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95–425 PDF 2015

FINANCIAL INSTITUTION BANKRUPTCY ACT 

OF 2015 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

REGULATORY REFORM, 

COMMERCIAL AND ANTITRUST LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

ON

H.R. 2947 

JULY 9, 2015 

Serial No. 114–35 

Printed for the use of the Committee on the Judiciary 

( 

Available via the World Wide Web: http://judiciary.house.gov 
(II) 

COMMITTEE ON THE JUDICIARY 

BOB GOODLATTE, Virginia, Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

LAMAR S. SMITH, Texas 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TOM MARINO, Pennsylvania 

TREY GOWDY, South Carolina 

RAU ́ L LABRADOR, Idaho 

BLAKE FARENTHOLD, Texas 

DOUG COLLINS, Georgia 

RON DeSANTIS, Florida 

MIMI WALTERS, California 

KEN BUCK, Colorado 

JOHN RATCLIFFE, Texas 

DAVE TROTT, Michigan 

MIKE BISHOP, Michigan 

JOHN CONYERS, JR., Michigan 

JERROLD NADLER, New York 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO R. PIERLUISI, Puerto Rico 

JUDY CHU, California 

TED DEUTCH, Florida 

LUIS V. GUTIERREZ, Illinois 

KAREN BASS, California 

CEDRIC RICHMOND, Louisiana 

SUZAN DelBENE, Washington 

HAKEEM JEFFRIES, New York 

DAVID N. CICILLINE, Rhode Island 

SCOTT PETERS, California 

SHELLEY HUSBAND, Chief of Staff & General Counsel 

PERRY APELBAUM, Minority Staff Director & Chief Counsel 

SUBCOMMITTEE ON REGULATORY REFORM, COMMERCIAL AND ANTITRUST LAW

TOM MARINO, Pennsylvania, Chairman 

BLAKE FARENTHOLD, Texas, Vice-Chairman 

DARRELL E. ISSA, California 

DOUG COLLINS, Georgia 

MIMI WALTERS, California 

JOHN RATCLIFFE, Texas 

DAVE TROTT, Michigan 

MIKE BISHOP, Michigan 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

SUZAN DelBENE, Washington 

HAKEEM JEFFRIES, New York 

DAVID N. CICILLINE, Rhode Island 

SCOTT PETERS, California 

DANIEL FLORES, Chief Counsel 
(III) 

C O N T E N T S 

JULY 9, 2015 

Page 

THE BILL 

H.R. 2947, the ‘‘Financial Institution Bankruptcy Act of 2015’’ .......................... 3 

OPENING STATEMENTS 

The Honorable Tom Marino, a Representative in Congress from the State 

of Pennsylvania, and Chairman, Subcommittee on Regulatory Reform, Commercial and Antitrust Law .................................................................................. 1 

The Honorable Henry C. ‘‘Hank’’ Johnson, Jr., a Representative in Congress 

from the State of Georgia, and Ranking Member, Subcommittee on Regulatory Reform, Commercial and Antitrust Law ................................................. 38 

The Honorable Bob Goodlatte, a Representative in Congress from the State 

of Virginia, and Chairman, Committee on the Judiciary ................................. 39 

The Honorable Dave Trott, a Representative in Congress from the State 

of Michigan, and Member, Subcommittee on Regulatory Reform, Commercial and Antitrust Law ........................................................................................ 40 

The Honorable John Conyers, Jr., a Representative in Congress from the 

State of Michigan, and Ranking Member, Committee on the Judiciary ......... 40 

WITNESSES 

Donald S. Bernstein, Esq., Partner, Davis Polk & Wardwell LLP 

Oral Testimony ..................................................................................................... 43 

Prepared Statement ............................................................................................. 45 

Stephen E. Hessler, Esq., Partner, Kirkland & Ellis LLP 

Oral Testimony ..................................................................................................... 59 

Prepared Statement ............................................................................................. 61 

Richard Levin, Esq., Partner, Jenner & Block LLP 

Oral Testimony ..................................................................................................... 85 

Prepared Statement ............................................................................................. 87 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Response to Questions for the Record from Donald S. Bernstein, Esq., Partner, Davis Polk & Wardwell LLP ....................................................................... 128 

Response to Questions for the Record from Stephen E. Hessler, Esq., Partner, 

Kirkland & Ellis LLP ........................................................................................... 132 

Response to Questions for the Record from Richard Levin, Esq., Partner, 

Jenner & Block LLP ............................................................................................ 134 

(1) 

FINANCIAL INSTITUTION BANKRUPTCY ACT 

OF 2015 

THURSDAY, JULY 9, 2015 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON REGULATORY REFORM, 

COMMERCIAL AND ANTITRUST LAW

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:10 a.m., in room 

2141, Rayburn House Office Building, the Honorable Tom Marino 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Marino, Goodlatte, Farenthold, Collins, 

Walters, Ratcliffe, Trott, Bishop, Johnson, Conyers, and DelBene. 

Staff Present: (Majority) Anthony Grossi, Counsel; Andrea 

Lindsey, Clerk; and (Minority) Susan Jensen, Counsel. 

Mr. MARINO. The Subcommittee on Regulatory Reform, Commercial and Antitrust Law will come to order. 

Good morning everyone. I apologize for the delay. We all have 

three or four things going on at once, starting at 7 in the morning. 

So without objection, the Chair is authorized to declare recesses of 

the Committee at any time. We welcome everyone to today’s hearing on H.R. 2947, the ‘‘Financial Institution Bankruptcy Act of 

2015.’’ I will now recognize myself for an opening statement. 

Last Congress, the Financial Institution Bankruptcy Act was reported favorably by this Committee and passed the House under 

suspension of the rules. This week, the legislation was reintroduced, and today, we build on last year’s record by further examining the bill. In the wake of the financial crisis of 2008, Congress 

enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. That legislation was intended to address, among other 

things, the potential failure of large financial institutions. 

While the Dodd-Frank Act created a regulatory process for such 

an event, the Act states that the preferred method of resolution for 

a financial institution is through the bankruptcy process. However, 

the Dodd-Frank Act did not make any amendments to the bankruptcy code to account for the unique characteristics of a financial 

institution. The legislation before us today fills that void. 

The Financial Institution Bankruptcy Act is the product of years 

of study by industry, legal, and financial regulatory experts, as well 

as bipartisan review over the course of three separate Subcommittee hearings last Congress. The legislation includes several pro-
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visions that improve the ability of a financial institution to be resolved through the bankruptcy process. It allows for a speedy 

transfer of a financial firm’s assets to a newly formed company. 

That company would continue the firm’s operations for the benefit 

of its customers, employees, and creditors, and ensure the financial 

stability of the marketplace. 

This quick transfer is overseen by, and subject to the approval 

of an experienced bankruptcy judge, and includes due process protections for parties-in-interest. The bill also creates an explicit rule 

in the bankruptcy process for the key financial regulators. In addition, there are provisions that facilitate the transfer of derivative 

and similarly structured contracts to the newly formed company. 

This will improve the ability of the company to continue the financial institution’s operations. 

Finally, the legislation recognizes the factually and legally complicated questions presented by the resolution of financial institutions. To that end, the bill provides that specialized bankruptcy 

and appellate judges will be designated in advance to preside over 

these cases. 

The bankruptcy process has long been favored as the primary 

mechanism for dealing with distressed and failing companies. This 

is due to its impartial nature, adherence to established precedent, 

judiciary oversight, and grounding in the principles of due process 

and the rule of law. We are here today as part of an effort to structure a bankruptcy process that is better equipped to deal with the 

specific issues raised by failing financial firms. 

As an original cosponsor of the bill, I look forward to hearing 

from today’s expert panel of witnesses on the merits of the Financial Institution Bankruptcy Act and whether any further refinements to the bill are necessary. I now recognize the Ranking Member of the Subcommittee on Regulatory Reform, Commercial, and 

Antitrust Law, Mr. Hank Johnson, for his opening statement. Mr. 

Johnson. 

[The bill, H.R. 2947, follows:] 
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Mr. JOHNSON. Thank you, Mr. Chairman. H.R. 2947, the ‘‘Financial Institution Bankruptcy Act of 2015,’’ amends the bankruptcy 

code to establish a process for the expedited judicial resolution of 

large financial institutions to soften the disruptive effects of their 

collapse. 

I trust the courts and am sympathetic to the notion that a judicial process may be preferable to an administrative process for resolving systemically important financial institutions that present a 

risk to the economic stability of our Nation, but I’m concerned that 

the lack of a funding mechanism for H.R. 2947 may make the bill 

unworkable. 

