TOO BIG TO FAIL: THE ROLE FOR BANKRUPTCY 

AND ANTITRUST LAW IN FINANCIAL REGULATION REFORM (PART I) 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

OCTOBER 22, 2009 

Serial No. 111–60 

Printed for the use of the Committee on the Judiciary 

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

TOO BIG TO FAIL: THE ROLE FOR BANKRUPTCY AND ANTITRUST LAW 

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TOO BIG TO FAIL: THE ROLE FOR BANKRUPTCY 

AND ANTITRUST LAW IN FINANCIAL REGULATION REFORM (PART I) 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

OCTOBER 22, 2009 

Serial No. 111–60 

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 

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO PIERLUISI, Puerto Rico 

MIKE QUIGLEY, Illinois 

JUDY CHU, California 

LUIS V. GUTIERREZ, Illinois 

TAMMY BALDWIN, Wisconsin 

CHARLES A. GONZALEZ, Texas 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California 

DEBBIE WASSERMAN SCHULTZ, Florida 

DANIEL MAFFEI, New York 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

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 ROONEY, Florida 

GREGG HARPER, Mississippi 

PERRY APELBAUM, Majority Staff Director and Chief Counsel 

SEAN MCLAUGHLIN, Minority Chief of Staff and General Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

STEVE COHEN, Tennessee, Chairman 

WILLIAM D. DELAHUNT, Massachusetts 

MELVIN L. WATT, North Carolina 

DANIEL MAFFEI, New York 

ZOE LOFGREN, California 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

JOHN CONYERS, JR., Michigan 

JUDY CHU, California 

TRENT FRANKS, Arizona 

JIM JORDAN, Ohio 

HOWARD COBLE, North Carolina 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

MICHONE JOHNSON, Chief Counsel 

DANIEL FLORES, Minority Counsel 

(III) 

C O N T E N T S 

OCTOBER 22, 2009 

Page 

OPENING STATEMENTS 

The Honorable Judy Chu, a Representative in Congress from the State of 

California, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 1 

The Honorable Steve Cohen, a Representative in Congress from the State 

of Tennessee, and Chairman, Subcommittee on Commercial and Administrative Law ........................................................................................................... 1 

The Honorable Trent Franks, a Representative in Congress from the State 

of Arizona, and Ranking Member, Subcommittee on Commercial and Administrative Law .................................................................................................. 3 

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

State of Michigan, Chairman, Committee on the Judiciary, and Member, 

Subcommittee on Commercial and Administrative Law .................................. 5 

The Honorable Jim Jordan, a Representative in Congress from the State 

of Ohio, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 9 

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

from the State of Georgia, and Member, Subcommittee on Commercial 

and Administrative Law ...................................................................................... 9 

WITNESSES 

Mr. Michael S. Barr, U.S. Department of Treasury 

Oral Testimony ..................................................................................................... 18 

Prepared Statement ............................................................................................. 20 

Mr. Michael Krimminger, Federal Deposit Insurance Corporation 

Oral Testimony ..................................................................................................... 26 

Prepared Statement ............................................................................................. 28 

Mr. Harvey R. Miller, Weil, Gotshal & Manges LLP 

Oral Testimony ..................................................................................................... 63 

Prepared Statement ............................................................................................. 64 

Mr. David Moss, Harvard Business School 

Oral Testimony ..................................................................................................... 95 

Prepared Statement ............................................................................................. 98 

Mr. Christopher Sagers, Cleveland-Marshall College of Law 

Oral Testimony ..................................................................................................... 105 

Prepared Statement ............................................................................................. 107 

Mr. David A. Skeel, Jr., University of Pennsylvania Law School 

Oral Testimony ..................................................................................................... 128 

Prepared Statement ............................................................................................. 130 

Mr. Robert Weissman, Public Citizen 

Oral Testimony ..................................................................................................... 140 

Prepared Statement ............................................................................................. 142 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, Chairman, Committee on the 

Judiciary, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 7 

Page

IV 

Prepared Statement of the Honorable Lamar Smith, a Representative in 

Congress from the State of Texas, and Ranking Member, Committee on 

the Judiciary ......................................................................................................... 11 

Prepared Statement of the Honorable Henry C. ‘‘Hank’’ Johnson, Jr., a Representative in Congress from the State of Georgia, and Member, Subcommittee on Commercial and Administrative Law ......................................... 12 

Material submitted by the Honorable Steve Cohen, a Representative in Congress from the State of Tennessee, and Chairman, Subcommittee on Commercial and Administrative Law ........................................................................ 13 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Material submitted by the Honorable Lamar Smith, a Representative in 

Congress from the State of Texas, and Ranking Member, Committee on 

the Judiciary ......................................................................................................... 162 

Material submitted by Michael S. Barr, U.S. Department of Treasury .............. 260 

Material submitted by Christopher Sagers, Cleveland-Marshall College of 

Law ........................................................................................................................ 319

Material submitted by Harvey R. Miller, Weil, Gotshal & Manges LLP ............ 329 

(1) 

TOO BIG TO FAIL: THE ROLE FOR BANKRUPTCY AND ANTITRUST LAW IN FINANCIAL REGULATION REFORM (PART I) 

THURSDAY, OCTOBER 22, 2009 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 11:05 a.m., in 

room 2141, Rayburn House Office Building, the Honorable Steve 

Cohen (Chairman of the Subcommittee) presiding. 

Present: Representatives Cohen, Conyers, Maffei, Johnson, Chu, 

Franks, Jordan, Coble, and King. 

Staff present: (Majority) Eric Tamarkin, Counsel; Adam Russell, 

Professional Staff Member; and (Minority) Daniel Flores, Counsel. 

Mr. COHEN. Thank you. Thank you. This hearing of the Committee on the Judiciary, Subcommittee on Commercial and Administrative Law will now come to order. 

Without objection, the Chair will be authorized to declare a recess of the hearing. Before I start I would like to recognize Ms. 

Chu, who is our new Member of the Subcommittee, and we welcome her to the Committee, and we would like to recognize you for 

any opening statement you would like to make or hear the Bruin 

fight song. 

Ms. CHU. Well, I am very pleased to join this Committee and to 

have this as my first Committee hearing, so thank you very much. 

Mr. COHEN. You are welcome, and we are honored to have you. 

I will recognize myself for a short statement. Today we meet to 

consider the critical question of whether the Administration has 

met its burden of demonstrating that the bankruptcy code should 

be set aside with respect to large, non-bank, financial institutions 

that are critical to the Nation’s financial system—too big to fail. In 

place of the regular bankruptcy process the Administration proposes that Congress grant enhanced resolution authority for such 

institutions, similar to the authority that the FDIC currently has 

with respect to banks. 

This Subcommittee has not yet formed an opinion on the merits 

of the Administration’s resolution authority proposal. Given, however, that this Subcommittee is charged with ensuring the effective 

functioning of the Nation’s bankruptcy system and the three-part 

system of government that we have had for 200-and-something 

2 

years, we take a keen interest in any move to go outside that system. 

Additionally, a resolution authority proposal raises some antitrust concerns that my distinguished colleague, Hank Johnson, the 

Chairman of the Courts and Competition Policy Subcommittee will 

probably address in more detail. I thank Chairman Johnson for his 

willingness to allow this hearing to take place before this Subcommittee for scheduling purposes. 

Proponents of enhanced resolution authority contend that the 

bankruptcy process is inadequate to handle insolvent but systemically important financial institutions. These proponents assert 

that bankruptcy law is too slow to address the imminent collapse 

of a systemically significant financial institution and that this lack 

of speed creates dangerous uncertainty in financial markets. Nevertheless, this is what the Constitution and the past statutes have 

dictated as the proper course. 

They also contend that the mere act of a bankruptcy filing by a 

large, interconnected financial institution could have a destabilizing effect on the financial system because markets and investors react very badly to news of such filings. Proponents of resolution authority point to the chaotic aftermath of Lehman Brothers’ 

bankruptcy filing as well as the ad hoc government financial assistance given to AIG to avert its imminent collapse. They maintain 

that what transpired served as proof that resolution authority for 

non-bank financial institutions in financial trouble is needed to 

provide a mechanism for the orderly restructuring, sale, or liquidation of such entities. 

In response there have been some criticisms leveled at the proposed resolution authority. The President’s critics contend that 

granting resolution authority to those financial firms deemed to be 

systematically significant may be interpreted as a guarantee of a 

future government bailout should those firms run into financial 

trouble, thereby encouraging continued irresponsible risk-taking by 

such firms. 

Others, including Harvey Miller, one of our distinguished panelists, Lehman’s bankruptcy council, note that some tweaks—with 

some tweaks the bankruptcy code is perfectly capable of dealing 

with insolvencies of systematically important, non-bank financial 

institutions. Additionally, according to Mr. Miller, the creation of a 

new resolution regime may, in fact, raise a host of transparency 

and due process concerns, all of which have constitutional issues 

involved. 

A resolution mechanism independent of bankruptcy, if carefully 

crafted to avoid the creation of moral hazard and with sufficient 

elements of transparency and due process might be an effective 

way to save the systematically important institution, or also creating a means of orderly wind-down, should that be necessary. 

The burden remains with the proponents of the resolution authority, however, to demonstrate to the satisfaction of Congress 

and this Subcommittee, in particular, that the bankruptcy system 

truly does not offer such a mechanism already with respect to nonbank financial institutions and that any actions of this creation 

would not violate constitutional authorities that have long held this 

3 

country in great esteem and which are the basis of our oath of office. 

I hope that this Subcommittee, which is charged to oversee the 

Nation’s bankruptcy system, can gain some useful insight from our 

witnesses as it considers the merits of the resolution authority proposal. Accordingly, I look forward to receiving today’s testimony. 

I now recognize my colleague, the distinguished Ranking Member of the Subcommittee, Mr. Franks, for his opening remarks. 

Mr. FRANKS. Well, thank you, Mr. Chairman. You know, Mr. 

Chairman, I know in many areas of this Committee, just the nature of the Committee means that we often have starkly different 

perspectives, and I am sure that there are going to be some of 

those things exhibited here today, but I want you to know that I 

appreciate you for holding this unusually important hearing. 

I want to salute you for your leadership and that of the Chairman of the full Committee, because I really sense that there has 

been an effort to try to get at what is right rather than who is right 

here, and I am really grateful for that. And now I have to make 

a statement that seems to completely countermand everything I 

just said, but it doesn’t change the sincerity of it in any—— 

Mr. COHEN. You don’t have to do that. 

Mr. FRANKS. Mr. Chairman, on the Judiciary Committee we, as 

I said, often grapple with issues that are among the most important in Congress, but even among those matters the issue today is 

singularly important. The question is, how will Congress respond 

to the near financial meltdown of 2008? 

That crisis vaporized trillions of dollars in Americans’ wealth. 

Through our globally interconnected economy it affected people all 

across the world. The wisdom of the Federal response to date still 

hangs in the balance. 

Second guessing over the choices the executive branch and the 

Federal Reserve have made, particularly in September 2008, will 

of course continue for decades. But, Mr. Chairman, we don’t really 

have the luxury of waiting for decades for those details to be manifested and sifted by time. Another crisis may come before we know 

it. 

So we must choose. We must ask ourselves, what reforms should 

Congress press to guard the Nation against future calamity? And 

to help with that decision, Mr. Chairman, you have called this 

hearing, and once again I commend you for that. 

Now, on what basis should we make this choice? I believe the answer is fairly clear: Unless we understand what triggered the crisis 

we cannot hope to answer it with the right reform or solution. And 

if we don’t answer it with the right reform we may only launch the 

Nation toward the next crisis. 

What, then, caused the financial crisis of 2008? And boiled down 

to the simplest answer, in my sincere opinion the answer is fairly 

straightforward: It was human errors of judgment in our government when faced with the choice of whether and how to intervene 

in our economy. 

Beginning in the 1990’s and continuing into this decade, Washington laid the conditions for financial disaster. Through the Community Reinvestment Act and its implementing policies our Federal Government fueled an unsustainable housing bubble. 

4 

Responding to government rules, government pressure, and easy 

Federal monetary policy, our financial system spread the bubble’s 

risk throughout our economy and the world. It did so through riskladen mortgages and secure ties to mortgage instruments that were 

built from and upon them. 

In 2008 and 2007 the piper, unfortunately, came to call. As economic conditions deteriorated institutions realized that vast majority of vast mortgage-related instruments they held might not be 

worth the paper upon which they were written. 

Financial institutions holding or responsible for insuring these 

interests were exposed to being called to honor debts they simply 

couldn’t pay. In response, they hoarded their capital. Lending 

began to freeze up and the financial system began to grind to a 

halt. 

As the crisis intensified, the government of the Treasury—the 

government, the Treasury, and the fed took upon themselves the 

unprecedented step of bailing out Bear Stearns. The market took 

note and began to believe the government would bail out any institution that was as large or larger. 

When Lehman Brothers hung on the brink in September of 2008, 

the Treasury and the fed refused to bail them out. Now this, obviously—that expectation was dashed at that point. When Treasury 

and the fed reversed course days later to bail out American International Group, dashed expectations then changed to widespread 

confusion. 

Then, when the Treasury and the fed declared that the financial 

system was on the verge—the edge, as it were—of the abyss and 

ran to Congress with only a two-and-a-half-page outline of a rescue 

plan, full-blown panic began to ensue. And we still, of course, are 

trying to recover to this day. 

Now, the Obama administration proposes in response to revamp 

our system for resolving failing financial institutions like Bear 

Stearns, Lehman, and AIG. But instead of responding to what actually happened in 2008, the Administration rests on the myth that 

Lehman’s insolvency and the simple need to deal with it in bankruptcy triggered the entire crisis, and acting on the myth, it would 

take the largest non-bank financial institutions out of the bankruptcy system, create a new authority for Federal agencies to intervene with them, and let those agencies—like the Treasury and the 

fed did in 2008—decide who survives and who does not. To fund 

the endeavor it gives the agencies a new bailout checkbook. 

Now, Mr. Chairman, I really believe that this is a recipe for supercharging the disaster. It institutionalizes vulnerability to 

human error in the executive branch. It institutionalizes the temptation for large firms to take excessive risks, banking on government bailouts. And it concentrates risks in those same institutions 

by encouraging their consolidation and extending the competitive 

advantage of a safety net smaller firms will simply not have. 

Mr. Chairman, that is exactly the wrong direction in which to 

lead this country. It is imperative that we on the Judiciary Committee press for the clear alternative option: strengthening the 

bankruptcy code so that fair, transparent, and impartial courts can 

be relied upon without question to resolve these firms’ insolvencies. 

5 

Precisely that option is embodied in H.R. 3310, in which I join 

Ranking Member Smith as a cosponsor. Now, I look forward to discussing the bankruptcy option in depth with you today and to 

working together on the right path forward for America. 

And thank you, Mr. Chairman, for your indulgence. 

Mr. COHEN. Thank you, Mr. Franks, and thank you for your 

working with us on this. I was surprised you didn’t have the section we agreed on, that ACORN was not going to be able to use 

this resolution authority at any time in the future. 

Mr. FRANKS. I forgot that. We will get her in there. 

Mr. COHEN. Right. And no abortions will be provided either. 

Mr. FRANKS. Absolutely. 

Mr. COHEN. That is right. 

I now recognize the Chairman of the Committee, the distinguished Chairman from the State of Michigan and the city of Detroit, the Honorable John Conyers, for an opening statement. 

Mr. CONYERS. Thank you, Chairman Cohen. We are privileged to 

have the distinguished panelists—the witnesses that are coming to 

help guide our discussion this morning. We are very pleased to 

have them both here—Mr. Barr, Mr. Krimminger, and the others 

that are coming afterward. 

You know, Jim Jordan and I are in a very similar situation. As 

representatives of Ohio and Michigan we have been particularly 

hard hit by this downturn, and I want Trent Franks to know that 

we are looking very carefully at H.R. 3310. 

And I would like to meet with you about it as soon as my staff 

has digested all of the intricacies of that measure. And I thank you 

for bringing it forward. 

Last fall, our Nation’s economy was on the edge of a financial 

meltdown. There is some that say we still are. I mean, this is not 

like a piece of history that has gone by and now everything is okay. 

What caused the crisis was the mistaken belief shared by Republican and Democratic administrations in the past that the financial 

industry could be relied upon to regulate itself without significant 

government oversight. We had to learn this painfully before in 

1929, which ended the Roaring ’20’s and ushered into a depression 

that has never been comparable to anything else our economic system has sustained. 

In an oversight hearing last fall, our former colleague, then the 

SEC chairman, Chris Cox, finally admitted that voluntary regulation doesn’t work. Well, that is wonderful, Chris. We had to take 

a nation to the edge and we made this profound economic discovery. 

At the same hearing was the distinguished Alan Greenspan, who 

made a similar confession—admission—that you can’t rely upon 

the industry to police itself. Well, that is wonderful. He apologized. 

Who can you really, seriously rely on to police itself, anyway? 

Now, instead of demanding change from the financial industry and 

insisting that it work cooperatively with the regulators, we in the 

legislature did something amazing: We turned around and gave— 

and this was a string of multibillion dollar bailouts—we gave the 

first one at $700 billion. 

6 

Taxpayer funded, no strings attached, no requirement to even explain what you did with the money. $700 billion. Well, thanks, 

Chairman Paulson. 

I voted no on it too, Trent, and it is now a part of American history. 

He summoned the leaders of the Senate and the House into that 

room at night and laid down three sheets of paper and said, in effect, the following: Sheet one, I want new Treasury powers never 

before given to a treasury secretary in history—that is me, he said. 

Sheet two, I want $700 billion right now. And sheet three, if you 

can believe the arrogance, he said this sheet requires that there be 

no review in the courts or even the Congress over what we are 

doing. 

Do you know, they signed that? This is what started us off. 

And so the financial system, from this humble perspective, was 

temporarily stabilized on the backs of the American taxpayer. Your 

kids will be paying for that and they will be saying, ‘‘Hey Dad, why 

did you guys do that?’’ 

‘‘Well, we were at the edge. Don’t you know, the whole system 

was going to fall. We had to. We didn’t have any choice.’’ 

In the meantime, we said, now, would you folks hold up on the 

bonuses? They said, ‘‘We can’t. We are contractually obligated to 

reward the people that have driven us to the edge of the precipice—$1 million bonuses, at that.’’ 

And so most of the institutions that caused the crisis—many of 

them—shared in the bailout and are now working against the proposals of consumer protection and efforts to crack down on predatory and abusive lending practices, and also any additional regulatory oversight, while we are at it. I mean, let us continue business as usual. 

And at the same time, the money is still drying up at the bottom. 

You still can’t get loans. You still can’t get—the credit is stuck. 

People with good credit cannot get small business loans right this 

minute, after trillions of dollars have been shoveled out. 

And as the Troubled Asset Relief Program oversight panel reported, nearly—right now—2 million homes have already been lost 

to foreclosure in the United States. Five million mortgages are either in foreclosure or default. And the panel predicts another 10 

million homes can or could be lost to foreclosure. 

In Detroit, in the County at Wayne—I had to check the figure 

just now—it was 147 families every day go into foreclosure—they 

are served with eviction. It said here on my remarks 195, so I 

turned to Attorney Tamarkin. I said, ‘‘195? It is 147.’’ He said, ‘‘It 

has gone up.’’ 

Every day, Monday through Friday, every week, 195 families in 

my city are served with eviction or foreclosure notices because they 

are behind in their mortgage payments. And so what the Committee on Commercial Administration Law is doing here today is 

raising the question of, how can we return fairness to the economy 

and how can we unwind out of this insolvency that surrounds financial institutions and how we can get the credit flowing again in 

our Nation, not just my state or Jim’s state, across the country? It 

is not much different—it may not be as bad as we are getting hit. 

7 

These massive financial institutions—this was caused—yes, the 

government should take some of the blame, but the government 

didn’t plan the risky, risky, unregulated credit transactions that 

they dreamed up with exotic instruments. 

And here is, Trent, where the government does kick in. We came 

up with a theory that you are too big to fail. Why do you have to 

give these people that caused the problem taxpayer money? 

Well, Chairman, they are too big to fail. You have got to do it. 

Well, I think that theory has been reexamined much more carefully. And then we hastily arrange a merger for Bear Stearns, but 

we said, ‘‘Oh, Lehman Brothers, let them go.’’ And then turned 

around and hand $180 billion cash infusion to AIG. 

