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WHO IS TOO BIG TO FAIL: 

DOES TITLE II OF THE 

DODD-FRANK ACT ENSHRINE 

TAXPAYER-FUNDED BAILOUTS? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

MAY 15, 2013 

Printed for the use of the Committee on Financial Services 

Serial No. 113–19 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

PATRICK T. MCHENRY, North Carolina, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

PETER T. KING, New York 

MICHELE BACHMANN, Minnesota 

SEAN P. DUFFY, Wisconsin 

MICHAEL G. GRIMM, New York 

STEPHEN LEE FINCHER, Tennessee 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

AL GREEN, Texas, Ranking Member 

EMANUEL CLEAVER, Missouri 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

CAROLYN B. MALONEY, New York 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 15, 2013 ..................................................................................................... 1 

Appendix: 

May 15, 2013 ..................................................................................................... 41 

WITNESSES 

WEDNESDAY, MAY 15, 2013 

Krimminger, Michael H., Partner, Cleary Gottlieb .............................................. 11 

Rosner, Joshua, Managing Director, Graham Fisher & Co. ................................ 9 

Skeel, David A., Jr., S. Samuel Arsht Professor of Corporate Law, University 

of Pennsylvania Law School ................................................................................ 6 

Taylor, John B., Mary and Robert Raymond Professor, Stanford University, 

and George P. Schultz Senior Fellow in Economics, Stanford’s Hoover Institution ..................................................................................................................... 8 

APPENDIX 

Prepared statements: 

King, Hon. Peter ............................................................................................... 42 

Krimminger, Michael H. .................................................................................. 43 

Rosner, Joshua .................................................................................................. 57 

Skeel, David A., Jr. ........................................................................................... 66 

Taylor, John B. ................................................................................................. 70 

(1) 

WHO IS TOO BIG TO FAIL: 

DOES TITLE II OF THE 

DODD-FRANK ACT ENSHRINE 

TAXPAYER-FUNDED BAILOUTS? 

Wednesday, May 15, 2013 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10 a.m., in room 

2128, Rayburn House Office Building, Hon. Patrick T. McHenry 

[chairman of the subcommittee] presiding. 

Members present: Representatives McHenry, Fitzpatrick, Duffy, 

Hultgren, Ross, Wagner, Barr; Green, Cleaver, Delaney, Sinema, 

Beatty, and Heck. 

Ex officio present: Representative Hensarling. 

Also present: Representative Sherman. 

Chairman MCHENRY. The Oversight and Investigations Subcommittee of the Financial Services Committee will come to order. 

We are pleased to begin a hearing entitled, ‘‘Who Is Too Big To 

Fail: Does Title II of the Dodd-Frank Act Enshrine Taxpayer-Funded Bailouts?’’ 

We have a distinguished panel composed of 4 witnesses. Three 

of them are currently here, and one is en route. 

Without objection, the Chair is authorized to declare a recess of 

the committee at any time, and the Chair would like to announce 

that the intention is to adjourn this subcommittee by noon today. 

We have one witness who has to depart by 11:45, and that witness 

is Professor Skeel, who has to catch a flight. 

So, with that, I recognize myself for 5 minutes for an opening 

statement. 

Two-and-a-half years ago, when the Dodd-Frank Act was signed 

into law, President Obama declared that too-big-to-fail had ended. 

Today, there seems to be much debate as to whether that is true. 

Across the ideological spectrum, elected officials, members of the 

media, Federal Reserve Presidents, and even the Chairman of the 

Federal Reserve have acknowledged that this problem still persists. 

Just this past week, Chairman Bernanke, in his speech to the 

Federal Reserve Bank of Chicago, said, ‘‘I think that too-big-to-fail 

is a very big issue and we will not have completed the goals of financial regulatory reform unless we have adequately addressed 

this issue.’’ 

2 

The Administration’s Attorney General Eric Holder highlighted 

the problem from the perspective of prosecuting Federal crime. Testifying in front of the Senate he said, ‘‘I am concerned the size of 

some of these institutions has become so large that it does become 

difficult for us to prosecute them when we are hit with indications 

that if you do prosecute, it will have a negative impact on the national economy, perhaps even the world economy.’’ 

The fact is that Dodd-Frank did not end too-big-to-fail but instead enshrined it. Title II of Dodd-Frank, which created the Orderly Liquidation Authority (OLA), made government guarantees 

for Systemically Important Financial Institutions (SIFI) explicit. 

The Orderly Liquidation Authority is less than orderly. Liquidity 

is provided by the government, but it does have enormous authorities within it. And it is this explicit guarantee that not only provides an unfair advantage to the biggest and most powerful companies and institutions, but in doing so has the potential to seriously 

distort our marketplace. 

However, relatively little has been done in terms of the halls of 

Congress and policymakers here in regard to the actual process 

that takes place within the Orderly Liquidation Authority (OLA). 

The competitive advantages that OLA provides to large, troubled 

institutions are real, and whether these advantages will be applied 

to save large, troubled financial institutions while harming otherwise healthy competitors remains to be seen, as well. 

OLA imposes a bank restructuring process in lieu of bankruptcy 

that is intended to allow troubled financial institutions to continue 

operating while undergoing recapitalization. The general idea is 

that the parent company suffers equity in debt write-downs while 

the operating subsidiary remains solvent and proceeds with business as usual. The FDIC calls this the single point of entry process. 

While this process provides attractive benefits such as avoiding 

a loss of franchise value that often results from a run on a failed 

bank, the benefits of continuity come with an extraordinarily great 

price and a price to the taxpayers and to those who bank with 

other institutions, potentially, as well. 

Protecting the franchise value requires a bailout. While the government provides liquidity to a bridge holding company while exempting it from taxes and potentially exempting it from capital requirements or other regulatory requirements, the cost of these subsidies is ultimately backed by attacks on banks and thereby attacks 

on those that utilize banking services, which, as we know, is clearly 

passed on to customers in my district and across the country. 

The FDIC and Treasury—their discretion to provide these advantages is paired with the political value of saving a Systemically Important Financial Institution. When faced with a failed institution, 

and an open wallet from the Treasury backed by a bank tax, what 

do we expect the regulators to do? To advantage these corporations, 

these new entities, or disadvantage them? 

These are the questions that we have today. As reflected in the 

continued lower cost of borrowing available to Systemically Important Financial Institutions, this bailout perpetuates too-big-to-fail 

and the moral hazard associated with it. 

I recognize that our witnesses have a variety of opinions on this 

matter, and we look forward to their talking through this process 

3 

to policymakers here so that we can more deeply understand the 

Orderly Liquidation Authority, what that bridge holding company 

looks like, and the terms under which they will operate, potentially 

operate, and what the letter of the law actually says. 

So, I look forward to your testimony. And I look forward to Members’ questions and getting to a deeper understanding of the Orderly Liquidation Authority within Dodd-Frank. 

With that, I now recognize the ranking member, Mr. Green, for 

5 minutes. Oh, the ranking member wishes Mr. Sherman to be recognized first on his side. 

Mr. Sherman is recognized for 3 minutes. 

Mr. SHERMAN. I thank the ranking member. 

Chairman MCHENRY. I’m sorry. Recognizing that you are not a 

member of the subcommittee, we have to ask unanimous consent 

for you to make a statement, since we allow subcommittee members to speak first, but hearing no objection, we will recognize you 

for 3 minutes for an opening statement. 

Mr. SHERMAN. I thank both the ranking member and my colleagues. 

TARP stood for Troubled Asset Recovery Program. We put a big 

light on it, we stopped it for a while, and in the end they didn’t 

dare buy a single toxic asset, a single bad bond from the big banks. 

Instead, they bought preferred stock, and that is why we are getting most of our money back, but it was still a bailout. 

The Orderly Liquidation Authority in Dodd-Frank has some 

problems, but compare it the first four drafts of the bill, which I 

described and it was quoted by a few on the other side as TARP 

on steroids because it provided permanent unlimited bailout authority. The current bill limits the amount of cash the taxpayers 

put out to the value of the assets securing that cash, and while 

that does provide some advantages, it certainly is a pale shadow 

of what was intended by those who started that legislation. 

Ultimately, though, you don’t need legislation to get a bailout. 

They didn’t have one in 2008. They were credibly able to tell the 

country that if we didn’t bail them out, they would take us down 

with them, and as long as there are institutions that can credibly 

make that claim, we have seen once that Congress is willing to 

pass whatever statute eventually they propose. So what we need to 

do is make sure that no private entity can make the claim that 

they can pull down the entire economy. We ought to break up those 

who are too-big-to-fail, and as I think the chairman pointed out, too 

big to jail, no institution should be so large that its creditors believe that they will be bailed out and its executives believe that 

they are immune from the criminal laws that affect us all. 

So, I look forward to ending the—not just changing the statute 

but changing the economic reality that we were confronted with in 

2008, and that I hope we are not confronted with again. 

I again thank the chairman, and I yield back. 

Chairman MCHENRY. The gentleman yields back. I now recognize 

the vice chairman of the subcommittee, Mr. Fitzpatrick, for 2 minutes. 

Mr. FITZPATRICK. Thank you, Mr. Chairman, for holding this important hearing. The Orderly Liquidation Authority, or the OLA, 

provides an alternative to bankruptcy that will most likely arise 

4 

when a financial institution’s failure threatens the broader economy. The FDIC has decided to implement the OLA through the single point of entry approach, or SPOE. The SPOE approach is an 

attempt to reduce the complexity associated with resolving massive 

and enormously complex financial institutions. SPOE calls for the 

equity and debt issued at the holding company level to be written 

down during the OLA process as a means to convert a failed financial institution into a new and stable financial institution, thereby 

imposing losses on the former owners and unsecured creditors of 

the firm. 

Due to the complexity of Systemically Important Financial Institutions, the drafters of Dodd-Frank provided a great deal of discretion to the FDIC and Treasury in how and whether to recapitalize 

or liquidate a firm that is resolved under the OLA. Ultimately, the 

vast discretion embeds a permanent level of uncertainty. 

Central to this point is the funding authority provided to the 

FDIC through the Orderly Liquidation Fund, or the OLF. When a 

troubled financial institution enters the OLA process, the FDIC is 

authorized to provide funding up to 90 percent of total consolidated 

assets in the financial institution. The FDIC alternatively could 

provide 0 percent and instead maximize capital via the write-down 

of debt. The difference between 90 percent of a trillion dollars and 

0 percent of a trillion dollars is enormous. How can creditors of 

Systemically Important Financial Institutions accurately evaluate 

risk when the FDIC holds so much discretion? This is only one 

component of the vast discretion provided to the FDIC and to the 

Treasury. 

I look forward to the testimony of our witnesses, and I yield back 

the balance of my time. 

Chairman MCHENRY. I thank the vice chairman, and we will 

now recognize the ranking member of the subcommittee, Mr. 

Green, for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I thank you, and I want 

to especially thank the staff, if I may take a moment to do so, for 

the outstanding work that they have done in compiling information 

for us for this hearing. 

I think this hearing will provide us an opportunity to get some 

answers to many questions that are being posed with reference to 

Dodd-Frank, but I would like to take a moment and deal with the 

issue that the hearing is designed to address: Does Title II of DoddFrank Enshrine Taxpayer-Funded Bailouts? Stated another way, 

does Title II of Dodd-Frank—which is the law—enshrine—which is 

to legalize, memorialize, perpetuate—a taxpayer-funded bailout? As 

you know, bailouts are monies that go to these institutions to keep 

them afloat. That is the way the public views this and that is the 

way I interpret what we are talking about today, the proposition 

that is before us. 

And the question is to be answered in the following manner, pursuant to some of the material that the staff has given to us, and 

I am proud of this material. We have Section 214 styled ‘‘The Prohibition on Taxpayer Funding,’’ which reads, ‘‘Section 214(a) provides that no taxpayer funds may be used to prevent the liquidation of any financial company under this title. Section 214(b) requires that all funds expended in the liquidation of a covered finanVerDate Nov 24 2008 17:55 Sep 05, 2013 Jkt 081754 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\81754.TXT TERRI
5 

cial company be recovered from the disposition of assets or through 

assessments on the financial sector. Section 214(c) provides that 

the taxpayer shall bear no losses from the exercise of any authority 

under Title II.’’ 

Now, that is pretty explicit in terms of taxpayers bailing out an 

institution. I would also add, and I am pleased that my friend Mr. 

Sherman is here, he was very vocal about Section 13(3) and pursuant to his request, and I thank him for making these requests, we 

were able to prevent Section 13(3) funds from being utilized to bail 

out these institutions in the future. So we had this big debate 

about how we were going to bail out companies, and we decided we 

wouldn’t, and then the debate became, how will the taxpayer dollars be used if they are used, and we thought that they shouldn’t 

be used at all. That was the argument that was made in what is 

called an ex ante fashion, meaning that we would use funds from 

the industry to cover any losses the same way we use industry 

funds for premiums for FDIC. If you like the way FDIC functions, 

you should like the way Dodd-Frank and the Orderly Liquidation 

Authority function because FDIC funds are used, these are premiums, and these premiums are an ex ante premium. That means 

they are paid before an event occurs. 