A key difference between an orderly resolution under DoddFrank and the resolution contemplated by this bill concerns the 

proper mechanism for funding the reorganization of the debtor. In 

a typical bankruptcy case, the debtor’s reorganization may be funded by private parties or by the Federal Government as illustrated 

by the General Motors bankruptcy. 

In many instances, liquidity provided by the U.S. Government to 

prevent the collapse of financial institutions has either returned a 

profit to the government or is likely to be repaid. The National 

Bankruptcy Conference (NBC), which includes the Nation’s leading 

bankruptcy scholars and practitioners, explained in a letter to the 

Committee in June that, ‘‘meeting the liquidity needs of a distressed financial institution is essential to successfully resolving 

the firm without creating undue systemic risk.’’ 

This critical mechanism has prevented the collapse of several 

major financial institutions without cost to the taxpayer. It is my 

understanding that this element does not currently exist in the bill 

for jurisdictional reasons. Nevertheless, I remain optimistic that 

the Chair will continue to work across party lines to accommodate 

these concerns prior to the bill’s consideration on the floor. 

In addition to these concerns, I would caution the Chair against 

efforts to combine this bill with legislation that would strike Title 

II of the Dodd-Frank Act. Such efforts would be unacceptable and 

would meet strong opposition. As the National Bankruptcy Conference further noted, laws currently in place such as Title II of the 

Dodd-Frank Act should ‘‘continue to be available even if the bankruptcy code is amended to better address the resolution of systemically important financial institutions’’ because ‘‘the ability of U.S. 

regulators to assume full control of the resolution process to elicit 

the cooperation from non-U.S. regulators is an essential insurance 

policy against systemic risk and potential conflict and dysfunction 

among the multinational components of these institutions.’’ 

Title II of the Dodd-Frank Act also serves as a valuable backstop 

to the bankruptcy process should this bill become law. Additionally, 

as the conference has also noted, it is important that financial regulators have a very significant role in the timely resolution of a financial institution regardless of whether by bankruptcy or orderly 

liquidation. 

As the Conference noted, the ‘‘heavy involvement of U.S. regulators would be critical if adverse systemic effects from the failure 

of the systemically important financial institution are to be prevented or minimized.’’ 
39 

It would be unwise to overlook the expertise of financial regulators who are charged with considering the impact of a resolution 

on the economy and financial markets in favor of a process that is 

intended to produce maximum returns to creditors while facilitating the debtor’s reorganization. 

Thank you, Mr. Chairman, and I yield back. 

Mr. MARINO. Thank you, Mr. Johnson. 

The Chair now recognizes the Chairman of the full Judiciary 

Committee, Congressman Goodlatte of Virginia for his opening 

statement. 

Mr. GOODLATTE. Thank you, Mr. Chairman. I appreciate your 

holding this hearing. 

Our Nation’s financial system provides the life blood for industry, 

small businesses, and our communities to develop, grow, and prosper. Ensuring that this system functions efficiently in both good 

times and bad is critical to the ongoing vitality of our economy. The 

recent financial crisis illustrated that the financial system and existing laws were not adequately prepared for the insolvency of certain institutions, which threatened the very stability of the global 

economy and our financial industry. 

There has been considerable debate over whether Congress’ main 

response to the financial crisis—the Dodd-Frank Wall Street Reform and Consumer Protection Act—is adequate to respond to a future crisis. Today’s hearing, however, is not focused on that debate. 

Instead, we turn our attention to the private and public efforts to 

strengthen the Bankruptcy Code so that it may better facilitate the 

resolution of an insolvent financial firm while preserving the stability of the financial markets. 

The subject of today’s hearing, the ‘‘Financial Institution Bankruptcy Act of 2015,’’ is a reflection of these efforts. The bill is calibrated carefully to provide transparency, predictability, and judicial 

oversight to a process that must be executed quickly and in a manner that is responsive to potential systemic risk. 

Additionally, it incorporates the ‘‘single point of entry’’ approach, 

which a growing consensus of experts in public and private industry believes is the most effective and feasible method to resolve a 

financial institution that has a bank holding company. The Judiciary Committee has a long history of improving the Bankruptcy 

Code to ensure that it is equipped properly to administer all failing 

companies. 

The Financial Institution Bankruptcy Act adds to this history by 

enhancing the ability of financial firms to be resolved through the 

bankruptcy process. The development of the legislation before us 

today has been a collaborative effort that included the financial 

and legal community, Members of Congress on both sides of the 

aisle, the Federal Reserve, the FDIC, the courts, and Treasury. 

I applaud Congressman Trott for continuing the efforts of last 

Congress to strengthen the bankruptcy code and Chairman Marino 

for holding today’s hearing on this important reform. I look forward 

to hearing from today’s witnesses on the Financial Institution 

Bankruptcy Act and whether the passage of time has resulted in 

the need for any further revisions to the bill. 
40 

And at this time it is my pleasure to yield the balance of my time 

to the gentleman from Michigan, Mr. Trott, the chief sponsor of the 

legislation for any opening remarks that he might have. 

Mr. TROTT. Thank you, Chairman. I also want to thank Chairman Marino and Ranking Member Johnson for holding this hearing, and also thank our witnesses for again providing their insight 

on this bill. 

The health of our financial institutions, particularly large multinational players, is critical to not only our economy but also our 

citizens. Consequently, how we react when a systemically important financial institution fails is of particular concern. 

The Financial Institution Bankruptcy Act of 2015 seeks to address those concerns and put in place a better process. The bill 

amends the bankruptcy code so as to allow the insolvency of a financial institution to be resolved through the Chapter 11 process. 

The Chapter 11 process provides rules that are designed to accomplish an equitable and predictable resolution of competing claims. 

Chapter 11 is a relatively efficient process, and the integrity and 

transparency ensured by due process protections will reduce the 

risk to our overall economy and reduce the potential of a taxpayer 

funded bailout. 

As an aside, my hometown is Detroit, Michigan, and I am here 

to tell you that the bankruptcy process can add great value to difficult financial situations that undermine our economy and our 

communities. 

Thank you again, Chairman. I yield back my time. 

Mr. GOODLATTE. And I yield back. Thank you, Mr. Chairman. 

Mr. MARINO. Thank you, Chairman. 

The Chair recognizes the full Judiciary Committee Ranking 

Member, Congressman Conyers from the State of Michigan for his 

opening statement. 

Mr. CONYERS. Thank you, Mr. Chairman and Members of the 

Committee. I join in congratulating my colleague from Michigan, 

Mr. Trott, for his authorship of the measure that is before us. I 

support it, and I am a cosponsor of it. As a matter of fact, there 

are a number of reasons for my support. 

Number one, the bill addresses a real need, recognized by regulatory agencies, bankruptcy experts, and the private sector that the 

bankruptcy law must be amended so that it can expeditiously restore trust in the financial marketplace as soon as possible after 

the collapse of a major financial institution. 

Many of us recall the failure of Lehman Brothers in 2008 which 

caused a worldwide freeze on the availability of credit, which not 

only affected Wall Street but Main Street as well. 

The near collapse of our Nation’s economy because of Lehman’s 

failure revealed that current bankruptcy law is ill equipped to deal 

with complex financial institutions in economic distress. H.R. 2947 

would establish a specialized form of bankruptcy relief under Chapter 11 of the Bankruptcy Code by which the holding company of a 

large financial institution could voluntarily use or be forced to use 

by the Federal Reserve Board, under certain conditions. 

The debtor’s operating subsidiaries would continue to operate 

outside of bankruptcy while the debtor’s principal assets—such as 

secured property, financial contracts, and the stock of its subsidi-
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aries—would be transferred to a temporary bridge company. The 

bridge company, under the guidance of a trustee, in turn, would 

liquidate these assets to pay the claims of the debtor’s creditors. 

The legislation would also impose a temporary stay to prevent 

parties from exercising their rights in certain qualified financial 

contracts. Each critical step of this process would be under the supervision of a bankruptcy judge and subject to the right of appeal. 

Another reason for my support is that it appropriately recognizes 

the important role of the Dodd-Frank Act in the regulation of large 

financial institutions. Without doubt, the Great Recession was a direct result of the regulatory equivalent of the Wild West. In the absence of any meaningful regulation of the mortgage industry, lenders developed high risk subprime mortgages and used predatory 

marketing tactics targeting the most vulnerable. 