And since you had to be big and powerful to get on the preferred 

treatment list, small banks failed at a rate not since seen since the 

savings and loan crisis in the 1980’s while the 19 largest banks in 

the country were all deemed too big to fail. And I want our witnesses to comment on these theories that Chairman Cohen and 

Trent Franks and I have put forward. 

And what did some of the big boys do? They bought out the 

healthy small banks. They had enough money, thanks to us, to go 

out and buy the biggies—to go out and buy the little ones. 

Well, I will put the rest of my statement into the record and I 

thank the Chairman for his generously allowing me to take this 

time. 

[The prepared statement of Mr. Conyers follows:] 

PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN, CHAIRMAN, COMMITTEE ON THE JUDICIARY, AND MEMBER, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

Last fall, our Nation’s economy was on the edge of a financial meltdown. What 

essentially caused this crisis was the mistaken belief shared by past Administrations—both Republican and Democrat—that the financial industry could be relied 

upon to regulate itself without significant government oversight. 

Unfortunately, the lessons our Nation had painfully learned in the market crash 

of 1929, which ended the Roaring 20s and ushered in the Great Depression, were 

forgotten over the intervening years. 

At an oversight hearing last fall on the financial meltdown, the then SEC Chairman finally admitted that ‘‘voluntary regulation does not work.’’ 

Also testifying at that same hearing was former Federal Reserve Chairman Alan 

Greenspan, who likewise admitted he made a ‘‘mistake’’ in relying upon the industry 

to police itself. 

But, instead of demanding change from the financial industry, and insisting that 

it work cooperatively with the regulators, Congress gave the industry a $700 billion 

taxpayer-funded, no-strings-attached bailout. 

And with the financial system now stabilized on the backs of the American taxpayer, Wall Street is poised to hand out another round of hefty bonuses. 

Meanwhile, most of the institutions that caused the crisis and then shared in the 

bailout are working against the Obama Administration’s consumer protection proposals to crack down on predatory and abusive lending practices. 

Many of these same institutions have been woefully slow in granting reasonable 

mortgage modifications to struggling homeowners facing foreclosure, while strenuously opposing my legislation to allow market-based judicial modification of mortgages. 

As the TARP Congressional Oversight Panel reported earlier this month, nearly 

2 million homes have already been lost to foreclosure, and more than 5 million mortgages are either in foreclosure or default. The Panel predicts another 10 to 12 million homes could be lost to foreclosure. 

Let me put these numbers in some perspective. In my district, about 195 homes 

in Wayne County, Michigan are being foreclosed or entering into the foreclosure 

process each day. 

8 

With this worrisome backdrop, I am pleased that the Commercial and Administrative Law Subcommittee is considering how we can return fairness to the economy, 

and find ways to unwind insolvent financial institutions that present a systemically 

significant risk to our Nation’s economy. 

These massive institutions were allowed to precipitate an economic meltdown 

with their risky and largely unregulated credit transactions, then were all-too-often 

sheltered from the consequences of their behavior as ‘‘too big to fail.’’ 

The last Administration took an ad hoc response. They financed a hastily-arranged merger for Bear Stearns, then let Lehman Brothers collapse into bankruptcy, then handed a $180 billion cash infusion to mega-insurer AIG. 

Since you had to be big and powerful to get on the preferred treatment list, small 

banks failed at a rate not seen since the savings and loan crisis in the 1980s, while 

the country’s 19 largest banks were all deemed too big to fail. 

FDIC Chairman Sheila Bair recently testified that big banks were able to use 

their size and reach to essentially ‘‘blackmail’’ the government. 

The ironic result is even bigger banks, in an even more concentrated financial 

market. 

So the Obama Administration’s resolution authority proposal is a welcome response to the ad hoc approach and the financial blackmail. 

It is a welcome response to the perverse incentives for too-big-to-fail entities to 

take on excessive risk, yet avoid moral hazard. 

It promises to provide a practical mechanism to allow systemically significant 

companies to fail, while managing the ripple effects. 

We can all agree that the current ad hoc system, where the American taxpayer 

is used as a backstop for too-big-to-fail corporations is not working. 

However, as we consider next steps, the first question we have to answer is 

whether the Administration’s resolution authority proposal is the best approach for 

addressing insolvent systemically significant nonbank financial institutions, or 

whether the Bankruptcy Code can be amended to handle failures of these institutions. 

The Lehman bankruptcy, the largest in U.S. history, has been cited as the primary rationale for the need to create a new resolution authority. 

Some have argued that bankruptcy procedure is too slow in the time of a fastmoving financial crisis. They have also argued that the bankruptcy process is 

‘‘messy,’’ and has a destabilizing effect on markets and investor confidence. 

They have supported a resolution regime largely modeled on the FDIC’s current 

authority to resolve failed depository banks. 

Others maintain that the Lehman bankruptcy demonstrated that the bankruptcy 

process has unique flexibility that makes it better equipped to handle resolution of 

these companies. 

With a few tweaks, they say, the bankruptcy system can handle the resolution 

of nonbank systemically significant financial institutions far better than an FDIC 

model. 

I hope that our witnesses today will help Committee members better understand 

which approach would be the more effective. 

Second, if Congress decides to pursue the Treasury’s resolution authority approach, we should ensure that antitrust considerations are given their full account, 

so that the problem of institutions becoming too big to fail doesn’t just get worse, 

with larger institution, less competition, and higher prices to consumers. 

The Administration’s draft resolution authority legislation would vest the FDIC 

and SEC with authority to seize and resell the assets of certain business entities. 

However, the draft proposal is unclear about the role of antitrust oversight by the 

Justice Department and the Federal Trade Commission. 

In an environment where a few banking giants are dominating the market, it is 

important that we keep the antitrust laws at the forefront. 

Third, if Congress decides that the bankruptcy process is the better course, then 

we must revisit which aspects of the Code should be amended to provide a better 

framework to deal with institutions too big to fail. 

For example, we should scrutinize the use of the netting and safe harbor provisions, which were inserted into the Bankruptcy Abuse Prevention and Consumer 

Protection Act of 2005 at the behest of financial industry associations. 

These provisions created a safe harbor that put derivatives, swaps, and securities 

transactions beyond the jurisdiction of the bankruptcy court. 

Giving banks and brokers a free hand to offset mutual debts against each other 

through netting might sound like prudent risk management, it has been described 

as ‘‘chaotic’’ in practice, as evidenced by the Lehman case. 

On the day before its Chapter 11 bankruptcy filing, Lehman utilized the netting 

provisions to offset various financial contracts it had outstanding. 

9 

Instead of resolving these financial contracts in a transparent manner under the 

framework of the Bankruptcy Code, Wall Street conducted a private trading session 

without any oversight. During this session, Lehman’s assets were ravaged by its 

creditors. 

We remain at a momentous crossroads in our economic recovery—the big banks 

propped up by the taxpayers are back to prosperity, but everyone else has been left 

behind. 

I commend the collaboration between Commercial and Administrative Law Subcommittee Chairman Steve Cohen and Courts and Competition Policy Subcommittee 

Chairman Hank Johnson in putting together an important and thought-provoking 

hearing, and I look forward to the testimony. 

Mr. COHEN. Thank you, Mr. Chairman. Your remarks are always 

welcomed. 

And before I recognize my fellow Chairman, I think the opposite 

end of the Big 10 axis here, Michigan, Ohio State should be recognized for a statement. Mr. Jordan? 

Mr. JORDAN. I thank the Chairman. 

Thank the Chairman of the full Committee for his comments 

about the economic situation in the Midwest and Ohio and Michigan, and frankly across the country. 

Let me just make this point: As the Chairman was going through 

the history of the TARP program, I do think it is important to remember, as well, that, you know, we gave this unprecedented authority to the government and the results have not been what we 

expected, not been—well, I guess some of us maybe expected, those 

of us who voted against it. 

But think about what took place. That whole package was sold 

to the United States Congress that they were going to get this 

money and go in and purchase the troubled assets, free up the dollars that need to be put to use right now in our economy. And to 

date, they still haven’t purchased the first troubled or toxic asset. 

In fact, I would almost argue that—and we had hearings on this 

in another Committee—that when the program was sold to the 

Congress of the United States you wonder if there was any misleading going on, because 9 days after—this came out in testimony 

during the Bank of America hearings—9 days after the program 

passed the Treasury and the fed had already changed directions 

and simply went to injecting capital into these institutions. 

And so I would be concerned about any new power we start giving to government in light of what took place in that whole scenario, which I think was just a wrong move and the wrong kind 

of approach to a tough situation we had to deal with last year. 

And with that, Mr. Chairman, I would yield back. 

Mr. COHEN. Thank you, Mr. Jordan. I appreciate your remarks. 

We have got votes but we have got time for the opening statement from the Chairman of the Committee that has been so kind 

to work with us today, Mr. Johnson, of Georgia. 

Mr. JOHNSON. Thank you, Chairman Cohen. Thank you for holding this important hearing. And I am glad that this Committee is 

taking the opportunity to look at the role of bankruptcy reform in 

financial regulatory reform. 

And I think one of the things that I am most proud of as a congressman in my sophomore term is my vote against the Wall Street 

bailout, also known as the TARP program. And the reason why I 

10 

voted against it was because yes, I felt that there was a—our economy was freefalling, but I thought that the best way of addressing 

the issue was to start not on Wall Street but on Main Street. 

Main Street needed the bailout. So many people suffering from 

foreclosure, suffering from medical bills that they could not pay, so 

many people had already lost their jobs, and I thought that we 

could put together a package that would help those people. And 

then once Main Street was stabilized, then we could address some 

concerns about Wall Street. 

Used to be, in the old days I guess, that you preside over a company, you make billions of dollars in profit, and if something goes 

wrong your company goes into bankruptcy and your leadership resigns or is fired, either one. But that process was usurped by a new 

process in this Wall Street bailout situation. The very people who 

led us to impending doom were allowed to remain on board of their 

companies, continue to lead their companies, while at the same 

time they were given taxpayer money with no strings attached. 

And with that money, instead of cleaning up toxic assets, cleaning up balance sheets, and getting rid of toxic paper, as it was 

called—and that would have, by the way, cleaning up that toxic 

paper probably should have entailed the Main Street stopping the 

foreclosures. That was what made the securities in which they 

were bundled valueless. 

And so it was when people figured that out that, you know, we 

started to have these failures of these financial institutions. And so 

we didn’t handle the $700 billion sudden request very well, in my 

opinion, and that is why I am proud of not having voted in favor 

of that. 

And I will say that as Chairman of the Subcommittee on 

Courts—by the way, still find folks who made the billions of dollars, millions of dollars individually, presiding over the industry 

and its big players are the same people that are now prospering 

from the $700 billion that they have been given relatively few 

strings and in some cases no strings attached. And then, instead 

of buying up the toxic paper and doing the—clearing out balance 

sheets and that kind of thing, they used the money to acquire 

smaller entities, smaller financial entities. 

So now it is like you have got three big great white sharks swimming in a body of water that is not that great and then all of the 

lesser fish, you know, they are getting ate up, or eaten up with 

reckless abandon. And it doesn’t look good long-term for the great 

white sharks because they won’t have any food to eat if they keep 

going at this pace. 

And what they need is to be regulated, but not by a new entity. 

The bankruptcy laws, I believe, and—in other words, you fail, you 

file bankruptcy, you resign, you get terminated. Company then either comes back or it is permanently dead, liquidated. 

And as Chairman of the Subcommittee on Courts and Competition Policy I consider the competition aspect or the antitrust aspect 

to be of great national importance. In fact, my Subcommittee held 

a hearing on this ‘‘too big to fail’’ issue, which we have multiplied 

now with the $700 billion bailout. We had a hearing on that and 

in that hearing we looked at whether antitrust laws should have 

prevented these ‘‘too big to fail’’ institutions from becoming so big 

11 

and whether antitrust law was sufficient to review the competitive 

implications of the ongoing consolidations of the banking industry. 

And to make a long story short, I want to—I look forward to 

hearing the testimony today from those pro and con as to this new 

entity that is being proposed. And I thank Chairman for this time. 

Mr. COHEN. I thank Mr. Johnson. 

Before we leave—adjourn—for about 35 minutes I want to recognize and accept the statement into the record, Mr. Lamar Smith. 

That will be done without objection. We will return in about 35 

minutes, and we are in recess. 

[The prepared statement of Mr. Smith follows:] 

PREPARED STATEMENT OF THE HONORABLE LAMAR SMITH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TEXAS, AND RANKING MEMBER, COMMITTEE ON THE

JUDICIARY

The 2008 financial crisis riveted the world’s attention on America’s federal response to large, insolvent financial institutions. This response lurched from Bear 

Stearns to Lehman Brothers to AIG as one linchpin after another failed in our financial system. 

Led by the Treasury Department and the Federal Reserve, the reaction to the crisis was driven by fear of a systemic, financial meltdown. Treasury’s and the Fed’s 

interventions, however, were hardly helpful. They were ad-hoc, inconsistent and left 

the federal government with unprecedented ownership of banks, insurance companies and other major institutions. 

With the benefit of hindsight, few would say that the strategy Treasury and the 

Fed adopted ought to be repeated today. America needs to put in place a better 

strategy to address the next crisis, if one comes. 

Before Congress acts, however, we must understand two issues clearly—what 

caused the 2008 crisis and what corresponding strategies may help prevent a future 

financial meltdown. 

Many assume that it was the bankruptcy of Lehman Brothers that triggered the 

worst of the panic. As a result, some commentators advocate that we should not look 

to the Bankruptcy Code to deal with similar institutions in the future. 

As the committee with jurisdiction over the Bankruptcy Code, the Judiciary Committee has a responsibility to dispel this myth. 

Leading economists and academics have concluded that it was not Lehman Brothers’ bankruptcy that caused the panic. Instead, the actions of government were at 

the root of the crisis. 

An eminent Stanford University economist has pinpointed the immediate cause 

of the panic. It was not Lehman’s bankruptcy filing—the market absorbed that 

event. 

Instead, it was Treasury’s and the Fed’s subsequent actions that signaled to investors that the government anticipated a market collapse, but did not yet have an 

adequate plan of action. 

First, Treasury and the Fed hastily announced a broad financial rescue package 

without revealing the details. Then, their officials appeared before Congress and demanded $700 billion with no more than an initial sketch of their legislative plan. 

Though Congress criticized the plan and demanded more details and oversight 

protections, the Administration urged Congress to act immediately to prevent a collapse of America’s financial institutions. 

In a self-fulfilling prophecy, it was only after the Treasury and Fed spun everyone 

up into a panic that the market, indeed, panicked—not after Treasury’s and the 

Fed’s earlier decision to let Lehman Brothers go into bankruptcy. 

The government’s inconsistent treatment of Bear Stearns and AIG—which it 

bailed out—and Lehman Brothers, which it did not—added to the uncertainty that 

gripped the market, while underscoring the flawed approach of ad hoc government 

intervention decided behind closed doors. 

Finally, of course, other government distortions of the market, from the Community Reinvestment Act to Fannie Mae and Freddy Mac and on, helped produce the 

2007–2008 credit crisis that set the stage for panic. 

The lesson of this history is not that America should avoid the Bankruptcy Code 

as a means to resolve failed financial institutions. It is that America should renounce government authority that lets federal agencies and government employees 

determine who lives and dies in our economy. 

12 

H.R. 3310, House Republicans’ Consumer Protection and Regulatory Enhancement Act, takes both of these lessons to heart. It brings an end to billion dollar bailouts and establishes a new chapter of the Bankruptcy Code to resolve failed financial institutions other than banks. 

Through its bankruptcy reforms, H.R. 3310 keeps the resolution of these firms in 

the transparent, predictable and fair arena of the bankruptcy courts. 

It removes these cases from the closed-door world of government agencies and 

prevents back-room political favoritism towards struggling institutions. And it adds 

special provisions to better handle the bankruptcies of financial institutions so all 

that is possible to avert future crises may be done. 

The Obama Administration has a different proposal, which only threatens to hasten our next crisis. The Administration institutionalizes billion dollar bailouts and 

the idea that some firms are ‘‘too-big-to-fail.’’ Its special treatment of the biggest 

firms gives them competitive advantages, consolidates excessive risk-taking and lays 

the groundwork for the next meltdown. 

And, once again, the Administration mistakenly gives government agencies—and 

the political appointees who head these agencies—the power to determine who survives. 

Rather than abandon our bankruptcy system, Congress should strengthen it. 

[Recess.] 

Mr. COHEN. This is not working—there it goes. Good. Good. 

We are back, and if any other Member would like to have an 

opening statement entered in the record, so will be allowed and 

have 5 days to enter that statement. 

[The prepared statement of Mr. Johnson follows:] 

PREPARED STATEMENT OF THE HONORABLE HENRY C. ‘‘HANK’’ JOHNSON, JR., A REP- RESENTATIVE IN CONGRESS FROM THE STATE OF GEORGIA, AND MEMBER, SUB- COMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

Chairman Cohen, Thank you for holding this important hearing. I am glad that 

CAL is taking the opportunity to look at the role of bankruptcy reform in financial 

regulation reform. 

As Chairman of the Subcommittee on Courts and Competition Policy, I consider 

this an issue of national importance. In fact, I held a hearing on the ‘‘too big to fail’’ 

issue, from a competition perspective, in March 2009. 

In that hearing, we looked at whether antitrust law should have prevented theses 

‘‘too big to fail’’ institutions from becoming so big and whether antitrust law was 

sufficient to review the competitive implications of the ongoing consolidations of the 

banking industry. 

In fact, these proposals raise competition concerns because they would give the 

FDIC and the SEC the authority to seize and resell the assets of business entities. 

Compounding the problem is that the seizures would not be subject to any specific 

competitive review; in fact competition concerns are only one of several factors. 

The agencies are directed to focus on keeping the market stable which could actually harm competition in the banking industry in the long run. 

DOJ, the experts in evaluating mergers, is only given an advisory role and it is 

unclear whether DOJ will be able to challenge these transactions after the fact. 

Our economy remains unstable. Hundreds of billions of taxpayer dollars have 

been spent and will be spent trying to revive our economy. Congress must act in 

conjunction with the Administration to help America recover. 

But we must be cautious that we do not allow our antitrust laws to be trampled 

on in our attempt to fix the economy. If we do, we may face additional problems 

down the line. 

I yield back the balance of my time. Thank you. 

Mr. COHEN. We have a letter that we have received from—to Mr. 

Conyers—from Mr. Bernanke concerning this subject matter, and 

he has a different approach than several of the opening statements 

concerning the need for some type of resolution authority for the 

financial systems, and I will enter the letter in the record as delivered; he is unable to attend. 

13 

[The information referred to follows:] 


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Mr. COHEN. Unlike everybody else, I think, that is here, I voted 

for the TARP, but the continued egregious and—conduct of the 

companies that received it in getting these bonuses so that Mr. 

Johnson’s fish can be served at Masa and Nobu and be consumed 

through their salaries does make it difficult to continue to support 

such actions. But the letter will be admitted. 


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I would like to thank all the witnesses for participating in today’s 

hearing. Without objection, your written statements will be placed 

into the record and we would ask that you limit your oral remarks 

to 5 minutes. 

You will note we have a lighting system that starts with a green 

light. At 4 minutes it turns yellow, and then red at 5 minutes. 

When it gets to red you should have concluded your remarks or be 

wrapping them up. After you have presented your testimony Subcommittee Members will be permitted to ask questions, again with 

the 5-minute limit imposed. 

I am pleased to introduce our first witness, Mr. Michael Barr. 

Mr. Barr was confirmed by the United States Senate on May 21 

to serve as the Department of the Treasury’s Assistant Secretary 

for Financial Institutions. As such, he is responsible for developing 

and coordinating Treasury’s policies on legislative and regulatory 

issues affecting financial institutions. 

Mr. Barr previously served during the Robert Rubin Treasury period as a special assistant and a special advisor to President Clinton, as an advisor and counselor on the staff at the State Department as well, and as a law clerk to the esteemed U.S. Supreme 

Court Justice David Souter, who I think the world of. 

Thank you, Mr. Barr. Will you proceed with your testimony? 

TESTIMONY OF MICHAEL S. BARR, 

U.S. DEPARTMENT OF TREASURY 

Mr. BARR. Thank you, Chairman Conyers, Chairman Cohen, 

Ranking Member Franks, Members of the Committee. I appreciate 

the opportunity to testify today. 