Because we had a good many persons who—and by the way, 

these were not persons, for the most part, on my side of the aisle— 

felt that we ought to have an ex post process, meaning that the 

funds, if they are to be collected from the industry, would be collected after the event occurs, and that was made a part of the bill, 

the ex post process. 

Given that we now have this process of collecting after the fact, 

we also have this language that protects taxpayer funds. We can’t 

use 13(3) funds. Taxpayers, while some of the funds may be used, 

they are not given to the FDIC. It is a loan, and the loan can carry 

with it an interest rate such that taxpayers will never be on the 

hook for a company going out of business. 

Finally, on this point, and I will make it quickly, in my opinion, 

too-big-to-fail is the right size to regulate. That is what DoddFrank does. It regulates too-big-to-fail, but it also provides a means 

by which too-big-to-fail can be eliminated. There is an Orderly Liquidation Authority, and this Orderly Liquidation Authority has the 

means by which large mega companies, the AIGs of the world, can 

be wound down and not have an impact on the broader economy. 

That is what Dodd-Frank is enshrined to do, that is what the law 

says, and in my opinion, we have an opportunity to regulate and 

manage these too-big-to-fail institutions. 

Thank you, Mr. Chairman. I yield back. 

Chairman MCHENRY. I thank the ranking member, and it is 

healthy to have a debate, and that is good. So, with that, we will 

now recognize Mrs. Wagner of Missouri for 2 minutes. 

Mrs. WAGNER. Thank you very much, Mr. Chairman. After our 

country went through the financial crisis of 2008, there was broad 

agreement on two very important issues: first, that hardworking 

American taxpayers should never again be forced to foot the bill for 

the failure of a financial institution; and second, that government 

policy should not favor one particular institution or class of institutions at the expense of the rest of the market. 

6 

Unfortunately, it appears that the so-called Orderly Liquidation 

Authority included in Dodd-Frank violates both of these principles. 

At best, the new resolution authority is, as former Democratic Senator Ted Kaufman recently put it, a ‘‘paper tiger that will fall apart 

the minute it is tested in a real life financial crisis.’’ 

And at worst, the OLA is a mechanism which makes taxpayer 

bailouts the official law of the land, and at the same time undermines basic principles of our free market economy. Either way, I 

hope today’s hearing will make clear that Dodd-Frank and the OLA 

did not end too-big-to-fail and in many ways have actually made 

the problem worse. 

I look forward to hearing from our witnesses on this very important topic. 

Chairman MCHENRY. I thank the Members. With no other Members seeking recognition for opening statements, we will now move 

to the panel’s oral presentation of their written testimony. Without 

objection, all of the witnesses’ written statements will be made a 

part of the record. 

On your table, there is a light. All four of you are savvy to hearings on Capitol Hill, and you know the process: green means go; 

yellow means hurry up; and red means stop. So with that, let me 

introduce our distinguished panel today. 

We have Professor David A. Skeel, who is the Samuel Arsht Professor of Corporate Law at the University of Pennsylvania Law 

School. Among a number of his scholarly publications, he authored 

a book entitled, ‘‘The New Financial Deal: Understanding the 

Dodd-Frank Act and Its Unintended Consequences.’’ 

Professor John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University. He has also authored 

a number of scholarly publications, including a well-regarded book 

entitled, ‘‘First Principles: Five Keys to Restoring America’s Prosperity.’’ For Fed watchers, he is the originator of the Taylor rule, 

inventively entitled the ‘‘Taylor Rule,’’ which is important. 

We have Mr. Josh Rosner, the managing director at Graham 

Fischer & Company. He recently co-authored a book entitled, 

‘‘Reckless Endangerment,’’ which the Economist Magazine recognized as one of its 2011 books of the year and a ‘‘must read.’’ The 

‘‘must read’’ part was my addition to the Economist’s recommendations. I think others will note the Economist’s recommendations 

more than mine. 

Mr. Michael Krimminger is a partner at the law firm of Cleary 

Gottlieb. He recently joined the firm in 2012 after a long and distinguished career serving government with the Federal Deposit Insurance Corporation, where he most recently was the General 

Counsel. 

Each of you will be recognized for 5 minutes, and as I mentioned, 

your written statements will be included in the record, so you can 

summarize. We will begin with Professor Skeel. 

STATEMENT OF DAVID A. SKEEL, JR., S. SAMUEL ARSHT PROFESSOR OF CORPORATE LAW, UNIVERSITY OF PENNSYLVANIA LAW SCHOOL 

Mr. SKEEL. Thank you all for the opportunity to testify on this 

important issue. It is a great honor to appear before you all today. 

7 

What I would like to do in my brief opening remarks is two things: 

first, I will describe several very problematic features of Title II as 

it is written, as it is on the statute books; and second, I will focus 

for a minute or two on the single point of entry strategy that the 

FDIC has developed over the past year or so for implementing Title 

II. 

I will argue that Title II needs serious amendments and also that 

the too-big-to-fail issue is not solved, not resolved by a long shot 

by Title II and should be addressed in other ways such as by 

changes to the bankruptcy laws. 

I should perhaps start by noting that it is quite possible that regulators would simply bail out another giant financial institution 

that threatened to fail rather than ever invoke the rules in Title 

II. Although the Dodd-Frank Act tries to make bailouts more difficult, as has already been alluded to several times, it certainly 

hasn’t at all eliminated the possibility of a bailout. With the six 

biggest institutions in particular, there is a very good chance that 

regulators would never turn to Title II, particularly if more than 

one of them were in trouble at the same time. 

If regulators did invoke Title II, they would probably transfer 

some or all of the assets and liabilities of the holding company, the 

top corporation in the enterprise, to a newly created bridge financial institution. Title II authorizes the FDIC to create a bridge institution like this and permits the FDIC to keep it going for up to 

5 years. For this 5-year or up to 5-year period, the bridge institution has major competitive advantages as compared to other financial institutions. 

One benefit is access to copious amounts of funding from the 

United States Treasury, potentially at below market rates. Bridge 

institutions also are given a sweeping exemption from taxes. While 

the bridge is in existence, it is not required to pay any taxes on 

the value of its franchise, property, or income. This tax-free status 

gives the bridge institution an enormous advantage over other financial institutions. In my view, there is simply no justification for 

this special treatment. 

For more than a year, the FDIC has been developing a strategy 

it refers to as a single point of entry strategy for invoking and 

using Title II. After establishing a new bridge institution, the FDIC 

would transfer all of the holding company’s assets and all of its 

short-term liabilities to a new bridge institution, leaving its longterm debt, primarily its bonds, and its stock, behind in the old institution. 

Although I think this is a very clever strategy for resolving a 

large bank’s financial distress, it seems to me to raise three very 

important concerns. First, the single point of entry strategy assumes that all the derivatives contracts and other short-term obligations of the troubled financial institution will be bailed out. This 

will encourage the big banks to use even more of the derivatives 

and other complex financial contracts that caused so much trouble 

5 years ago. 

Second, although Title II explicitly requires that its provisions be 

used for liquidation, single point of entry is essentially a reorganization. It thus stands in tension with the explicit requirements 

of Title II. 

8 

Finally, the single point of entry strategy won’t end too-big-to-fail 

at all. It will essentially rescue the troubled financial institution 

and is designed to ensure that the institution retains just as dominant a position after a financial crisis as before it. 

Let me suggest three implications of these comments about the 

likely effect of Dodd-Frank’s resolution rules. First, I think it is 

very, very important to amend Title II to fix these problems, particularly the exemption from taxes that the bridge institution has. 

Second, Title II is not a solution to the too-big-to-fail problem. 

The largest financial institutions have, as they had, a dominant position in American finance in no small part due to the too-big-tofail subsidy they enjoy when they borrow money. I think it is very 

important to do something directly about the too-big-to-fail problem. 

Finally, I believe it is important to recognize that bankruptcy is 

a very effective alternative to Title II for addressing the financial 

distress of large financial institutions. John Taylor and I are both 

involved in a project at the Hoover Institution that tries to suggest 

some ways to make bankruptcy even better. 

[The prepared statement of Professor Skeel can be found on page 

66 of the appendix.] 

Chairman MCHENRY. Thank you for your testimony. 

We will now recognize Dr. Taylor. 

STATEMENT OF JOHN B. TAYLOR, MARY AND ROBERT RAYMOND PROFESSOR, STANFORD UNIVERSITY, AND GEORGE 

P. SCHULTZ SENIOR FELLOW IN ECONOMICS, STANFORD’S 

HOOVER INSTITUTION 

Mr. TAYLOR. Thank you, Mr. Chairman, and Ranking Member 

Green for inviting me to testify on this important topic of bailouts, 

too-big-to-fail, and Title II of Dodd-Frank. 

In my view, too-big-to-fail, and the concern about bailouts is very 

much alive even with Title II of Dodd-Frank. I know there is disagreement about that. The Chairman of the Federal Reserve says 

that expectations of bailouts aren’t there because of Title II. A couple of his colleagues take different viewpoints. Jeff Lacker of the 

Richmond Fed says we haven’t dealt with the too-big-to-fail problem. Charlie Rosner at the Philadelphia Fed says in particular, 

Title II resolution is likely to be biased toward bailouts. 

When you look at OLA and how it might operate in practice, it 

seems to me there are serious reasons for concern. The FDIC will 

have an enormous amount of discretion about how to implement its 

difficult task of resolving a large financial institution. It is hard to 

specify what exactly they will do. There is a great deal of uncertainty about that, and a great deal of concern about transparency. 

My sense is given this, and given the heat of a crisis, it is quite 

likely the top policymakers will go right around Title II. They may 

have to change the law to do so. That is quite possible. So that will 

involve the same kind of bailouts we saw in 2008. It is not enough 

of an alternative to bailouts, if you like. 

But even if Title II is used, it seems to me the bailout problem 

is still there. There will be every incentive for the FDIC to provide 

additional funds to some creditors, additional funds over and above 

what they would get under a normal bankruptcy or in the marketVerDate Nov 24 2008 17:55 Sep 05, 2013 Jkt 081754 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\81754.TXT TERRI
9 

place. This is, by definition, to me a bailout. It really doesn’t matter 

whether the funds come directly from the taxpayers or they come 

indirectly from the taxpayers through an assessment of financial 

institutions and higher prices to consumers of financial institutions, or for that matter, it doesn’t matter if it comes from other 

creditors less favored. Money is taken away from the less favored 

to the more favored creditors. All the problems of lower interest 

rates that the large firms might get, the problem is the moral hazard exists with this form of a bailout. Yes, there is removal of the 

protection of the shareholders, but the protection of large important 

creditors is still there, and the determination of that will be 

through discretion, not through the law. 

I think there are some other problems with Title II. David Skeel 

mentioned some of these. But more basically, under a bankruptcy, 

the new firm would be motivated by profit and loss considerations, 

the decisions to be made as we are familiar in our economy. Under 

Title II, the new firm, for as long as 5 years, is going to be run 

by the government, so all the concerns that this committee, in particular, would have about the pressures put on government agencies for favors, for example, for different kinds of treatment, will 

most likely exist for this kind of a firm. 

In addition, as David said, there are very particular advantages. 

The lower borrowing cost because of the access to the Treasury, the 

exemption from taxes, and the lower capital requirements are enormous advantages this firm will have, and you can understand why 

the FDIC would like to nurse this firm for a while with those special advantages. But the truth is, they are so huge, and for a 5- 

year period, the firm will most likely have those unfair advantages, 

and I could see very well the government agencies would want to 

take account of that. 

So I think a better approach is to reform the Bankruptcy Code. 

There is a lot of work done on that. David Skeel mentioned that. 

The idea is to have even a large financial firm go through an orderly bankruptcy without spillovers, according to the rule of law, 

without all the discretion that the current Title II entails. I think 

it is possible. I write about this in detail in my testimony. I will 

be happy to answer any questions you may have about it. 

Thank you, Mr. Chairman. 

[The prepared statement of Dr. Taylor may be found on page 70 

of the appendix.] 

Chairman MCHENRY. Thank you, Dr. Taylor. 

I now recognize Mr. Rosner. 

STATEMENT OF JOSHUA ROSNER, MANAGING DIRECTOR, 

GRAHAM FISHER & CO. 

Mr. ROSNER. Chairman McHenry, Ranking Member Green, and 

members of the subcommittee, thank you for inviting me to testify 

on this important subject. 

I should express my concern that the criticisms of Title II will 

be used as an argument for repeal of a flawed rule before a workable replacement or fix is created. That is not my intent. Before addressing Title II, I want to highlight the key problem with Title I. 

Congressional intent was to ensure all too-big-to-fail firms would be 

10 

unwound through bankruptcy. If the Fed adhered to the intent of 

Title I, then Title II would be unnecessary. 