These doomed-to-fail mortgages were then securitized and sold to 

unsuspecting investors, including pension funds and school districts. The ensuing 2008 crash froze credit and trapped millions of 

Americans in mortgages they could no longer afford, causing waves 

of foreclosures, massive unemployment, and international economic 

upheaval. 

The Dodd-Frank Act goes a long way toward reinvigorating a 

regulatory system that makes the financial marketplace more accountable and hopefully more resilient. In particular, Title II of 

Dodd-Frank establishes a mandatory resolution process to wind 

down large financial institutions, which is a critical enforcement 

tool for bank regulators to ensure compliance with the Act’s heightened regulatory requirements. 

Nevertheless, Dodd-Frank clearly recognizes that bankruptcy 

should be a first resort and that Title II’s orderly resolution process 

should be a last resort. In fact, Title I of the Act explicitly requires 

these companies to write so-called living wills that must explain 

how they will resolve their financial difficulties in a hypothetical 

bankruptcy scenario. This is because bankruptcy law has, for more 

than 100 years, enabled some of the Nation’s largest companies to 

regain their financial footing, including General Motors and Chrysler Corporations. 

But to be a truly viable alternative to Dodd-Frank’s resolution 

process, the bankruptcy law must be amended to facilitate the 

rapid administration of a debtor’s assets in an orderly fashion that 

maximizes value and minimizes disruption to the financial marketplace. 

And finally, I am pleased to note that this bill is the product of 

a very collaborative, inclusive, and deliberative process, which I 

hope would be more regularly employed in this Congress and not 

the exception when it comes to drafting legislation. 

While an excellent measure, H.R. 2947 unfortunately does not include any provision allowing the Federal Government to be a lender of last resort, which nearly every expert recognizes is a necessary element to ensure financial stability. I recognize, however, 

that this is an issue not within the Committee’s jurisdiction but 

more within the area of the jurisdiction of the Financial Services 

Committee. 
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I welcome the witnesses, particularly Mr. Levin, and I thank the 

witnesses for their participation here today, and I yield back the 

balance of my time. 

Mr. MARINO. Thank you, Congressman Conyers. 

Without objection, other Members’ opening statements will be 

made part of the record. The Chair will begin by swearing in our 

witnesses before introducing them. Would you please rise and raise 

your right hand. 

Do you swear that the testimony you’re about to give before this 

Committee is the truth, the whole truth, and nothing but the truth, 

so help you God? 

Let the record reflect that the witnesses have answered in the 

affirmative. Thank you. Please be seated. 

I will now introduce each of the witnesses before anyone gives 

their opening statement. Mr. Don Bernstein is a partner at Davis 

Polk, where he heads the firm’s insolvency and restructuring practice. During his distinguished 35-year career, he has represented 

nearly every major financial institution in numerous restructurings, as well as leading a number of operating firms through bankruptcy, including Ford, LTV Steel, and Johns Manville. Mr. Bernstein has earned multiple honors for his practice, including being 

elected by his peers as the chair of the National Bankruptcy Conference, the most prestigious professional organization in the field. 

Mr. Bernstein received his A.B. (Cum laude) from Princeton University and his JD from the University of Chicago Law School. 

Thank you, Mr. Bernstein, for being here 

Mr. Stephen Hessler is a partner in the restructuring group of 

Kirkland & Ellis. His practice involves representing debtors, creditors, and investors in complex corporate Chapter 11 cases, out-ofcourt restructurings, acquisitions, and related trial and appellate 

litigation. In addition to practicing law, Mr. Hessler is an author 

and frequent lecturer on a variety of restructuring related topics, 

including, as a professor at the University of Pennsylvania, where 

he teaches a restructuring class to both law school and Wharton 

students. Mr. Hessler has been recognized by both Chambers and 

Turnarounds & Workouts as an outstanding restructuring lawyer. 

Mr. Hessler received his BA and JD from the University of Michigan, where he served as the managing editor of Michigan’s Law 

Review. Welcome. 

Mr. Richard Levin is a partner in the Bankruptcy, Workout and 

Corporate Reorganization Practice of Jenner & Block. Mr. Levin is 

the current chair of the National Bankruptcy Conference, a fellow 

of the American College of Bankruptcy, and a lecturer of bankruptcy law at the Harvard Law School. In almost 40 years of practice, Mr. Levin has gained a reputation as one of the foremost restructuring, bankruptcy and creditor/debtor rights lawyers. Notably, Mr. Levin served as a bankruptcy counsel to the House Judiciary Committee and was one of the principal authors of the 1978 

U.S. Bankruptcy Code. Mr. Levin received his undergraduate degree from MIT and his JD from Yale Law School where he served 

as editor of Yale Law Review. Welcome, Mr. Levin. 

Mr. LEVIN. Thank you, Mr. Chairman. 

Mr. MARINO. Each of the witnesses’ written statements will be 

entered into the record in its entirety, and I ask each of the wit-
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nesses to summarize their statements, you’ve been through this before, in 5 minutes or less. To help you stay within your time, you 

see the lights in front of you, but as I do, when I’m sitting at that 

table making a statement, I’m concentrating on making my statement and not watching the lights. 

So what I will politely and diplomatically do if it gets too far over 

the 5 minutes, is I will reach for the gavel and just sort of raise 

it to get your attention, and ask you to succinctly come to a close 

in your statement. 

I’m going to recognize our witnesses for their opening statement. 

Mr. Bernstein. 

TESTIMONY OF DONALD S. BERNSTEIN, ESQ., 

PARTNER, DAVIS POLK & WARDWELL LLP 

Mr. BERNSTEIN. Thank you, Chairman Marino, and thank you, 

Chairman Goodlatte, and also Congressman Trott for introducing 

and being a sponsor of the bill, as well as Congressman Conyers. 

I want to say that you have made my job easy in terms of meeting 

the 5-minute requirement because the statements were so good in 

terms of summarizing the bill. I’m just going to skip to my major 

points 

So, just as a little bit of background, this idea of single point of 

entry resolution of a financial firm is a result of a lot of work that’s 

been done at the FDIC and in other contexts, including under Title 

II of Dodd-Frank, with the idea that if you set up financial institutions correctly in the United States with bank holding companies, 

you should be able to recapitalize their operations if the operations 

have losses because there is loss absorbency at the holding company level. 

And in fact, there are a number of features that are being added 

to the way bank holding companies are structured in order to facilitate resolution under the Bankruptcy Code, which has been an outgrowth of the resolution planning process under the Dodd-Frank 

Act. One of these is a concept that is being adopted globally, which 

is called, ‘‘Total Loss Absorbing Capacity.’’ 

That consists of two things. It consists of the capital of the bank 

and also a layer of debt that can effectively be bailed in or converted, in effect, to equity so that no capital needs to be infused 

from sources outside the firm, including no taxpayer funds would 

have to be infused to create the capital necessary. 

The capital levels of financial institutions since 2008, especially 

the largest ones, have essentially doubled from where they were in 

2008, and then if you add a requirement that is in the process of 

being developed and is likely to be imposed by regulators for total 

loss absorbing capacity, it will double again in effect and permit 

the use of bankruptcy and single point of entry resolution to use 

that loss absorbing capacity in order to resolve firms. 

Most of the largest financial institutions actually have that layer 

of indebtedness already, so we are actually at a point where the resources are available to recapitalize these firms. 

Secondly, there has been a massive increase in the amount of liquidity that’s being maintained by all the firms. Congressman Conyers made the point about a liquidity source. I know the NBC 

makes that point in their letter and I make it as well in my testi-
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mony, my written testimony, but today, with the levels of liquidity 

that the banks are maintaining, they can resolve themselves in a 

severely adverse economic scenario based on the balance sheet liquidity that they are currently maintaining. So that is—and it’s a 

huge increase from the way it was in 2008. 

The third area that single point of entry requires is a clean holding company, a holding company that can be left behind in a bankruptcy proceeding when the operating subsidiaries have been recapitalized and then get transferred to a bridge company. And pursuant to regulatory requirements and also pursuant to the resolution planning process, the firms are also putting themselves in a 

place where they are not having material operations occurring in 

the holding company where there is little or no short-term debt in 

the holding company, and subsidiaries are not guaranteeing holding company debts. So that is another aspect of how the companies 

are putting themselves in a position to actually utilize the single 

point of entry process. 

