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

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 999
rely even more heavily on vulnerable, short-term funding strategies
that led to repeated disasters during the financial crisis. The proposed
rule will make short-term liabilities more attractive to SIFIs because
short-term creditors are likely to demand much lower yields, in light
of their implicit subsidy under the proposed rule, compared to longterm
bondholders (who will charge higher yields to protect
themselves against the significant risk of suffering haircuts in any
future OLA receivership).
As indicated by the proposed rule, Dodd-Frank gives the FDIC
considerable leeway to provide de facto bailouts for favored creditors
of failed SIFIs. Dodd-Frank also provides a funding source for such
bailouts. Section 201(n) of Dodd-Frank establishes an Orderly
Liquidation Fund (OLF) to finance liquidations of SIFIs. As
discussed below in Part V.D., Dodd-Frank does not establish a prefunding
mechanism for the OLF. However, the FDIC may obtain
funds for the OLF by borrowing from the Treasury. Under section
201(n)(5) of Dodd-Frank, the FDIC may borrow up to (1) 10% of a
failed SIFI’s assets within thirty days after the FDIC’s appointment as
receiver plus (2) 90% of the “fair value” of the SIFI’s assets that are
“available for repayment” thereafter.” 199 The FDIC’s authority to
borrow from the Treasury provides an immediate source of funding to
protect unsecured creditors that are deemed to have systemic
significance. In addition, the “fair value” standard potentially gives
the FDIC considerable discretion in appraising the assets of a failed
SIFI because the standard does not require the FDIC to rely on current
market values in measuring the worth of a failed SIFI’s assets. 200
199 Dodd-Frank Act § 210(n)(5), (6). In order to borrow funds from the Treasury to
finance an orderly liquidation, the FDIC must enter into a repayment agreement with the
Treasury after consulting with the Senate Committee on Banking, Housing, and Urban
Affairs and the House Committee on Financial Services. Id. § 210(n)(9).
200 Jeffrey Gordon and Christopher Muller have criticized Dodd-Frank on somewhat
different grounds. In contrast to my concern that Dodd-Frank will allow the FDIC to
finance future bailouts of favored creditors of failed SIFIs, Gordon and Muller believe that
(1) the OLA provides “inadequate funding for the orderly resolution of individual firms,”
and (2) Dodd-Frank’s “stringent constraints on government financial support of firms not
in FDIC receivership will drive firms into receivership,” resulting in a “nationalization of
much of the financial sector” during a serious financial crisis. Jeffrey N. Gordon &
Christopher Muller, Confronting Financial Crisis: Dodd-Frank’s Dangers and the Case
for a Systemic Emergency Insurance Fund 38–48 (Columbia Law & Econ., Working
Paper No. 374, Draft 3.0, Sept. 2010), available at http://ssrn.com/abstract=1636456.
Gordon and Muller identify the FDIC’s authority to provide loan guarantees to SIFIs
placed in receivership as the only source of financial assistance that Dodd-Frank allows for
specific troubled firms, apart from the FDIC’s limited (and in their view inadequate)
authority to borrow from the Treasury based on the value of a failed SIFI’s assets. Id. As