Instead, Title I and Title II create a special class of GSE-like 

companies that benefit from implied government guarantee. Title 

II’s liquidation authority was designed to protect from the disorderly failure of firms that cannot be resolved under bankruptcy. 

Because of the explicit and implicit subsidies it offers, the industry 

prefers it to bankruptcy. While a traditional liquidation would result in replacement of management, under the FDIC’s proposed regime, key management of failed operating subsidiaries could continue to manage the newly recapitalized firm. It remains unclear 

what if any benefit will accrue to the public from OLA. By contrast, 

the measurable benefits will flow to those creditors that benefit 

from disparate treatment and bonuses will be paid to retain highly 

paid employees deemed essential to keeping the enterprise functioning. 

The FDIC’s approach requires an enormous amount of taxpayer 

subsidized debtor-in-possession financing from Treasury. It supports an ‘‘all animals are created equal but some animals are more 

equal than others’’ banking system. These companies are far too 

large. Markets simply can’t fund them in bankruptcy. 

Under Section 210(n)(5), bridge funding from Treasury is priced 

at Treasury rates plus the spread for average corporate bond 

yields, but Dodd-Frank does not state which corporate index should 

be used. If the FDIC indexes to a Triple A corporate average, funding may by at rates the market confers on only the healthiest institution. That subsidy has value not just in failure. 

Additionally, the government has the authority to leave behind 

as much debt as it wants, another subsidy. Potential needs of the 

largest companies could reach to close to $100 billion, straining 

even Treasury’s ability to access funds. This is the easiest way to 

understand that these companies are far too large. Markets simply 

can’t fund them in bankruptcy. 

Under the FDIC’s approach, a failing firm’s operating subsidiaries remain open and operating while the holding company would 

be subject to OLA. Thus, subsidiary creditors face greatly diminished chances of loss. After all, the FDIC has declared that these 

subsidiary banks and broker dealers will probably never face insolvency. Counterparties will be less prudent if they think creditors 

of the holding company are on the hook. 

If the government stands behind the holding company, market 

monitoring will go down, leading to further problems. Why would 

creditors choose to do business with companies that face normal 

market discipline in bankruptcy when they could deal with the 

company that offers subsidized pricing and assurances from the 

FDIC that it would never fail? The FDIC’s approach also create incentives for management and creditors to starve the holding company of funding and to instead raise capital at the operating company, weakening the holding company’s ability to act as a source 

of strength. 

It is very problematic if the same institution has the possibility 

of going through two different insolvency regimes, depending on 

the whim of regulators. Returns to creditors are different under 

each regime and are somewhat unknowable in the Title II regime, 

11 

making it difficult for creditors to make investment decisions. More 

disturbing is the FDIC’s decision to justify dissimilar treatment of 

similarly situated creditors under the guise of protecting critical 

functions. As market participants become concerned about the potential failure of a too-big-to-fail firm, they will exacerbate problems and increase systemic risk by selling their holdings into an 

increasingly illiquid market. It paradoxically provides benefits to 

any claimant that can convince regulators of its systemic importance. 

As a restructure regime, Title II levies no cost of failure and provides no clear process to move assets from weak hands to strong 

hands. The proper approach to ending the too-big-to-fail problem 

would be to consider fairness, which is at the core of the too-bigto-fail problem. It is essential that large firms be subject to the 

same insolvency regime that smaller firms are: the Bankruptcy 

Code. Making these firms small and simple enough to fail through 

standard bankruptcy is clearly the best path forward. It would 

eliminate the Orwellian approach to equality, reduce risk of capital 

market flight, and support the FDIC’s mission as deposit insurer 

to the narrow banking system. 

There is obviously far more detail in my written testimony, and 

I would hope that you would take the time to read that. Thank 

you. 

[The prepared statement of Mr. Rosner can be found on page 57 

of the appendix.] 

Chairman MCHENRY. Thank you, Mr. Rosner. 

And finally, I recognize Mr. Krimminger. 

STATEMENT OF MICHAEL H. KRIMMINGER, PARTNER, CLEARY 

GOTTLIEB 

Mr. KRIMMINGER. Chairman McHenry, Ranking Member Green, 

and members of the subcommittee, thank you for the opportunity 

to testify today. 

Too-big-to-fail did not begin with the recent financial crisis or 

with Dodd-Frank. It has been the long-term expectation by the 

market that some institutions are so critical to the functioning of 

the financial system that the government will act to prevent their 

insolvency. Over many years, this has distorted market pricing for 

debt and equity and limited the incentives that should be provided 

by market discipline. Unfortunately, the recent financial crisis 

proved the expectation of too-big-to-fail to be true. 

Why? Because faced with the massive disruptions in the market 

in the fall of 2008, regulators had no other option than the Bankruptcy Code to resolve the largest non-bank financial companies. 

After the turmoil following the Lehman bankruptcy, this was not 

viewed as a reasonable choice, and as a result, the regulators had 

to take several difficult steps to prevent greater chaos. 

To be succinct in response to the question posed for today’s hearing, Title II of Dodd-Frank does not enshrine too-big-to-fail. Title 

II simply provides an alternative to the Bankruptcy Code to ensure 

that the tools are available in a crisis to close the largest financial 

companies and to impose the losses on their shareholders and 

creditors while mitigating the potential for more widespread dislocations in the financial system and economy. 

12 

Any consideration of Title II has to examine why it was created. 

In a properly functioning market economy, there will be winners 

and losers, and some firms will become insolvent and should fail. 

Actions that prevent them from failing ultimately distort market 

mechanisms, including the market incentive to monitor the actions 

of similarly situated firms. 

Title II is a reaction to the fact that in 2008, the regulators did 

not have an adequate legal framework to close and resolve the largest companies. This was the reason that Title II was created, to address limitations of the then-current Bankruptcy Code. Title II is 

simply an adaptation of the rules the FDIC has long used to resolve banks. It is important to note also that the authorities in 

Title II are now the international standard because regulators everywhere recognize the need for tools adapted from those previously used by the FDIC. The G20 heads of state and the Financial Stability Board have endorsed them, and countries are putting 

those tools into place. 

Let me be clear, however, that bankruptcy has a long and honored history under U.S. law. For the vast majority of the business 

bankruptcies in the United States, the current system has worked 

very well. In extraordinary circumstances, the limitations of normal bankruptcy can impair its ability to resolve the most complex 

financial companies. Improvements can and should be made to the 

bankruptcy process to make it more effective for such insolvency. 

I have long recommended several improvements such as better 

capabilities to continue businesses under first day orders, changes 

to address financial contracts, and the ability to act immediately 

under broader mandates for designated trustees or debtors in possession. The recommendations made yesterday by the Bipartisan 

Policy Center and others offer valuable additional suggestions. 

However, Title II does provide a critical backup resolution structure for extraordinary cases, and I think we need both. While Title 

II is a vital foundation, it is not sufficient to end too-big-to-fail. The 

expectation of a government bailout will end only when the market 

fully incorporates into its pricing and other interactions an expectation that in the next crisis, the largest institutions will be closed 

and resolved. While Title II provides the legal framework, more 

must be done. We must continue ongoing efforts to achieve even a 

greater international coordination and we must continue the ongoing resolution planning. 

The FDIC has done an admirable job of explaining its plans, but 

the job is not complete, because questions and doubts remain. To 

complete the job, the FDIC must be much more explicit about how 

it will conduct any Title II process. I understand it will shortly be 

issuing a policy statement about that process. I will say that this 

statement needs to lay out very clearly the expected process under 

Title II and the limitations of its discretion. 

Too-big-to-fail should be eliminated because of its distortion of 

market discipline and market practices and ultimately its negative 

consequences for the real economy. However, too-big-to-fail is not 

created or enshrined by the Dodd-Frank Act. We need to support 

market discipline by ensuring that we have insolvency procedures 

that are effective for all scenarios. Market discipline, if allowed to 

13 

act, can prevent failures by incentivizing action by management 

and creditors alike. 

Thank you, and I would be pleased to answer any questions. 

[The prepared statement of Mr. Krimminger can be found on 

page 43 of the appendix.] 

Chairman MCHENRY. I thank the witnesses. 

Under Section 210 of the Dodd-Frank Act, the FDIC is authorized to borrow from the Treasury, ‘‘all purchases and sales by the 

Secretary of such obligations under this paragraph shall be treated 

as public debt transactions of the United States.’’ 

It is clear that the Orderly Liquidation Authority authorizes the 

FDIC to tap the Treasury, the Treasury to tap the public markets, 

and the taxpayers are on the hook for that debt that the Treasury 

lets, just as they are today for Treasury auctions in our current 

market. 

Now, I bring this up, Professor Skeel, to understand this process, 

what dollar percentage cap within the Act is provided as a limitation on what the FDIC can loan a bridge corporation? 

Mr. SKEEL. The Act has two different dollar limitations, and limitations almost isn’t the right word because they are not very limiting. At the time a Title II resolution starts, the FDIC can borrow 

up to 10 percent of the consolidated asset value of the institution, 

which if you take JPMorgan Chase as your example, that is 10 percent of $2 trillion in consolidated assets, more or less. That is $200 

billion at the start of the case. 

Chairman MCHENRY. And then, thereafter? 

Mr. SKEEL. And then, thereafter, after 30 days the FDIC can borrow up to 90 percent of the fair value of the assets. So if the 

asset— 

Chairman MCHENRY. So 90 percent. 

Mr. SKEEL. —is in that same range, we would be talking about $1.8 trillion. 

Chairman MCHENRY. Okay. So Dr. Taylor, Mr. Rosner, can you 

put that in context for this last crisis? Perhaps, let’s walk through 

the scenario. If you had multiple firms going through the Orderly 

Liquidation Authority, had it been in place in 2008, what would 

that look like? 

Mr. ROSNER. I think it is fair to say that Title I and Title II were 

created under the premise of single institutions failing. I think if 

we ended up with the contagion and multiple large institutions failing at the same time, unfortunately we would likely see the Treasury, the Fed back up here before all of you arguing as to the reasons that we are going down the same path and need to do another 

TARP-like bailout. 

Chairman MCHENRY. That is not a great answer. Dr. Taylor? 

Mr. TAYLOR. I think your question really was addressing within 

Title II. There is the concern about going around it as well, but 

even within it, of course, that is a huge subsidy. The access to the 

Treasury borrowing is lower interest rates; also, the rate at which 

the FDIC would be able to translate that into its own loans is pretty much discretionary at this point as well. 

Chairman MCHENRY. You have a bridge company, it is funded, 

getting liquidity support from the Treasury, lending enormous 

sums to this company. You have the FDIC that is in charge of 

14 

managing this government bank, let’s call it, so you have ongoing 

operations managed by the FDIC, while at the same time the FDIC 

and the Treasury are making decisions on how to value the assets, 

and is there enormous discretion there, Professor Skeel? 

Mr. SKEEL. Absolutely. 

Chairman MCHENRY. So you have enormous discretion on valuing those assets. Describe this conflict within the FDIC and 

Treasury on making a wise decision for taxpayer dollars while at 

the same time making wise decisions to get a firm back on a 

healthy basis making a nice profit. 

Mr. SKEEL. Obviously, the FDIC has an incentive to make valuation decisions that support its goal of preserving this giant financial institution, so there is a direct conflict of interest, and the 

FDIC has almost complete discretion. It is very, very difficult to 

challenge its decisions 

Chairman MCHENRY. So that discretion, Mr. Rosner, in terms of 

valuation, is there any check within the Act on that? 

Mr. ROSNER. No, there isn’t a check. First of all, I think it is also 

worth pointing out that there is no obligation or mechanism within 

Title II to price the credit risk that is being taken on, and I think 

that is an important part of a subsidy as well, but beyond that, I 

think the point that was made is really important to emphasize, 

which is the conflict, the internal and inherent conflict between the 

role as balancing the public interest with the interest of creditors— 

let’s not think about it as the institution—as creditors of that institution, are really unbridgeable 

Chairman MCHENRY. So unbridgeable, why? 

Mr. ROSNER. Because at the end of the day, there is a political 

reality where they are going to have to show, just as we have seen 

claimed over and over since the crisis, that they have made all of 

the taxpayers’ money back, and if that comes at the cost of unfair 

disadvantaging of certain creditors, that is an internal conflict 

which really needs to be addressed. 

Chairman MCHENRY. I thank the witnesses. We will now recognize the ranking member for 5 minutes. I am sorry. The ranking 

member is asking me to recognize Mr. Cleaver. Mr. Cleaver is recognized for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Dr. Taylor, would you agree that unless it is curtailed, too-bigto-fail will continue to place the taxpayers in a position of blackmail? You might want to substitute a word for ‘‘blackmail,’’ it probably won’t rhyme, but you get the premise of my question? 