Just over a year ago the collapse of Washington Mutual, 

Wachovia, Bear Stearns, Lehman Brothers, and the extraordinary 

intervention in AIG severely tested our ability to respond to the financial crisis. In the panic that followed, our financial system nearly ground to a halt and the crisis revealed deep weaknesses in our 

financial system. 

I want to begin today by briefly outlining how President Obama’s 

comprehensive approach addresses the challenge of those firms 

whose failure could threaten the stability of the financial system 

and then focus on the Administration’s proposed resolution authority. 

In recent decades we have seen the growth of—significant growth 

of large, highly leveraged, substantially interconnected firms. 

These firms benefitted from the perception that the government 

could not afford to let them fail. 

Of course, during the financial crisis the Federal Government did 

stand behind many of these firms. That action was necessary, but 

there is no question that unless we act meaningful reform of our 

financial system the problem will have been made worse. We must 

end the perception that any firm is too big to fail. 

First, the biggest, most interconnected firms must be subject to 

serious accountable, comprehensive oversight and supervision. Second, we need tougher standards. The largest, most interconnected 

firms should face significantly higher capital and liquidity requirements. Through tougher prudential regulation we aim to give these 

firms a positive incentive to shrink, to reduce their leverage, their 

19 

complexity and their interconnectedness, and we aim to ensure 

that they have far greater capacity to absorb their own losses when 

they make mistakes. 

We need to make clear that being among the largest, most interconnected firms does not come with any guarantee of support in 

times of stress. Indeed, the presumption must be the opposite. 

Shareholders and creditors should expect to bear the cost of failure. 

That presumption needs to have real weight. That means the financial system itself must be stronger and made more able to handle the failure of any financial firm. In this last crisis it was not. 

And as part of our proposal we have also called for firms to prepare what have been called living wills, a credible plan for their 

rapid resolution in the event of distress. This requirement will 

leave us better prepared to deal with the firm’s failure and will 

provide another incentive for firms to simplify their organizational 

structures and improve risk management. 

By building up capital and liquidity throughout the system, by 

increasing transparency in key markets, our plan will make it easier for the system to absorb the failure of any given financial institution. In most circumstances, these precautions will be enough. 

Moreover, in the event that these firms do fail, we believe that 

these actions will minimize the risk that any individual firm’s failure will pose a danger to broad financial stability, which is why 

bankruptcy will remain the dominant option for handling the failure of a non-bank financial institution, even very large ones. 

The last 2 years, however, have shown that the U.S. government 

simply does not have the tools to respond effectively when failure 

could threaten financial stability. That is why our plan permits the 

government, in very limited circumstances, to resolve the largest 

and most interconnected financial companies outside the traditional bankruptcy regime, consistent with the approach long taken 

for bank failures. 

This is the final step in addressing the problem of moral hazard. 

To make sure we have the capacity, as we do now for banks and 

thrifts, to break apart or unwind major non-bank financial firms in 

an orderly fashion that limits collateral damage to the system. 

The resolution authority we have proposed allows the government to impose losses on shareholders and creditors without exposing the system to sudden disorderly failure that puts everyone at 

risk. Our approach is modeled on the longstanding regime for bank 

failure. 

There are significant and tested safeguards in placed, modeled on 

the bank failure law to protect creditor rights. Creditors in the resolution process, moreover, are protected by the same system of judicial review that has existed for the FDIC and its predecessors for 

its receivership authorities for more than 75 years. 

In our view, we need to have humility about the future and our 

ability to predict or prevent every systemic failure of a major financial firm. In a severe crisis if major firms fail and prudential measures and capital buffers prove inadequate, special resolution should 

be available. 

Our proposals provide a way to end the firm, to wind it down 

without contributing to system-wide failure. Our proposals represent a comprehensive, coordinated answer to the moral hazard 

20 

challenge posed by our largest, most interconnected firms, and the 

plan protects taxpayers and enables shareholders and creditors to 

take losses. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Barr follows:] 

PREPARED STATEMENT OF MICHAEL S. BARR


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Mr. COHEN. Thank you, Mr. Barr. I appreciate your staying within your 5 minutes and pardon your microphone. We will work on 

it. 

Second witness is Mr. Michael Krimminger, Special Advisor for 

Policy to the Chairman of the FDIC, especially involved in issues 

involving regulatory restructuring and resolution authority, mortgage market developments, banking charter and capital, interVerDate Aug 31 2005 10:18 Mar 10, 2010 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6601 H:\WORK\COMM\102209\52942.000 HJUD1 PsN: 52942

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national and large bank resolution initiatives, derivatives, and 

other similar financial contract developments and assorted issues. 

He chairs the Basel Committee on Banking Supervision’s CrossBorder Resolutions Working Group, which recently issued a recommendation for international infrastructure improvements and 

the international working group that developed core principles for 

effective deposit insurance systems. 

Mr. Krimminger, proceed please. 

TESTIMONY OF MICHAEL KRIMMINGER, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. KRIMMINGER. Chairman Cohen, Ranking Member Franks, 

and Members of the Subcommittee, thank you for the opportunity 

to testify on behalf of the FDIC today. 

The current crisis has caused tremendous hardships for millions 

of Americans and shaken confidence in our institutions and financial system. Our system has proven resilient, but at great cost. 

To restore market discipline and prevent future bailouts, we 

must adopt reforms with the goal of ending ‘‘too big to fail.’’ These 

reforms must focus on strengthening market discipline while protecting the public, and this should include strengthened oversight 

and capital requirements for our largest and most interconnected 

financial firms, creation of an oversight council to identify and address emerging systemic risk, more effective protections for consumers, and tightened regulation of derivatives. 

However, improved supervision and regulation alone cannot prevent the next crisis. Fundamentally, we must end ‘‘too big to fail’’ 

as an approach for dealing with the largest financial firms when 

they are failing. We need a resolution process for these firms that 

can be used in a crisis to close the firm while a receiver maintains 

critical operations to prevent a broader catastrophe for innocent 

businesses and consumers. 

This new process would only apply after a systemic oversight 

council decided that an exception to bankruptcy was essential to 

prevent systemic risk to our financial system. This is no bailout. In 

fact, shareholders and creditors absorb the losses and the firm’s assets are later sold to private firms. However, the ability to preplan 

the resolution, transfer key contracts to a bridge institution, and 

temporarily maintain critical financial operations will prevent the 

market disarray that could occur if the firm collapsed. 

To underline our goal of preventing future bailouts, we would 

recommend that the law ban special assistance targeted to specific 

open institutions. In a free economy there are winners and losers. 

When a firm cannot continue it should be closed. 

However, today we have a system in which the largest financial 

firms appear immune to market discipline. Bankruptcy provides 

the right process for the vast majority of insolvent companies. However, the current crisis has reminded us that there are fundamental differences between our largest financial firms and commercial or industrial companies. Large financial firms fulfill critical 

functions in providing financing for businesses and individuals, settling cash payment, intermediating liquidity and access to capital 

markets, and even providing the infrastructure and financing for 

the government securities market. 

27 

The functioning of our markets depends on ready liquidity, confidence among market participants, and financial assets whose 

value is tied to the intermediation of market, credit, and other 

risks. To end ‘‘too big to fail,’’ we must have a resolution process 

that market participants know can be implemented without causing disarray in the markets. They must know the process will actually be used in a crisis. 

What the solution should entail, first and foremost, is the swift 

and orderly closing of the firm while keeping its key functions operating. Like the bank resolution process, this requires extensive 

preplanning and developed expertise in dealing with complex financial operations. 

The immediate power to take charge of the firm and pass critical 

operations to a newly-created bridge financial institution will protect the public by avoiding market uncertainty and ensuring continuity. This will allow the receiver to stabilize the market, retain 

going concern value, and avoid dumping financial contracts in already illiquid markets. The well-established checks and balances 

that protect stakeholders in the bank receivership process should 

apply here as well. 

In conclusion, the proposed resolution process is not a challenge 

to the important role that bankruptcy plays in the U.S. system. It 

simply offers an alternative in a financial crisis so that regulators 

can realistically close the largest firms while protecting the public 

from a market collapse and from future bailouts. 

I would be happy to answer any questions. Thank you. 

[The prepared statement of Mr. Krimminger follows:] 

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PREPARED STATEMENT OF MICHAEL KRIMMINGER


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Mr. COHEN. Thank you, Mr. Krimminger. I appreciate your testimony. 

And I now recognize myself for 5 minutes of questioning. 

First thing I want to ask, I guess, is Mr. Barr, and I am not sure 

if you can answer this or not, but a lot of people feel that Mr. 

Paulson chose his friends at Goldman Sachs and other friends in 

the financial market to take care of and let other friends die. The 

laws are supposed to be applied fairly, and the bankruptcy code is 

a fair, due process, transparent system where people—there are 

laws and the judges are supposed to work in that. 

How can you assure the public and those of us who voted for the 

TARP, although reluctantly, that if we have such a resolution authority formed that there will be fairness and transparency rather 

than favoritism played when it is outside of the bankruptcy system, 

which has fairness build into it? 

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

Under the regime that we have proposed—the resolution regime 

we proposed—it is modeled on the long history under the Federal 

Deposit Insurance Act, that if the FDIC acts as receiver under such 

cases, under the Administration’s proposed approach for the largest, most interconnected firms, the same process would be used. 

So the FDIC would act as receiver, there would be judicial review 

as there is today of the FDI’s decision with respect to the appointment of a receiver, there would be judicial review with respect to 

the FDIC’s decisions with respect to the payment of claims, and so 

there are important safeguards very much built into the basic 

structure of resolution in our regime. 

Mr. COHEN. Thank you. 

And Mr. Krimminger, maybe you would answer this but maybe 

Mr. Barr would if—it is just it is FDIC. In FDIC, when a bank 

needs protection does every bank have the same—is dealt with the 

same way, or is there any subjectivism on the judgment on the part 

of the FDIC on which banks and how they deal with them? 

Mr. KRIMMINGER. Well, the banks are dealt with—under the 

FDIC’s current law we are required to apply the least cost test. In 

other words, we have to choose the resolution process for that particular bank that is the least costly to the deposit insurance fund. 

So in other words, it is determined in some ways by the assets of 

the bank, but not by the character of the bank management or any 

other types of influences. We simply bid the bank out to resolution 

and then the winning bidder—the highest bidder, essentially, then 

acquires the bank’s assets. 

The proposal we are talking about here would essentially create 

the same process so that you might have to temporarily, with the 

largest firms, create a bridge financial institution in order to bridge 

that process so that there wouldn’t be an immediate collapse, but 

nonetheless there would be a bidding process that would be open 

and transparent so that other financial firms could bid for the assets and operations of that bank once it were stabilized—for that 

institution once it were stabilized. 

Mr. COHEN. Mr. Barr, I might have missed it, but I think you 

said something about the largest financial institutions. Is there a 

definition of what the largest financial institutions would be so that 

46 

they would all be within the same class and not be determined by 

favoritism? 

Mr. BARR. So, under our proposal, Mr. Chairman, the Federal 

Government, through the agencies, the Federal Reserve, with input 

from the counsel of all the regulators, would make a determination 

that a firm that is large, interconnected, and highly leveraged such 

that its failure would pose a threat to financial stability could be 

designated for stricter, tougher, more stringent forms of supervision with higher capital standards, higher prudential requirements, the requirement of the living will, the tougher set of standards I outlined very quickly in my testimony. 

That designation itself would have due process protections in it. 

It would have a provision with respect to notice and an opportunity 

to be heard and to rebut the designation. And that process would 

be open. 

Mr. COHEN. It may not be—it is not directly relevant to this, but 

Mr. Barr, do you have anything to do with the Treasury’s decisions 

on bonuses and this outrageous system that we have now? 

Mr. BARR. I do not. That is not directly within my responsibilities. I am certainly aware that the Treasury is involved in such 

cases, but it is not core to my responsibility. 

Mr. COHEN. Okay. Mr. Miller, who is going to testify later, has 

suggested Lehman’s biggest problem was lack of liquidity and a 

need for stay protection. Have you read Mr. Miller’s testimony, Mr. 

Barr? 

Mr. BARR. I have, just before this hearing. 

Mr. COHEN. And what do you believe about his suggestion that 

the problem was its lack of liquidity and the suggestion that the 

Treasury’s authority be expanded in certain circumstances and 

that we needed to amend the bankruptcy code to eliminate safe 

harbor provisions for derivatives and other types of transactions? 

Mr. BARR. In our judgment, whatever is done with respect to the 

bankruptcy code, it is absolutely essential that we have resolution 

authority for the failure of the largest, most interconnected firms 

that might pose a risk to the system. The resolution authority is 

designed to meet different objectives from the bankruptcy code. The 

bankruptcy code, as you know far better than I, is focused on the 

process with respect to creditors. The resolution regime is really designed to protect all of us, to protect the economic system from the 

collapse of a significant financial firm that blows through its capital buffers. 

So we think whatever the Committee decides to do with respect 

to bankruptcy, it is absolutely essential that we have resolution authority. 

Mr. COHEN. Thank you, Mr. Barr. 

And before I recognize Mr. Franks, the problem we have got— 

and I concur with much of what you have said and what Mr. 

Bernanke says and Mr. Geithner—but when you said that the resolution authority is to protect all of us, with that as a belief, you 

know, I tepidly push the green button. But it is so difficult to do 

that when you see what the people on Wall Street are doing with 

the money, and how well they live, and how arrogant they are, and 

it is hard to think it is really us. It is about them; it is their crowd, 

it is not our crowd. 

47 

Mr. BARR. If I would, Mr. Chairman, I think that people are 

rightly outraged at that kind of behavior. I know I certainly am as 

well. I think, though, that it is incumbent on us to design a system 

in the future that protects us from excessively risky behavior, that 

requires firms to pay their own way, and by that I mean having 

big capital cushions so they take their own losses, and I also mean 

if there is any financial trouble in the future that the largest firms 

are the ones that pay for it, not us. 

Mr. COHEN. And do you think there should be something in your 

legislation—in the legislation so we don’t have to come back later 

and fight another special interest group when we have it as an individual bill to have some control over executive compensation 

maybe in the bill, when somebody comes into your authority that 

it has already drafted as part of that law that there is no allowance 

of these particular types—— 

Mr. BARR. We have made legislative suggestions with respect to 

executive compensation. Those have passed in the House with respect to stay on pay and the independence of compensation committees, and we have been strongly in favor of regulators taking into 

account compensation in the firm not just for the highest paid executives but throughout the firm in judging the firm’s risk management practices. So I do think those are important principles. 

Mr. COHEN. They are important principles, and I think there 

ought to be something specifically in your legislation if you hope to 

pass it that makes the public realize it is not going to be another 

fight. 

Mr. BARR. I would agree, Mr. Chairman, and there are these two 

provisions that would be essential to the reform package we have 

put forward in a legislative manner. 

Mr. COHEN. Thank you, Mr. Barr. 

I now recognize the Ranking Member for 5 minutes, Mr. Franks. 

Mr. FRANKS. Well, thank you, Mr. Chairman. Mr. Chairman, the 

Chairman of the full Committee asked, I think, a very pressing 

question related to how organizations police themselves. And I 

think he is right; I think it is very difficult for any group to police 

themselves even though I think they have a responsibility to do so. 

But ultimately it is wise to have a third disinterested party as referee. 

And I am concerned that what I am hearing here would put an 

awful lot of power into the executive branch or into your bureaucratic branch of government to the extent that it would be difficult 

for them to police themselves any better than anyone else. I mean, 

in this week’s news the White House pay czar is slashing corporate 

pay by 90 percent. The TARP inspector general says we won’t get 

our TARP funds back. Unemployment is up in 49 of 50 states, and 

kind of the surreal events in our economy, the list sort of goes on. 

And now what I hear—an all due respect, because I know you 

guys are here to advocate a position and there is no personal disrespect intended—but what I hear is that you are asking us now 

to give the government new power to seize Citigroup and the Bank 

of America and the rest of the largest financial institutions we 

have. And I just think on the basis of both the Bush and the 

Obama administrations in the last year I don’t know how we can 

possibly trust government—the bureaucratic aspect of governVerDate Aug 31 2005 10:18 Mar 10, 2010 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6601 H:\WORK\COMM\102209\52942.000 HJUD1 PsN: 52942
48 

ment—to use that authority without blowing it up again in everyone’s faces. 

And I guess I am convinced that unless we get back to some basics and make sure that these financial institutions have basic requirements to where they are the ones that are at risk when they 

make these decisions there will never be enough policemen to take 

care of it. The way to get organizations to police themselves, as 

Chairman Conyers said, I think is to create a tremendous incentive 

on their part—selfishly on their part—to do so. 

Now, in 2008 two of the ostensibly foremost financial authorities 

in the world—Ben Bernanke and Hank Paulson—I think they 

made a critical mistake when they were inconsistent in responding 

to Bear Stearns and Lehman Brothers. Later I think they made another mistake when they came to Congress and declared that the 

financial system would collapse if they were not granted this rescue 

authority. But they failed to present a full, thought-out rescue 

plan, in my judgment; two-and-a-half pages is what they brought 

us. 

Now, John Taylor, of Stanford, and other eminent economists say 

that those two mistakes played a major role in triggering the allout financial panic after September 19. So if we couldn’t trust these 

two experts to make two decisions in the course of a month to avoid 

a systemic panic, how do we entrust the entire future to the same 

experts again working with lesser experts in the FDIC and the 

SEC? I know that is kind of a convoluted question, but I am just 

suggesting—what I hear Mr. Krimminger saying, you know, about 

the process of how you would administer the end-of-life decisions 

of a major company, as it were, they sound an awful lot like the 

bankruptcy process. 

And I am just wondering, how does the executive branch feel like 

that without any practice in regard all of a sudden that they are 

going to be able to handle it better than the bankruptcy process? 

So I guess I will start with you, Mr. Krimminger. Take a shot 

at it. 

Mr. KRIMMINGER. Well, I appreciate the chance to respond. I 

mean, I think the—what we have developed over the last 75 years 

is a fairly stabilized process, or a very stabilized process for dealing 

with failed banks. What we are suggesting with the resolution authority is that when an institution is at the point of death, where 

it is in default on its obligations, or would be subject to a Chapter 

11 proceeding, that the council or that the, you know, key authorities would have the ability to take that institution and put it into 

a resolution process that is very much like the bankruptcy process. 

The difference is that we would have this process designed to 

make sure that you could have the continuity that is available at 

times during a Chapter 11 reorganization but have the access to 

the liquidity resources that would allow that continuity through a 

bridge financial institution and would allow it to continue while 

you are in the process of selling off the assets—— 

Mr. FRANKS. I don’t want to interrupt you, Mr. Krimminger, but 

why can’t that process—what you are talking about sounds good, 

but why can’t that occur under bankruptcy? 

Mr. KRIMMINGER. Well, right now one of the difficulties with the 

largest financial institutions is that you need to have preplanning, 

49 

build up a level of expertise in dealing with the types of financial 

contracts we are talking about, that you need to be able to have 

the ability to continue those without having to rely upon debtor in 

possession financing, which at times, as in the crisis last fall, can 

be difficult to acquire. So this would allow for some backup liquidity financing. 

But let me emphasize one point that I think is very important— 

it is very important to us. We would not be allowing, under what 

we would propose, would not be allowing open bank assistance or 

assistance for specific open institutions. This would be a situation 

where you would close the institution, put it into a receivership or 

a resolution, but make sure that the public interest was protected 

by continuing those key financial operations. 

Mr. FRANKS. Mr. Chairman, I guess I would just—my time is up 

but I would just like to suggest that if I am a financial source to 

one of these companies and they are going into this process I would 

be much more likely to give money or to encourage the process to 

continue under a bankruptcy setting than I would on sort of an uncharted, untested bureaucratic takeover of the process. 

It simply doesn’t make a lot of sense to me because I think that 

the whole process becomes politicized and those critical resources 

that are necessary to even animate a process like this become completely uncertain about doing anything, and I think they take a 

hands-off approach. That is just my opinion, and I yield back. 

Mr. COHEN. Thank you, sir. 

I now recognize the gentleman from Wayne County, Michigan, 

Wayne State University, dean of the Judiciary Committee, Mr. 

Conyers. 

Mr. CONYERS. Thank you, Mr. Chairman. 

