Author: David A. Skeel, Jr., University of Pennsylvania Law School
The Dodd-Frank Act requires systemically important financial institutions to prepare living wills explaining how they could be smoothly resolved in bankruptcy. Yet Dodd-Frank itself did not do anything to ensure that the bankruptcy laws actually are adequate to the task of handling a major financial institution. Earlier this month, the House Judiciary committee unanimously approved proposed legislation (known colloquially as “Subchapter V”) that is designed to finish the job. Subchapter V would mimic the single point of entry strategy that the FDIC has devised for resolution under the Dodd-Frank Act by facilitating a quick sale of the assets and some of the liabilities of the financial institution’s holding company in bankruptcy.
In this Essay (which pre-dates Subchapter V), I consider the risks and benefits of single of entry and the bankruptcy alternative. The Essay begins with a brief overview of concerns raised by the Lehman Brothers bankruptcy, and points out that the Dodd-Frank Act as enacted left nearly all of them unaddressed. By contrast, the FDIC’s new single point of entry strategy, which is introduced in the second section, can be seen as addressing nearly all of them. The third and fourth sections point out some of the limitations of single point of entry, first by highlighting potential pitfalls and distortions and then by explaining that single point of entry does not end the too-big-to-fail problem and would not reduce worrisome concentration in the financial services industry. The final section turns to bankruptcy, and shows that the single-entry-style strategy can easily be replicated in bankruptcy. Indeed, the strategy harkens back to the original procedure used to reorganize American railroads well over a century ago.
The full version of the article can be found here.