Mr. TAYLOR. I am not sure I do. I think the concern of too-bigto-fail and the bailout tendency is multifold. Part of it is the distortions it creates in the market and it encourages risk-taking. It 

leads to the crisis we are trying to avoid. That is probably the biggest concern I would have. 

In terms of the taxpayers, absolutely. Using taxpayers’ money 

like this is inexcusable, but I think the too-big-to-fail problem goes 

beyond that, because if, for example, through an assessment, you 

charge a broad group of financial institutions, they are going to 

charge higher prices on their customer, so it is going to be paid 

elsewhere. Or if the bailout of certain creditors occurs at the expense of other creditors, that is also a problem because it is going 

15 

against the direction of the rule of law which we have in the country. So there is a whole set of ramifications that I am concerned 

about here. 

Mr. CLEAVER. You mention rule of law. I was sitting right here 

when Secretary Paulson was sitting right there telling us that we 

have to take some action, that President Bush had sent him over 

to tell us the situation that we were in, and then I was really unhappy later when I read his comment that he did not have the authority to do what he did, and so my question is, in an economic 

crisis, do you think that we will discard again the rule of law? Mr. 

Rosner? 

Mr. ROSNER. The answer, unfortunately, I think is yes, if we continue down the path that we are heading down. The thing that I 

found interesting is there does seem to be unanimity of view among 

the Members that too-big-to-fail is an intolerable situation for us 

to accept, which really says two things: one, we either have to 

make these companies small enough and manageable enough that 

they can be treated like every other corporation; or two, they have 

to have sufficient amounts of capital, real capital to be able to 

avoid that crisis. Those are the outcomes. Those are the opportunities. And I don’t think Title I or Title II address those, and I think 

that really is the task before you. 

Mr. CLEAVER. Yes, Mr. Krimminger? 

Mr. KRIMMINGER. I thought I would note one thing. One of the 

things I would note about the criticisms of Title II as well, as I 

think as I noted in my testimony, is you have to look at the realistic alternatives we have had in the past. I don’t think it is realistic to go back and discard Title II and have the Bankruptcy Code 

that was in existence in the past and expect to the situation to be 

different than it was in the past. 

We certainly need to make improvements to the Bankruptcy 

Code. I think everyone, and I believe even including the FDIC, certainly when I was there, would have been wholeheartedly in support of making Title II a less-likely-to-be-used alternative, but to 

eliminate the alternative, even with an improved Bankruptcy Code, 

I think is in some ways potentially sending the message that in the 

next crisis, they are much more likely to come back and sit at these 

desks and ask for more money in the future. 

Mr. CLEAVER. Do you believe that the economies of scale in 

banks and other certain businesses are worth preserving as long as 

they are regulated in proportion to their impact on the economy? 

Mr. KRIMMINGER. I think it is always very difficult to come up 

with a metric, if you will, or an analysis that it concludes at what 

size institutions should be. So, certainly there are economies of 

scale. Certainly, there is a need for a global financial system and 

financial institutions that can provide credit for that financial system. Certainly, there is regulation, additional regulation in Title I, 

and I think you have to look at Title I, Title II, and other parts 

of the Dodd-Frank Act as a combined whole and what effect they 

will have. Are there changes that may be necessary at times? Yes. 

But Title I and Title II, I think, are designed to kind of work in 

tandem, and that is part of the issue. 

Mr. CLEAVER. We still have banks behaving badly, and I think 

something needs to be done about it. I appreciate the hearing, but 

16 

I think we need to tweak Title II if it is not strong enough and 

tough enough. I think the American people would support that. 

I think that my time has run out, Mr. Chairman. 

Chairman MCHENRY. I thank the gentleman, and I would certainly like to work with him on a process that will actually work, 

and I think this hearing is bringing to light that the current process doesn’t. So I am encouraged by your comments, and I appreciate that. 

We will now recognize Mr. Ross of Florida for 5 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. It is interesting that three 

of our witnesses talked about an amendment to the Bankruptcy 

Code, and one says that the Bankruptcy Code would not have 

helped. 

In my experience in my practice, which has been very limited in 

bankruptcy, at least allowed for due process, notice to creditors, notice to debtors, and in fact put them on notice that they may only 

receive pennies on the dollar of what may be owed them, and yet 

underneath Title II it appears as though we are creating a situation where those creditors, even those shareholders have no risk if 

a bridge holding company takes over. 

Is that your understanding, Mr. Skeel? 

Mr. SKEEL. That is absolutely my understanding. And as I said 

earlier, the creditors that are most guaranteed to be protected are 

the fancy financial contracts, the derivatives that caused problems 

in 2008. 

Mr. ROSS. With the obvious competitive advantage that a bridge 

holding company has, you also have a situation that is so contrary 

to market forces that says where you have increased risk, you may 

have increased return, and so if I am a shareholder in a company 

that is now part of a bridge holding company, my risk is almost 

eliminated; is that not true? 

Mr. SKEEL. Absolutely, for up to 5 years. As long as that bridge 

company is going, it is a protected entity. 

Mr. ROSS. And Mr. Krimminger, let me ask you this: Under Title 

II, is there any due process for these companies? 

Mr. KRIMMINGER. Absolutely, there is due process. 

Mr. ROSS. And what would that be? Obviously, it is not a full due 

process as the law allowed under the Bankruptcy Code. 

Mr. KRIMMINGER. There is due process. In fact, the Bankruptcy 

Code provides for ex ante due process and a hearing before a judge. 

Part of the reason Title II has an ex post, in other words, you have 

a right to file suit against the FDIC for making errors or doing 

something to with your credit that is inappropriate after the fact, 

is because of the need for speed and financial insolvency. 

And let me, if I may, just clarify one thing. I may have been misinterpreted. I absolutely believe that improvements to the Bankruptcy Code should be done and will be very helpful. 

Mr. ROSS. And I think they should be, too, because not only are 

we talking about financial institutions. There are some financial institutions that are too-big-to-fail under some people’s interpretation, but what about non-financial institutions? If we are allowing 

now for this process to go through that totally ignores our bankruptcy, what about Wal-Mart? What is to prevent them from having some regulatory reform system in place to keep them from 

17 

going for bankruptcy? My point is that we are taking traditional 

due process methods and not allowing companies that have created 

a high risk, poor performance and allowing them to succeed to a 

market disadvantage. 

Dr. Taylor, you talked about three of the disadvantages, one of 

which is the lack of having to be liable for taxes at every level. Do 

we know what the cost of that is? 

Mr. TAYLOR. I don’t think it has been estimated, unfortunately. 

Maybe that is something you could request. 

Mr. ROSS. I think I will. Quite frankly, I think that the cost of 

tax exemption will probably outweigh the benefits, if any at all, in 

saving these companies. 

Now, let me ask you this: The risk-based assessment, the last 

step in the event that we have to now repay FDIC, and we go to 

the good players, and we assess them their share, if you will, what 

happens if you have a mutual company, a savings and loan insurance company, that now has to be assessed. It has done everything 

right. Are they able to recapture the cost of this assessment in 

their rate-making process with their consumers? Does anybody 

have a comment on that? 

Mr. TAYLOR. Most likely, absolutely. They will be able to capture 

it partly by passing it on to their customers, whether they are regulated or not, quite frankly. Economics says that kind of— 

Mr. ROSS. So if I am a consumer who has a AAA rated, mutual 

insurance company that is now being assessed, I am going to have 

to pay for somebody who has been a bad actor. This reminds me 

of a situation where we have created the ultimate hangover cure 

in Title II, and every morning, these SIFIs, these Systemically Important Financial Institutions that are performing badly can take 

this hangover cure and go on and continue to perform, and yet they 

do so at the risk and at the cost of those who are not the drinkers 

in this situation. 

Lastly, one of the three, and I am going to—give me a second, 

here, Dr. Taylor. You talked about the competitive advantages, including capital requirements. So if my State of Florida has certain 

capital requirements for an insurance company, those would be totally disregarded by the bridge holding company under Title II, is 

that correct? 

Mr. TAYLOR. No. 

Mr. KRIMMINGER. I would just say it would not because certainly 

under Title II, the insurance company—frankly, insurance companies are not really eligible for Title II until it has already gone 

through a— 

Mr. ROSS. But the process is there, and I only have a second. The 

process is there that if they have been deemed Systemically Important Financial Institutions as an insurance company, they can have 

lesser capital requirements in conflict with State regulation. 

Mr. KRIMMINGER. No, that is not true, but we can talk later, sir. 

Mr. TAYLOR. The example of the insurance companies, there are 

many other examples you could use for which the capital requirements could be lower, as in Title II at this point. 

Mr. ROSS. And I will follow up. Thank you, Mr. Chairman. I yield 

back. 

18 

Chairman MCHENRY. The gentlelady from Ohio, Mrs. Beatty, is 

recognized for 5 minutes. 

Mrs. BEATTY. Thank you so much, Chairman McHenry, and 

Ranking Member Green. And to our guests here testifying today, 

as you know, this is one of three hearings that we have had, and 

I am certainly looking forward to hearing your comment. This has 

been an ongoing discussion that we have been having in learning 

a lot of new terminology, hangover, from what I am drinking, to 

SIFI and all of the other things we are talking today. So I certainly 

welcome this healthy debate on the issue. 

But first, I think it is clear that size and scope and scale and 

interconnectedness of the largest financial institutions prevent the 

elimination of all possible fallout resulting from a failure. But in 

Dodd-Frank Title II, it provides a new mechanism, I think, and I 

am interested later to hear your comments on that for government 

to resolve the most complex forms without creating new systemic 

failures associated with bank loans or across default provisions or 

acute asset value decline. 

But as I look through your testimony, I guess one of the questions I would like to ask that we haven’t quite touched on this 

morning is what is happening at an international level. And I 

think I want to address this question to you, Mr. Krimminger. 

Can you tell us if what we are doing here today, if they have had 

any better results, for example, in China, with using Title II in 

their complex and in their monetary system? 

Mr. KRIMMINGER. Certainly. I think Title II, as I said before, provides a statutory framework that I think has facilitated a lot more 

cooperation. One of the steps that has been undertaken over the 

last few years as a result of the crisis was that many other countries recognize that the old, if you will, liquidation process for 

banks as well as other types of financial companies was not very 

effective. Part of the problem, particularly in Europe, is that effectively they have always bailed out all of their banks because their 

only option was essentially a liquidation rather than the continuity 

that you even get under the Federal Deposit Insurance Act with 

the insured banks in the United States. 

So one of the things that has gone on internationally is there has 

been a great expansion of cooperation, a great expansion of moving 

towards more similar types of legal infrastructures, as I noted in 

my testimony, and the heads of the state of the G-20, the Financial 

Stability Board and others, the types of authority that Dodd-Frank 

gives has really effectively become the international standard for 

the most complex financial companies. 

One of the things we have to make sure we push against is the 

continuing desire in some countries to go to a bailout-type process. 

The problem is if you have nothing but a bankruptcy, or an oldfashioned bankruptcy liquidation process, or a bailout, these countries have always opted for a bailout. So the FDIC and other U.S. 

regulators are doing a lot to work more cooperatively with other 

international regulators to make sure that a plan is put in place, 

because planning and the ability to plan in advance is, I think, a 

major advantage provided by having this type of insolvency framework. 

Mrs. BEATTY. Okay, thank you. Others, please? 

19 

Mr. ROSNER. Dodd-Frank provides no mechanism to deal with 

the international resolution process, and the Fed has recognized 

that and has made proposals on that basis for an intermediate 

holding structure for foreign banks operating in the United States. 

I think it is a little bit disturbing for us to fail to accept the reality 

that different countries have different legal regimes, and those cannot be handled through cooperation among regulators, or bridged 

I should say, by cooperation among regulators. That is something 

that is left and intended to be left to law, and each jurisdiction has 

its own. 

We currently have memoranda of understanding between various 

jurisdictions. Those are largely unworkable when push comes to 

shove, especially because of the legal barriers imposed upon regulators. So I think this is an issue that needs to be addressed affirmatively by legislators, not outsourced to policymakers. It needs to 

be done before, not during or after a crisis. 

Mr. KRIMMINGER. If I might comment on that, it is somewhat odd 

to assert as a defect of Title II that it doesn’t deal with all of the 

international law issues when other countries have the ability to 

adopt their own laws. But what it does do, and what has occurred 

is a great deal more pre-planning. You have to have planning if you 

are going to have an effective resolution. And yes, I agree that 

paper documents don’t do it. But you have to have planning if you 

are going to have any progress in the future. And to ignore the 

planning is to basically set yourself up for failure the next time. 

Chairman MCHENRY. The gentlelady’s time has expired. I am 

going to yield myself 5 minutes. Professor Skeel, I just want to follow up on a comment, a suggestion I made in my opening statement, which is since the FDIC can loan up to 90 percent of total 

consolidated assets to a bridge holding company, presumably it 

could loan 0 percent. Is that correct? 

Mr. SKEEL. It can loan as little or as much as it wants up to that 

90 percent, which is as much as $1.8 trillion. 