I appreciated the line of questions that you engaged our distinguished witnesses in, and for Trent Franks I want to say that I appreciated his line of questioning especially. We are making momentous decisions about how we get out of the problem that we are in. 

And so it is very critical to minimize finger-pointing because that 

always deteriorates down to personalities. 

But there are a lot of apologetic bureaucrats, economists, government officials that are lining up here, Trent. Chris Cox was very 

sorry about how he misapprehended the problem in his executive 

branch position. Alan Greenspan, the guru of American economic 

policy for decades, apologized about how he misunderstood it. Hank 

Paulson has made some remarkable about-faces about things that 

he has done. 

But wait. There is Ben Bernanke, who now—you know, these 

guys just didn’t drop out of the sky. They have been in this business for a long time. Do you know what Tim Geithner was doing 

before he came to Washington? He was in New York. What was he 

doing there? Heading up the Federal Reserve. 

And what about Larry Summers? You think he has been the 

head of Harvard? Is that all you think he has done? No. 

You know, there have been—it would be very interesting for us 

to track all the about-faces that have been made in their careers, 

and it is not to say that if you find out that you are wrong and 

you admit you are wrong—I think it is the thing to do. I have had 

50 

to do it. But I didn’t affect the American economic system when I 

made a mistake. 

Who among us hasn’t cast a vote that, on reflection, you might 

have not voted that way at all? So, you know, this father-knowsbest attitude, this know-it-all approach—and I want to say here 

and now that the resolution authority risks creating a new generation of companies that are too big to fail. Now you can’t find anybody in Washington that doesn’t realize that this ‘‘too big to fail’’ 

crap was just that. 

Oh, we all know that now. We didn’t know it until just very recently, though. And so for one, I haven’t heard anybody yet suggest 

that the Department of Justice controlling antitrust questions, 

bankruptcy questions, should be given at least equal authority to 

block any asset sale that would harm competition. 

Look, you don’t have to agree with me, but not to discuss it—it 

is one thing if we have a discussion and we don’t reach agreement. 

It is another thing that it is not even on the table for discussion. 

None of you have indicated—of our distinguished witnesses—have 

indicated anything like the direction that the Chairman, the Ranking Member, myself are moving in, and I would like you to explain 

this difference of economic analysis that we are in. 

Mr. BARR. Mr. Chairman, if I could just try. I think first I would 

agree with both Chairman Conyers and Ranking Member Franks 

that the absolutely essential first step, important step, is that firms 

pay their own way. We need to have firms taking risks, having big 

capital buffers so in the event that they fail their owners suffer. We 

need to make sure that we have a system of tough prudential supervision of the largest firms with respect to their capital positions, 

their liquidity positions, their activities, engagement with merger 

and acquisition activity, management interlocks, the full range of 

tools available to address the problem of too big to fail. 

We do need to end the perception of too big to fail. It is an absolutely critical element. I think we are in agreement on that. I think 

we need to have tougher standards to do that. 

The question is, what do you do in the event of extremists in a 

crisis? And I think our judgment is, consistent with Ranking Member Franks’ earlier statement, we need to be humble about the ability of regulators; we need to be humble about the ability of managers of large firms. People are going to make big mistakes and 

you need to have big buffers in the system when they do so that 

taxpayers aren’t on the hook. 

So in our resolution regime, this is a regime to end big firms if 

they have made big mistakes, but to do it in a way that doesn’t 

bring down the system. And if any financing is needed to do that, 

the industry—the large firms in our industry, in the financial industry have to be on the hook for it. They have got to be—in the 

legislation there has got to be an assessment on them so that in 

the event any financing is required or any working capital is required, that the largest firms are required to pay, not the taxpayer. 

That is an essential part of our reform. 

That also means those other big firms are going to have a big 

incentive not to have any firm go into resolution, because they are 

going to pay. So you get the system right, the incentives are right, 

you have people watching each other. 

51 

I would agree with both Chairman Conyers and Ranking Member Franks that we don’t want to have a system where we just 

trust the regulators or trust the banks. You know, I think Ronald 

Reagan famously quoted the old Russian proverb, ‘‘We need to 

trust, but we have got to verify, too.’’ And that is why we have to 

have a system of rules, we have to have transparency, we need judicial review of the like that has existed for the FDIC for the last 

75 years. 

Mr. KRIMMINGER. If I could just note in kind of continuation of 

that point, that at least looking at it from the perspective of the 

FDIC, in our current resolution authority there is a process, of 

course, where Department of Justice review of the antitrust implications of mergers and acquisitions as a result of a resolution. That 

is something that we have applied for many, many years. 

There certainly are checks and balances that are put into place 

to make sure that shareholders have the opportunity to object to 

the appointment of a receiver. It is not purely an administrative 

process. 

There are checks and balances in place so that if someone disagrees with our decision on their claim they have the right to go 

for a de novo review before Federal district court so that we are 

not in any way making the decision about claims willy-nilly but are 

subject to oversight as well as, of course, the totally appropriate 

oversight from the Congress and from our inspector general and 

others. But there is judicial oversight of the decisions on claims 

and the decision to appoint the receiver. 

Mr. COHEN. Thank you, Mr. Chairman. I appreciate your questions. 

And I now recognize Mr. Coble, the distinguished gentleman 

from the Tar Heel state. He will not take his 5 minutes because 

he never does. Thank the gentleman. 

Mr. COBLE. I thank the gentleman from the Volunteer State. 

Thank you, Mr. Chairman. 

It is good to have you on with us today, Mr. Barr. When can we 

expect the TARP to wind down and our reimbursements to TARP 

being used to pay down the national debt? 

Mr. BARR. I am sorry, sir. I couldn’t hear the end of your question. 

Mr. COBLE. And our reimbursements to TARP being used to pay 

down the national debt? 

Mr. BARR. Let me just say, Mr. Coble, that the TARP program 

is not directly within my responsibilities. The department has 

begun to wind down many of the major programs in the TARP with 

the recognition that we are beginning to see some signs of financial 

stability. 

I think there are important—it is important to maintain the 

flexibility to act in the future. I do believe that—I do believe that 

we will be able to protect taxpayers in that process and help over 

the long haul in deficit reduction, but we need to make sure that 

we have the flexibility while the financial system is still recovering 

and don’t want to take any precipitous action in that area. 

Mr. COBLE. Thank you, Mr. Barr. Now, Mr. Barr, when you say 

wind-down, is that synonymous with reimbursement? 

52 

Mr. BARR. Again, I don’t want to spend too much of your time 

on this because it is not directly within my area of responsibility, 

but we are seeing repayments coming into the Treasury Department. 

Mr. COBLE. Okay. Thank you, sir. 

Mr. Krimminger, what is the current fiscal health of FDIC and 

is its solvency expected to increase or decrease in the coming 

years? 

Mr. KRIMMINGER. The FDIC deposit insurance fund—I am sorry, 

did I interrupt you, Congressman? 

Mr. COBLE. No. 

Mr. KRIMMINGER. Okay. The FDIC’s insurance fund today, as of 

the end of the second quarter, and those are the most recent numbers we have, including the DIF balance, deposit insurance fund 

balance, as well as our loss reserves has about $42.4 billion in it. 

We are taking steps, of course, to replenish the fund and have put 

out for public comment a plan to have the fund replenished by having institutions pay in advance some of their deposit insurance assessments to provide additional liquidity to the fund. 

We do expect that the fund will continue to have the liquidity to 

meet all of its obligations, but very important to note is that we 

have the ability to immediately draw on $100 billion line of credit 

from the Treasury as well as additional authority that was granted 

by Congress to pull down a total of $500 billion with the consent 

of the secretary of the Treasury. 

Mr. COBLE. I thank you, and I will put this question to either 

or both: What is the rationale, if you know, for proposing a permanent TARP-like program and why has the Administration selected 

the FDIC to oversee the program in lieu of the Treasury, if you 

know the answer to that? 

Mr. BARR. Maybe I might just say a word and then Mr. 

Krimminger could, of course, join. We in no way have made that 

kind of proposal. The proposal that we have is a proposal designed 

to make firms pay their own way, to internalize the cost they pose 

on the system, to make sure that taxpayers are protected, to cause 

assessments to be paid by the largest firms in the event that financing is needed. 

And we have a system of checks and balances in our proposal 

among the FDIC, the Federal Reserve, and the Treasury designed 

to ensure that resolution is only used in rare circumstances. And 

when it does, the FDIC has a 75-year history with resolution and 

we thought it was appropriate to ask them to take on the responsibility of resolving these firms. 

Mr. COBLE [continuing]. Mr. Krimminger? 

Mr. KRIMMINGER. Yes. Congressman, we would in no way support a proposal that would provide for open bank assistance, we 

call it, or assistance for open institutions, and I think that was 

kind of one of the key elements of the TARP program. 

What we have proposed, or what we have supported—and Chairman Bair has stated this in testimony—is a resolution process that 

literally does close down the institution and terminates its existence going forward so that—but one that allows for the continuation of critical financial services during a bridge financial institution. 

53 

So as I said, we have made very clear in our testimony before 

other Committees that we would not support open bank assistance 

or that type of support but would support a closing process that, 

as Assistant Secretary Barr mentioned, was designed to make the 

firms pay their own way and that they would pay any sums that 

were necessary. 

Mr. COBLE. Thank you, gentlemen. 

And I see my red light has appeared, and I will yield back. 

Mr. COHEN. Thank you, sir. Let me follow up and use Chairman’s prerogative. 

Mr. Barr, I think what Mr. Coble asked about is the TARP 

money being used to pay down the debt—I think he was—I know 

it is not your area, but I think the answer is, ‘‘No, it is not. It is 

going back into the TARP.’’ Would that not be correct and you all 

are continuing to use the money that is being repaid for other 

TARP-type ventures? 

Mr. BARR. The funds that come back into the TARP program, to 

the extent that they are not used for financial assistance, are held 

at the Treasury Department and the response I gave to Mr. Coble 

was to say those funds, to the extent that they are not needed in 

the event of financial crisis, would help reduce the debt. But in our 

judgment it is important to retain some flexibility while the system 

is still recovering. 

So I do think that—I do think that there will, in the long term, 

be advantages for debt reduction from the program, but in the 

short term we are quite focused on making sure that there is an 

ability to act, if necessary. 

Mr. COHEN. Right. And about the whole program, is that just because of the whole approach that this is going to make the economy 

better and save us from disaster or is it because you think there 

will actually be some dollars reserved—returned to the Treasury to 

be used for debt reduction? 

Mr. BARR. There will be, unless we see a significant further crisis 

point in the coming year, which is possible but certainly doesn’t 

seem likely right now, but if there is such a downturn then you 

would want to have flexibility available. If we don’t see that additional crisis then there would be remaining funds, both through repayment as well as unexpended amounts, that would be available 

to help reduce the debt over time. 

Mr. COHEN. Do you have any idea how much is unexpended? 

Mr. BARR. I am sure that the department would be happy to respond to the Committee with that. I don’t have that figure in my 

head. 

Mr. COHEN. Okay. And you don’t have an idea about how much 

has been repaid either, do you, and how much interest has been 

accrued? 

Mr. BARR. I would have to have the department respond to you, 

Mr. Chairman. It is just not within my area of responsibility. I 

have rough senses of sizes, but not enough to really be able to answer for you in a thoughtful way and I would prefer the department respond. 

Mr. COHEN [continuing]. Mr. Barr, thank you. 

Mr. Johnson, you are recognized. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

54 

Federal Reserve Chair Ben Bernanke earlier this month noted 

that the bankruptcy code does not sufficiently protect the public’s 

strong interest in ensuring the orderly resolution of a non-bank financial firm. Do either one of you know exactly what problems that 

Mr. Bernanke sees in the bankruptcy process insofar as these large 

non-bank financial firms are concerned? And also, does the United 

States government have power to force a—such an institution into 

an involuntary bankruptcy? 

Mr. KRIMMINGER. Let me address, if I may, Congressman, address the first question first. One of the issues that exists under 

the current bankruptcy code is something that has been highlighted by other witnesses before this Committee and I think is 

highlighted by the second panel, is that under the current bankruptcy law there is a provision that provides for the immediate termination and netting of derivatives contracts or other types of financial contracts upon the filing of the bankruptcy petition. 

There is also the need to have access to immediate liquidity 

funding for continued operations, so in the past in the bankruptcy 

that could be obtained through debtor and possession financing. Of 

course, last year after the Lehman Brothers insolvency debtor in 

possession financing became very difficult or very costly if you 

could obtain it at all. 

So the primary reason that we have supported suggestions for a 

resolution authority or resolution process for the very largest systemically significant financial firms is simply to make sure that 

you could impose a process that would have the credibility to be 

imposed while making sure that the shareholders and creditors absorb the losses from that insolvency, just as they should in bankruptcy, as well as making sure that you maintain continuity in 

some of those critical functions. For example, many—— 

Mr. JOHNSON. Okay. Well, now before you go off there I am trying to stick within my 5 minutes. Any ability of the government to 

force an involuntary bankruptcy? 

Mr. KRIMMINGER. Under current law I do not believe so. The proposal that Treasury has provided would provide for the authority 

of the secretary of the Treasury, with the concurrence of two-thirds 

majority of the board of the FDIC and the Federal Reserve to create or to decide that an institution should be placed into this kind 

of special systemic authority, and it would be triggered by, effectively, the same circumstances that will lead to a filing of bankruptcy. 

Mr. JOHNSON. All right. There is no reason why that could not 

be done to the bankruptcy process to enable it to be of service in 

these kinds of situations. Yes or no? 

Mr. KRIMMINGER. I would respectfully indicate that I think the 

difficulty with the bankruptcy process would be two-fold. Number 

one, we believe we need a process that focuses on the public interest of maintaining these systemic functions while also making sure 

that the losses would be imposed and making sure that you have 

the ability to create bridge financial institutions so that there could 

be the continuity to avoid a liquidation of assets. 

Mr. JOHNSON. Well, that can be done within the context of a regulatory entity and let bankruptcy do its thing, in my opinion. I 

55 

haven’t heard why that would not be a viable alternative to setting 

up a new public agency, another layer of government. 

How do you respond to critics who would suggest that with a resolution authority acting in a sudden emergency situation would be 

able to provide for the transparency and things like notice to creditors, an opportunity to be heard—not necessarily by creditors, 

but—who are interested parties? How would that be worked out? 

And last, but not least, I am concerned about the competition 

concerns of your proposal that would give the FDIC and the SEC 

the authority to seize and resell the assets of business entities. And 

with the fact that we have only a few—we have only a few great 

white sharks in the pool, wouldn’t that process cause them to get 

bigger because they would be the entities that would be eligible 

and able, financially, to take over one of these competitors? 

Mr. KRIMMINGER. If I could just respond to—I will start with the 

first part of your question first. I think that the—we need to make 

one thing very clear: We, the FDIC, are not supporting nor do I 

think Treasury is recommending the creation of a new agency or 

a new authority. The proposal would be that it would be an obligation that the FDIC could take on for most entities, similar to its 

resolution authority. 

As far as transparency, similar, again, to the bank resolution 

process. There is full transparency with regard to that process. The 

benefit of the bank resolution process compared to the bankruptcy 

process for banks in part is the ability for the receiver to act quickly, to be able to sell assets and be able to continue the business 

operations so that communities are not deprived of credit, are not 

deprived of deposits, et cetera. 

The transparency is provided because there is a full right—there 

is a full claims process that is provided so people can file claims 

with the receiver, and if the claim is determined against their interest or they don’t like the decision they have the full right to go 

to Federal court to litigate that claim with a complete new look at 

that case without any deference at all to the FDIC’s receiver’s decision. So there is tremendous transparency there, plus we, of course, 

provide reports to Congress on what we are doing with receiverships; we, of course, provide reports to our inspector general’s office 

as well—— 

Mr. JOHNSON. What would be the difference in a sudden emergency? 

Mr. KRIMMINGER. In a—I am sorry—— 

Mr. JOHNSON. A sudden emergency. What would be the—— 

Mr. KRIMMINGER. There would be no difference. The key thing is 

to be able to move quickly to make sure there is not a collapse of 

the markets that might be caused by the lack of liquidity or the 

lack of completing certain transactions. 

But you would still have the ability, as a creditor, to challenge 

the claim decision by the FDIC in court. You would still have clear 

checks and balances so even the shareholders could challenge the 

appointment of a receiver in court. That is the way it is today 

under existing law. So all those protections and checks and balances on what we do would still be in place. 

Mr. JOHNSON. And the last question? 

56 

Mr. KRIMMINGER. I think your last question was relating to the 

competition—— 

Mr. JOHNSON. Yes. 

Mr. KRIMMINGER [continuing]. Issues. We do have, under banking law today, the obligation when we are doing a bank resolution 

to consult with the Department of Justice for an antitrust review, 

or a competition review, of the merger and acquisition transaction. 

I think one of the key things that we believe is crucial and one 

of the reasons for proposing a new resolution regime is to make 

sure that market discipline is actually brought to bear on the largest great white sharks out in the financial sector so that, indeed, 

they will have to bear the same risk as the smaller fish they are 

swimming with. 

I think that is going to have a much greater impact because they 

are now—the pricing of their debt, the pricing of their equity, the 

pricing of their liquidity and credit is going to be subject to market 

impacts in a way that they, in many cases, are immune today because they are not expected to be closed. 

Mr. JOHNSON. All right. Thank you. 

Mr. KRIMMINGER. Thank you. 

Mr. COHEN. Thank you, Mr. Johnson. 

I now recognize our rookie Member for her initial questioning, a 

historic moment, Ms. Chu. 

Ms. CHU. Well, I certainly would agree that after the Lehman 

and AIG experiences there is little doubt that we need a third option that—between the choices of bankruptcy and bailout for nonbank financial firms and that we have to end the expectation that 

certain financial institutions are too big to fail. But my question is, 

what would be the threshold for intervention by the resolution authority? I am assuming that you are not suggesting that there be 

intervention for every non-bank financial firm that fails, and who 

would determine that threshold? 

Mr. BARR. That is a terrific point, and I think that it is absolutely critical, as you said, that the resolution authority that we 

are proposing is not supposed to be used, won’t be used, can’t be 

used broadly in the economy for non-bank financial firms. It is a 

narrow authority. It is only to be used for the largest, most interconnected, highly leveraged firms. It is only to be used in the event 

that no other option is going to be able to work for the financial 

system to preserve financial stability for the system. 

It is designed to be, again, a proposal that in the main, the largest firms will have their own capital buffers, pay their own way, 

and go into receivership in the bankruptcy system. The resolution 

authority is really just for the cases where the criticality to the system of what is going on, the fact that the capital buffers and prudential requirements have not been sufficient—in that rare circumstance you would be able to place that firm into special resolution to prevent widespread harm to the American economy. 

The decision would be made with checks and balances between 

the Federal Reserve, the Treasury, and the FDIC, as receiver, in 

order to make sure that it is only used in the rarest of circumstances. 

57 

Ms. CHU. I heard Mr. Krimminger say that the FDIC should be 

this authority, but Mr. Barr, I didn’t hear what your opinion was 

on that. 

Mr. BARR. We think the FDIC is the natural place to play the 

receivership function. They have had 75 years experience acting as 

receiver of the largest firms. There may be circumstances when it 

is absolutely critical for the SEC also to be involved with respect 

to a broker dealer, but the expertise with respect to receivership 

really does lie with the FDIC. 

There would be no need to create a new entity or a new bureaucracy or a new group of individuals involved; the FDIC is there, it 

is in place, it is a well respected, well trusted institution and I 

think Americans have come to see the important role that the 

FDIC has been playing for three-quarters of a century. So I think 

that is how we would proceed. 

Ms. CHU. How would the Administration’s resolution proposal 

guarantee that stakeholders would be no worse off by regulators’ 

use of this authority than would be in the case of a liquidation? 

Mr. BARR. We would put a floor on recovery at liquidation value, 

so it would just, by operation of law, require that system. 

Ms. CHU. Okay. Thank you. 

Mr. COHEN. Thank you, Ms. Chu. 

Let me ask a question of Mr. Krimminger—a couple. I was the 

initial person to suggest we should raise our FDIC rates here in 

Congress. We did it. Would you concur that it was a good idea and 

that it should be continued on to give investors—depositors assurances that their money is safe? 

Mr. KRIMMINGER. You are referring to the guarantee of the—— 

Mr. COHEN. Two-fifty. 