And finally, because the amendments that are in section 1188 of 

the proposed bill have not been enacted, there has been a very 

strong effort by both regulators and by the firms to amend financial contracts to remove cross defaults to a holding company bankruptcy so that the financial contracts cannot be terminated the way 

they were in Lehman Brothers and can continue in effect, of course 

with appropriate protections for counterparties, because the guarantees would be moved to the new bridge company and would 

therefore not be subject to the debt that’s been left behind in the 

old bankrupt company. 

So all of those features, and there were some others that I mention in my written testimony, are putting things in a position to actually accomplish single point of entry. 

Now, there were two provisions in the bill that I wanted to mention that I think are worth just highlighting. The first one is the 

ability of the Federal Reserve to commence an involuntary case. 

One of the difficulties that’s been raised with that provision is involuntary cases normally come with the right to oppose them and 

other parties need to be heard by the court, there might be appeals, 

and in my view, if the due process issues are so overwhelming with 

respect to that issue, it’s not critically necessary to include that 

provision. 

And I see you raising your gavel, so what I will do is wait for 

questions if there are questions on that issue or on the other provision that I wanted to address. Thank you. 

Mr. MARINO. Thank you, Attorney Bernstein. See it works very 

subtilely. 

[The prepared statement of Mr. Bernstein follows:] 
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Mr. MARINO. Attorney Hessler, please. 

TESTIMONY OF STEPHEN E. HESSLER, ESQ., 

PARTNER, KIRKLAND & ELLIS LLP 

Mr. HESSLER. Thank you. Chairman Marino, Chairman Goodlatte, Ranking Member Johnson, Ranking Member Conyers, other 

Members, thank you for inviting me to testify at today’s hearing. 

As noted in your very kind introduction, I’m a partner in the restructuring group of Kirkland & Ellis, LLP. Although my practice 

includes representing creditors, equity holders, and other constituencies in complex distressed matters, I mostly represented major 

corporations as company counsel in some of the largest and most 

challenging bankruptcies in history. I am speaking especially from 

that perspective this morning. 

I am distinctly pleased to appear before this Subcommittee again 

regarding the Financial Institution Bankruptcy Act of 2015, also 

known as Subchapter V. It was my privilege to testify in July 2014 

in support of the prior version. Given the comprehensive record 

scrutinizing Subchapter V, I will not repeat my prior testimony and 

will instead this morning focus on two issues. 

First, the comparative benefits of a judicial process such as 

Chapter 11 versus a regulatory process such as Title II of the 

Dodd-Frank Act for addressing a major bank’s failure, and second, 

how the 48-hour delay of the qualified financial contract safe harbors from the automatic stay is critical to the effectiveness of Subchapter V. 

Turning to the first issue. The touchstone analytical framework 

for evaluating Subchapter V should not be as a stand-alone proposal, but rather, as compared to Chapter 11 in its current form, 

Chapter 11 as amended by Subchapter V and Title II. Among these 

alternatives, Subchapter V is the best designed option both structurally and philosophically to advance the private and public policies that animate the reorganization of a financial corporation. 

The hallmarks of an optimal resolution regime for failing SIFIs 

must be clear and established rules administered by an impartial 

tribunal. Subchapter V is a financial corporation specific supplement to the existing reorganization provisions of Chapter 11 of the 

Bankruptcy Code. And thus, it builds upon decades of practice and 

precedent that have refined the code and that otherwise provide a 

well tested and proven successful reorganization framework for 

major corporations, including SIFIs and their stakeholders. 

Importantly, Subchapter V does not directly preclude or supplant 

the potential applicability of Title II. Critically, however, by design 

and operation, the availability of Subchapter V will make it far less 

likely that Title II will ever be invoked. 

Turning to my second point. As a general rule, upon a debtor 

commencing a Chapter 11 case, contract counterparties are automatically stayed from terminating their agreements and engaging 

in self-help remedies against estate assets, but the Bankruptcy 

Code currently provides that counterparties to so-called qualified financial contracts, such as derivatives, repurchase, and swap agreements enjoy a so-called safe harbor from the automatic stay. 

Consequently, a Chapter 11 filing by a financial corporation with 

significant qualified financial contracts could be chaotic at the out-
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set as counterparties that are not subject to the automatic stay proceed to terminate and enforce their rights in the debtor’s assets. 

Subchapter V addresses this potential problem by precluding access to these safe harbors for 48 hours after the commencement of 

the case, which is consistent with the time period under Section 

1185 for effecting the transfer of the subsidiary operating assets 

which include qualified financial contracts to the bridge company 

under the single point of entry approach highlighted by Mr. Bernstein. 

I have previously criticized Title II for imposing too brief a stay 

on this front until only 5 p.m. Eastern on the business day following the FDIC’s appointment as receiver, and as a general matter, my default position remains that safe harbors should not exist 

at all. That said, for the following four reasons, I am persuaded 

that Subchapter V proposes a workable construct in this context. 

One, since passage of the Dodd-Frank Act in 2010, financial corporations have had 5 years to draft and refine their living wills. 

Ideally, the enactment of Subchapter V will reinforce the need to 

be prepared to make expedited qualified financial contract transfer 

and assignment decisions. 

Two, Subchapter V requires that decisions on whether to transfer 

and assign all of the debtor financial corporation’s assets, expressly 

including qualified financial contracts, must be made within 48 

hours. It logically follows that 48 hours is a sufficient period to stay 

qualified financial contract counterparties from taking remedial actions that would interfere with these determinations. 

Three, the implicit expectation of Subchapter V is that essentially all qualified financial contracts will be transferred to the 

bridge company. Because Subchapter V precludes cherry-picking 

only certain qualified financial contracts for assignment, this 

should reduce the burden of having to make transfer determinations for every individual agreement. 

Lastly, the most likely alternative to a Subchapter V case, which 

is Title II, proposes a shorter stay than 48 hours, and Chapter 11 

without Subchapter V provides for no stay at all on qualified financial contract counterparty termination. This means Subchapter V’s 

48-hour stay is actually the most robust option under the current 

and potential SIFI insolvency regimes at issue. 

I look forward to further careful consideration of the important 

issues addressed by Subchapter V. I thank the Subcommittee for 

allowing me to share my views on this legislation, and I welcome 

the opportunity to answer any questions about my testimony. 

Mr. MARINO. Thank you, Attorney Hessler. 

[The prepared statement of Mr. Hessler follows:] 
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Mr. MARINO. Attorney Levin, did I—am I pronouncing it correctly? Levin or Levin? 

Mr. LEVIN. It is Levin, Mr. Chairman 

Mr. MARINO. Levin. I apologize for the mispronunciation. 

Mr. LEVIN. Not a problem. 

Mr. MARINO. Please, your opening statement. 

TESTIMONY OF RICHARD LEVIN, ESQ., 

PARTNER, JENNER & BLOCK LLP 

Mr. LEVIN. Thank you. Thank you, Mr. Chairman. Thank you for 

your kind introduction. I thank the Members of the Subcommittee 

for their attention here today. 

I want to reiterate that as chair of the National Bankruptcy Conference, I am speaking here today only on behalf of the Conference, 

not on behalf of my own views or the views of my law firm, Jenner 

& Block, or the views of any clients of Jenner & Block. 

You have our written statement, Mr. Chairman, which I understand will be included in the record. It covers many more things 

than I will address today orally, but I want to highlight a few 

points. 

First, I would like to describe that the National Bankruptcy Conference is in general agreement with what Mr. Bernstein and Mr. 

Hessler have already said. There is a lot of—as there is within the 

Subcommittee—there is a lot of agreement within the financial and 

bankruptcy community about many terms of this bill. It was very 

carefully crafted and constructed to address many of the concerns 

that had been addressed, especially with respect to financial contracts. 

That said, the National Bankruptcy Conference, which generally 

supports bankruptcy legislation, has concerns about the workability 

of this legislation considered in an isolated form. But what has 

happened over the last several years since the financial crisis is 

that many other structures have arisen that make this bill much 

more workable than it would have been had it been enacted say in 

2009 or 2010, the single point of entry concept development, the 

provisions in financial contracts that provide for nontermination 

upon the guarantor’s or the parent guarantor’s bankruptcy and 

many other things that Mr. Bernstein and Mr. Hessler have addressed, but the Conference nevertheless is concerned about the 

workability of this legislation. 

We do not oppose it. We are not, I will say, vigorous supporters 

of it. We are, I think, mild supporters of the legislation as a good 

alternative for the reasons that Mr. Hessler just described. But let 

me describe the few concerns that we have. 

