FDIC to
Provide Full Protection for Favored Creditors of Those Institutions
1. Dodd-Frank’s Orderly Liquidation Authority Does Not Preclude
Full Protection of Favored Creditors of SIFIs
During the financial crisis—as shown by the FRB’s emergency
assistance for Chase’s acquisition of Bear, the traumatic bankruptcy
of Lehman, and the federal government’s massive bailout of AIG—
federal regulators confronted a “Hobson’s choice of bailout or
disorderly bankruptcy” when they decided how to respond to a SIFI’s
potential failure. 169 Dodd-Frank establishes an “orderly liquidation
authority” (OLA) for SIFIs. The OLA seeks to provide a “viable
alternative to the undesirable choice... between bankruptcy of a large,
complex financial company that would disrupt markets and damage
the economy, and bailout of such financial company that would
expose taxpayers to losses and undermine market discipline.” 170 In
some respects, Dodd-Frank’s OLA for SIFIs—which is similar to the
FDIC’s existing resolution regime for failed depository
institutions 171 —resembles my proposal for a special resolution
regime for SIFIs. 172 However, contrary to the statute’s stated purpose
of ending bailouts, 173 Dodd-Frank’s OLA does not preclude future
rescues of favored creditors of TBTF institutions.
Dodd-Frank establishes the FSOC as an umbrella organization with
systemic risk oversight authority. The FSOC’s voting members
include the leaders of nine major federal banking agencies and an
independent member with insurance experience. 174 By a two-thirds
169 Daniel K. Tarullo, Governor, U.S. Fed. Reserve Bd., Financial Regulatory Reform,
Speech at the U.S. Monetary Policy Forum (Feb. 26, 2010), available at
http://www.federalreserve.gov/newsevents/speech/tarullo20100226a.htm.
170 S. REP.NO. 111-176, at 4 (2010).
171 See CARNELL ET. AL., supra note 118, ch. 13 (describing the FDIC’s resolution
regime for failed banks); Fed. Deposit Ins. Corp., Notice of Proposed Rulemaking
Implementing Certain Orderly Liquidation Authority Provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, 75 Fed. Reg. 64,173, 64,175 (Oct. 19, 2010)
[hereinafter FDIC Proposed OLA Rule] (stating that “[p]arties who are familiar with the
liquidation of insured depository institutions . . . will recognize many parallel provisions in
Title II” of Dodd-Frank).
172 See Wilmarth, supra note 6, at 754–57.
173 See Dodd-Frank Act pmbl. (stating that the statute is designed “to end ‘too big to
fail’ [and] to protect the American taxpayer by ending bailouts”).
174 The FSOC is chaired by the Secretary of the Treasury and includes the following
additional voting members: the chairmen of the FRB and the FDIC, the Comptroller of the