Chairman MCHENRY. What are the ramifications or problems 

with that scenario? 

Mr. SKEEL. It reinforces the things that we have been talking 

about. It creates an enormous amount of uncertainty. It gives the 

FDIC complete discretion as to what it does with Title II, and there 

really is no check on that. 

Chairman MCHENRY. Dr. Taylor, given this wide latitude in 

funding authority, could the FDIC use it to change the degree to 

which they require creditors to suffer losses due to write-downs of 

their debts? 

Mr. TAYLOR. Absolutely. It has the power to do what it needs to 

do, or what it wants to do to favor certain creditors maybe because 

there are concerns about systemic issues with those creditors, or 

there may be other reasons we don’t know, but it has the power 

to do it. And it could do that even without this by hurting, if you 

like, other creditors who are not so favored compared to the bankrupt rules. So it definitely has that power. It is one of the uncertain 

things here you can’t plan for. It is really not a rule of law as 

would exist under the Bankruptcy Code where you have priorities 

or specific ways you handle various kinds of creditors. 

Chairman MCHENRY. Mr. Rosner? 

20 

Mr. ROSNER. Yes. I think that problem is probably the biggest 

issue to contend with, the ability to hand the FDIC the authority 

to treat similarly situated creditors differently at their whim under 

the guise of protecting the ability of potential counterparties to continue to serve in supporting essential functions of the institution. 

And so, they do have far too much discretion. It is absolute discretion, and by the way, the ability to fund can conceivably take what 

is a failed firm into being the most profitable firm overnight if we 

pump in enough taxpayer dollars. 

Chairman MCHENRY. Mr. Rosner, if a bridge holding company 

borrowed at lower interest rates than its competitors while also 

avoiding all taxes, how significant would those combined advantages be? 

Mr. ROSNER. Starve competition, increase the scope and scale 

and size of that utility, provide opportunities for that utility to justify to neighboring jurisdictions its ability and capability to operate 

in those markets. And it would ultimately just reinforce the oligopolistic market power of that institution and the small group of institutions that are similar. 

Chairman MCHENRY. Professor Skeel? 

Mr. SKEEL. I just want to follow on to that. I agree completely, 

and I would like to make a comment about the comparisons that 

have been made to the way financial institutions are regulated in 

Europe. I think it is important to keep in mind that the approach 

to financial institutions in Europe is completely different than the 

U.S. approach. Too-big-to-fail is a long-standing tradition in European regulation, and so the idea that we would be replicating what 

they are doing is not an idea that I think we should be sympathetic 

to. We have a very different perspective on the importance of competition in this country. 

Chairman MCHENRY. I yield back the balance of my time. 

I recognize the gentleman from California, Mr. Sherman, for 5 

minutes. 

Mr. SHERMAN. Let me start by asking Mr. Krimminger to also respond to the latest, the last question. 

Mr. KRIMMINGER. I don’t think anyone is suggesting we should 

adopt the European model for our financial regulation. This point 

was simply being made, was that the authorities to dissolve companies in Title II are being adopted in Europe, not the other way 

around. So I think that everyone has recognized that you simply 

can’t have only a liquidation under bankruptcy as the only alternative under the existing Bankruptcy Code. We agree that we need 

to make improvements to it, but we need to look at the alternatives 

to make sure that you can deal with the potential systemic 

unwinding of the financial institution. That is why, frankly, under 

Title II there is some discretion, just as there has been for many, 

many years under the Federal Deposit Insurance Act, to provide for 

some additional payments to creditors that are essential to keep 

the company operating. 

Bankruptcy also has first-day orders. In fact, one of the recommendations by many with regard to bankruptcy improvement 

has been to expand the ability to make sure that you can keep the 

essential functions operating beyond the traditional way of looking 

at first-day orders. So this is not a huge departure in terms of the 

21 

tools that are available from the Bankruptcy Code. I think the departure that people are concerned about apparently is that there 

is the ability to act quickly with ex post judicial review instead of 

an ex ante judicial oversight. 

Mr. SHERMAN. Thank you. We sometimes speak a different language than those who favor bailouts, should deal with translation. 

They believe that you have checks and balances if several different 

executive department officers have to sign off on the same thing, 

that you don’t need Congress to have checks and balances on enormous power. And they also believe that it is not a bailout if the 

shareholders lose their money, even if the creditors are fully bailed 

out. And I disagree with that simply because the key in financial 

services is your cost of capital. And if you can assure creditors that 

they will be bailed out, you will have a lower cost of capital. 

Mr. Taylor, for the record, if you could expand on in a written 

response how Title II provides for an almost crony capitalism as to 

which creditors get paid and which don’t, because I am familiar 

with regular bankruptcy; you are either a secured creditor or you 

are an unsecured creditor. All of the unsecured creditors are equal. 

Apparently in this world, some animals are more equal than others. So if you could provide us with a written response there, certainly what worries me is that the key to being a successful business ought to be a successful business, not covering yourself by 

being well-connected and well-respected in Washington, D.C. 

We have been focusing on what happens if there is a great catastrophe, a great storm, but the effect of this too-big-to-fail affects us 

even now on a relatively calm day, because the giant banks are getting bigger, and my concern is not so much for the banks. It is for 

the borrowers. We had Jamie Dimon sitting there saying he 

couldn’t find small businesses in America to loan to, so he sent his 

money to London, where it got eaten by the whale. And the really 

big banks would rather make a billion dollar bet than a million dollar loan. 

One controversy that has swirled is how much do the big banks 

benefit from this belief that when you lend the money, you are not 

just relying on their balance sheet; you have Uncle Sam’s safety 

net? I have heard estimates of 80 basis points, 60 basis points. I 

would like to go down the list. Take the second or third largest 

banking institution in America, how many basis points do they 

save on their borrowed capital? 

Mr. SKEEL. As John Taylor has noted, there is a lot of controversy about this, but I have heard anywhere from 70 or 80 basis 

points to higher. I have heard up to 2 percent in some of the estimates. There are a lot of numbers that are swirling around, but it 

is clear that the benefit is very, very large. 

Mr. SHERMAN. Mr. Taylor, do you have an opinion? 

Mr. TAYLOR. I think there are 80 basis points, that is what translates into $83 billion, is based on a study which I have looked at. 

I think it makes sense. They are looking at how different types of 

government policies affect credit ratings, which in turn, affect interest rates. I think that is a good number. 

Mr. SHERMAN. Mr. Rosner? 

Mr. ROSNER. Yes, I would agree. The NY study is actually fairly 

robust. I would also point out that any subsidy that advantages 

22 

these institutions relative to the seven other firms in our country 

is anticompetitive and too much, and I would request or suggest 

that you turn to page 8 of my testimony, in which I refute many 

of the claims made about scale and benefit that we receive as a result of large global financial institutions. 

Mr. SHERMAN. Mr. Krimminger? 

Mr. KRIMMINGER. I am not sure that I have a number I would 

give. I think the key thing is to make sure that these large institutions are all subject to insolvency processes that will have the market discipline act and operate. 

Mr. SHERMAN. My time has expired. I yield back. 

Chairman MCHENRY. The gentlelady from Missouri, Mrs. Wagner, is recognized for 5 minutes. 

Mrs. WAGNER. Thank you, Mr. Chairman. Professor Skeel, in 

your opinion, does Title II of Dodd-Frank do anything to limit the 

maturities of loans that the FDIC provides to the bridge company? 

In other words, could the FDIC just continuously provide shortterm loans at favorable rates to the bridge company? 

Mr. SKEEL. Sure. The FDIC can essentially cherry pick the rate 

it wants by picking obligations of the maturity that has an attractive interest rate. So, there is very, very little limitation on them. 

Mrs. WAGNER. So while a private corporation would have to 

worry about renegotiating its credit line every 6 months or so, a 

company under OLA would have guaranteed access to favorable 

loans backed by the taxpayer? 

Mr. SKEEL. Absolutely. 

Mrs. WAGNER. I direct this both to Professor Skeel and Dr. Taylor. Would you say that one of the biggest risks financial institutions face, which is liquidity risk, would be largely eliminated for 

a financial institution that enters OLA? 

Mr. TAYLOR. Once it is in the bridge form, yes, basically it can 

provide as much credit as it needs. That was put in the Act on purpose, I am sure, but it creates, if you take care of the liquidity 

problem, then you can do a lot of other things at the same time. 

So, it is a huge advantage. 

Mrs. WAGNER. Professor Skeel? 

Mr. SKEEL. Yes, all of those numbers we have been talking about 

are available to eliminate any hint of a liquidity problem. 

Mrs. WAGNER. Dr. Taylor, what kind of advantages would this 

confer upon the company under OLA versus private financial institutions that don’t have access to cheap, taxpayer-backed loans? 

Mr. TAYLOR. One thing it could do which is actually kind of perverse is since it doesn’t have to worry about liquidity, it doesn’t 

have to worry about accessing the private market liquidity, you can 

take actions actually which are more risky than otherwise and be 

covered by that, and therefore that gives us a direct advantage. 

That would be one example. 

Mrs. WAGNER. Professor Skeel, a little over a year ago, Martin 

Gruenberg as the Acting Chairman of the FDIC, gave a speech regarding OLA and talked about the need to, as you put it, craft a 

resolution, undergo a market test of viability, and appoint a temporary new board of directors, and a CEO from the private sector. 

When you were talking about an institution with potentially trilVerDate Nov 24 2008 17:55 Sep 05, 2013 Jkt 081754 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\81754.TXT TERRI
23 

lions of dollars in assets, wouldn’t these steps to running a bridge 

holding company potentially take years? 

Mr. SKEEL. Potentially, they could. And I worry more about this, 

about how we are going to decide who is going to be managing 

these giant bridge institutions the further we get away from 2008. 

If it happened right now, everybody has been focusing on it for 2 

years. It is possible you could come up with some folks to run these 

companies. The further away we get, the more worried I am, and 

it is a huge question mark even now. 

Mrs. WAGNER. The FDIC really has no experience winding down 

a large, internationally connected complex institution? 

Mr. SKEEL. No. That is a very important point, and if I may, let 

me throw in an additional cause for concern. We have been talking 

about what the FDIC does with its bank resolutions, what it has 

done for a long time. It is very important to keep in mind the normal FDIC bank resolution looks nothing like the institutions we 

are talking about. 

Mrs. WAGNER. Right. 

Mr. SKEEL. The small mom-and-pop institution, all of its liabilities are deposits. This is a completely different creature and this 

is uncharted territory. 

Mrs. WAGNER. Absolutely. Mr. Rosner, if OLA were implemented 

prior to 2008, is it reasonable to assume that multiple firms would 

have undergone the OLA process as a result of the financial crisis? 

Mr. ROSNER. It is reasonable to expect that they would try because of congressional legislative mandate. Is it reasonable that it 

would succeed? No. 

Mrs. WAGNER. So, if multiple institutions are undergoing the 

OLA process at the same time, is it reasonable to assume that the 

FDIC would find itself, as we have just discussed with Professor 

Skeel, quickly overwhelmed? 

Mr. ROSNER. I think the answer is, absolutely. And in fact, during the crisis we had managements that needed to be replaced and 

there was not an available pool of talent within the industry to 

bring enough management in, so we often found management left 

in place under greater supervision, which is neither an equitable 

outcome, nor is that the proper resolution to have the people who 

created failure continue to run an institution in failure. 

Mrs. WAGNER. My time is short here, but if the FDIC proves 

itself—as we just discussed—incapable of running a bridge holding 

company into the ground after exercising discretion over its assets, 

could this potentially, I assume, cause irreversible harm to the 

broader economy? 

Mr. ROSNER. I don’t think there is any question, and I think you 

raise an important point, which is if in failure, or if we find OLA 

results in failure, what are the remedies at that point? 

Mrs. WAGNER. Right. Thank you, I appreciate it. I believe I have 

run out of time. 

Chairman MCHENRY. We will now recognize the gentleman from 

Maryland, Mr. Delaney. 

Mr. DELANEY. Before I ask my questions, I want to say that I actually think the FDIC did a very nice job through the financial crisis. We had a situation where 19 of the 20 largest financial institutions in the United States, 19 of 20, either failed or required masVerDate Nov 24 2008 17:55 Sep 05, 2013 Jkt 081754 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\81754.TXT TERRI
24 

sive investment by the U.S. Government. The only one that didn’t 

was Berkshire Hathaway, and we, within a relatively short period 

of time, completely recapitalized the banking system and the financial system continued to function. So it is not clear to me why there 

is a sense that the FDIC would not manage this process well. Does 

anyone have data that suggests that the FDIC did a bad job managing this process? 

Mr. ROSNER. I don’t think the question is, did the FDIC do a bad 

job. As you said, 19 of 20 either failed or required capital investments. 

Mr. DELANEY. Yes. 