Mr. KRIMMINGER [continuing]. Level? We think that certainly 

that has been extended now through 2013. We would want to look 

at that point as to whether that is appropriate to continue. We 

have not made any recommendation on that thus far. 

Mr. COHEN. Can I ask you why it would possibly not be important to continue when it was set at $100,000 in 1981 and then if 

you take the—you know, figure it out pro rata, it should be at least 

$250,000 now. Why would it not be appropriate to keep it at the 

same level as it was in 1981? 

Mr. KRIMMINGER. Chairman, I wouldn’t want to really express an 

opinion on that, but certainly we have looked—we have done some 

analysis and looked and yes, there has been, obviously, quite a bit 

of inflation since 1980 when it was raised to $100,000 initially. We 

initially felt that it was appropriate to put it up to $250,000 during 

the crisis, and we just simply want to work with Congress and do 

some analysis to support whether $250,000 is the appropriate level 

or some different level. 

We have certainly talked about it in the past, even before—long before the crisis—about having it be $100,000 level adjusted based 

upon inflation changes in order to make sure that it provided appropriate protection. 

Mr. COHEN. And let me ask you another question: Major financial institutions move ungodly amounts of money—trillions of dollars—across global economies and affect—in many countries. Considering the amount of money that these major financial instituVerDate Aug 31 2005 10:18 Mar 10, 2010 Jkt 000000 PO 00000 Frm 00063 Fmt 6633 Sfmt 6601 H:\WORK\COMM\102209\52942.000 HJUD1 PsN: 52942
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tions move and across so many countries, does the FDIC have the 

capacity to resolve all these big institutions if they get into a crisis 

situation? 

Mr. KRIMMINGER. Well, we certainly would believe that we have. 

This is something that we have been doing for a long time, is resolving banks. Banks are involved in many of these complex financial transactions. We were very heavily involved in helping to resolve several very large banks last year. 

I will fully agree with you that the types of institutions we are 

talking about are much more complex and much larger in size. But 

the type of expertise related to the derivatives products, which we 

have dealt with quite a bit in bank failures, and other types of financial contracts, we believe put us in a good position to help deal 

with the resolution of the largest banks and bank holding companies. 

That is the area that we think is most crucial that we would be 

involved in, and we think that we do have the expertise to move 

forward—— 

Mr. COHEN. And adequate personnel as well? 

Mr. KRIMMINGER. We have a long history, Congressman, of increasing size if necessary. We would increase size somewhat with 

this authority. We are now about 6,300 employees; we have increased the size of our staff by a little over 1,500 employees in the 

last year. And I think we have the ability to call on the expertise 

of many others outside of the FDIC through contracts in order to 

provide special expertise for particular institutions, which we have 

used quite a bit with some of the bank failures we have already 

had. 

Mr. COHEN. Thank you, Mr. Krimminger. 

Does the Chairman have additional questions? 

I recognize Mr. Conyers. 

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

Am I correct to assume that you two gentlemen, from your respective authorities, have created this new resolution authority 

idea? 

Mr. BARR. Mr. Conyers, Mr. Chairman, the Treasury Department 

submitted a proposal to the Congress with respect to resolution authority that is under—will be under consideration by the Congress. 

The FDIC is an independent agency and reaches its own judgments 

with respect to any legislation it might support or would not support. And certainly I was quite involved in that process, but it is 

ultimately a departmental decision. 

Mr. CONYERS. Your modesty is appropriate, but this is largely 

your idea. 

Mr. BARR. Mr. Chairman, I can say not only with humility but 

with honesty that there are a lot of people who worked on this proposal, and it is really a departmental judgment about the appropriate path forward with respect to resolution. 

Mr. KRIMMINGER. If I might just simply—I could even claim more 

modesty, because it was primarily something developed through 

the Treasury Department. Certainly we have had a lot of contact 

with Treasury and other regulators—— 

Mr. CONYERS. I will get to your modesty in just a minute. Let 

us go into the secretary’s modesty. 

59 

You are the secretary for financial institutions for the Department of the Treasury. 

Mr. BARR. Yes, sir. 

Mr. CONYERS. Right. Well, who would be putting this kind of 

thing together—somebody over you did this and gave it to you? 

Mr. BARR. I am sorry, Mr. Chairman. I don’t mean to be absenting myself from the decision-making processes. I just wanted to 

make clear that it is a departmental judgment. I share that judgment. I certainly was quite involved in that judgment, and it is my 

responsibility to work to get that judgment enacted. And you can 

hold me accountable if you don’t—— 

Mr. CONYERS. All right. Let us look at it like this: Treasurer 

Geithner wrote this up and gave it to you and you and maybe one 

other person, and we have got it now. It is okay to admit it here. 

Mr. COHEN. You have a right to a lawyer. You have the right to 

remain—— 

Mr. BARR. I don’t especially need one. I am happy to have you 

hold me accountable for anything I say up here about the resolution authority. It certainly, in my judgment, it is the right course 

of action. And please, any questions you may have about it, I am 

happy to answer. 

Mr. CONYERS. Well, I am glad that you are happy to answer 

them. I am happy to give them to you. 

Now that we are all happy, let us—somebody wrote this. This 

didn’t drop out of the air, or somebody walking, a window rolled 

down in a limo and a sheaf of papers were handed to you. 

Mr. BARR. Mr. Chairman—— 

Mr. CONYERS. Somebody wrote it, and you are the one that wrote 

it. 

Mr. BARR. I am not trying to avoid responsibility, Mr. Chairman. 

You can hold me accountable for it. It is the department’s position. 

I worked on it with our general counsel’s office. We have a terrific 

team of people there, and I am happy to have you hold me accountable for any of the words in it. 

Mr. CONYERS. Well, look, I will hold your secretary accountable 

then, or the guy in the office next door to you. 

Mr. BARR. No. Please hold me accountable, sir. 

Mr. CONYERS. Well, that is what I was trying to do. So why are 

you trying to—— 

Mr. BARR. I apologize, sir. I am not—— 

Mr. CONYERS [continuing]. What is with the modesty? I hold you 

accountable and you accept accountability. 

Mr. BARR. Yes, sir. 

Mr. CONYERS. All right, now that that is straight. Now we are 

getting somewhere. 

Now, over in the Federal Deposit Insurance Corporation, where 

modesty is the mode, Mr. Krimminger, and you have already asserted your modest role in this, where does the relationship between FDIC and Treasury come in here? In other words, they 

wrote it and you are here supporting it, right, this new resolution 

authority? 

Mr. KRIMMINGER. It was Treasury’s bill. We are here because we 

support the concept of having a new resolution authority. We do 

not support every provision of the bill and we have had discussions 

60 

about some areas that we do have concerns about. So I think that 

is the completely honest and completely fair way of expressing our 

view. 

Mr. CONYERS. Well, that is all we are trying to do is identify 

the—look, we are all in the same government working on behalf of 

the same citizens, and—but you are here to support the Treasury’s 

position, and there are some reservations that you have. Okay. 

Now that we have got that, we are through with this and the 

modesties and the assuming responsibility parts have all been handled. 

Now, in this new proposal of resolution authority there comes 

with it a dismantling of some of the protections that have already 

existed. Is that not correct? 

Mr. BARR. Mr. Chairman, in our judgment the bill preserves important protections—key protections—for firms, for shareholders in 

the firm and for creditors in the firm, while providing the government with the appropriate tools to engage in resolution authority 

subject to judicial review of their actions with respect to the appointment of a receiver or the adjustment of claims, as Mr. 

Krimminger has previously outlined. 

Mr. CONYERS. I see. That is not so good. 

Mr. Krimminger, let me try the same question on you: Doesn’t 

this proposal anticipate and include certain dismantling of some 

protections that already exist? 

Mr. KRIMMINGER. Chairman, I do not believe it does because it 

simply—the only change that it really creates is that the initiation 

of an insolvency proceeding that would be initiated through an administrative process rather than through a court-filed insolvency 

process through the bankruptcy code. The types of protections that 

would be available to creditors and shareholders to challenge that 

process and challenging the decisions through a court action would 

all remain in place. 

Mr. CONYERS. Are you a lawyer? 

Mr. KRIMMINGER. Yes, sir. 

Mr. CONYERS. And Mr. Barr, are you an attorney? 

Mr. BARR. Yes, sir. 

Mr. CONYERS. Oh, okay. What about the dismantling of—you 

both not agreed with my assertion. What about bankruptcy code 

protections currently in existence? 

Mr. BARR. So again, Mr. Chairman, with respect to—— 

Mr. CONYERS. No dismantling? 

Mr. BARR. With respect to firms that are subject to the special 

resolution regime, those firms would be subject to the resolution 

process that the FDIC uses for bank failures. Those bank failure 

protections provide important protections for creditors and shareholders with the appropriate opportunity for judicial review, and 

those same sets of procedures would be used with respect to these 

firms. So in our judgment it doesn’t dismantle protections; it provides protections that are available under the bank failure regime 

and provides those protections in the context of firms that are subject to the special resolution regime. 

Mr. CONYERS. Okay. Attorney Barr, that is very good. 

Now, let me try Attorney Krimminger. Same question. 

61 

Mr. KRIMMINGER. I think, Chairman, we—in the FDIC’s resolution process we provide the same types of protections for creditors. 

For example, there is protection under the bankruptcy code for secured creditors; there is protection under the FDI Act for secured 

creditors. In fact, in some ways there is even more protection under 

the FDI Act for secured creditors because secured creditors are not 

subject to cram down, as there can be some circumstances under 

the bankruptcy code. 

Another example is that for existing contracts of the failed bank 

or the failed institution, there is protection for those existing contracts. There is a bankruptcy trustee who has the power to reject 

or affirm certain contracts under the bankruptcy code. So does the 

FDIC as receiver has the power to reject or, as it was referred to 

in our statue, repudiate those types of contracts. 

But damages recoveries are available to those whose contracts 

are rejected. If they disagree with the decision on the repudiation 

or disagree with the amount of damages that the receiver determines to be due to them they can file for a de novo review, or actually a de novo case, in the Federal district court of the jurisdiction 

of the bank or in the District of Columbia. 

Mr. CONYERS. Well, let us take antitrust safeguards. Attorney 

Barr, antitrust safeguards—are they compromised, diminished, or 

dismantled, from your perspective, under this new extended resolution authority idea? 

Mr. BARR. In our judgment the proposal mirrors the procedures 

that are used with respect to bank failure laws. So in the event of 

the need for merger and acquisition, there is a process for appropriate Department of Justice review. As under existing bank failure law there are emergency exceptions to that; those would apply 

also in this case. 

Mr. CONYERS. So the answer is no? 

Mr. BARR. In our judgment they are, again, Mr. Chairman, the 

same as currently provided under bank failure law. We are extending the exact type of regime that exists today with respect to antitrust review to this narrow context. In our judgment that is appropriate. 

Mr. CONYERS. Let me try a new tactic with Mr. Krimminger. 

Yes or no? 

Mr. KRIMMINGER. With regard to the antitrust protections? 

Mr. CONYERS. That is right. 

Mr. KRIMMINGER. With regard to the antitrust protections, Assistant Secretary Barr stated it accurately. There typically—yes, 

there is a requirement to go through Department of Justice review 

on bank failures, but there can be exceptions. 

Mr. CONYERS. But there is no dismantling or diminution of antitrust safeguards? Your answer is, like Attorney Barr’s, no? 

Mr. KRIMMINGER. In a systemic context there can be cases in 

which there is an override of the anticompetitive consequences, yes. 

Mr. CONYERS. Wait a minute. 

Well, let us talk about union contracts. Are they protected under 

the bankruptcy code? 

Mr. KRIMMINGER. My understanding, and I would consult with 

counsel on this because I have never been involved in a bankruptcy 

proceeding involving union contracts—— 

62 

Mr. CONYERS. Well, they are all in back of you. Just take a moment. We are in no hurry—— 

Mr. KRIMMINGER. But nonetheless, in a Chapter—I think a 

Chapter 11 proceeding is somewhat distinct from a Chapter 7 liquidation proceeding. A bank receivership, where they—I can just 

give you the experience that I have with bank receiverships. In a 

bank receivership the claims under the union contract would be 

due to be paid in accordance with the priority system for the bank 

receivership, because once the bank is closed the charter is 

pulled—charter is terminated. 

There is no longer a right, of course, to the employment because 

we are in a liquidation mode in a bank receivership. But any 

claims that are due from the bank to the union or to the union employees would be paid in the priority system, in that liquidation 

priority system. 

Mr. CONYERS. So you can break the contract? 

Mr. KRIMMINGER. The institution in that case, Chairman, is no 

longer in existence. I have no employer to provide. And I understand from counsel that there are similar protections and similar 

rights to reject certain union contracts under Chapter 11 provisions 

of Title 11, of course with certain protections in place. Chapter 11 

proceedings, of course, are reorganization proceedings, whereas 

Chapter 7 is a liquidation and the resolution of a bank is the closing of the bank so that there is no longer a reorganization of that 

specific bank but the sale of its assets over to other private entities. 

Mr. CONYERS. Lawyers, are retiree benefits and pensions protected as they are—would they be protected under the resolution 

authority concept that you bring to us as they are under the bankruptcy code? 

Mr. KRIMMINGER. I believe they would be protected, Chairman, 

in the same way that they would be protected in a Chapter 7 liquidation proceeding. You are entitled—— 

Mr. CONYERS. Wait a minute. Could we start off with a yes or 

no and then the explanation? 

Mr. KRIMMINGER. Yes, they would be protected in the same way 

as under a Chapter 7 liquidation proceeding. As in a liquidation 

proceeding, there is a winding up of the affairs of the entity and 

its assets are then sold to others in order to recover money to pay 

off the creditors. That is the same situation in a bank failure. 

Mr. CONYERS. Now, Attorney Barr, what is your response to that 

same question? 

Mr. BARR. I am afraid, Mr. Chairman, I would have to defer to 

Mr. Krimminger’s expertise on that. 

Mr. CONYERS. Sure. 

I am sorry, Mr. Chairman, but this is some of the most fantastic 

questioning and responses that I have received in a long time here 

in the Committee. I apologize for taking so much time. 

Now, in bankruptcy the non-bank would be in a Chapter 11 and 

not break the contract without negotiations and approval. That is 

not true under the FDIC. Is that a true statement? 

Mr. KRIMMINGER. I would defer, Chairman, to your counsel with 

regard to what the bankruptcy provides. But what the FDI Act provisions provide is that, just as in a Chapter 7 liquidation, we have 

a insolvent closed entity that no longer continues in operation. 

63 

Our goal with the resolution authority that we would support is 

to end the ‘‘too big to fail’’ so that the entity is propped up in some 

fashion, either temporarily or permanently, from government or 

taxpayer dollars. So we would be closing the entity, just as in a 

bank receivership, and it would be then—its assets would then be 

recycled, if you will, into the financial system. 

Mr. CONYERS. Is that a long way of saying yes? 

Mr. KRIMMINGER. I say I would defer to counsel—your counsel—— 

Mr. CONYERS. My counsel says yes. 

Mr. KRIMMINGER. I do not know the bankruptcy provision on that 

specific provision, but we are not talking a Chapter 11 proceeding. 

We are talking about the closure of the institution, the pulling of 

its charter, and then the maintenance of the functions that are systemic, not the actual firm in a Chapter 11 reorganization. So it is 

a different situation. 

Mr. COHEN. Mr. Chairman, if I could do something out of the ordinary, I would like to ask Mr. Miller to come up to the panel— 

not be recognized, because I think everybody has recognized him in 

the past; he is kind of our Black’s Law Dictionary on bankruptcy 

sometimes—and ask him without introduction if he can give us his 

basis of his knowledge on bankruptcy to respond to some of the 

questions the Chairman has asked and the witnesses have demurred on. 

Mr. Miller, please? 

The question is an assortment of questions that the Chairman 

asked. He may want to ask you directly about bankruptcy law and 

how it might be distinguished from resolution, and as far as union 

protection, as far as Justice Department and antitrust, as far as 

pensions, et cetera, et cetera. Are there more opportunities to the 

bankruptcy court to protect rights of individuals that might be 

under this new legislation? 

You need to hit your mike. 

TESTIMONY OF HARVEY R. MILLER, 

WEIL, GOTSHAL & MANGES LLP 

Mr. MILLER. As I understand the testimony, the concept of the 

FDIC is that because the charter of the bank is terminated there 

is no longer an employer and therefore there is no longer a union 

contract, and all of these other contracts have effectively been terminated. Under the bankruptcy code, if it is a Chapter 11 bankruptcy, there are protections for pensions, there are protections for 

labor contracts, and very specific procedures that have to be followed. 

And a Chapter 11 does not have to be a reorganization. Many 

Chapter 11s today are liquidations with those protections under 

1114 and 1113 in place. So there are extra protections under the 

bankruptcy code. 

Under Chapter 7, which is a liquidation, those provisions do not 

apply. But if a Chapter 7 trustee wanted to sell the assets to another company or a purchaser who wanted to run that business, 

there is still the possibility for a trustee to assume the union contract and transfer it to the purchaser. So I would submit there are 

64 

greater protections which are being proposed in the resolution regime. 

[The prepared statement of Mr. Miller follows:] 

PREPARED STATEMENT OF HARVEY R. MILLER


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Mr. KRIMMINGER. May I respond briefly? 

Mr. COHEN. Yes, sir. 

Mr. KRIMMINGER. Just to be clear about this, if you have a Chapter—if you have a bank resolution and you create a bridge bank, 

yes, the existing contracts can be terminated by the fact that there 


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80 

is no further employer, but you can also transfer a contract. That 

is one of the powers of the receiver when one of us talk about continuity. The receiver would have the authority to transfer those 

contracts over to the bridge bank intact so that, just like a Chapter 

11, there are to be similar types of protections for union, pension, 

or other contracts if that were viewed as being important to maintain the going concern value of the entity in a bridge bank structure or a bridge financial institution structure under the proposal, 

or the operations and prevent a systemic risk that was the concern 

that led to the use of this extraordinary power in the first place. 

So you can transfer contracts. That is why I am saying it is very 

similar, in many ways, to bankruptcy law. You can transfer contracts by the receiver over to the bridge bank. You can also terminate, reject, or repudiate, depending upon your preference for 

terms, those contracts as well so that they don’t flow over to the 

bridge banks. 

Mr. CONYERS. It doesn’t seem like you concur completely with 

Mr. Miller. 

Mr. KRIMMINGER. No, I don’t, because there is also the power to 

continue those contracts into the bridge bank, and I would just 

simply humbly suggest that perhaps that is something that hasn’t 

been considered. 

Mr. MILLER. If I may, Mr. Chairman, that assumes that the 

FDIC will find a buyer. What we are talking about here are firsttier financial holding companies of a huge size. I would look to the 

Indymac situation, where the FDIC was unable to find another 

bank to transfer those accounts to. And in the context of the testimony, that would mean those union contracts, those pension plans 

are terminated. 

Mr. KRIMMINGER. Well, look, if I may respond as well—may I? 

Since the reference was made to the Indymac situation, the 

Indymac situation did involve, effectively, a bridge bank structure 

created. The contracts and primary—all of the operations of 

Indymac were transferred to that bridge bank structure and then 

that entity was sold virtually intact from the bridge bank. Of 

course you leave some claims that are of no value down in the receivership, but that institution was sold virtually intact and is now 

operating as One West Bank in California by a new set of investors. 

Mr. MILLER. Yes, sir, which can also be done in bankruptcy if 

you are going to have a bridge bank that is being financed by a 

Federal agency. You can also do it in Chapter 11 without any Federal assistance. 

Mr. KRIMMINGER. And may I respond as well? 

The Indymac receivership and bridge bank, since we are referring to that one, had no special assistance other than a protection 

of the depositors, which is, of course, the charge of the FDIC. There 

was not other Federal assistance provided at all. 

Mr. CONYERS. Well, there seems to be a problem in the minds of 

some of the Members of this Committee about whether these guarantees are diminished or improved through this resolution authority idea. I am a little bit concerned, and this is why we are having 

this discussion, of course, isn’t it? 

81 

I mean, after all, this is a draft that is not in final form, is it, 

Mr. Barr? 

Mr. BARR. That would be up, of course, to the Congress to determine. 

Mr. CONYERS. Well, sure, and we wouldn’t do anything without 

consulting with you and Mr. Krimminger. And so we are concerned 

about whether or not we would be dismantling many of the bankruptcy code protections that apply to non-bank financial institutions and the antitrust safeguards that apply to them. 

