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4
Financial
Regulatory
improvement
and
TaxpayerProtection
Act
Summary
of
RepublicanSubstitute
Bill
April
26,
2010
Title
I
—
Orderly
Liquidation
Authority
OverviewTitle
I
of
the
Republican
alternative
will
establisha
resolution
mechanism
for
thç
orderly
winding-dawn
and
liquidation
of
financial
companies.The
resolution
mechanism
will
provide
a
process
for
winding-down
financial
companies
with
minimal
impact
on
the
financial
system
while
ensuring
that
failed
finns
are
liquidated
and
creditors
and
shareholdersbear
all’
the
losses
of
the
failed
firm
andthe
costsof
its
resolution.
Triggering
ProcessThere
will
be
a~three4-part
process
for
lriggerin~g
the
resolution
authority.
First,thc
Board
of
Governors:
of
the
Federal
Kescrvefloard’~
.~id
the
Board-of
Directors
of
theFederal
Deposit
InsuranceCorporation
(“FDIC’)
must
make
a
recomm~d~o
I
etherthe
FDIC2sh~rnldbe
appointedreceiver
for
the
financial
company,
whichmust
include,
among
otherthings,
an
evaluationQfthe.effect:default.bythefinancial
company
would
have
on
financial
stability
in
the
Unlte4
States.
If
the
financial
compailyisabroker-dealer,
-the
Securitiesand
Exchange:
Commiasion
would
makcthe
recommendation
in
place-of
the
.Boarct
The
recommendation.
would
require
the
2/3
vote
of
each
bo~r&
Second,
the
Treasury
Secretary,
in
consultation
with
the
President,
must
determine,
amongotherthings,that
resolving
the
financial
company
under
this
title’would
prevent
or
mitigate
the’adverse
effects
thatdefaultby
the
financial
company
woulàhave
oafinanciai.stability
in
the
United
StateaThird,.
upon
making
suchdetemiinationis,the
Treasury
Secretary
would
file
a
petition
in
the
United
States
District
Court
for
the
District
of
Columbia
for
an
orderauthorizing
theSecretaryto
appoint
the
FDIC
as
receiver
for
the
financialcompany.
The
court
would
issue
the
order
within
24
hours,
unlessthe
courtfindsthat
the.
Secretary’sdeterminations
were
arbitrary
and
capricious.
Mandatory
Liquidation
....
If
theTreasury
Secretaryobtainsthe
necessary
court
order
andappoints
the
FDIC
as
receiver,
the
FDICwould
have
to
choose
to
resolvethe
financial
company
by
either
(1)
liquidatng
and
winding
down
thecompany,or(2)transferringthe
assets
and,
liabilities,
of
the.
financial
company
to
a
bridge
banlç
selling
such
bridge
bank
and
liquidating
anyremaining
assets.
The
FDIC
is
mandated
to
resolve
the
financial
company
within.
1
year
of
its
appointment
as
receiver~but
theTreasury-Secretary
could
apptove
two
6-month
eneinions~
.0
e
sure
accountability.and
1
04/26/201017:02
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I~j0002/0020
-C..
oversight
of
the
resolutionpñcess,
anyadditional
extensions
beyond
2
years
would
requireCongressionalapproval.
Emergency
Powers
withoutCreditoror
Shareholder
Bailouts
The
FDIC
will
have
authority
to
operateand
liquidate
the
financial
company
in
a
mannerthat
prevents
the
failure
of
thecompany
from
sparking
or
worsening
a
financial
crisis.
Most
importatly,
the
FDIC
will
be
authorized,
with
the
consent
of
theTreasurySecretaryto
ensure
accountability,
to
takeemergencyactionsto
stabilize
the
financial
company.
These
actions
-
include
isating
guarantees,
purchasing
a~sets,
—
a4vancingfduds
to
crëdito±s.:on
thcitthiihs.
In
particular,
allowing
the
EDIC
toadvance
funds
to
creditorson
their
claimsWillsignificantlyhelp-preventthe.resohjon
of
the
fina
ii
comj
any
from
adversel
a~~pgflnan
ginistabLilty,
because
creditors
will
not
have
to
wait
months
or
even
years
to
be
paid
ontheit
claims,
as
canoccur
presently
underthe
Bankniptcy
Code.
The
illiquidity
of
creditorclaims
can
cause
the
failurc
of
one
financial
company
totrigger
cascading
failures
of
its
counterparfiea.,
Although
the
FDIC
could
advancefunds
to
creditors,
once
the
FDIC
complcted
the
claims-
valuation
process
the
FDIC
would
haveto
recoup
front
creditors
any
amounts
that
a
creditor
had
received
in
excess
of
what
it
would
have
received
in
bankruptcy..:.This
gives
the
FOIC
the
flexibility
toadvance
fundstocreditors
toprevent
ormitigate
a
systemic
crisis,
but.
then
ensures
that
the
FDIC
is
not
balling
out
creditors.
Thus,
the
resolutionauthority
will
allowfor
ordörlyresolution
of
financial
companies,
but
will
~
allow
the
FDICto
jrnycreditorsmore
than
theywould
receive
in
banlthiptcy.
Because
the
resolutionauthority
will
not
bail
out
creditors,there
isno
need
for
a
resolution
fund.
.
The
FDlCiwiflbeprohibjted
from
makkig
a*cqu~~y
investments
y.eompa~without.:~;.:::
Congressional
approvaL.
.In-addifion,
the
resolutionauthority
cannot
be.
used’to:res~lve
fl~j
fipanp
iakt~nipa$es4~
~
.
:r
.;
—.J.:.
~
C.c~:.~i.”’.
~
H
.)~
~
.
.~t
.
-/
~
-.:
.‘ç-e
~
Ensur~ng
~*flflia~Iliy
...
.
..
-.-/
.
.
..tf;
.~
.
.:
~•
-...~;J
.t;,4.
:~--~-c..
~-L
—
To~hsqrcacàiütt4ffity
~
~
thO
FiPD
and
T~ê
IuEy
3è~t~
requirecitocomply
with
extensive
reporting
requirementsTheTreasury
Seçreta~yw~l
have
theauthority
to
remove
the
EDIC
as
the
receiver
of
a
financial
company
fur
cause
l.a
addition,
the
GAO
and
theCouncil
of
Financial
Regulators
will
be
requiredtoexamine
the
reasqns
for
the
failure
of
thefin~nbial
company,
uüfudmgeváluatinjthe
performance
of
the
company’sregulatoñ.
TMet~iso
*ilFehd
the
Olvixig-dc)ot
that
aIloW~
fdineäegülatorslà
be
emplOyedby-the
companiesthat
teysupenrised.
.
.
~
.
..
-
To
ensure
accountability
onthe
part
of
thecreditors,
shareholders,and
management
of
the
failedfinancial
company,
all
costs
of
theresolution,
includingall
of
the
FDIC’s
costs,
will
be
paid
for
2
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by
thecreditors
andshareholders
of
the
company.Taxpayers
will
not
coverany
costs
of
the
resolution
of
the
company.Claims
for
executive
compensation
will
havethe
same
rank
as
equity,
meaningthat
all
othercreditors
of
a
company
cmciwling
those
of
employeesandthe
FDIC)
will
have
to
be
paid
in
full
beforeexecutives
would
be
paid
anything
on
their
claims.
hi
addition,
the
FDIC
will
have
the.
ability
toclaw-back
compensati
boil
received
by
executives
responsible
for
the
failure
of
the
companyduring
the.
prior
two
yen
Finally,
management
of
theresolved
finn
will
bebanned
from
futureemployment
at
the
financialinstitution.
3
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