Mr. ROSNER. And that in itself, is inequitable, that we ended up 

backstopping, supporting, saving, keeping in place management of 

companies that otherwise would neither have been able to fund or 

exist to the disadvantage of the other banks within our banking 

system. 

Mr. KRIMMINGER. If I may just respond, of course, one of the reasons we now have have Title II is to have an alternative to a bailout that occurred in TARP, and I think that we also—again, I have 

a theme here, what are our alternatives to having a process where 

the FDIC can help take over these institutions and make the 

shareholders and creditors bear the losses. In bankruptcy, in Chapter 11 we often ignore the fact that the debtor in possession, which 

is typically the old management, is operating the company in reorganization. So there is always going to be a challenge with getting 

the right-skilled people to take over these companies. 

Mr. DELANEY. Exactly, and that is why I wanted to just put this 

in context because I think it is a great discussion, and an appropriate discussion of that inequality that occurred as it relates to 

the response to the financial crisis, because I certainly believe 

there was significant inequality. But perfect is the enemy of the 

good, and we had to save the financial system because the consequences, in my judgment, would have been worse. 

And my point was, as it relates to the FDIC, I don’t see anything 

in their behavior that would indicate that they are not in a position 

to manage this process well, because in fact, when tested, their deposit insurance fund did not in fact, need a significant—I am going 

to move on to my next question—bailout, and I think again, in the 

context of things, they operated prudently. And this is a roadmap 

for handling it, one which did not exist before. So if you look at 

their past behavior, when they didn’t actually have a roadmap, and 

assume that with a roadmap I would actually judge that they 

would do better, but what I do worry about, which is what my 

question is, that the ability to provide funding to these financial institutions fails for one of three reasons: fraud; credit risks; or liquidity risk. And these large institutions have an advantage as it 

relates to liquidity, because they have liquidity built in to the extent they were to fail. And while it is very clear that equity and 

management and those kind of things get wiped out, stabilizing the 

institutions does help its creditors, and the equity of these institutions is 10 percent of the balance sheet; 90 percent of the balance 

sheet is creditors, so having in place a mechanism to stabilize the 

institution with liquidity, while the liquidation occurs, one would 

argue is good for its creditors because it allows an institution to acVerDate Nov 24 2008 17:55 Sep 05, 2013 Jkt 081754 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\81754.TXT TERRI
25 

tually liquidate its assets in an orderly way where you typically get 

better prices than if you have to liquidate assets in a non-orderly 

way where you get worse prices. So the question is, do you think 

this mechanism will in fact over time—and I apologize if you testified on this before—provide an advantage to how these institutions 

borrow in the unsecured debt markets? 

I will open that up to Mr. Skeel and Dr. Taylor. 

Mr. SKEEL. I certainly do think it will provide an advantage, particularly with short-term debt. The proposal that the FDIC is putting forward, the single point of entry proposal, would, if it were 

ever used, write down bond debt, so I think there may be some 

negative effect on the price with respect to bond debt. But with 

short-term unsecured debt in particular, I think there is going to 

be a significant increase in the attractiveness of this debt. The cost 

is going to go down a lot, and there is still a general too-big-to-fail 

subsidy that is going to reduce credit costs as well. 

Mr. TAYLOR. I think a lot of the things you would like to have 

orderly, et cetera, could be achieved with the Bankruptcy Code in 

the right format. And don’t forget that the Bankruptcy Code avoids 

all of this rule of law violation, all of these special things we are 

doing for favored creditors here. It has a procedure to handle that 

and it can be modified so that you do have the orderly kind of process if you want to. 

Mr. DELANEY. Thank you. Mr. Krimminger? 

Mr. KRIMMINGER. I will just note that I think the idea that, yes, 

there could maybe be a subsidy to creditors in some ways if they 

are carried over to the bridge bank, we have to put that, again, in 

consideration of the alternatives. 

Mr. DELANEY. Right. 

Mr. KRIMMINGER. Right now, everybody has been saying that the 

banks have uplift based upon the expectation of too-big-to-fail. If 

you remove an alternative way of resolving these institutions, 

whether in the extraordinary case where the Bankruptcy Code 

won’t work, and again, I think we need to make it where the Bankruptcy Code can be more successful, removing that alternative way 

is simply going to emphasize that too-big-to-fail may still be the 

case in a crisis. 

Mr. DELANEY. I agree with you; it is better than the alternative. 

I just think we should be observing how much these spread differentials in fact occur. 

Mr. ROSNER. Can I just make one point? 

Mr. DELANEY. Please. 

Mr. ROSNER. We are also forgetting a key issue here, which is 

we are creating incentive through this structure for the institution 

to issue debt at the OPCO level, rather than at the HOLDCO level, 

and creditors who prefer to invest in the operating company level, 

rather than the holding company level because of the difference in 

treatment. 

Mr. DELANEY. I am not sure that is a problem. I am going to 

take back my time, because the problem was HOLDCO debt, not 

OPCO debt, generally speaking. 

Chairman MCHENRY. The gentleman’s time has expired. I would 

love to engage more deeply on this question, because where those 

unsecured creditors are going into a crisis may be significantly difVerDate Nov 24 2008 17:55 Sep 05, 2013 Jkt 081754 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\81754.TXT TERRI
26 

ferent under the Orderly Liquidation Authority and their rights are 

very unclear, and that is—I have a question about that when we 

get to the second round, which I am hopeful we can, and I would 

love to engage with you about that. 

With that, I will recognize Mr. Hultgren for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. And thank you all for 

being here. I want to follow up briefly on Representative Sherman, 

who was questioning a couple of minutes ago. I think he had to 

step out maybe to another meeting, but to follow up a little bit on 

some of his points that he had started discussing, I was looking at 

a speech that Richard Foster, President and CEO of the Federal 

Reserve Bank of Dallas, had made back in January where he referenced some numbers given by Andrew Haldane and gave estimates of the current implicit too-big-to-fail global subsidy to roughly $300 billion per year for the 29 global institutions identified by 

the Financial Stability Board as systemically important. To put 

that $300 billion estimate annual subsidy in perspective, all of the 

U.S. BCs summed together reported 2011 earnings of $108 billion. 

I wondered if I could ask Professor Skeel, and also Professor Taylor, to the extent Dodd-Frank and Title II truly eliminate bailouts, 

shouldn’t this be reflected in increased borrowing costs to the institutions covered by the title? 

Mr. SKEEL. It should, and the Haldane speech—which I would 

commend anybody to read; it is a terrific paper—very, very strongly 

suggests to the contrary that we are going in the opposite direction, 

that the too-big-to-fail subsidy has gotten bigger since the crisis, 

not smaller. 

Mr. TAYLOR. And the IMF study we discussed a few minutes ago 

finds that the basis points have increased since the crisis. 

Mr. HULTGREN. I wonder if you could just elaborate a little bit 

more. To the extent the borrowing cost advantage persists, does 

this imply that the expectation for bailouts persist as well? 

Mr. SKEEL. Absolutely, and the trend line is not good. To refer 

to something else that is in that Haldane talk, the top three U.S. 

banks in 1990 had 10 percent of industry assets. They now have 

40 percent of industry assets. So we are very much going in the 

wrong direction. 

Mr. ROSNER. I think it is also demonstrable. If you look at the 

rating agencies’ response to the Brown-Vitter bill as introduced, it 

was that if it were enacted, it would eliminate the upsweep support 

of the government that they include in their ratings of these companies. 

Mr. HULTGREN. Following a little bit further on that with Professor Skeel and Professor Taylor, what other factors do you see 

that contribute to the borrowing cost advantage enjoyed by bigger 

institutions, and any other factors besides an implicit guarantee 

that affect the creditworthiness and borrowing costs of banking institutions? 

Mr. SKEEL. We have talked about a lot of the factors, the likelihood that creditors will be bailed out, the likelihood that the institution wouldn’t be allowed to fail. Also in that is an assumption 

that the capital requirements that everybody is talking about as 

the solution to too-big-to-fail won’t work. Historically, capital requirements have not worked. They haven’t predicted crises. They 

27 

haven’t avoided crises, and I think the market is pretty confident 

they are not going to work this time either. 

Mr. TAYLOR. I think it is hard to control for all of the different 

factors that affect the spreads, and these studies tried to do that. 

But there could be other differences with large banks. Mr. Rosner 

says he doesn’t find particular advantages of larger banks, but 

there may be some advantages besides the Federal support which 

provides a different rate. So it is important to take that into account and if you are going to have a good debate about these 

issues, consider the other sides. But when you look carefully, it 

seems to me that the expected Federal Government support, if you 

like, the expectations of bailouts, is a big factor in this favorable 

rate. 

Mr. HULTGREN. But any specifics? Besides the backstop, what 

other implicit benefits? 

Mr. ROSNER. I should make sure it is understood that I wasn’t 

saying there were no benefits. I was suggesting that the social benefits, the systemic benefits of these global institutions are overstated and not substantial. 

Mr. SKEEL. Just to throw one more benefit in, the big institutions 

were given enormous tax breaks during the period of the crisis, as 

well. And these were ad hoc tax breaks, where the IRS changed its 

rule on things like net operating losses for the benefit of the institutions. So there is an assumption that the government is going to 

be behind them helping them out in the event of a crisis. 

Mr. HULTGREN. My time is winding down, so I am not going to 

really have a chance to ask another question, but I would love to 

follow up. There has been some allusion to needed changes in the 

Bankruptcy Code, dealing specifically with this, so I would love to 

hear any suggestions you might have on that, of what we should 

be looking at or working on with other committees, Judiciary and 

other committees, to be able to address that, and to also make sure 

that this never happens again. 

Thank you so much. I yield back. 

Chairman MCHENRY. Mr. Heck is recognized for 5 minutes. 

Mr. HECK. Thank you, Mr. Chairman. For those of you who said 

that having access to the Orderly Liquidation Fund yields some 

kind of funding or competitive advantage, that is clearly implying 

that there is an incentive to do so. So my question is, is there evidence to suggest that banks have engaged in merger talk to reach 

that magic $50 billion threshold to take advantage of this? Is there 

evidence that banks are lobbying any of us to lower the $50 billion 

threshold so that they could achieve this status? Is there any evidence that non-banks are lobbying FSOC to be designated as SIFIs 

so they could take advantage of what you are suggesting is competitive and funding advantage? 

Mr. ROSNER. Can I turn the question around a little bit? 

Mr. HECK. No. 

Mr. KRIMMINGER. I would be happy to answer it, briefly. I think 

it is very clear— 

Mr. HECK. I was teasing him. He is welcome to turn it around. 

Mr. KRIMMINGER. I would be happy to say that I think by and large, companies have not been willing to be over that $50 billion 

threshold. Certainly, Title II of Dodd-Frank does not apply to any 

28 

company over the $50 billion threshold. Of course, it applies to the 

very largest where bankruptcy would potentially create systemic 

risk, and it is trying to address that systemic risk. So companies 

certainly would not want it to be over $50 billion because they 

would not want to undergo the additional supervisory oversight by 

the Federal Reserve and other preparation of living wills and 

things like that. 

Mr. HECK. So are the funding advantages and the competitive 

advantages neutralized or negated by this additional requirement? 

Mr. KRIMMINGER. I certainly don’t think that the institutions perceived there being a funding advantage, particularly at that $50 

billion threshold cutoff. 

Mr. SKEEL. It seems to me that the issue isn’t the $50 billion 

threshold. It is the $800 billion, $1 trillion threshold. So in my 

view, the reason why people don’t want to be over the $50 billion 

is because they are not the beneficiaries. The beneficiaries are 

JPMorgan and Citigroup and Goldman and Morgan Stanley, and 

those banks, and so if you get just over the $50 billion threshold, 

you get the disadvantages of being singled out without the advantages of being singled out. 

Mr. HECK. So at what dollar level does the advantage kick in? 

Mr. SKEEL. I couldn’t put a precise dollar level, but when you get 

into the top 10 banks or so in the country— 

Mr. HECK. It is not clear to me how that changes the spirit of 

my question, though. Then why aren’t multiple regional banks 

talking with one another to achieve this holy grail of the funding 

advantage and competitive advantage of— 

Mr. ROSNER. I do think that we have institutions that have 

sought to be what I call aspirational too-big-to-fail institutions that 

have grown in precisely that manner with— 

Mr. HECK. Can you name names? 

Mr. ROSNER. I think that is one of the drivers we have seen with 

PNC over the years, and previously with SunTrust and with regions at times. So I think there is this class of aspirational too-bigto-fails, but where I was going before was if we do not see the Orderly Liquidation Authority as a benefit, or the DIF funding as a 

subsidy, then why don’t we just open that DIF funding to every 

single institution in this country in case of trouble? Allow everyone 

to access low-cost Treasury capital when they are in trouble. It is 

absurd. It is an absurd suggestion, and the fact that we all recognize it is an absurd suggestion demonstrates or points to the inequity of that financing in the first place. 

Mr. HECK. I am glad you made a reference to DIF. I would like 

to move on if I may, sir. As you define bailouts, would the traditional FDIC resolution process to wind down a depository institution qualify as a bailout? 