That is a valid concern, and that is a big concern, Mr. Miller. 

Mr. BARR. Again, Mr. Chairman, in our judgment it made sense 

to use the system that is in place for bank failures, which has a 

long history and established protections in it and to decide in particular circumstances that are rare that should be extended to a 

further category of institutions that would have then a regime that 

has the same protections that have been used in bank failure law 

for many, many years. 

Mr. MILLER. Thank you, sir. 

I suggest that we should not forget that what is the fourth-largest non-bank financial holding company is currently in bankruptcy 

and is being administered in bankruptcy very efficiently and without a single dollar of Federal assistance, in a proceeding in which, 

as the prior panelists have said, was able to sell assets within a 

period of 5 days, did not need debtor and possession financing, has 

been running this estate—this huge, complex estate—for well over 

a year, and if it had the protection of the automatic stay in connection with the derivative contracts, would be a much more valuable 

estate today. 

I would submit to the Committee that this whole problem of derivatives is so complex that three-quarters of the people on Wall 

Street still do not understand what a derivative is. And where you 

have almost a million counterparties in these derivative transactions, many of whom took full control because of the way the 

statute is written. 

I don’t believe the FDIC has ever had any experience with derivatives and how you unpeel them and how you unwind them. 

And there are billions and billions of dollars involved in that process. 

Mr. CONYERS. We can’t disagree with that, can we, Mr. Barr? 

Mr. BARR. If I could, Mr. Chairman—— 

Mr. COHEN. Well, Mr. Krimminger, that is the reason I asked 

you the question about, is the FDIC equipped to take on these global economic situations with these multi-country—I mean, you all do 

like the bank of, you know, Tucum Karey—you are talking about 

doing the bank of the Semi-world. 

Mr. KRIMMINGER. Like WaMu and some other substantial institutions. Yes, I think it would be a challenge but I think the—— 

Mr. CONYERS. You have never done it before. 

Mr. KRIMMINGER. Well, I don’t know—our point is that there is 

value to preplanning and value to planning these types of insolvencies in advance. There were some consequences from the Lehman 

failure that were created by the drying up of liquidity. I am not 

going to say that was all caused by the Lehman failure, but cerVerDate Aug 31 2005 10:18 Mar 10, 2010 Jkt 000000 PO 00000 Frm 00087 Fmt 6633 Sfmt 6601 H:\WORK\COMM\102209\52942.000 HJUD1 PsN: 52942
82 

tainly there were consequences to that failure that created substantial problems in the financial system. 

Our judgment, which we would agree with Treasury on this, is 

that it is important to have an alternative system where you have 

the most—the largest financial firms involved in a potential collapse. We have had experience working with derivatives. We have 

dealt with a lot of major counterparties around the world. 

My work, as illustrated by the Chairman’s introduction, as a cochair of the international working group looking at these issues, we 

have been working with international colleagues for months and 

years to try to deal—to try to find better ways of dealing with these 

issues. 

One of the recommendations in our working group report, which 

was published on the Bank for International Settlements Web site 

on September 17, was the need to have an insolvency system that 

could be consistent across both banks and the very largest nonbank financial firms in order to allow for greater coordination to 

prevent there from being cross-border consequences that can cause 

significant problems. 

And it is certainly not a secret that there certainly have been 

substantial cross-border disagreements with regard to everything 

from information sharing, with regard to the treatment of certain 

creditors and certain claims, and with the preferential treatment 

alleged by some of certain creditors and claims in the Lehman 

Brothers bankruptcy. 

So I wouldn’t want to sit here and say that it is an easy problem 

to solve, but I don’t think we can sit here and say that the bankruptcy resolution is an easy problem to solve for these very largest 

institutions either. 

Mr. CONYERS. Well, we beg to apologize for undervaluing the extensive global experience that the FDIC has accumulated over the 

years. I wasn’t fully appreciative of that fact. 

Mr. BARR. If I could, Mr. Chairman, I think that the bankruptcy 

proceeding that Mr.—is referring to is successful only in the narrowest sense. So we have a responsibility, I think all of us, not just 

to have a system that works with respect to the process of bankruptcy and the creditors in that bankruptcy, but really with respect 

to the stability of the financial system as a whole and the protection of taxpayers. 

And the decisions that were made last year and the results of 

which, since the tools were so limited available to the Federal Government, the Lehman bankruptcy was maybe okay for the narrow 

proceeding that it is engaged in, but was absolutely horrible for the 

financial system, and American taxpayers, consumers, and businesses are paying for it every day. And I don’t think we want to 

set up a system in the future that is narrowly procedurally successful and brings down our financial system. 

Mr. CONYERS. But aren’t we creating a super—a powerful superregulator with so-called resolution authority that we have never 

created before? 

Mr. BARR. Not in my judgment, Mr. Chairman. We have a longstanding system of resolution for bank failure, we have particular—— 

83 

Mr. CONYERS. Am I right? Are we creating a—or maybe I am 

wrong. When have we ever created any kind of authority with the 

power that is being contemplated now that the Treasury—that Mr. 

Barr, particularly—has handed us to consider? Is this routine? 

Mr. MILLER. Absolutely not, sir. Absolutely not. I don’t believe we 

have ever done that before. 

Mr. CONYERS. I don’t know about it. 

Mr. BARR. Mr. Chairman, we have a longstanding history, we 

have a bank failure regime that has been in place for three-quarters of a century. It is a special resolution regime for financial 

firms. We are talking about applying that in rare circumstances to 

an additional group of companies whose failure could really bring 

down the system. And so in our judgment really we have a long 

history of established practice and we are applying it in this context. 

Mr. CONYERS. Well, all I have to do is take my medicine and get 

more rest and I will learn that this is what we do regularly for almost a century. This has been going on all the time, Chairman 

Conyers, you just didn’t know about it. It slipped my attention completely. A super-regulator authority with this authority to get rid 

of many of the safeguards of due process for unions, pensions, for 

secured and unsecured creditors that are all covered in the bankruptcy code now. 

Attorney Harvey Miller? 

Mr. MILLER. Yes, sir. 

Mr. CONYERS. It is all there. 

Mr. MILLER. It is all there. I think Mr. Barr, sir, is referring to 

two different things: one, what caused the failure, which is an entirely different subject. There are many factors that precipitated 

Lehman’s collapse which were—included excessive risk-taking, 

which should have been subject to some regulation, poor regulation, 

and a general economy which was suffering from the takeover of 

Fannie Mae and Freddie Mac, and as well as the growing enormity 

of the subprime crisis. And you can trace back the subprime crisis, 

many of the problems. 

What I was addressing myself to was, when failure occurs, how 

do you deal with that failure? And the bankruptcy code and the 

bankruptcy courts allow you to deal with that failure with all of the 

protections which Congress has already put in, and if you amended 

the code to deal with this derivatives problem we would have a 

much more efficient Administration. 

And even though Lehman was an unplanned Chapter 11, it was 

something that, responding to Mr. Johnson’s comments, the Federal Reserve Bank and the Treasury and Mr. Cox told the board 

of directors of Lehman, ‘‘You should file a bankruptcy petition by 

midnight on September 14.’’ And while they said it is in the discretion of the board, it was pretty much a command. 

And then the question was, how do you deal with that failure? 

I believe that the Chapter 11 bankruptcy in Lehman demonstrates 

that you can deal with it and we have dealt with it. And in fact, 

Lehman owns two banks. And it is through the Chapter 11 proceeding where, in the full light of the sunshine, full transparency, 

the Lehman estate has invested money in those to banks to keep 

them in compliance with the FDIC. And you have an administraVerDate Aug 31 2005 10:18 Mar 10, 2010 Jkt 000000 PO 00000 Frm 00089 Fmt 6633 Sfmt 6601 H:\WORK\COMM\102209\52942.000 HJUD1 PsN: 52942
84 

tion there where everybody is involved and the stockholders are 

being wiped out. 

Mr. CONYERS. Would you agree with that, Mr. Barr? 

Mr. BARR. I don’t, sir. With respect, I think it is very hard to 

hold up the failure of Lehman Brothers and the way it was managed as a model of how we want to deal with financial crises in 

the future. It was horrible for the system, it is horrible for taxpayers, it is horrible for consumers, it is horrible for workers, it is 

horrible for our economy. 

We have to set up a system that is designed to bring—— 

Mr. CONYERS. What should we have done? 

Mr. BARR. I think we need to have tougher regulation. Mr. Miller 

and I are in agreement on that. As I said at the outset, we need 

to make sure that these largest financial firms that are complex 

and interconnected have tougher regulation, higher capital requirements, more stringent activities and restrictions alike, but we have 

to have a system of special resolution. 

If they fail we have to have humility about getting that right and 

the system we have in the past, where our choice is sending that 

firm into the bankruptcy or not, is insufficient and it has really 

hurt the system. We can’t do it again. 

Mr. CONYERS. But isn’t the Miller description, Mr. Krimminger, 

a valid one? 

Mr. KRIMMINGER. Well, I think what the Miller description fails 

to recognize is that you have the light of day. You have transparency in the bank receivership process as well. You have access 

to the courts, you have determinations by Federal judges about 

whether or not claims were accurately paid or not. 

So while I understand Mr. Miller’s understanding of the bankruptcy code, I think you have to look at what has actually been 

done in the bank receivership laws as well. There are protections, 

contrary to what he said, for secured creditors. There are protections for unsecured creditors. There are protections for all types 

of—— 

Mr. CONYERS. Maybe he hasn’t studied this carefully enough to 

know that. 

Mr. MILLER. I agree with a lot of the things that Mr. Barr said 

and what we do need, but in a context of saying that if you disagree with the FDIC and how they are handling things in autocratic fashion you can start an action in the Federal district court, 

a plenary action, it is not like going to the bankruptcy court, which 

has hearings regularly, somewhat informal. Starting a plenary action to complain about the FDIC requires a great deal of financial 

backing, and that—— 

Mr. BARR. We are talking about the largest firms in the country. 

Mr. KRIMMINGER. And that is why you have an administrative 

process first to hear those claims and have a determination of 

them, then there is the right, if you are dissatisfied with that determination, to go to court in which there is no deference given to 

the FDIC’s views. 

Mr. CONYERS. Well, let us see. What is it that we agree on collectively? These are three of the finest legal minds in the country. 

What is it that we can agree on here and what is it that needs to 

be discussed a little further? 

85 

Mr. BARR. I think that we can all agree we need to end the perception of ‘‘too big to fail.’’ I think we can all agree we need tougher 

capital requirements, tougher liquidity requirements, more stringent forms of supervision on the largest, most interconnected firms. 

I think that we need to come to an agreement but we apparently 

don’t have one with Mr. Miller that the—— 

Mr. CONYERS. Or this Committee. 

Mr. BARR [continuing]. Bankruptcy regime is sufficient. In our 

judgment, the bankruptcy regime is not designed for the purpose 

of protecting financial stability. It is not designed for the purpose 

of protecting the taxpayer. It is designed for the purpose of ensuring process with respect to creditors. That is too narrow a vision. 

I think we have a deeper responsibility. 

Mr. CONYERS. What do you say, Mr. Krimminger? 

Mr. KRIMMINGER. Well, I think that we do agree on the need for 

reform across the regulatory and supervisory realm, which I mentioned both in my written statement and my oral statement. But 

what we also—we think that there does need to be a special resolution regime, if you will, only to be used in those rare cases where 

the—going through the normal bankruptcy process could create additional systemic risk. 

So I concur with Assistant Secretary Barr that it is important 

that in that narrow scope of issues that we have the ability to go 

through a process that is designed to make sure there is speed, 

make sure there is continuity in these key contracts so that contracts where the liquidity is so crucial can be maintained through 

the bridge financial institution. That is simply what we are proposing, not some other—not a Federal bailout—because we believe 

that we do need to end ‘‘too big to fail.’’ 

The problem is that there was not an interest by both, in some 

cases policymakers but certainly in the case of also creditors, in 

many cases, of putting some of these largest firms through a bankruptcy proceeding because of the fear that there would be a massive dumping of these financial contracts on an already illiquid 

market. That is a danger that we need to avoid, and we can avoid 

it without having to have a taxpayer bailout as the only alternative. 

Mr. CONYERS. Attorney Harvey Miller? 

Mr. MILLER. I agree with almost everything Mr. Barr has said, 

but when he refers to stability I need a definition for stability. I 

said in my statement that Lehman’s primary problem, putting 

aside its other problems, the immediate problem on the weekend 

of September 12 was liquidity. The liquidity had been drained out 

of Lehman by a series of different events, and finally the clearing 

banks just demanding more and more collateral. 

If you were looking for stability at that point in time, the government, the Federal Reserve Bank, or the Treasury could have done 

a bridge loan. And there was a request for a bridge loan to get Lehman assistance to get to a sale. 

The Treasury decided against that, and that resulted in the unstable conditions that happened. There is no prohibition in using 

the bankruptcy process, and if it is appropriate for the Treasury or 

whoever, in the interest of stability, to do a bridge loan it can be 

86 

done in bankruptcy and it can be done in the bright light of full 

transparency. 

Mr. CONYERS. Now, you don’t need to qualify that statement do 

you, Mr. Barr? 

Mr. BARR. I think that—I think again, with respect to Mr. Miller, 

it is too narrow a perspective. We are not focused on the success 

of failure of Lehman. We are focused on financial stability overall. 

I think that the Lehman process obviously occurred in the context of a massive inflow of—followed by a massive inflow of liquidity provided into the system. There was a massive inflow of liquidity in the system from the Federal Reserve before. There was an 

enormous amount of government action taken in and around the 

Lehman bankruptcy. 

The Lehman bankruptcy itself is a narrow slice of what we need 

to look at, and I think we have broader responsibilities. I think we 

need to have a special resolution regime because we are looking out 

for the taxpayer and the system and not just for the creditors or 

the firm. 

Mr. CONYERS. Mr. Krimminger, you have less criticism of the 

Miller evaluation. 

Mr. KRIMMINGER. I wish that I could provide concurrence, but I 

will say again that what the Miller evaluation fails to recognize, I 

think, is that the simple process that are provided by current bankruptcy code provisions, of requiring or allowing parties to terminate 

and net their contracts immediately onto an illiquid market creates 

a great deal of risk of destabilization. 

A bridge loan would not necessarily solve that, but let us presume for a second that we also adopted the Miller proposal, say 

that these financial contracts were subject to the automatic stay. 

That is going to create nothing but illiquidity and concern by creditors of other entities that might be in trouble around the financial 

markets that their contracts will be subject to delay and they won’t 

be able to get out of the contracts. 

As much as the netting provisions cause problems, they were put 

in place in part to help deal with the potential destabilization that 

could occur by immediate—by having contracts tied up in a bankruptcy proceeding or other type of proceeding. That is why the Congress, in its wisdom, did give us the power to transfer these contracts over to a bridge financial institution so that they could be 

maintained and wound down slowly rather than being terminated 

immediately. 

Mr. MILLER. Referring to the last comment, that is what should 

be in an amendment to the bankruptcy code, and that is exactly 

what, as I understand it, the resolution regime would want—the 

ability to assume or reject these contracts rather than allowing the 

counterparties to terminate them and take advantage of a declining 

market. 

The other issue that I would raise is, in response to Mr. Barr, 

how are you going to protect this country against the same decision 

that was made on the weekend in which the Treasury decided, ‘‘We 

are not going to do a bridge loan or anything for Lehman,’’ and 

then on Tuesday the 16th advanced $85 billion to AIG? How do you 

check that decisions? 

Mr. CONYERS. How can you explain that? 

87 

Mr. BARR. Mr. Chairman, obviously I was not in the government 

at the time of those decisions. I don’t really have a particular judgment with respect to weekend activities. I will say that I think it 

is absolutely critical—and here I think Mr. Miller and I agree— 

that we change the basic nature of regulation in our system so that 

there are big buffers and we can internalize the costs. I think those 

are important—— 

Mr. CONYERS. But he wants to put the law into bankruptcy and 

you want to put it into a super-regulator. 

Mr. BARR. I don’t want to put it into a super-regulator, sir. I 

think that these institutions need to be toughly, confidently supervised at the consolidated level. I think there need to be important 

checks and balances in the system for the use of resolution authority with three keys, as under the systemic risk approach—the Federal Reserve, the Treasury, and the FDIC in agreement. 

I think there does need to be transparency in the process once 

the firm is in resolution with the opportunity for judicial review. 

So I don’t agree with the characterization of this as a super-regulator. 

And again, with respect, I think that we need to have broader 

system interests in mind and not just the interests of creditors of 

the firm. 

Mr. COHEN. The Chair is temporarily going to ask Chairman 

Conyers to assume the Chair and recognize the Ranking Member 

as well to continue this questioning. And if the Chair would take 

the Chair for just about 5 or 10 minutes, I would appreciate it. And 

I will return shortly. But Mr. Franks has some questions, but I will 

leave that to the Chair to recognize Mr. Franks. 

Mr. CONYERS. [Presiding.] Recognize Mr. Franks. 

Mr. FRANKS. Well, thank you, Mr. Chairman. 

You know, I guess just fundamentally here I think Mr. Miller’s 

testimony has been very compelling to me. My original question 

was, what is the primary difference between what you are doing 

and the bankruptcy protocol that is already set up? And I understand that the big difference is who is in charge here. 

And I have got to tell you, I want to be very respectful to Mr. 

Barr and Mr. Krimminger because I know that you are here, you 

know, at the behest of others, but you are in a position of having 

to defend what I think is almost an indefensible situation here because there is the reality of a super-regulator, like the Chairman 

suggests. This is putting this into an entirely new environment, 

kind of a bureaucratic environment, and you are trying to write a 

whole century of law here in a short period of time. You are trying 

to create an entirely new mechanism; you are trying to essentially 

replace what the bankruptcy system already accomplishes in most 

cases. 

I have not heard any particular, clear, specific advantages that 

this would offer over the bankruptcy system. I just haven’t. So let 

me just say that one of the things that concerns me is under the 

legislation here it says—this is verbatim—no judicial review of determination pursuant to the subparagraph. No court may review 

the appropriate Federal regulatory agency—that would be you—determination subject to subparagraph D to disallow a claim. 

88 

In other words, the gentleman, Mr. Miller, is absolutely correct. 

You could go into a Federal court and make a big statement—I will 

call on you in a moment—and I just think that you are talking 

about a modicum of chaos here, and there is a lot of hubris I am 

hearing here that if the right people were in charge it would all 

work out okay. 

And, you know, I am looking at some graphs here and there is 

an indicator where, when the bankruptcy by Lehman occurred 

there was a little hiccup in the graph, but when the BernankePaulson testimony came and TARP was announced, boom, it was 

disaster time. And I am convinced that the inept intervention by 

the department is most of what catalyzed the panic. Now, I am not 

suggesting that it was at the cores substance of what the underlying problem was, but it catalyzed the panic. 

The same thing here with the Dow. When the Lehman bankruptcy occurred it bounced a little and bounced back up, but when 

this announcement of this two-and-a-half-page plan to save the 

world occurred the Dow just went—bottomed out because the market couldn’t understand how the bureaucrats were going to come 

along and save the day. 

Now, what I hear happening here is that somehow you are going 

to all of a sudden have, under the FDIC, the ability to have the 

same transparency, the same protective rules, the same wisdom, 

the same experience as the entire bankruptcy court mechanism 

that has been going on for so long. And I know I am being a little 

rough on you here, but let me ask a couple questions. 

First of all, it seems to me that the additional strain and resource demand on the FDIC of this proposed new regulation would 

weaken the confidence in the FDIC’s existing brand as a guarantee 

and the resolver of depository institutions and a single measure 

failure here by the FTC to resolve a bank holding company, for example, Citigroup, under the new proposed resolution would undermine the market confidence in the FCID. And wouldn’t a loss of 

confidence then accomplish the same tragedy here where there is 

a run on the banks? 

So let me ask you both, if you have got Goldman Sachs over here 

on one hand, now a bank holding company, and you have got your 

largest covered bank under FDIC, and both of them go into disaster at the same time, which one is your priority? And I will address it to Mr. Barr first. 

Mr. BARR. Thank you very much, Mr. Franks. I guess I would 

respectfully disagree with respect to the characterization of the activity we are doing as creating this kind of entity you described. 

