Senate Legislation Would Replace Dodd-Frank Title II with New Chapter in Bankruptcy Code

Senators  John Cornyn (R-TX) and Pat Toomey (R-PA) have  introduced legislation to repeal Title II of the Dodd-Frank Act, which provide for an orderly liquidation authority for failed financial firms, and replace it with new Chapter 14 of the federal bankruptcy code.  The  Taxpayer Protection and Responsible Resolution Act, S 1861, is designed, said the Senators, to end taxpayer-funded bailouts for large financial institutions. 

The Taxpayer Protection and Responsible Resolution Act strengthens and modernizes U.S. bankruptcy laws to facilitate the resolution of a failed or failing financial institution. The legislation creates a new, specialized bankruptcy chapter (Chapter 14) for certain financial corporations and eliminates the orderly liquidation authority in Title II of the Dodd-Frank Act, which the Senators called  an ad hoc process ripe for political manipulation that provides for yet another bailout.

Under Chapter 14, the failed financial institution would go bankrupt, leaving its owners and long-term creditors on the hook for its bad decisions, not taxpayers. To avoid systemic risk to the financial system, Chapter 14 would enable all the assets and the liabilities of the failed financial firm that pose systemic risk to be transferred to a new bridge company, which would be owned by the bankrupt estate, but  would operate as a new, solvent, company that could go on meeting the failed firm’s obligations.