Mr. ROSNER. No, because it is actually a liquidation rather than 

a restructuring. And in fact, it seems that the institutions have 

sought to make themselves intentionally more complex even within 

the banks by moving their derivative books which had historically 

in many cases been outside the banks into the banks to increase 

the complexity and the difficulty of resolving a bank. 

Mr. KRIMMINGER. Having a little bit of experience with the 

FDIC, I think it is—you can’t make that distinction, frankly, beVerDate Nov 24 2008 17:55 Sep 05, 2013 Jkt 081754 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\81754.TXT TERRI
29 

tween the FDIC process and banks being a liquidation and this 

being a reorganization. What happens in a bank is that you sell it 

to another bank. You put it into a bridge and then sell it to another 

bank. Here, you don’t want to put it into a bridge and sell it to another large institution because then you just treble the size of the 

large institution, potentially. So you really can’t draw that distinction. I think the FDIC certainly has a lot of experience in dealing 

with those bank resolutions, but certainly I think under the DoddFrank Title II provision, we want to make sure that the Bankruptcy Code can be effective up to the largest possible size. I don’t 

think, frankly, banks have been moving their derivatives portfolios 

into the bank to increase their magic complexity, but there is funding because you have a deposit base that is insured. That is why 

people like to have that solidity of the deposit base. You can debate 

whether that is the appropriate step or not, but that is the reason, 

not— 

Mr. ROSNER. I think there are multiple reasons. I don’t think 

they are mutually exclusive. 

Chairman MCHENRY. The gentleman’s time has expired. I will 

now recognize Mr. Barr of Kentucky for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman, and thanks to the witnesses for your testimony this morning. Professor Skeel, I was particularly impressed with the arguments that you made that OLA 

does, in fact, afford a competitive advantage to failed financial 

firms that access the Title II provisions. I would like all of the witnesses to maybe comment and amplify on those thoughts, and in 

particular, how the tax exemption, the funding advantage, the capital advantage, for a bridge company, how would that contribute to 

the perception or reality of an implicit government guarantee contribute to moral hazard, and in your comments in answering that 

question, I would like for you to address the arguments made by 

those who defend Title II, that Title II doesn’t somehow enshrine 

too-big-to-fail because it imposes losses on shareholders, because it 

imposes losses to creditors, because management has changed; in 

other words, that Title II does impose consequences on failed institutions. 

Mr. SKEEL. Okay, a couple of quick comments on that. I do think 

that the bridge institution would be a specially protected non-market driven institution. It has all of these benefits we have been 

talking about, the tax benefits. It is also the case that the FDIC 

would not let it back out into the world until it was healthy and 

there was no way it was going to fail. So I think there is this limbo 

state in which it would have enormous advantages. 

With respect to the claim that taxpayers will never pay anything, 

I don’t think that is accurate for two reasons. One is, we have 

talked about a number of ways in which taxpayers will pay, even 

though in theory they are not paying. Taxpayers are paying if the 

interest rate on loans that the bridge institution has is a belowmarket interest rate. Taxpayers are paying because of the tax exemption that the bridge institution has. So there is that set of 

issues. The other set of issues is that even if some of the costs of 

resolution were ultimately recovered from the industry down the 

road after 5 years or whatever, that is a tax of sorts, as John TayVerDate Nov 24 2008 17:55 Sep 05, 2013 Jkt 081754 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\81754.TXT TERRI
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lor has said. Effectively what we are doing is taxing a particular 

industry to support the resolution of the failed institution. 

Mr. TAYLOR. I would just agree with that, but it is a different— 

under a bankruptcy, the shareholders get wiped out, so there is not 

an issue there. The issue is about other creditors. And in Title II, 

it is hard to see how it wouldn’t happen. You would be giving special favors to certain creditors and charging the assessment fund 

for that, if not the Treasury directly, or also just charging other 

creditors for that, and that has all of the elements of a bailout, all 

of the dangers that we are worried about of a bailout, too much 

risk-taking, the moral hazard, the uncertainty, the lack of rule of 

law, and those are the concerns. That is why we keep coming back 

to some notion of a Bankruptcy Code trying to do this, but also, it 

is fair. It deals with Wal-Mart, and other firms as well. 

Mr. BARR. I am mindful of my time, so if I could just move on 

to a second question. Many of you testified that an enhanced bankruptcy procedure perhaps amending Chapter 14 is preferable to a 

Title II OLA. What about the criticism of those who say that a 

bankruptcy process is too slow, particularly in a 2008 financial 

meltdown scenario? What is the response to those criticisms, and 

also speak to access to debtor and possession financing in a liquidity crisis? 

Mr. SKEEL. Just a couple of things very quickly on that. Bankruptcy can be used very, very quickly. One of the interesting things 

that a group of us are working on now is the idea of using bankruptcy to do a resolution somewhat similar to the one that the 

FDIC has in mind, where you sell the assets of the holding company immediately, and then you have a new institution that is subject to market forces out there. So it seems to me the idea that 

bankruptcy can’t be used quickly is a misperception, and that you 

can do all of the things we have been talking about with Title II 

with a couple of tweaks to the Bankruptcy Code in bankruptcy, and 

if you did it in bankruptcy, you would have a new institution that 

would be fully subject to market pressures. 

Chairman MCHENRY. I thank the gentleman. 

Professor Skeel, as previously announced, your departure time 

has arrived, and we thank you for your testimony, and you are dismissed. We will continue with the remainder of the panel. 

We will now recognize the ranking member, Mr. Green, for 5 

minutes. 

Mr. GREEN. Thank you, Mr. Chairman. We have now concluded 

that Dodd-Frank is not perfect. The current Bankruptcy Code is 

not perfect. But we can, it seems, make the Bankruptcy Code perfect, whereas we cannot make Dodd-Frank perfect. 

So let me start by asking who among you would eliminate DoddFrank completely? If you would do so, would you kindly raise your 

hand? This way, I will be able to move quickly. Who would eliminate Dodd-Frank completely? Mr. Taylor, would you eliminate it 

completely? 

Mr. Taylor, I hate to do this because time of the essence. 

Mr. TAYLOR. There are some things in there I would not eliminate. 

Mr. GREEN. Okay, so you would keep some portions of DoddFrank. 

31 

Mr. Rosner? 

Mr. ROSNER. I would keep some portions of Dodd-Frank. 

Mr. KRIMMINGER. I would keep some portions of it. We clearly 

need an alternative. Just very quickly, I know you have very little 

time, is that mainly the tweaks we need to do with the Bankruptcy 

Code, they are in all of the recommendations, actually make it 

more like Dodd-Frank in many ways to accomplish some of the 

goals. Bankruptcy needs cash because in a huge crisis, debtor-inpossession financing is not always available. 

Mr. GREEN. You are going to segue into my next question, so let 

me just toss it to you. Dodd-Frank mimics the Bankruptcy Code as 

much as possible, but it has some additional things that the Bankruptcy Code doesn’t have. Can you take just a quick moment and 

give us some thoughts on those different things, please? 

Mr. KRIMMINGER. A couple of things. First of all, it does have liquidation funds we have talked about a lot. The Bankruptcy Code 

would need cash in order to be able to do a resolution. If you are 

trying to deal with systemic risk, you need to have some ability to 

deal with systemic risk and to say you want to eliminate any ability to make sure you can maintain operations which does involve 

preferencing some creditors, I think is not consistent with trying to 

deal with systemic risk. The Bankruptcy Code, itself, has some 

mechanisms to continue those things. They might need to be expanded. The ex ante, or the before decisions are made, a decision 

by a judge on each of the questions, is something that Dodd-Frank 

puts after the fact for lawsuits to challenge what the receiver has 

done, and the receiver would need to be able to act quickly. That 

is one of the things that Title II does, and it also provides for borrowing authority to transfer things to that bridge financial company. 

Mr. GREEN. Thank you. I asked the question about Dodd-Frank, 

and mending it, because there are some people who want to end 

it. And there are some people who want to use your testimony to 

end Dodd-Frank and bring in a regime under bankruptcy. 

Let’s point to something else. There was talk about the industry 

being taxed after the fact once the liquidation has taken place. 

That taxing, as you have called it, isn’t that similar to the premium 

paid by banks with the FDIC? Mr. Krimminger? 

Mr. KRIMMINGER. It is. The difference, of course, is that the Deposit Insurance Fund is funded up front by risk-based premiums. 

Mr. GREEN. Right. 

Mr. KRIMMINGER. The Orderly Liquidation Fund is repaid. If all 

the cash that is paid, that is received through the bridge company 

could not be paid to Treasury, which I think is very unlikely, you 

would have to almost have the value of that company being zeroed 

out because Treasury takes off the top. The cash is risk-based, and 

it is paid ex ante, very much like the Deposit Insurance Fund. 

Mr. GREEN. So it is similar, just that one is paid up front, and 

the other is paid after the fact, correct? 

Mr. KRIMMINGER. That is correct, and the important difference, 

to respond to one of the questions earlier, this is only paid by those 

institutions that are over that $50 billion threshold or have been 

designated as 50 that is not paid by the thrift and savings and 

loans that are smaller. 

32 

Mr. GREEN. Mr. Krimminger, in your paper—by the way, I 

thought it was excellent, and I plan to post it on my Web site— 

you indicate that there is an additional thing that Dodd-Frank does 

that bankruptcy doesn’t do. Bankruptcy deals with creditor claims, 

whereas Dodd-Frank also deals with protection of the public, and 

it looks at the impact on the economy. Can you please give me your 

thoughts on this, because it is important for us to note that in 

2008, the crisis was so large that banks were not lending to each 

other, that a prepackaged bankruptcy was not possible because you 

didn’t have the liquidity to take into that process. So with that in 

mind, would you kindly explain how this notion in Dodd-Frank of 

protecting the public becomes exceedingly important? 

Mr. KRIMMINGER. The reason that Title II was created in the 

first place was because of making sure that in that rare extraordinary circumstance where you had a systemic crisis, you had an 

additional option that could impose losses upon the shareholders 

and the creditors as much as possible while making sure you could 

continue this operation of the institution that would deal with systemic risk. That is why you needed funding and that is why inevitably, just as you do in bank failures because of maximizing value, 

you do have some creditors who get more than others. To say that 

all creditors should get only the amount provided for under the priority system, in some ways is not even true under bankruptcy at 

times because you need to continue operations. 

Mr. GREEN. One final quick question. How many of you would 

make the big banks smaller? There has been talk about doing it. 

Let’s see now if you would do it. Would you raise, would you make 

the big banks, would you downsize them, break them up? If so, 

kindly raise your hand. Okay, we have one person, Mr. Rosner 

would. Mr. Taylor? 

Mr. TAYLOR. You asked, would I like to get rid of this too-bigto-fail? I would like to deal with it that way. 

Mr. GREEN. I understand, but the question I am asking is, would 

you break up the big banks? 

Mr. TAYLOR. It would have those effects. That would have those 

incentives. When you ask the question that way, you missed, I 

think, the point that we have a problem that is— 

Mr. GREEN. I understand the point, but when you make statements about breaking up the banks, I would like to know if this 

is what you would do. 

Mr. ROSNER. When I say break up the banks— 

Mr. GREEN. My time has expired, and I have gone over. So I 

have to yield back, Mr. Chairman. 

Mr. ROSNER. Can I just respond? 

Chairman MCHENRY. The gentleman is trying to answer the 

question. 

Mr. ROSNER. So to clarify, if the Fed took seriously its obligations 

under Title I, which would be to use the living will process to figure out how institutions can fit through the Bankruptcy Code, Title 

II becomes unnecessary. Would I use that process to achieve those 

ends? Yes. Is that forcibly breaking them up? No. It is creating incentives to make sure that they are manageable through the bankruptcy process. 

33 

Mr. GREEN. And in effect, what you are doing, what you are acknowledging, is that Dodd-Frank provides a means by which this 

may be done. 

Mr. ROSNER. No, what I am acknowledging is that there is a tool 

that creates a living will, which is a blueprint for how things could 

work, not how they will work. 

Mr. GREEN. I didn’t say how they will, but I do contend and I 

believe you agree that Dodd-Frank provides the means by which it 

may be done. 

Chairman MCHENRY. I appreciate the dialogue and debate. We 

will now recognize Mr. Duffy for 5 minutes. 

Mr. DUFFY. Thank you, Mr. Chairman. Mr. Taylor, I don’t know 

if you wanted to further answer that question that was asked 

about your thoughts on breaking up big banks. 

Mr. TAYLOR. I think I would like to. A lot of the concerns about 

too-big-to-fail and the anticipation of bailouts is that it does give 

advantages to certain institutions. And so that could make that 

larger. There is also the question about what capital should be. 

There is a real concern about capital, in my view, and so that 

would also have an impact on the size of the institutions. I think 

that is what you want to do. You want to level the playing field. 

