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

WILMARTH
4/1/2011 1:11 PM
998 OREGON LAW REVIEW [Vol. 89, 951
BFC. 193 Subject to the foregoing conditions, the FDIC may give
preferential treatment to certain creditors as long as every creditor
receives at least the amount she would have recovered in a liquidation
proceeding under Chapter 7 of the federal Bankruptcy Code. 194
In October 2010, the FDIC issued a proposed rule to implement the
OLA under Dodd-Frank. The proposed rule states that the FDIC may
provide preferential treatment to certain creditors in order “to
continue key operations, services, and transactions that will maximize
the value of the [failed SIFI’s] assets and avoid a disorderly collapse
in the marketplace.” 195 The proposed rule also declares that the
FDIC’s powers under the OLA “parallel authority the FDIC has long
had under the Federal Deposit Insurance Act to continue operations
after the closing of failed insured banks if necessary to maximize the
value of the assets... or to prevent ‘serious adverse effects on
economic conditions or financial stability.’” 196 The proposed rule
would exclude the following classes of creditors from any possibility
of preferential treatment: (1) holders of unsecured senior debt with a
term of more than 360 days and (2) holders of subordinated debt.
Accordingly, the proposed rule would allow the FDIC to provide full
protection to short-term, unsecured creditors of a failed SIFI
whenever the FDIC determines that such protection is “essential for
[the SIFI’s] continued operation and orderly liquidation.” 197
Under the proposed rule, the FDIC is likely to give full protection
to short-term liabilities of SIFIs, including commercial paper and
securities repurchase agreements, because those liabilities proved to
be highly volatile and prone to creditor “runs” during the financial
crisis. 198 The proposed rule’s statement that the FDIC reserves the
right to provide preferential treatment to short-term creditors of failed
SIFIs, but will never provide such treatment to holders of long-term
debt or subordinated debt, will likely have at least two perverse
results. If adopted, the proposed rule will (1) provide an implicit
subsidy to short-term creditors of SIFIs and (2) encourage SIFIs to
193 § 210(b)(4), (h)(5)(E).
194 Id.; see also FDIC Proposed OLA Rule, supra note 171, at 64,175, 64,177
(explaining Dodd-Frank’s minimum guarantee for creditors of a failed SIFI).
195 FDIC Proposed OLA Rule, supra note 171, at 64,175.
196 Id. at 64177 (quoting 12 U.S.C. § 1823(c)).
197 Id. at 64177–78.
198 See Zoltan Pozsar et al., Shadow Banking 2–6, 46–59 (Fed. Reserve Bank of N.Y.,
Staff Report No. 458, 2010), available at http://www.newyorkfed.org/research/staff
_reports/sr458.pdf.