What we are talking about doing is applying for a narrow class of 

the largest, most interconnected firms in the country the opportunity to apply, in narrow circumstances, special resolution authority to be administered by the FDIC, an institution that has carried 

out the same procedures through the same protections for threequarters of a century in the narrow additional class. 

In my judgment the FDIC would have the capacity to engage in 

the kind of necessary approach to preserve the stability of the financial system while also taking care of deposit insurance—— 

89 

Mr. FRANKS. But you are suggesting that it would be a new—you 

know, you would have additional responsibilities? I hope I could get 

that, because if I can’t get that I am—— 

Mr. BARR. Yes, sir. 

Mr. FRANKS. Okay. So what would be the main—and you haven’t 

told me where your priorities would be. Would it be with Goldman 

Sachs or your largest bank—covered bank? 

Mr. BARR. It is not a question of—— 

Mr. FRANKS. Well, that is my question. 

Mr. BARR. Yes, sir. I believe that the FDIC has the judgment and 

the capacity to take appropriate steps to protect depositors with respect to a bank and also to take appropriate steps to wind down 

large firms and to preserve through that mechanism financial stability in the system. 

Mr. FRANKS. Well, could you understand a potentially large 

bank’s reticence to see this situation when maybe Goldman Sachs, 

which would be largely represented in the department, and all of 

a sudden it looks to me like that they would say, ‘‘Hey, you know 

what? These guys might favor Goldman Sachs over the banks here 

because of the large political representation that is there.’’ And I 

am not making any—I am not challenging anybody’s loyalty here, 

I am just suggesting that the market is going to consider that and 

what you are doing is you are politicizing the whole process. 

You have got sort of a ‘‘bailout on demand’’ mechanism here and 

you are widening the ability of executive government, of bureaucratic government, department government to intervene in these 

areas that it really—that has pretty much been determined to be 

what was the catalyst of a lot of the panic in the first place. And 

I mean, can’t you understand why the business community would 

say, ‘‘Well, they screwed it up once. Why should we all of a sudden 

have this great confidence that they can come along and rescue everything now?’’ 

Mr. BARR. Mr. Franks, in fact I agree that we shouldn’t care at 

all what Goldman Sachs thinks or any other firm thinks about anything we all do up here. The point is to develop a system that protects the taxpayer, protects our economy, and makes sure that we 

have the tools available to we need to end ‘‘too big to fail,’’ to regulate the largest firms, to have higher capital requirement and liquidity requirement on it, and we have to be humble about that. 

We have to know that sometimes that is not going to work. If it 

doesn’t work we need to have the option, other than a bailout or 

bankruptcy, that is actually going to be able to resolve the firm in 

a way, wind it down in a way that is not disruptive to the system. 

And our judgment is that—— 

Mr. FRANKS. It just occurs to me that, you know, if you have got 

this additional process, that the market doesn’t know whether to 

trust it or not and the firms, then they think, ‘‘Oh, well then our 

issue is not whether we get a bailout or a bankruptcy. We have got 

this other possibility that we may try.’’ And all of a sudden there 

is an entirely new calculus in the minds of some of the business 

leaders. And it just occurs to me that this is a recipe for absolute 

confusion. 

And I still haven’t heard a major advantage in the process that 

you are talking about that would not be—and I am sure there may 

90 

be some—but that would not be already available under what Mr. 

Miller has talked about in a Chapter 11. 

Mr. BARR. Could I suggest, sir, that I think that the ability to 

act quickly and decisively with respect to changing the management, with respect to providing financing for liquidity functions, 

with respect to the ability to reduce risks to financial system as a 

whole through knock-on effects to counterparties, and the ability to 

take that kind of decisive action, not with respect to protecting the 

narrow interests of the firm but with respect to preserving taxpayer interests and having the ability to assess on the industry as 

a whole to make sure that the largest firms pay for any financing 

improves market discipline and preserves the ability to strengthen 

our financial system. I do not believe that bankruptcy is adequate 

to doing that. 

Mr. FRANKS. So getting back to the one question that I asked, 

just as clear as you can, I know—what happens if Goldman Sachs 

and your largest bank blow up on the same weekend? What happens? What do you do? 

Mr. BARR. You resolve the depository institution according to existing bank failure law and you resolve the large financial holding 

company according to the special resolution procedures as described in our proposal. 

Mr. KRIMMINGER. May I respond to the section of the FDI Act 

that you read from a moment ago? 

Mr. FRANKS. Sure. 

Mr. KRIMMINGER. That section simply means that there is no, 

like, administrative procedure act type of review of the decision by 

the receiver. That is why I was saying before, there is a de novo 

judicial review of the decision. 

The court can’t review the decision and give deference to it; they 

have to review it without giving deference. And the subsequent 

provision of the FDI Act, which provides specifically for the ability 

to go to court, file your claim, and get that resolved by the court. 

So there is a judicial review of the claim, the decision—— 

Mr. FRANKS. But the ultimate impact is that the process then 

has less transparency in the long run because, you know, you can’t 

possibly suggest to me that you are going to—under this new modicum here where you don’t have 50 years of developed transparency 

with the bankruptcy court, you can’t suggest to me that there is 

the same transparency. 

And Mr. Miller, would you suggest—— 

Yes. We have given you plenty of time here, guys, but I want 

to—because my time is short too. 

Mr. MILLER. Thank you, Mr. Franks. There is nothing that Mr. 

Barr has said that could not be done as a complement to bankruptcy. I believe Mr. Barr is—and I think simply saying that the 

Chapter 11 bankruptcy has a very narrow focus is understating, 

because if there is exigent in circumstances, certainly there is going 

to be a lot of public interest in it. 

In terms of bridge financing and all of that, that can be done. 

Now, I hate to use Lehman as an example all the time, but before 

Lehman filed, the Federal Reserve and the Treasury went to all of 

the major money-center banks and the major street—Goldman 

Sachs and Morgan Stanley and Merrill Lynch, when Merrill Lynch 

91 

was still there—and nobody was prepared to do anything. What do 

they do in those circumstances? 

Mr. BARR. I think that Mr. Miller is exactly right that no one 

was prepared to do anything. Our financial system was teetering 

on the brink. And I think it is ironic to say the least to hold up 

the failure of our financial system last fall as the model for the 

kind of financial system we want to have in the future. We can’t 

have that kind of system in the future. 

Mr. MILLER. Well, I would just suggest that, you know, the entire 

foundation of the crash was loans that did not perform as those 

who rated them said they would perform, because whether it is derivatives or whatever it might be, that was the basis. If those loans 

had performed as they would have traditionally, until we changed 

the rules and government in the middle of it all, then the entities 

would have had much more to lose and their own stockholders, all 

of these systems—even Fannie Mae and Freddie Mac—their stockholders would have said, ‘‘What? You are underwriting loans that 

you don’t know whether the person has a stated income, no credit 

history, no big down payment. What are you doing?’’ 

All of a sudden the traditional judgment would have entered into 

the process, but when government comes in and says, ‘‘Well, we are 

guaranteeing it because we are really smart; we know how to make 

it all work,’’ and I will suggest to you that this is the same mistake 

that has littered the highway of histories where government comes 

in and feels like they can make better judgments than the market 

and those who are in business and the foundational productivity 

sector are. 

Now, let me just suggest here, the assistance that is talked about 

in this legislation for a bank holding company—this would be Goldman Sachs—this would allow you to come in, make loans or purchasing any debt obligation, purchasing assets of the covered bank, 

assuming or guaranteeing the obligations of the covered bank, acquiring any type of equity interest in the covered bank, taking a 

lien on all assets of the covered bank, selling or transferring all or 

any part of the covered bank. That is a recipe for you just coming 

in and just taking them over, and I don’t know how you think that 

you are going to do a better job than most of the private sector has 

done without putting the responsibility on them to perform or go 

bankrupt. 

Mr. KRIMMINGER. May I make a comment with regard to that 

provision? 

As I indicated before, we have not—we at the FDIC have not— 

supported every provision in the proposed Treasury proposal. We 

do not support provisions that would provide assistance to open institutions. That is why our focus is on the institution needs to be 

closed and needs to go through an insolvency process and not be 

bailed out prior to closure. 

Mr. FRANKS. Well, the Chairman has been very kind to me and 

I want to give you, Mr. Barr, a last thought and Mr. Miller a last 

thought, then I am finished. But obviously you could probably 

guess here that I am a little bit not convinced here. 

Mr. BARR. Mr. Franks, I would agree with you that we need to 

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92 

lators. We need to be humble about the ability of managers of large 

firms. 

And I think that is why it is absolutely critical that we build up 

large buffers in the system in the event of failure. It is why we 

need tough rules on these institutions in advance. 

And I think what we are talking about is just a narrower question of, do you want a process through the bankruptcy process, 

which involves a set of individuals working in the government, or 

do you want a special resolution process which involves a set of individuals working in the government to decide the nature of the 

resolution? And in our judgment the bankruptcy process is set up, 

designed for a different function. It works well for most of the time 

for most institutions in doing what it is supposed to do. 

We are talking about in the narrow case of financial stability— 

do we need a broader purpose and a carefully cabined approach 

using long trusted mechanisms? We think that we do. 

Mr. FRANKS. Mr. Chairman, considering the history of the last 

year, we have seen some major intervention by government that is 

unprecedented in this country, and I would just suggest that if we 

had gotten back to just basics and told these financial institutions, 

‘‘Listen, you better have enough equity to cover your risks and you 

better make sure that the taxpayer is the last one to have to intervene here, and if you don’t you are not going to go bankrupt you 

are going to go to jail if you don’t follow at least having the fundamental equity necessary to cover your risk.’’ And if we did that and 

we said, ‘‘Okay, buyer beware, lender beware, guys, have a good 

time,’’ I can tell you it would have worked a whole lot better than 

government trying to come in and tell everybody how to do it and 

guaranteeing everything to the extent that it threw the whole skew 

of a real market out of place in the minds of any rational participant. 

And with that, Mr. Miller, I give you the last word here. 

Mr. MILLER. Thank you, Mr. Franks. 

I go back to what Mr. Johnson said earlier this morning in connection with Chairman Bernanke’s statement about after the experiences with AIG and Lehman we need a third option. There is no 

place where Mr. Bernanke or anybody else has said, ‘‘What are the 

experiences in AIG and Lehman that requires this special superagency?’’ 

I would submit to you that H.R. 3310 is a good start to where 

we should go incorporating those amendments into the bankruptcy 

code. We need to deal with the derivative problem. We have to take 

out those safe harbors that are in the bankruptcy code. And all of 

this without some cross-border solution is not going to work. 

We are dealing with firms that are global and have huge operations overseas. In the Lehman case we now have 80 separate insolvency proceedings. We have to deal with corporate governance 

obligations and fiduciary duties in other countries that the FDIC 

can’t deal with, or the Treasury, in terms of stability. 

And until we have a cross-border solution the type of solution— 

this regime that is being proposed simply is not going to work. It 

all can be done in the bankruptcy—within the bankruptcy law and, 

as I said, with full transparency. 

93 

Mr. COHEN. [Presiding.] Thank you, sir. And this has been a very 

unusual manner of conducting a Committee hearing, but I think it 

has been very evocative of issues, and I think it has been very 

helpful to us. And I thank Mr. Miller for joining the panel and Mr. 

Barr and Mr. Krimminger for participating as we have gone long. 

I would like this one last thing, Mr. Barr. I just think there probably needs to be some type of standard when you get out of the 

bankruptcy into this resolution, and the standard ought to be 

spelled out in some way, like a compelling state interest sometime 

that—your compelling financial economic doomsday, you know, and 

define some standards that could be met. 

Mr. BARR. I would agree with that, Mr. Chairman, and we have 

a standard proposed in our legislation. We would be happy to make 

it available to you for your consideration. 

Mr. COHEN. I look forward to that and I think—and I have to ask 

you, too, how are you related to Bob Barr? Are you all cousins? 

Mr. BARR. We are not cousins. In fact, I am fairly confident we 

are not related in any way. My name comes from a long string of 

changes through the process of immigration and assimilation to the 

United States and I believe it used to be Kaplinski in Poland. 

Mr. CONYERS. But so did Barr’s, I think, came from the same 

place. [Laughter.] 

Mr. BARR. The gulag. Maybe. Right now I am just your neighbor 

up the street in Ann Arbor. 

Mr. COHEN. Thank each of you and I appreciate your testimony. 

And I would—you might want to find a different word that is a better word than regime. I am afraid that may reflect poorly. But I 

thank each of you. 

Mr. BARR. Thank you for your advice. 

Mr. COHEN. We will get the thesaurus together. 

We would like to now welcome the second panel and thank our 

first panel for their—oh. I thought I beat the clock—— 

Mr. KING. Mr. Chairman, I—— 

Mr. COHEN. Mr. King is here. 

Yes, Mr. King, you are recognized. 

Mr. KING. Thank you, Mr. Chairman. I thought for a moment 

that you had suspended your peripheral vision and—— 

Mr. COHEN. I can go to my left. 

Mr. KING [continuing]. And I seldom do. 

And I want to thank the witnesses for your testimony, and as I 

look out across the list we have here perhaps I could start with Mr. 

Barr and ask you this question, and that would be, if we had simply allowed these financial institutions to go through a normal 

process of Chapter 11 or Chapter 7, what would you predict would 

be the results today? How would those large investment banks 

have fared? What would be left? Who would have picked up the 

pieces without regard to what the prediction might have been for 

the global financial structure? 

Mr. BARR. I think that if we had—if the Federal Government at 

the time had not taken significant measures, both through the Federal Reserve and the Treasury and the FDIC, to provide liquidity 

in the system the financial consequences would have been much 

more severe and lasting. Already I think that the difficulties that 

have been experienced because of the financial crisis have been 

94 

quite severe to American consumers and businesses and households and the taxpayer. I think—— 

Mr. KING. Mr. Barr, I think I am going to need to rephrase my 

question: What would the pieces look like if we had let that happen, though? I mean, I understand that you endorse the support 

that has been there for these institutions to maintain the entities 

that we had as much as possible to go through this. 

Had we not, if we had decided that ‘‘too big to be allowed to fail’’ 

really didn’t apply, that the free enterprise and free markets and 

the risk of failure as a deterrent for future imprudent investments 

or risks on lending institutions, what do you think would have happened in the function of the, say, bankruptcy court, for example, of 

those large investment institutions that were bailed out? 

Mr. BARR. Sir, in my judgment let me just say, I don’t really care 

at all about the firms themselves or what pieces would have been 

left of them or what—— 

Mr. KING. But I do, Mr. Barr. That is why I asked the question. 

Mr. BARR [continuing]. What new pieces arrive. It is not about 

protecting the firm, so the key question is what is necessary, in 

terms of imposing the discipline on them in the future, making 

sure they have higher capital standards, higher liquidity requirements, bigger buffers in the system, tougher forms of prudential 

supervision. We have to make sure they are supervised on a consolidated basis so you don’t have a firm like AIG that really is a 

loophole in the system with respect to bank holding companies. 

And then the question is just, in the event of crisis if all that is 

crashing down and has failed, should the government have the 

ability to throw those firms into a resolution procedure? I think the 

answer is that in some cases maybe yes, and that is why there is 

this narrow authority that is provided in that special circumstance 

with respect to these largest interconnected firms. 

Mr. KING. Thank you, Mr. Barr. 

If I could direct that similar question to Mr. Miller, and also ask 

Mr. Miller if you have gamed this out and anticipated or tried to 

predict what would have happened if the government hadn’t intervened. And as a person who takes care of my money—when I invest it in a business startup, for example, I do so with the prudence 

of the realization that if it doesn’t work out I lose my money. When 

I borrow money or loan money it is done so with the prudence of 

the judgment of being allowed to fail. 

And that deterrent was taken away, and I think it was taken 

away implicitly some years ago. In fact, some of the top financial 

people that I have heard from 2 years ago were, ‘‘What you do in 

this business is pretty much what everybody else does. That way, 

if they are making money you make money but if everything falls 

apart you get bailed out with the rest of them.’’ What would you 

say about that subject matter? 

Mr. MILLER. Mr. King, I would respond in this context: If the 

firms went into bankruptcy—Chapter 11 or Chapter 7—the survival of the firms would be minimal at all. The assets would have 

been offered for sale, they would have been broken up. 

If the economy was in a stable condition there is a thing called— 

a capitalist term called constructive destruction, or something like 

that, that part of capitalism is failure, and when there is a failure 

95 

other elements of the economy take over that deceased, let me call 

it, entity. I think the problem in September of 2008 was the systemic risk, where it wasn’t a question of Lehman; it was the question, was Merrill Lynch next? Was Goldman Sachs next? Was Morgan Stanley next? 

And if you had a successive set of bankruptcies for each one of 

those firms the consequences to the overall economy, I think, would 

have been disastrous. 

Mr. KING. I thank you, Mr. Miller, Mr. Barr, all the witnesses. 

I appreciate it, Mr. Chairman, and I yield back the balance of my 

time. 

Mr. COHEN. Thank you, Mr. King. 

And now we will conclude the first panel, and we are going to 

quickly go because we are going to have to vote at 3’ish, or whatever. 

Mr. BARR. Thank you, Mr. Chairman, Chairman Conyers. 

Mr. COHEN. You are welcome, sirs. Thank you very much. 

Second panel, come in. I am sorry I have been probably derelict 

in recognizing your expertise and just deferring to Mr. Miller but 

it made for a good panel discussion. 

The first witness we are going to hear from is going to be Mr. 

David Moss. Professor Moss is the John McLean professor at the 

Harvard Business School, teaches business, government—senior 

economist at Abt Associates and he joined the business school faculty in 1993. And we will recognize Professor Moss now for his 

statement. 

Professor Moss, if you would start in the interest of time? 

TESTIMONY OF DAVID MOSS, HARVARD BUSINESS SCHOOL 

Mr. MOSS. Thank you, Mr. Chairman. 

Mr. Chairman and Members of the Subcommittee, I appreciate 

your inviting me here today, and I am very pleased to have the opportunity to speak about the proposal for a resolution mechanism 

for systemically significant financial institutions. I actually support—I do support the broad idea of a resolution mechanism, and 

the reason I support it is that I believe it could be helpful in navigating a rather narrow path and a treacherous path between—— 

Mr. COHEN. If I may interrupt, at the suggestion of the Chairman we will go through a continued unorthodox policy in this Committee, which I am happy to be the initiator of because I am very 

unorthodox in more ways than one. And what we would like to do 

is ask Mr. Moss, first, Professor Sagers, Professor Skeel, and Mr. 

Weissman to comment—you can incorporate some of what you had 

in your opening statements, all of which will be put into the record, 

but also to comment on what you have heard in the testimonies of 

Mr. Barr and others and give your opinion of their testimonies and 

how you—safeguards or non-safeguards you think we should look 

for in having a resolution group rather than bankruptcy. 

Professor Moss, you start. 

Mr. MOSS. It was quite an interesting discussion to begin with. 

I guess I would start that I am not sure that the choice, which has 

been framed here is, in fact, the choice we face. The choice that 

was framed in this discussion back and forth was one between a 

96 

resolution mechanism and bankruptcy, and I realize that that may 

seem like the choice but I don’t think it is. 

I think the choice, sadly, is between resolution and bailout. I 

think that in the—what we have seen is that there is now a sufficiently widely held belief, perhaps correct, that bankruptcy of 

enough very large financial institutions could have catastrophic effects for the financial system. And given that, it is not clear that 

policymakers from any party at any time, in my view, would allow 

that to happen. 

And I think as a result, although the law on the books would say 

to put the firm in bankruptcy, it is not clear to me that in fact that 

would be followed in a crisis. It was not followed in this crisis by 

either administration, Republican or Democrat. I don’t think it 

would be followed in the future either. 

And, as a result, I don’t actually think the choice is, in fact, between resolution and bankruptcy. I think it is between resolution 

and bailout. 

Between those two choices I will take resolution. I recognize its 

problems. 

I will say that your predecessors, it seems to me—I had not prepared to talk about this, but—your predecessors have excluded financial firms quite regularly over the course of American history 

from bankruptcy law. The original 1898 act, as I recall—Mr. Miller, 

I am sure, would know better than I—but I believe excluded all 

corporations from voluntary bankruptcy, but banks in particular 

were excluded from involuntary bankruptcy, so they were already 

excluded. Banks, of course, were subsequently brought under 

FDIC. 