One is that the, the regulators in every other financial area of 

stockbrokers, insurance companies, usually have the speed and the 

agility and the expertise to take over and resolve a distressed financial institution. Here we are talking about the holding companies where the regulators, in normal times, have a lot of expertise. 

Bankruptcy courts do not have that expertise. They are going to be 

asked to move very quickly over what we call a resolution weekend. 

We all recognize that things have to move that fast. And we think 

that therefore the regulators should continue to play a major role 

in this process. 
86 

The judicial supervision is useful for transparency and due process, we agree with that, but we do not believe that given the speed 

that is required and the time it takes to get educated about the intricacies and complexities of these institutions that all of this can 

be put upon even a well trained bankruptcy judge and that the regulatory role is still very important in the process. 

We believe it’s also important because of cross border issues. 

Regulators in other countries are much more comfortable dealing 

with the regulators that they have worked with for years in supervising these institutions rather than with an unknown bankruptcy 

judge who might be every bit as qualified and capable as the regulators but is not a known quantity and therefore would create uncertainty and therefore risk. 

So the next point is that—the point on involuntary petitions. We 

are concerned about due process with the amount of time that is 

available to deal with involuntary petitions, and we favor the voluntary route. I think we can witness the Lehman experience, which 

in a voluntary petition works, that we don’t need a regulator in a 

voluntary because the regulators have enough tools to persuade 

management and a board of directors that a voluntary petition is 

necessary. So we support the idea of voluntary use of Subchapter 

V. 

We are concerned about the lender of last resort issue. We know 

that’s outside this Committee’s jurisdiction, so I won’t spend much 

time on it other than to say we think its availability will obviate 

the need for its use, and that’s an important point. 

And finally, we do support the provision in this bill, which was 

not—which has not been in some other proposals, that this proceeding take place before bankruptcy judges who are expert in financial reorganization rather than before the district court who 

does not have the same expertise as the bankruptcy court. 

With that, Mr. Chairman, I’m happy to address any questions 

the Committee might have. 

Mr. MARINO. Thank you, Attorney Levin. 

[The prepared statement of Mr. Levin follows:] 
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Mr. MARINO. The Chair will now start by asking questions of the 

panel, and I ask my colleagues to keep their questions at 5 minutes 

or less and give you ample time to answer 

Mr. Bernstein, I would like to start with you for a moment. We 

know that banks have increased their liquidity reserves, but if a 

bank were to fail and the bridge company—would the bridge company still have to receive some type of loan to cover the issue concerned, or do banks have enough liquidity to keep those loans at 

a minimum? 

Mr. BERNSTEIN. Thank you. At current liquidity levels, which 

have been enhanced since 2008, the banks have used severe stress 

testing of those liquidity models in a resolution context, and they 

show that they do have enough liquidity. I agree with Mr. Levin’s 

point that if there were a liquidity backstop, it wouldn’t be used, 

but having it there would help to stabilize the firm more quickly 

simply because it exists. 

So I think the need for—there is no need for liquidity because of 

the current balance sheet levels, but having a liquidity backstop 

would serve the purpose of helping to facilitate the resolution and 

getting the company to be stabilized more quickly to give the market confidence. 

Mr. MARINO. Thank you. Attorney Hessler, you stated in your 

last, I think, testimony about your reservations concerning the single point of entry approach, and have you come up with an alternative to that? Would you please explain that in a little more detail? I did it get it in your opening statement, but could you elaborate on it, please? 

Mr. HESSLER. Sure. I have not come up with an alternative way, 

but I would say—and this was emphasized in my testimony submitted for today. Over the last year since my testimony last summer, I spent significant additional time contemplating the bill, and 

I am at this point comfortable with the single point of entry approach, and I guess very quickly I’ll tick off four reasons why I 

think it is—— 

Mr. MARINO. Please. 

Mr. HESSLER [continuing]. A viable construct. 

First of all, a point that was highlighted by Mr. Bernstein in his 

opening statement. SIFIs have corporate structures that don’t comport with conventional bankruptcy practice. Many of the operating 

subsidiaries either cannot be filed for bankruptcy or need to be liquidated in a regulatory proceeding. 

So Subchapter V, the single point of entry approach actually facilitates and accommodates the unique corporate structure of systemically important financial institutions. 

The second point is while the discreet steps of single point of 

entry may be a unique addition to Chapter 11, the transfer determination, that in and of itself is subject to Bankruptcy Code and 

bankruptcy court approval within well established and applicable 

law under the legal principles of sections 363 and 365 of the Bankruptcy Code. 

The third point is more of a practical matter, which is, again, although single point of entry would be a novel addition to the Bankruptcy Code, as already noted, versions of this very rapid sale have 

been happening already. Lehman is the most extreme example, 
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which was the sale of all the operating assets within, you know, 

four to 5 days of the petition, but there have been other sort of 

lightning fast with the ‘‘melting ice cube sales’’ that are already 

happening under the Bankruptcy Code, and so understood, the single point of entry approach actually just formalizes and codifies 

something that’s already going on. 

And then lastly, and I talk about this at great length in my testimony, if you actually walk through the expectations of various 

creditors, secured creditors, unsecured creditors, and equity interest holders, the distributional scheme that is effected by single 

point of entry is consistent with typical Chapter 11 principles. 

Mr. MARINO. Thank you. Attorney Levin, you talk about the regulators having a role in this, and I do agree that they should have 

a role in this, but their decisions, in part, are subjective. How can 

we assure that at least their subjective findings are going to be 

consistent? I have a concern when so many subjectivity is involved 

in this situation by someone who is not a judge or an experienced 

bankruptcy judge, please. 

Mr. LEVIN. Fair point, Mr. Chairman. I’d note, however, that in 

a lot of these areas, even in the bankruptcy courts, the decisions 

are discretionary, and therefore, to a large degree, subjective. The 

courts set out broad rules for what kinds of transactions are permitted, but within those broad rules, there is tremendous subjectivity in their application. And I would note that the regulators 

themselves have begun adopting regulations on how this process 

would work, so it is controlled as well. If you have the combination 

of the regulators and the bankruptcy court supervising this process, I think you get the best of both worlds in that area. 

If I might follow up on Mr. Hessler’s last—— 

Mr. MARINO. Quickly, please 

Mr. LEVIN [continuing]. Remark. There is a real—there is a dividing line that’s very important in the single point of entry concept. The dividing line is the transfer of the operating assets to the 

bridge company. 

From that point, what goes on in the bankruptcy case is purely 

bankruptcy. It’s not regulatory. It’s not financial institution. The financial institution has been moved to the bridge company, and the 

bridge—what’s going on in the bridge company is totally outside of 

the bankruptcy realm. It should be a healthy operating financial 

institution that will be subject to regulatory control. 

I think Subchapter V, meaning no pun, bridges that nicely and 

separates them and therefore works to facilitate both systems in 

due process and transparency and protection of creditors and protection of systemically important—protection of the system with a 

systemically important financial institution, and that, I think, addresses the fourth of Mr. Hessler’s points that he made. 

Mr. MARINO. Thank you. My time is expired. The Chair recognizes the Ranking Member, the gentleman from Georgia, Congressman Johnson. 

Mr. JOHNSON. Thank you. Mr. Levin, in a letter that the NBC 

sent to our Subcommittee last month, the conference stated that 

any amendments to the Bankruptcy Code relating to the resolution 

of SIFIs should make it clear that regulators retain Title II’s orderly liquidation authority despite the pendency of bankruptcy. 
116 

Does H.R. 2947 sufficiently ensure that regulators retain their 

Title II authority, notwithstanding the pendency of the bankruptcy? 

Mr. LEVIN. Yes. I haven’t—the bill was introduced this week, and 

I haven’t had a chance to review it, but my understanding was that 

it does not affect the regulators’ other authorities for liquidation. 

Mr. JOHNSON. All right. Thank you. Can a Subchapter V operate 

as intended if there is no secured lender of last resort such as the 

Federal Government? 

Mr. LEVIN. Possibly. It’s a far riskier proposition. Mr. Bernstein 

notes that the banks are far better capitalized now than they were 

6 or 7 years ago, very true. I would expect that a SIFI that winds 

up in Subchapter V probably would not be as well capitalized as 

most banks are today, and therefore, there would be a need for liquidity. That liquidity might be supplied by the recapitalization of 

the subsidiaries when they are transferred over to the bridge company and they’re recapitalized by contribution of the parent from 

the assets, but at the same time it might not be adequate and 

therefore liquidity could be important. 

