House Passes Bill to Create New Bankruptcy Process for Big Banks

NoteDec 2, 2001: Enron files bankruptcy

The House of Representatives late Monday voted to approve a bipartisan bill amending thebankruptcy code for large financial institutions as part of an ongoing response to the 2008 collapse of Lehman Brothers.

The House approved the measure by voice vote, which means that the names or numbers of senators voting on either side are not recorded. It follows approval – also by voice vote– of a “substantially similar” measure by the House Judiciary Committee in September.

The bill H.R. 5421, titled the Financial Institution Bankruptcy Act of 2014 or FIBA, seeks to ensure that a failing big bank can employ the traditional bankruptcy process in a way that doesn’t cause collateral damage to the global financial markets.

“FIBA removes potential obstacles to an efficient bankruptcy of a financial institution,” said Rep. Bob Goodlatte, R-Va., the chief of the House Judiciary Committee, in a statement. “This legislation enhances the bankruptcy code and its ability to resolve financial firms for the benefit of stability in the U.S. and global economies and does so with minimal financial burdens or cost.”

The bill, which is supported by Wall Street, is intended to drive failing banks to employ bankruptcy instead of an alternative system set up by the post-crisis Dodd-Frank Act known as the Orderly Liquidation Authority. The OLA allows regulators to infuse a failing bank and its creditors with taxpayer funds initially to stem a panic emerging from a collapsing big bank.

Critics say the OLA is an opaque process that gives regulators and politicians too much discretion to pick winners and losers among junior and senior creditors when a failing institution is dismantled. In addition, they worry that taxpayer funds spent through the OLA process would never be recouped even though there is a provision in the law requiring those costs to later to be covered by a fee assessed on big banks.

Alternatively, the bankruptcy bill seeks to produce an expedited bankruptcy process at the same time that it maintains creditor priority as well as transparency in the process.

Read on.

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