Monday, May 10, 2010

Dodd-Shelby Amendment, in conjuntion with Boxer Amendment, Ends Too Big To Fail

The Senate legislation establishes a resolution regime to unwind and liquidate failed financial firms. The Dodd-Shelby Amendment, in conjunction with the Boxer Amendment, end the ideas that any firm can be too big to fail. Pursuant to the Dodd-Shelby Amendment, the legislation creates an orderly liquidation mechanism for the FDIC to unwind failing systemically significant financial companies. This mechanism represents a fundamental change in federal law that will protect taxpayers from the economic fallout of the collapse of a large interconnected systemically significant financial firm. Senator Chris Dodd, Cong Record, May 5, 2010, S3131.

Shareholders and unsecured creditors will still bear losses and management at the failed firm will be removed. In fact, the Dodd-Shelby Amendment empowers regulators to ban culpable management and directors of failed firms form working in the financial sector. According to Senator Dodd, it makes sense that if someone has been involved in the mismanagement of a company and caused such disruption in the economy they should be banned from engaging in further economic activities. Senator Chris Dodd, Cong Record, May 5, 2010, S3131.

Subject to due process protections, regulators can ban from the financial industry senior executives and directors at failed financial firms upon determining that they violated a law or regulation, a cease and desist order, or an agreement with a federal financial regulator; or breached their fiduciary duty; or engaged in an unsafe or unsound practices. In addition, the executive must have benefitted from the violation or breach, which must also involve personal dishonesty or a willful or continuing disregard for the firm’s safety or soundness. The length of the industry ban is in the regulator’s discretion, but must be at least two years. Section 212.

There will also be clawbacks of excess payments to creditors, such that creditors will be required to pay back the government any amounts they received above what they would have received in liquidation. Those who directly benefitted from the orderly liquidation will be the first to pay back the government at a premium rate.

Congress must approve the use of debt guarantees by the Fed or Treasury. The Fed can only use its Section 13(3) emergency lending authority to help solvent companies.

The Dodd-Shelby Amendment also requires post-resolution reviews to determine if regulators did all they were supposed to do to prevent the failure of a systemically significant institution. According to Senator Shelby, this post-resolution review is essential to hold regulators accountable for their actions or inactions as the case may be. Cong. Record, May 5, 2010, S3140.

The Boxer Amendment puts to rest any doubt that the legislation ends federal bailouts of financial firms. The amendment means that no financial company is going to be kept alive with taxpayer money. Remarks of Senator Boxer, Cong. Record, May 4, 2010, S3063.

Specifically, the Boxer Amendment states that all financial companies put into receivership under the legislation must be liquidated and no taxpayer funds can be used to prevent the liquidation of any financial company. Further, all funds expended in the liquidation of a financial company must be recovered from the disposition of assets of such financial company, or must be the responsibility of the financial sector, through assessments. According to Senator Warner, the Boxer Amendment reaffirms that entry into the resolution regime will mean that the financial firm will go out of business, that equity will be toast, management will be toast, the unsecured creditors will be toast. This will be an effective death panel for a financial institution. Cong. Record, May 3, 2010, S3027.