To the extent it’s a bank subsidiary, the Federal Reserve discount window provides that. To the extent it’s a broker/dealer or 

an insurance company or another kind of financial institution such 

as a derivatives trading institution, there is no apparent source of 

liquidity, and that could create risk in the bridge company. 

As I said earlier, and this is the important point to stress, the 

market is less likely to run if it knows the liquidity facility is there 

than if there isn’t one. If the market knows that the liquidity facility is there, people will feel protected, and therefore, there will be 

less need for a liquidity facility. I sometimes characterize it as akin 

to our nuclear arsenal. The fact that we have it means that we 

don’t have to use it. 

Mr. JOHNSON. Thank you. Mr. Hessler, your response to that 

same question? 

Mr. HESSLER. I agree with the general thrust of Mr. Levin’s response. I think it’s possible that the absence of the Federal funding 

mechanism would not impair the ability of the bridge company to 

operate effectively because of the recapitalization that occurs upon 

the transfer of the assets. To the extent that is otherwise available, 

though, that could be reassuring to the market. 

Mr. JOHNSON. Thank you. Mr. Levin, in a letter that the NBC 

sent to our Subcommittee last month, the conference described several significant concerns. Among them, the NBC stated that under 

certain circumstances the bankruptcy process might not be best 

equipped to offer the expertise, speed, and decisiveness needed to 

balance systemic risks against other competing goals in connection 

with resolution of systemically important financial institutions and 

thus Title II of Dodd-Frank should be retained even if H.R. 2947 

becomes law. 

And as you’ve stated, it appears that this legislation does retain—or I mean, it doesn’t repeal it, so I mean, legislation is retained, but there is an ability of the regulators to assert authority 

during the pendency of the Subchapter V action. Please describe 

what types of companies or circumstances might warrant the appli-
117 

cation of Title II’s orderly liquidation authority in lieu of a resolution in bankruptcy? 

Mr. LEVIN. Subchapter V would address most of the problems 

that Title II would address. The fact that it was there and DoddFrank says that bankruptcy is the preferred alternative might 

make bankruptcy workable and probably will make bankruptcy 

workable in that circumstance. But none of us is prescient enough 

to know all of the bad things that could happen in a rapidly evolving crisis. And I don’t have a specific answer for the particular circumstances that might require a different regulatory regime than 

Subchapter V, but what is called the triple key entry for Title II 

as well as the statutory preference for bankruptcy, we think it’s 

useful to have that backup which would only be used in the most 

extreme circumstances, which are difficult to imagine and lay out 

at this point. 

The fact is, the banks are well capitalized now. Things are going 

pretty well. This is not likely to be used for many years. We don’t 

know what the system will look like several years from now if and 

when it ever becomes necessary for a SIFI to be resolved in a crisis 

situation. So that—I think that is what lies behind our position 

more than any specific circumstances. 

Mr. JOHNSON. All right. Thank you, and I yield back. 

Mr. MARINO. Thank you. The Chair now recognizes the ViceChairman of the Subcommittee on Regulatory Reform, the gentleman from Texas, Mr. Farenthold. 

Mr. FARENTHOLD. Thank you very much, Mr. Chairman. 

And actually Mr. Levin has a great lead in to my question. We 

are a bunch of lawyers up here that spend a lot of time looking at 

this and getting into the weeds. I want to take a step back and look 

at the big picture of this. 

We recently enacted Dodd-Frank, which is a very burdensome 

regulatory scheme, which went—from what I hear from a lot of 

banks and from a lot of people, seeking to borrow from banks. We 

got a situation where just recently we had the increased liquidity 

rules that we’ve been talking about. We really are looking at a very 

worse case scenario, something that none of us can imagine at this 

point. 

Can—maybe Mr. Bernstein, can you give me an idea? What kind 

of bankruptcy events are we talking about here? 

Mr. BERNSTEIN. Yes. So I actually think this is less related to the 

facts on the ground at the time of any particular resolution than 

it is to—it’s, frankly, almost a foreign policy issue. In the context 

of my practice, I’ve been dealing a great deal with foreign regulators. 

Foreign regulators do not understand bankruptcy. The main benefit and the primary benefit, I think, of retaining Title II is to give 

confidence to foreign regulators that if something is going wrong in 

the bankruptcy process, the regulators do have the ability to step 

in. Simply because they deal with the U.S. regulators every day, 

there is active dialogue with them, they think they understand 

where the U.S. regulators are coming from, so it’s not necessarily 

something that will need to be used because this bill actually has 

the appropriate process. 
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But in terms of preventing a foreign regulator from seizing a foreign subsidiary when we’re trying to keep them out of bankruptcy, 

it may go a long way in giving the regulator confidence that they 

don’t have to do that because they know that the U.S. regulators 

can step in. 

Mr. FARENTHOLD. All right. Now, again, I think we’re kind of get 

into the weeds now. And then again, this may be a little bit off 

topic of the bill, but would all of you agree that we really are dealing with a worse-case scenario situation here, something that is 

very—is not foreseeable at this point, would anybody disagree with 

that on the panel? I see no one does, so let me go on to my second 

question and—— 

Mr. LEVIN. I don’t disagree with that, but as I said a moment 

ago, Mr. Farenthold, had anybody asked us this question in the 

1990’s, we would have given the same answer. 

Mr. FARENTHOLD. Okay. Let me go on to my second question. Mr. 

Hessler—or did you want to weigh in on this first? 

Mr. HESSLER. There is one thing that I think would be hopefully 

clarifying about the interrelationship between Title II and Subchapter V. So nothing in Subchapter V diminishes Title II. 

Mr. FARENTHOLD. Right. 

Mr. HESSLER. It doesn’t touch it. However, I think it’s important 

that Subchapter V also be examined on its own merits because 

there’s a critical provision, which is Section 1184, which provides 

standing to Federal Government regulators to be involved in a 

bankruptcy case. That presently does not exist within Chapter 11. 

Mr. FARENTHOLD. And obviously the taxpayers could potentially 

be left holding the bag if the Federal regulators aren’t—— 

Mr. HESSLER. Well, the decision on that, the Federal Government 

at present can only participate in a bankruptcy case to the extent 

it is a creditor—— 

Mr. FARENTHOLD. Right. 

Mr. HESSLER [continuing]. Not the debtor. So the point I want 

to make is sort of irrespective of Title II and what it does and 

doesn’t provide or the future of Title II, whether it has one or not, 

just within Subchapter V, it specifically and on its own provides 

that critical grant of standing for Federal regulators to advance 

their public interest mandates in a Chapter 11 case. 

Mr. FARENTHOLD. Got you. All right. My other question is, one 

of the objections we’re hearing to Subchapter V is it actually increases the incentive for private regulation, which I would guess is 

say the creditors putting more creditor favorable terms, you know, 

regulations are by the creditors rather than by the government. 

Do you believe the bill increases the incentive for the creditors 

of banks to put in these more burdensome requirements for the 

banks or no? 

Mr. HESSLER. Subchapter V? No, I think—I actually believe that 

it puts a disincentivization for risky creditor behaviors. Creditors 

understand Chapter 11. It’s well established and the governing 

principles are highly effective and highly proven. I actually think 

it’s Title II, which is much more of an unknown quantity and an 

unknown entity that actually increases creditor uncertainty as to 

how a Title II untested proceeding would go, so I actually think 

Subchapter V, which really just adds additional clarifying facets to 
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Chapter 11, I actually believe that’s helpful for maximizing responsible creditor behavior. 

Mr. FARENTHOLD. And Actually Mr. Bernstein wants the weigh 

in on this as well. 

Mr. BERNSTEIN. Yes. I think the one thing about whether it’s the 

provisions of this bill or the fact that the FDIC has made it clear 

that holding company creditors rather than taxpayers will absorb 

losses, that will increase the level of monitoring by creditors, and 

they will be making decisions about whether to invest based on 

how they see the institution operating rather than based on the 

feeling that they are going to be bailed out. 

And I think that is a very important aspect of this bill. It is probably a good thing. 

Mr. FARENTHOLD. Thank you very much. I see my time has expired, Mr. Chairman. 

Mr. LEVIN. If I may add, Mr. Chairman, the fact that the ISDA 

has adopted this protocol that provides a stay in the financial contract itself of 48 hours shows exactly the opposite kind of creditor 

behavior. The creditors are helping to facilitate the process. 

Mr. FARENTHOLD. Thank you. 

Mr. MARINO. Thank the Chair recognizes the Ranking Member 

of the full Judiciary Committee, Congressman Conyers. 