And insurance companies are also excluded, if I am correct, from 

bankruptcy law. So I think the idea of excluding financial companies from bankruptcy law is not a new phenomenon. 

Maybe I can just make one more comment—I know you want me 

to be brief. I have two significant concerns about the idea of a resolution mechanism. Broadly I think it is necessary, but I have two 

concerns. 

One is that we should not fool ourselves to think that a resolution mechanism will solve all the problems. There is still the basic 

problem of systemic risk and the basic problem of moral hazard, 

and as we try to solve one we increase the other. A resolution 

mechanism is an attempt to provide a balancing act, but it is not 

a perfect one. 

The more serious problem—and I think this is one you ought to 

consider if you go forward with the resolution mechanism—is that 

in a crisis, in a crisis it is not clear that we would, in fact, follow 

a resolution mechanism. The question is, is the resolution mechanism credible? Just in the way that we have to ask, is bankruptcy 

credible? Over the past year-and-a-half it has not been. At every 

opportunity we avoided it. 

At every opportunity—it seems to me that if we are not careful 

we could create a beautiful resolution mechanism and it would be 

circumvented in a crisis. So we need to create a mechanism, and 

a system, that is credible. 

I would be glad to talk about how to do that. I have some ideas. 

But I will just remind you that with FDIC—which, by the way, I 

97 

think the resolution mechanism works quite well with FDIC—but 

it is attached to an insurance system that protects depositors. I 

suspect that if that insurance system did not exist we would be 

very reluctant to put a major bank into resolution for fear that it 

would spark runs on other banks by fearful depositors. 

So there is a question of how we stabilize the broader financial 

system, whether we put a major financial institution into bankruptcy or resolution. Do we have a system for protecting the 

healthy institutions at the same time? I would be glad to talk 

about that in more detail if that would be helpful, but those are 

my broad comments. 

[The prepared statement of Mr. Moss follows:] 

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Mr. COHEN. Thank you. And we will come back and hopefully 

have time for discussion. 

We are going to go to Professor Sagers next because Mr. Miller 

has let us know his thoughts and participated in the colloquy that 

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D.C. at Arnold & Porter and Shea & Gardner, involved in largescale litigation, public policy matters, and different issues of commercial affairs. 

Professor Sagers, your thoughts and opinions? 

TESTIMONY OF CHRISTOPHER SAGERS, 

CLEVELAND-MARSHALL COLLEGE OF LAW 

Mr. SAGERS. Thank you very much, Mr. Chairman. It is my great 

privilege to be here. 

I am more than happy to scrap my prepared statement because 

I think that I can be of use here in precisely one way, which is to 

answer Chairman Conyers’ specific question, does the bill change 

existing antitrust law with respect to these entities? And I can give 

a yes or no answer. I have the disability of also being a lawyer, so 

I would like to expand on it a little bit if I could, but the simple 

answer is yes, it does change existing law. 

In deference to Secretary Barr and Mr. Krimminger, I gather 

they are not antitrust lawyers primarily, and in drafting the bill 

and preparing their testimonies they were advised by antitrust 

counsel, and in their defense they gave answers which were not literally false. There is an existing—and I don’t mean to cast any aspersion there—— [Laughter.] 

Mr. COHEN. Criminal defense lawyer? [Laughter.] 

Mr. SAGERS. The short answer—a short way of saying what is 

really a very complicated answer—is that it is true that bank 

merger review has always existed as something of a special case 

under our antitrust merger review system. And it is also true, as 

they testified, that that system contains a series of emergency safety valves that can make the process go really fast if the banking 

regulators decide that one of the banks is in danger of failure. 

I think we need to beware—I do want to say, by the way, that 

there is one significant change. There is one technical legal change 

made to the law that really is potentially breathtaking. But even 

before getting to that, it is a bit misleading to say that we have 

addressed competition concerns because we just incorporate antitrust law that we have always had for bank failures. 

The antitrust law that we have always had for bank failures is 

extremely problematic. It has never ever incorporated any concern 

for systemic risk; it has repeatedly approved the merger of immense banking institutions and conglomerate financial institutions 

even over strenuous objections about the increase in systemic risk 

that is being caused. 

And I don’t think that—even if that system weren’t put into an 

incredibly rushed procedural framework under this bill, as it will 

be, it wouldn’t—that existing system of bank merger law wouldn’t 

be very well designed to handle the competitive risks, which are 

both systemic risks and also the more traditional competitive risks 

that we deal with in merger law. That system wouldn’t be very 

well set up to deal with mergers of entities of this immense magnitude. 

All right. That is all in answer to the question whether existing 

bank merger law is really adequate to deal with these problems 

even if it is not going to be changed by the bill. In one important 

respect existing bank merger law is changed by this bill, and that 

106 

is that the bank holding companies that can be subject to the resolution authority under this bill include ‘‘financial holding companies’’—that is, those businesses that are allowed to own both banks 

and other financial businesses. 

It is clear under the bill that if one of these resolution actions 

is undertaken and an entire financial holding company or big 

pieces of it are given away—sold, rather; they wouldn’t be given 

away but sold to other large competitors—there will be merger review, and moreover, the non-banking piece of any financial holding 

company that is taken into receivership, that transfer of that piece 

will be reviewed not under bank merger law, but under the HartScott-Rodino Act, or as the familiar, more normal review of antitrust merger review. 

And that is how it would happen under existing law, except that 

this bill provides that that non-banking piece of the financial holding company that is to be transferred to a competitor, possibly a 

really big competitor with a lot of market share, that transfer will 

be judged under the Hart-Scott-Rodino Act, just exactly as it would 

under existing law, except that the antitrust agencies won’t be allowed to make the so-called second request for additional information, they won’t be allowed to request any extension of time for reviewing the merger. 

So what we are basically going to have is transactions involving 

transfers of truly the largest non-banking financial institutions reviewed by DOJ or FTC under extremely tight time constraints and 

with very limited information, and those agencies are either going 

to be forced to rubber stamp these transactions or just challenge 

all of them so that they can get them stopped and the courts can 

review them. So the testimony that was given is, to some extent, 

incorrect and I think quite misleading. 

[The prepared statement of Mr. Sagers follows:] 

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Mr. COHEN. Professor Sagers, thank you for your addendum to 

their testimony. 

Mr. David Skeel, professor of corporate law at Penn, author of 

‘‘Icarus in the Boardroom’’—the history of bankruptcy laws—publications, received several distinguished recognitions and honors, corporate law, bankruptcy, and sovereign debt, law and religion, and 

poetry in the law. 

Thank you, Professor Skeel. 

TESTIMONY OF DAVID A. SKEEL, JR., 

UNIVERSITY OF PENNSYLVANIA LAW SCHOOL 

Mr. SKEEL. Well, thank you for that plug. I wish I had brought 

a few of my books to have outside to try to sell to people before 

we are done today. 

I think I have three quick points in response to the commentary 

I have heard so far. The first is, although Harvey Miller and I do 

not agree about everything—there are a few things in bankruptcy 

we are not completely on the same page on—I pretty much agree 

completely with everything Harvey has said thus far. To elaborate 

on that just a tad, Professor Moss made the comment that our real 

choice is resolution versus bailout. In my view that is not quite 

right. I think our real choice is bankruptcy versus bailout. 

In my view, the proposed resolution authority would just institutionalize the bailouts we have seen in the last year. If we had that 

resolution authority in place, what would happen if we had another 

Lehman or AIG is they would be bailed out before they got to the 

resolution authority decision. And I think it is not either accidental 

or unimportant that the trigger decision—the decision whether to 

invoke the resolution authority—is a purely political decision being 

made by bank regulators. So that is my first point. 

My second point is, with respect to Mr. Krimminger and Mr. 

Barr—and I am sorry they are not here now; Michael Barr is a 

friend of mine; I have not previously met Mr. Krimminger—they 

repeatedly referred to 75 years of beautiful FDIC history resolving 

bank failures. In my view, the reality is the FDIC was not tested 

from the 1930’s until the 1980’s. We didn’t have bank failures, for 

the most part, and that is one of the beauties of post-war America. 

The first time the FDIC was truly tested was in the banking and 

S&L crisis of the 1980’s. By most accounts their performance was 

quite poor. And as a result of that poor performance we put new 

banking laws in place in 1989 and 1991 that really forced the 

FDIC’s hands. 

We have prompt corrective action rules, we have least cost resolution rules. Those work pretty well for small banks and maybe for 

medium-sized banks as well. But they effectively don’t apply to the 

very institutions we are talking about today. 

They do not apply to large banks. When they run into trouble the 

FDIC is able to do whatever it wants, exaggerating just a little bit. 

And the FDIC’s history with the big banks is not a good history. 

I think the Indymac example from last year is a good example. 

So to the extent the FDIC is effective, it is only effective with 

small and medium-sized banks. It is not effective with large banks 

and there is not good reason to extend its authority beyond banks 

to other financial institutions. 

129 

Finally, in my view the key question—what I would hope you all 

will be thinking about and talking about in the coming months— 

is how we can make a bankruptcy system that works really well 

even better. And the answer to that, it seems to me, has to do with 

derivatives. 

Over the past 20 years, as part of the their campaign against 

regulation derivatives lobbyists together with the Fed and the 

Treasury persuaded Congress—that is you all—to exempt derivatives from several key core bankruptcy provisions, the most important of which is the automatic stay. What I hope you all will be 

talking about is how and how much to reverse that deregulation of 

the last 20 years and reimpose the stay. 

One approach to that would be a blanket reversal, a stay of all 

derivatives. Another would be the approach that has been suggesting in H.R. 3310. Either of those, I think, are very good approaches and I hope that is where you all end up before the dust 

settles. 

Mr. COHEN. Do you have a poem to close with? 

Mr. SKEEL. I will work on one before—give me a couple more 

hours. I can—— 

Mr. COHEN. A limerick will do—— 

Mr. SKEEL. Let us go now, you and I, while the evening is spread 

against the sky. [Laughter.] 

Mr. COHEN. It is not for us to do or die. 

Mr. SKEEL. We are reading from the same script. That is for 

sure. 

[The prepared statement of Mr. Skeel follows:] 

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PREPARED STATEMENT OF DAVID A. SKEEL, JR. 


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Mr. COHEN. Mr. Weissman has written extensively. He is our 

next witness—Robert Weissman, Public Citizen president. That is 

a pretty heady title. Expert on economic, health care, trade, and 

globalization, electoral property, and regulatory policy, and issues 

related to corporate responsibility and commercialism. 

Written extensively over the years. Prior to joining Public Citizen 

he was director of corporate accountability organization Essential 

Action, editor of Multinational Monitor, that tracks corporate actors worldwide, and an attorney with the Center for the Study of 

Responsive Law. 

Mr. Weissman, you are on. 

TESTIMONY OF ROBERT WEISSMAN, PUBLIC CITIZEN 

Mr. WEISSMAN. Thank you very much, Mr. Chairman. I am sorry 

that I am afraid I won’t be able to offer any poems or a—perhaps 

concepts achieve pristine insight of poetry. 

I want to thank you for holding the hearing and emphasize, I 

think, the importance of an antitrust approach to considering the 

‘‘too big to fail’’ problems in the structure of the financial sector. 

I think antitrust offers us a lot of tools and principles to think 

about how to handle the sector. 

With Chairman Greenspan I am happy to say that we agree that 

an appropriate application of antitrust principles is to actually directly break up the largest institutions. They are too big to fail. I 

agree with all of the proposals that Mr. Barr put forward on the 

front end to deal with systemic risk, but they are not enough. The 

largest institutions will always find a way to get around narrow, 

traditional agency regulation—prudential regulation. 

But if they are smaller they are more able to be grappled with. 

We can avoid a lot of the problems that we are spending this hearing talking about if we go ahead with an aggressive breakup strategy. 

It is feasible, can be done in an aggressive, top-down way, or it 

can be done in a more gentle way by the institutions themselves. 

Citigroup, for example, is itself now stripping itself down effectively 

on the model that I might be suggesting. 

Second, I think antitrust teaches us about the importance of 

structure and also looking to revising Glass-Steagall itself or GlassSteagall-like principles and separating out the super-risky activities of the investment banking operations from the commercial 

banks. And again, we are here very happy to side with Chairman 

Volcker on this point. 

There are more modest ways to achieve these kinds of objectives—for example, unwinding the recent set of mergers which 

have made the ‘‘too big to fail’’ problem much worse, or at least 

saying there should be a standstill on future mergers that are 

going to exacerbate the problem going forward. 

We should also be enforcing existing concentration limits which 

have been breeched in the last round of mergers, and there should 

be examination, I think, by Congress over new forms of concentration limits, both in terms of the depository institutions but also 

thinking about asset categories other than depository institutions, 

where it is not obvious what kind of standards you would impose. 

141 

Finally, in terms of trying to avoid problems before they emerge, 

I think antitrust teaches us not just to look at traditional regulation but a set of conduct remedies that are different in approach 

from what traditional regulators do. And to just quickly highlight 

some of the things we—I think it is worthwhile for Congress to consider both avoid systemic risk problems, enhance the ability of regulators to understand what is going on in the super large institutions, and to offer increased consumer protection. 

For this category of institutions that still are super large, there 

should be a prohibition on the use of offshore tax havens and offthe-books accounting, both of which make it too hard for our regulators to understand what is going on. There should be affirmative 

obligations that bonuses are tied—executive pay and bonus compensation is tied to long-term performance to avoid the wrongful 

incentives that exist with the short-term bonus structure that we 

have now. 

There should be, as Mr. Barr said, increased capital reserve 

standards, and I think also increased consumer protection obligations on the largest institutions. To the extent they are permitted 

they can continue to exist. 

On the specific issue of resolution authority, we do think that 

there is a good case to be made for resolution authority to avoid 

the bailout problem, but with some caveats and with some suggestions. One is that there should be a presumption that the institutions are not provided with new financing unless there is some very 

affirmative showing made that there needs to be external financing 

made available. So you really are talking about winding down the 

institution and you are avoiding the problem of the subsidies that 

were given to AIG counterparties. 

The AIG bailout, by the way, was really not a bailout of AIG so 

much as it was a bailout of AIG counterparties, which is, I think, 

an important consideration to keep in mind. 

There should be also, I think, a directive—this speaks to Professor Sagers’ point—there should be a directive to any resolution 

authority that as it is doing the resolution a central and maybe 

overriding objective must be to avoid a worsening of ‘‘too big to fail’’ 

problems, that as they are breaking up banks or merging them, 

whatever they are doing, it should not be to create new even bigger 

institutions, the bigger great white sharks of Mr. Johnson’s metaphor—maybe I do have some poetry in my after all. We ought to 

be avoiding worsening that problem. 

And finally, there should be conditions attached on the resolved 

enterprises, either in whole or when parties are broken up, replicating, I think, some of the things that I mentioned in the area of 

conduct remedies. Those things including, as you pointed out properly, compensation limits and competition standards ought to be attached. If taxpayers are going to be involved and intervening in 

these institutions it is reasonable that we have some reciprocal demands on what goes on with them after they are put back into the 

private sector. 

[The prepared statement of Mr. Weissman follows:] 

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Mr. COHEN. Thank you, Mr. Weissman. I appreciate it. 

Mr. Miller, who has been on our panel—he is our Black’s Law 

of bankruptcy; he is also associated with NYU and Columbia 

Schools of Law and the firm of Weil, Gotshal & Manges. 

Last thoughts? 


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Mr. COHEN. Microphone. 

Mr. MILLER. Thank you. 

Professor Skeel stated my position much more eloquently than I 

can, and I will rely upon his statement. 

Mr. SKEEL. He has a sense of humor, too. [Laughter.] 

Mr. COHEN. Mr. Conyers, do you have questions of the panel? 

Mr. CONYERS. Well, I think we have covered it all except that I 

would think that in the next 2 to 3 weeks, if not sooner—Mr. King, 

I would like you to hear this, as well, because I would want to get 

the concurrence of this Committee—first of all, I think the selection 

of these professors, lawyers, experts is very, very much needed. I 

think that we may have to reassemble to monitor what the Congress does and what further—we have got to go over this transcript. There is an incredible amount of material that we have got 

to digest and evaluate. 

We have had experts all over the place here, and I want to try 

to elicit an agreement that our panel would be able to come back 

and that we would be able to have them back as we proceed in a 

somewhat informal way that the Chairman has conducted this 

meeting, but it has been important. 

Why do you need a 5-minute rule? We are talking about the economic future of the Nation, and we are asking somebody to summarize in 5 minutes where this should go. And I appreciate the 

way that this has been conducted, and I commend all of you for 

what you have contributed to that. 

And I think Mr. Miller might want to comment in here, and I 

would like to yield to him if I can, Mr. Chairman. 

Mr. COHEN. Mr. Miller, briefly. We have got 10 minutes and Mr. 

King. But Mr. Miller, you are on. 

Mr. MILLER. I think I have said all I want to say about my position and I would be happy to answer any questions. 

Mr. COHEN. Thank you, sir. 

And thank you, Mr. Chairman. 

Mr. King, briefly please? 

Mr. KING. Thank you, Mr. Chairman. I am happy to expedite 

this, and I would second Chairman Conyers’ recommendation and 

suggestion. There is far too much knowledge and expertise here to 

dispense with it in 5 minutes of testimony each and a printed testimony. I hope we can find a time to do this in an environment 

where we can dig into this in depth. 

I had the whim to request a beer summit with all of you. I think 

that would be a constructive thing to do. 

But the testimony that I have heard and the testimony that I 

have read is engaging, and a lot of it concurs and overlaps, but the 

contradictions especially—those disagreements—I think we need to 

take some time to explore it in an intelligent fashion. And so rather 

than have me drill into one component of this I would really look 

at it at the broad perspective and second the recommendation of 

Chairman Conyers and ask that we do come back together and do 

justice to the quality of the witnesses we have today. 

I thank you and I would yield back. 

Mr. COHEN. Thank you, Mr. King. 

I appreciate all of the witnesses. I apologize for the timing. We 

are going to be out for another hour. We may, if you are kind 

160 

enough to return, ask you to return at a future time for another 

hearing. Your prepared remarks will be part of the record. 

We had, I think, a very good discussion and I appreciate Mr. Miller coming up. He is the only one of the panelists who I was familiar with, and I am sure that each of you could have contributed as 

well, but it would have not been maybe as—it might have been unwieldy. So I thank you for allowing me to have that type of discussion, which I think was helpful to us. 

It is an issue—bankruptcy versus resolution—and maybe it is another issue because people talked about the bailout. And when do 

you—the compelling interests of the—but you lose some—some of 

the people lose out if you go to resolution that don’t lose out in 

bankruptcy. They have to be thought about. 

And there is a concern in this Nation that we have done too 

much, as I think Barney Frank talks about the collateral benefit 

that to help the whole country we have had to help some people 

who aren’t deserving of help because they are not appreciative and 

they are such gluttons that they poison the water to where nobody 

wants to swim there again. And we might have to go there again, 

but it will be difficult because of the great white sharks that are 

out there swimming in that water. 

Mr. CONYERS. Would the Chairman yield for—— 

Mr. COHEN. Yield to the Chairman of the Chairman—— 

Mr. CONYERS. I just wanted all of you to know that we have been 

in consultation with Chairman Barney Frank, and that both the 

Judiciary Committee and the Finance Committee are moving together—we are not at odds or in competition. We met before this 

hearing, and we will certainly be meeting before we all reassemble 

again. So the thoughts and recommendations that you accumulate 

in preparation for this next Committee hearing, we will be looking 

forward to. 

And again, I want to extend my thanks to each of you for what 

you have done and contributed here today. 

Mr. COHEN. Thank you, Mr. Conyers. 

And I would like to thank all the witnesses for their testimony 

and their—today. 

Without objection, Members have 5 legislative days to submit 

any additional written questions which we forward to the witnesses, and we would ask you to answer promptly as you can to 

be made part of the record. Without objection the record remains 

open for 5 days for submission of other materials. And I thank each 

Member for their time, their patience, their forbearance for the 

way I ran the Committee and the time that we took. 

This hearing of the Subcommittee on Commercial and Administrative Law is adjourned. 

[Whereupon, at 3:11 p.m., the Subcommittee was adjourned.] 

(161) 

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

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MATERIAL SUBMITTED BY THE HONORABLE LAMAR SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS, AND RANKING MEMBER, COMMITTEE ON THE JUDICIARY


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CLEVELAND-MARSHALL COLLEGE OF LAW


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