Safe Harbors
It’s not hard to see why some would think that it’s not such a
great idea to suggest that a procedure that has a hard time
reorganizing companies should also be used to reorganize
SIFIs when their holding companies go bankrupt. But the
reality might be even worse, as the Bankruptcy Code includes
certain provisions that can make it even more difficult for
SIFIs and their regulated bank properties to make it through
reorganization.
Each witness referred to three
specific goals that resolution
of [SIFIs] should be done in a
manner that “(i) maximizes value
for stakeholders, (ii) minimizes
systemic disruption and
moral hazard, yet (iii) protects
taxpayers from loss.”
“A group of provisions in the Bankruptcy Code referred to as
safe harbor provisions permit (generally) counterparties to
short-term repossess financings, swaps and other derivatives
to terminate agreements, set off obligations and seize collateral,” Vris said, meaning that entities party to such transactions
can take action against the SIFI to reclaim what’s theirs in the
instance of a bankruptcy filing. “Ordinarily, once a company
becomes a debtor, the automatic stay under the Bankruptcy
Code prevents parties from taking any of these actions, preserving asset value for the benefit of all creditors ratably in
accordance with legal priorities,” she added. “Actions by counterparties to derivatives or qualified financial contracts (QFCs),
a term used elsewhere but not in the Bankruptcy Code, are to
a meaningful degree exempt from the automatic stay.”
mizes systemic disruption and moral hazard, yet (iii) protects
taxpayers from loss.” The NBC was referring specifically to
SIFIs, but the three goals were what everyone at the hearing,
and what everyone else agrees are the greatest priorities of any
resolution of any entity, company, bank, financial institution
or otherwise.
Regulators will continue to debate the merits of different ways
to create a system that can accomplish those three goals, but in
some ways they’re working to build a regulatory structure that,
at its best, aims to prevent another crisis and, at its worst,
cements companies’ and financial institutions’ right to shortsightedness. The financial sector will always be ahead of its
regulatory scheme for the most part, but the FDIC’s requirements that a company have a plan in place to resolve itself are
important in the sense that they at least place some value on
the concept of planning ahead, and planning for the worst.
New capital reserve requirements for financial institutions are
also a step in this direction, designed to require banks to consider the worst possible consequences. The global financial
market is considerably more complex than simply telling all
banks and companies to think ahead, and in order to remain
competitive all entities in the business economy must continue to take risks, but the point is to take them deliberately, rather than taking them as though the safety net is a certainty.
Jacob Barron, CICP, NACM staff writer can be reached at
[email protected].
This is not to say pity the SIFIs, for they have a hard time of
reorganizing even when they accumulated enough debt that,
to a large extent, formerly tossed the global economy into
recession. The point is that the current structure is not
designed to properly handle companies and SIFIs as they
operate in today’s financial market. Innovations in financial
products and activity have advanced so quickly that the structures the US has in place to contain them when things go awry
need to be amended in order for them to fit the new reality.
NACM’s
Throughout the Judiciary Committee’s Chapter 11 hearing,
each witness referred to three specific goals of any reorganization proceeding. Vris put it best, quoting from a letter NBC
wrote to Senators John Cornyn (R-TX) and Pat Toomey
(R-PA) regarding a bill they wrote that would create a new
wind-down procedure for SIFIs: “The NBC generally supports the idea that resolution of [SIFIs] should be done in a
manner that (i) maximizes value for stakeholders, (ii) mini-
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