Mr. CONYERS. Thank you, sir. Mr. Levin, the National Bankruptcy Conference states regulators should not have the power to 

commence an involuntary Subchapter V. Do you have any reasons 

to let us know why the Conference takes this position? 

Mr. LEVIN. Yes, Mr. Conyers. 

Mr. CONYERS. Please. 

Mr. LEVIN. An involuntary petition is like any lawsuit. It entitles 

the defendant, here the alleged debtor, to a defense. The amount 

of time necessary available for a resolution, we call it the resolution 

weekend, is so short that there really can be no meaningful defense. And there can be no meaningful appeal if the transfer process to the bridge company is to occur over a resolution weekend in 

response to an involuntary petition. So we think it undercuts due 

process to allow an involuntary bankruptcy petition. 

As I said earlier in my openings statement, we believe the regulators have enough tools at their hands to persuade a board of directors why it is important to file a voluntary petition at the beginning of a resolution weekend, rather than go through the contested 

in voluntary process. And we think that will suffice to protect the 

system. 

Mr. CONYERS. Thanks. Now Subchapter V, could it operate as intended if there is no secured lender of last resort, Mr. Levin, such 

as the Federal Government. How would you respond to those who 

would say that this could amount to a taxpayer funded bailout of 

Wall Street people. 

Mr. LEVIN. We don’t think it is a bailout because of the nature 

of lender-of-last-resort funding. Lender-of-last-resort funding has 

three requirements; one, that there be good collateral so that the 

lender, whether it is the Federal Reserve, or the Federal Government, or whether it is some other Federal corporation or agency is 

fully protected by the collateral it receives. 
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The second is that the interest rate be what is referred to in literature as a punitive interest rate so that it is higher than—so 

there is no desire to access it for convenience. And for a moment 

I’m drawing a blank on the third and I’m going to ask Mr. Bernstein to help me on the third requirement. 

Mr. BERNSTEIN. Above market interest rate. 

Mr. LEVIN. That was—— 

Mr. BERNSTEIN. You already said that? Then I don’t remember 

the third one. 

Mr. CONYERS. All right, two then. 

Mr. LEVIN. In any event, the point is this is not a bail out in the 

sense that the Federal Government or any agency is contributing 

money, taking an equity position, taking an equity risk. This is 

helping the financial institution take valuable assets that it has 

and make them liquid until those assets can be sold in a orderly 

market, rather than be dumped at fire sale prices and depress the 

market for everybody. 

Mr. CONYERS. Well, do you think that by allowing it—if there is 

no secured lender of last resort—that we may be in some ways rewarding irresponsible behavior? 

Mr. LEVIN. I don’t think a bankruptcy is a reward for irresponsible behavior whether or not there is a lender of last resort. 

Mr. CONYERS. Now, going to Mr. Bernstein for his response to 

this question. If Subchapter V was in existence when Lehman 

failed, would it have achieved a better result with respect to the 

case’s impact on the Nation’s financial marketplace? 

Mr. BERNSTEIN. It is a complicated question because many other 

things that are in place today weren’t in place at that time. I think 

one of the things that it would have helped is this bill would have 

potentially permitted Lehman to adopt a different strategy. It could 

have used a single point of entry strategy and could have preserved 

its derivative contracts. 

The problem with Lehman at the time, though, is it didn’t have 

the total loss absorbing capacity and might not have been able to 

recapitalize the subsidiaries. So that piece of it, which is now being 

required, not only in the U.S. but by global regulators, is very important. And if you have both of those pieces, the provisions in this 

bill or in the contractual ISDA to protocol, plus the total loss absorbing capacity, you would have had a totally different result in 

Lehman Brothers, I think. 

Mr. CONYERS. So your answer is a substantially yes. 

Mr. BERNSTEIN. That’s correct, your Honor. Your Honor—Congressman. 

Mr. CONYERS. Thank you. Thank you, Mr. Chairman. 

Mr. MARINO. Thank you. The Chair recognizes the gentleman 

from Michigan, Congressman Trott. 

Mr. TROTT. Thank you, Chairman. 

Mr. Levin, so you raised a few concerns, one concern was the 

lack of experience potentially in a bankruptcy judge and the need 

for regulators to be involved. Didn’t like the involuntary provision, 

which I agree with your comments in that regard. The lender of 

last resort concerns and then I think also then the need for experienced judges, not district judges. 
121 

So the first concern is what surprised me a little bit. You know, 

Dodd-Frank came upon us in 2010, the FDIC has been working on 

rules for single point of entry since then. So you have, you know, 

you believe regulators are going to be able to act more efficiently 

and quickly because of their experience than a bankruptcy judge? 

Particularly under section 298 we have one of the 10 experienced 

bankruptcy judges has been appointed for this purpose to deal with 

complex insolvency. I don’t know if I understand why you have 

more confidence in the ability of regulators to move quickly and 

react than a bankruptcy judge who essentially does it every day? 

Mr. LEVIN. I’ll tell you that the Conference had the view back in 

2009 and 2010 of great concern about the regulators being able to 

do what you just described. But I think we’ve all learned a lot in 

5 years, and the regulators have learned a lot. And we’ve watched 

them evolve in their thinking and learn and write regulations so 

they are in a much better position now to deal with this kind of 

circumstance than they would have been 5 or 6 years ago. But with 

that said, I want to go back to what I said in my opening statement. I think Subchapter V gives us the best of both worlds. 

The bankruptcy judge does not have enough knowledge about the 

company to be able to do it alone—the regulator—and does not 

have enough knowledge about the systemic affects of whatever is 

done. The regulators do not have the same process and remove that 

a bankruptcy judge has. And by combining the efforts of the two 

of them, I think you get a much better result than one alone. And 

this applies only to the resolution weekend and the transfer to the 

bridge. That’s where the important difficult decisions have to be 

made. After that happens, the bankruptcy judge is fully well qualified to handle all of the rest of the case. 

Mr. TROTT. Okay. Appreciate that clarification. Mr. Hessler made 

a comment about uncertainty as it relates to Title II. Mr. Levin, 

you made a comment, it will be many years before this perhaps 

even comes into play and we don’t know, you know, how things will 

play out and how soon the provisions will be interpreted. 

Would you agree with Mr. Hessler’s comments that the same can 

be said of Title II. 

Mr. LEVIN. Oh, yes, definitely. I mean there are parts of the 

Bankruptcy Code, Subchapter IV of Chapter 11 railroad reorganization is very rarely used, one case recently, nobody could have 

envisioned in 1978 what a Chapter 9 of Detroit might have looked 

like in 2013. So we have to think way into the future, and there’s 

going to be uncertainty whichever way we go. 

Mr. TROTT. Mr. Bernstein, so let’s say H.R. 2947 was in place 

and we have a Lehman type insolvency. Can you just discuss for 

a moment how that would have played out differently? 

Mr. BERNSTEIN. Yes. And this relates to Congressman Conyers’ 

question. I think if we had this bill, plus all the other changes that 

are being made in the resolution planning process, I think we 

would have had an extremely different outcome in Lehman Brothers. Lehman Brothers holding company would have filed, the subsidiaries would have been recapitalized so that they would have 

sufficient capital not to go into bankruptcy. 

The subsidiaries would have been transferred to a new bridge 

holding company. And the derivatives contracts importantly would 
122 

not have terminated, which would avoid enormous losses that 

would threaten the viability of those subsidiaries. So there wouldn’t 

have been the systemic disruption that occurred at the time of Lehman Brothers, which is very important. 

Mr. TROTT. So to that point I got delivered yesterday a copy of 

Hoover institute’s book on making failure feasible. I read their mission statement in terms of the resolution project. And it said if a 

clear and credible measure can be put in place that convinces everyone that failure will be allowed, then expectations of bailouts 

will disappear. If we get rid of the risk reducing behavior that are 

fostered by guarantees, then that would be a good thing. And then 

also a clear process to reduce panic, H.R. 2947 would have accomplished that in Lehman? 

Mr. BERNSTEIN. Yes, it would have. In fact, as you’ll see in that 

Hoover book, there are several chapters devoted to this type of single point of entry resolution and their conclusion is it would be 

very effective in that way. 

Mr. TROTT. It is a fascinating book, I’m not too far into it yet. 

But Mr. Hessler, one quick question, I am out of time. Ranking 

Member Johnson raised a concern about the funding. So back to 

Lehman, you know, the professional fees in Lehman were $2 billion, I believe. Can you just speak for a moment on funding concerns specifically as it relates to Ranking Member Johnson and this 

bill? 

Mr. HESSLER. Yeah, I think it is what Mr. Levin is hopefully 

clarifying for me. There are two funding questions at issue in Subchapter V proceeding. Upon the transfer of the assets to the bride 

company, it is the access to liquidity of the bridge company. 

Mr. TROTT. We’ve talked about that plenty. 

Mr. HESSLER. That’s not governed by Subchapter V because that 

is not in the jurisdiction of the bankruptcy. There is potentially the 

issue of for the purposes of finding the wind down—— 

Mr. TROTT. Do you have any concerns in that regard? 

Mr. HESSLER. No. There is regular DIP lending capacity and 

there that will be a significantly more limited funding need because 

what at issue the wind down of undesirable assets. That’s what’s 

happening in the Chapter 11 case upon single point of entry transfer. 

Mr. TROTT. Thank you, sir. 

Mr. HESSLER. Thank you. 

Mr. MARINO. The Chair now recognizes the Congresswoman from 

the State of Washington, Ms. DelBene. 

Ms. DELBENE. Thank you Mr. Chairman. Thanks to all of you for 

being here with us today. Some of my questions were asked already, but I just had a quick question for you Mr. Hessler on living 

will requirements and I just wondered what your thoughts were on 

this legislation in terms of whether or not it would help facilitate 

the Dodd-Frank living will requirements? 

Mr. HESSLER. I believe it will. I think the living will practices 

today have already begun to put in place the road map for what 

a Subchapter V proceeding would look like. And I think this is a 

point I want to augment that we’ve been talking how would Lehman have looked under a Subchapter V proceeding, and thus far 
123 

really all that we have focused on is what would the cause have 

looked have looked like once it’s filed. 

The one thing I’d want to mention to the Committee is from what 

we do in the vast majority of our work is spent preparing debtors 

for a soft landing into bankruptcy. So perhaps the most important 

consideration that I would urge lawmakers to keep in mind is with 

legislation what sort of incentives and disincentives does it put in 

place for directors and officers to confront restructuring challenges 

and begin to prepare and address those issues as early as possible. 

And this is something I talked about in my testimony. Title II 

has the provision that directors and officers are effectively all 

wiped out, the are all going to get fired and compensation is going 

to get clawed back and it’s sort of all types of punitive measures. 

I actually think that creates a disincentive for directors and officers 

to begin taking responsible actions that are otherwise necessary to 

maximize stakeholder recoveries in a bankruptcy. 

And so I think that’s a very important part in Subchapter V I 

think it very, very hopefully incentivizes management to begin to 

prepare for bankruptcy because it sees an orderly path forward to 

otherwise affect a resolution of a failing bank. 

Mr. LEVIN. We sometimes refer to what Title II does as requiring 

management to sign its own death warrant. 

Ms. DELBENE. Any other feedback on that one? 

Mr. BERNSTEIN. I think this bill would definitely facilitate structures already being used in the living wills of the largest financial 

institutions and I think that that is a very positive development. 

Ms. DELBENE. Thank you. Thank you Mr. Chair. I yield back. 

Mr. MARINO. Thank you, the Chair recognizes the gentleman 

from Texas, Congressman Radcliffe. 

Mr. RADCLIFFE. Thank you, Chairman. I would also like to thank 

my friend and colleague, the gentleman from Michigan, Congressman Trott for his work on this issue. 

The 2008 financial crisis hurt a lot of folks in Northeast Texas. 

And some of the families in my district are frankly still working 

to get back on solid financial footing. And I’ll be the first to admit 

that I’m not an expert on bankruptcy issues. But following that crisis I think it became obvious to all of us that these technical, complicated bankruptcy issues are having a huge impact on everyday 

Americans. And issues that impact everyday Americans are the 

ones that we as policymakers certainly want to make sure that 

we’re addressing. 

There were a lot of questions and frustrations that have come 

out of the financial crisis. For example, why did distressed financial 

firms receive government bailouts, instead of being forced to seek 

resolution through the bankruptcy process? Now I know in the 

years since this crisis this Committee has worked very hard to improve the Bankruptcy Code and make sure that it is equipped to 

handle all failing companies. I appreciate all of you witnesses being 

here today to provide your expertise on the proposed legislation. I 

want to find out whether it is in fact going to achieve its intended 

goal. 

So I want to kick things off by asking about a provision in the 

bill that would allow the Federal Reserve to initiate a bankruptcy 

case over the objection of a financial institution. 
124 

Now, a lot of folks in my district have a real distrust of the Federal Reserve. They see it as a dangerously powerful body, one with 

little oversights and little transparency. So if you gentleman were 

chatting with my constituents about possibly giving the Federal 

Reserve this new authority, how would you allay their concerns? 

And what would you tell them about how this new authority would 

help them? 

Mr. BERNSTEIN. Yes, there is a lot of uncertainty as a financial 

crisis develops and boards of directors may hesitate to act. I do not 

believe that the Federal Reserve will end up ever using the power 

if they are granted the power to file involuntary petitions, because 

the fact that the Federal Reserve can do it if it’s necessary will 

cause corporate managements to be very focused on when the right 

time to go into Chapter 11 is. And that, taken together with the 

living will process, I think the two together make it very unlikely 

it will ever be used. And it is really only a failsafe for a situation 

where the company management may be paralyzed at that time. 

That being said, I don’t think it is an essential part of this bill 

for the reasons that Mr. Levin stated, which is there are other supervisory powers that the Federal Reserve has. And the Federal 

Reserve is going to be intimately involved in the living will process, 

and they have been, so I think there is going to be a constant dialogue with the regulators and the financial institutions that make 

this provision almost unnecessary. 

Mr. RADCLIFFE. Mr. Hessler. 

Mr. HESSLER. Yeah, no, I would add to that. I think the involuntary provision is an unhelpful distraction to what is otherwise a 

very good bill. Already there are provisions in the Bankruptcy Code 

that provide creditors the express right to file an involuntary case 

against a debtor to commence an involuntary Chapter 15. Those 

are exceedingly rare and the reason they are is debtors are very 

aware of those creditor powers and they are usually already very 

engaged in dialogue with the creditors, debtors do not like to get 

tossed into bankruptcies on a timeline and terms that are not of 

their own making. So they will file voluntarily before involuntary 

can be initiated. I fully expect that’s what would happen here in 

the context of SIFIs, that they would be well aware of what Feds 

otherwise can do and even without the express involuntary rates, 

the Feds could probably force a bankruptcy anyway, and the company is going to file in advance of that so that it can maintain control of its own case. 

Mr. RADCLIFFE. Mr. Levin, anything you’d like to add? I will give 

you a chance. 

Mr. LEVIN. Nothing to add. The Conference agrees with both of 

those. 

Mr. RADCLIFFE. Terrific. Mr. Hessler, I spend a considerable 

amount of my time these days listening to constituents who have 

to deal with the immense burdens and expense of complying with 

Dodd-Frank. Personally I’d like to get rid of Dodd-Frank all together, but at the very least I would like to see us moving forward 

with respect to solving some of its challenges. 

So let me ask you this, in your opinion, would the bill before the 

Committee today reduce the necessity for regulators to initiate a 

Title II resolution proceeding under Dodd-Frank? 
125 

Mr. HESSLER. Yes, it would. I addressed it in my testimony and 

in my opening statement. I think the availability of Subchapter V 

will effectively render the need for a Title II unnecessary. 

Mr. RADCLIFFE. Mr. Bernstein, will you comment on that? 

Mr. BERNSTEIN. I agree, I agree with Mr. Hessler. 

Mr. RADCLIFFE. Thank you. I see that I’m out of time and I yield 

back. 

Mr. MARINO. Seeing no other Congressmen or women, this concludes today’s hearing. I want to thank the witnesses for attending, 

I want to thank our guests for attending. And each time I have an 

opportunity to listen to you gentlemen I learn something so thank 

you very much for today’s testimony. 

Without objection, all Members will have 5 legislative days to 

submit additional written questions for the witnesses or additional 

materials for the record. 

This hearing is adjourned. 

[Whereupon, at 11:30 a.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD
128 

Response to Questions for the Record from Donald S. Bernstein, Esq., 

Partner, Davis Polk & Wardwell LLP 
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130 
131 

f 
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Response to Questions for the Record from Stephen E. Hessler, Esq., 

Partner, Kirkland & Ellis LLP 
133 

f 
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Response to Questions for the Record from Richard Levin, Esq., 

Partner, Jenner & Block LLP 
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136 
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