And also with respect to repealing or eliminating Dodd-Frank, 

the question really—there is the Office of Thrift Supervision which 

is eliminated, you have the central clearinghouses. So those are 

good reforms, but Title II itself, it seems to me, has real problems. 

And if you could replace it with modification of the Bankruptcy 

Code, I think that would be far preferable. If for political reasons, 

you have to keep it, and put in the Bankruptcy Code reforms, then 

I would be all for that. But Title II itself is problematic. 

Mr. DUFFY. I think we have engaged in a really nice conversation 

today to try to find some solutions on how we can move forward 

to truly end too-big-to-fail, and I think you see a bipartisan approach to that effort. And I think we can all work together to improve the current legislation, and I think there is a willingness 

today, more so than there has been in the past, to try to find a system that is workable, and breathes certainty into the marketplace. 

But one of my concerns in regard to too-big-to-fail and SIFI is looking at Title I, and Title II, is the implicit Federal backstop for the 

operating subsidiaries. And my concern is that if you have this 

Federal backstop and you are designated an SIFI, what does that 

do to the borrowing costs of those various institutions? Does it create an actual benefit before they are thrown into Title II? If they 

are just operating as an SIFI, doesn’t that automatically give them 

a borrowing advantage? 

Mr. TAYLOR. Data certainly suggest that large institutions get 

this advantage and that it has increased since the financial crisis. 

So that is what the data show, and then when you go through and 

look at the details, you could see why that might be the case. 

Mr. KRIMMINGER. If I could just say, I think that, clearly, it has 

been a long-term issue about too-big-to-fail and the uplift, if you 

would, provided for the largest institutions. I think in some ways 

it would be difficult to, but we need to separate out the uplift that 

might have increased the Federal filing requirements because we 

34 

took what was an expectation of too-big-to-fail and made it reality. 

So the markets incorporated that concept as well. 

As far as the operating subsidiaries, certainly it is important to 

make sure that Title II, whether it is used at the single point of 

entry at the holding company, or at different levels, is kept in 

mind. I try to remind people—and I reminded people when I was 

at the FDIC as well—that single point of entry could not be the 

way it would work out because you might have multiple entities 

within that holding company that simply can’t go on. Multiple 

point of entry so that you close the subsidiaries has to be looked 

at as being a viable option as well so that you reduce that filling 

of the subsidy for the subsidiaries. 

Mr. DUFFY. But wasn’t it in your testimony that you admitted 

that there is a subsidy there to the operating subsidiaries? 

Mr. KRIMMINGER. In the case of a subsidiary that doesn’t fail, 

you don’t close a company just because they happen to be a subsidiary of a failed company. If the subsidiary is operating in the 

best value for that subsidiary, and it is making money, to continue 

for it to make money, then that would be the rational thing to do 

in any type of insolvency process. 

Mr. DUFFY. But if you are a creditor to that subsidiary, you are 

not going to be allowed to have that debt not met, right? The holding company is going to go to Treasury. They are going to access 

dollars from Treasury, and they are going to be able to meet—go 

find the creditor, and I am going to lend to a subsidiary. I have a 

Federal backstop. So I am going to be able to, if I am one of those 

subsidiaries, I don’t have a benefit in borrowing. 

Mr. KRIMMINGER. If that subsidiary is insolvent, it should be 

closed. That is why I am talking about the multiple— 

Mr. DUFFY. What happens to the creditor if it is insolvent? 

Mr. KRIMMINGER. If it is closed, then it goes through an insolvency process, and it would either go in through an insolvency 

process in bankruptcy, or it would go through an insolvency process 

under Title II, and the creditors— 

Mr. DUFFY. I am saying if we are in Title II. 

Mr. KRIMMINGER. Okay, but the holding company could be in a 

Title II resolution, a single point of entry, but there also could be 

a failure of a subsidiary. So that subsidiary under the statute could 

go right into bankruptcy or under Title II if it were systemic itself, 

and if it is systemic and it goes under Title II, the creditor is still 

going to take losses because you don’t have the kind of single point 

of entry approach at that level of the entity. 

Mr. DUFFY. Do you agree with that, Dr. Taylor? 

Mr. TAYLOR. This is the question about whether there is the Federal backstop and how that is affecting rates? 

Mr. DUFFY. Right. Yes. 

Mr. TAYLOR. I will stand with what I said before. It is there and 

it is affecting rates and it has increased since Dodd-Frank was 

passed. 

Mr. DUFFY. Mr. Rosner? 

Mr. ROSNER. I agree. And again, it creates an incentive for creditors to choose to invest in the OPCO rather than the HOLDCO, 

further distorting the ability of the HOLDCO to be a source of 

strength to its operating subsidiaries. 

35 

Mr. DUFFY. I yield back. 

Chairman MCHENRY. All right. The first round of questioning is 

now done. 

I expressed at the beginning of the hearing that our intention 

was to adjourn by noon, but we have additional Members with a 

few extra questions, so I ask unanimous consent that we have 7 

additional minutes per side, with 5 minutes going to Mr. Barr, and 

2 minutes to me on our side. I will now recognize the ranking 

member for 7 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. And if there are other 

Members who would like to speak, if you will kindly let someone 

know, I will adjust my time. 

Let’s come back to Dodd-Frank versus bankruptcy, because this 

is what this has become about today. Let’s ask this question. What 

is it that you find that you can do with bankruptcy that you cannot 

do with Dodd-Frank? 

Mr. TAYLOR. The advantage of bankruptcy is it is part of our system for creditors. It has been around as part of the rule of law. It 

can work for all kinds of— 

Mr. GREEN. I understand. 

Mr. TAYLOR. And that is what you want to— 

Mr. GREEN. Time is of the essence, and we have to move on. 

Mr. TAYLOR. —make it available— 

Mr. GREEN. Can you give me something that you can do under 

bankruptcy that you can’t do under Dodd-Frank? 

Mr. TAYLOR. Yes. That is the main thing. You have the rule of 

law applies and Dodd-Frank you don’t. 

Mr. GREEN. Dodd-Frank is not the rule of law? 

Mr. TAYLOR. Dodd-Frank has tremendous discretion authority 

given to— 

Mr. GREEN. I understand. 

Mr. TAYLOR. —to the FDIC. 

Mr. GREEN. But that is under the rule of law. 

Mr. TAYLOR. And how they treat creditors— 

Mr. GREEN. Let me go on to Mr. Krimminger. 

Mr. Krimminger, can you tell me something about Dodd-Frank 

that allows it to do what we generally speak and want to do with 

bankruptcy, please? 

Mr. KRIMMINGER. Essentially what Dodd-Frank does, as I said, 

it is really supposed to be an alternative, and I worked a long time, 

I worked with a number of people when I was at the FDIC, to try 

to make sure that Title II would not be viewed as being substantially or substantively different in the way it would treat creditors. 

Yes, there was more discretion, but the discretion is inherent to the 

ability to address a systemic risk. 

I think if we go and say we have to eliminate the discretion, you 

are eliminating the ability to deal with a systemic risk in a crisis. 

So, clearly, Title II will allow you to do that. It is also simply not 

true to say that Title II does not or ignores the rule of law. Title 

II just has the rule of law after the decision is made initially and 

you can file suit for damages. 

Under U.S. law, it has always been viewed as being an appropriate remedy to be able to file a suit for damages rather than havVerDate Nov 24 2008 17:55 Sep 05, 2013 Jkt 081754 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\81754.TXT TERRI
36 

ing a judge make every decision in advance. That is the bankruptcy 

way, and bankruptcy should apply wherever possible. 

Mr. GREEN. Let’s talk for just a moment about bridge institutions. There seems to be this notion that a bridge institution is 

somehow going to come into existence, reap a lot of benefits, and 

a lot of money is going to be made. What is the purpose of the 

bridge institution, and talk about its longevity, please, Mr. 

Krimminger? 

Mr. KRIMMINGER. The bridge institution is designed to be a very 

short-term entity. I think that much of the discussion today about 

the length of a bridge company being up to 5 years, that is also 

true under the Federal Deposit Insurance (FDI) Act, and the average length of time for a bridge institution under the FDI Act has 

been less than 6 months. 

Now, it might be longer under a Title II situation, but remember, 

under the single point of entry approach the FDIC is talking about, 

you would be taking over the holding company, which is a very 

simple organization. There, the way they plan to do that would be 

to do a—that debt for equity swap, if you will, a creditor claim for 

equity swap for the debt within 6 to 9 months, because I will assure you, the FDIC does not want to run a mega institution for any 

extended period of time. 

Mr. GREEN. Mr. Krimminger, in your paper you also talk about 

time being the enemy in a time of crisis. In 2008, it was a time 

of crisis and time was the enemy. Would you please elaborate on 

time being the enemy and juxtapose this to bankruptcy as an option? 

Mr. KRIMMINGER. I think time is an enemy because you need to 

act very quickly. In 2008, on the weekends when things needed to 

be done, and it seemed to happen on far too frequent a basis, you 

had to make the decisions and come to a conclusion about how to 

deal with an institution by the Sunday night before the business 

opened in Asia, because once the market was open, it would be too 

late, and the illiquid institution would fall. 

If you look at the Lehman bankruptcy, and again, I would like 

to see bankruptcy improve where it could deal with the situation 

much better, but if you look at the Lehman bankruptcy itself, it effectively allowed for a transfer of the broker-dealer, in that case by 

keeping the broker-dealer open with large funding from the Federal 

Reserve Bank of New York. We want to get to a situation where 

an institution can be closed, it can be resolved while losses are imposed rather than having funding for an extended period of time 

so that some creditors get out and complete their transactions. 

I think the Lehman bankruptcy illustrated some of the issues of 

bankruptcy and illustrated some of the ways forward in how we 

can make improvements. 

Mr. GREEN. We understand that banks don’t go through bankruptcy, generally speaking. They go through a process with the 

FDIC. Is what we are attempting to do with Dodd-Frank, which by 

the way is in its infancy, it is still being developed, rules are still 

being promulgated. Is what we are trying to do with Dodd-Frank 

similar to what is being done with the FDIC and banks, generally 

speaking? 

37 

Mr. KRIMMINGER. It is based upon essentially the similar powers 

of the FDIC. I think, as I was saying here in my testimony earlier, 

that it has been internationally recognized that you need to have 

certain powers in extremis, if you will, to be able to take those actions, so it is really based upon the same models of authority to 

take action and then have a determination. 

Mr. GREEN. Now, there were some points that you wanted to 

make earlier, and I remember you didn’t get an opportunity to. If 

you made note of them, I would like for you to use some of this 

time to make those points. 

Mr. KRIMMINGER. I would just note, as I was trying to make a 

lot—I just note in response to some of the questions earlier that 

clearly some of the improvements we are trying to make in the 

Bankruptcy Code, in order for the ability to act more quickly, the 

first day order issue, the ability to find an identifiable area of cash 

or debtor possession financing and others, the ability to deal with 

systemic risk; in fact, the creation through potentially a Section 

343 sale under the Bankruptcy Code of a sale to an entity that 

would be similar to a bridge company is very much modeled upon 

what we are talking about in Title II. 

So I think we just have to keep in mind that the changes we 

want to make should be appropriate for the types of entities we are 

talking about, and I don’t think we want to have all those changes 

in the normal bankruptcy process anyway, so we need to make sure 

that the changes in the Bankruptcy Code make it more effective, 

but do not dramatically change the normal bankruptcy process. 

Mr. GREEN. Is it possible for bankruptcy itself to have an adverse 

impact upon the economy in a time of crisis? For example, if AIG 

had gone through bankruptcy in a time of crisis, how would that 

have impacted the economy? 

Mr. KRIMMINGER. I don’t want to really speak to AIG particularly, being as it is an open company at this point, but certainly 

I think that if you had the rapid deleveraging of a company that 

is involved very much in the derivatives markets, that could be 

very destabilizing in the marketplace. And one of the great things 

about the ability to terminate net contracts in bankruptcy or under 

the FDI Act after a one-day stay is that it allows people to have 

liquidity in their market contracts. One of the bad things is that 

if you have that ability to immediately terminate those contracts 

and dump them on an already illiquid market, you run the risk of 

having much more illiquidity in the market and it freezes up the 

markets. 

Mr. GREEN. Thank you. My time has expired. 

Thank you, Mr. Chairman. 

Chairman MCHENRY. With that, we will now recognize Mr. Barr 

for 7 minutes, with my colleague understanding that I would certainly appreciate a few minutes at the end. Two minutes at the end 

would be great. 

Mr. BARR. Absolutely, Mr. Chairman. Thank you. 

Chairman MCHENRY. Thank you. 

Mr. BARR. I would be interested in Dr. Taylor’s and Mr. Rosner’s 

responses to the comments, the testimony that Mr. Krimminger 

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38 

ruptcy, and please speak to the liquidity issue and the timing questions? 

Mr. TAYLOR. I will just make a couple of points. There is no reason, and I document it in my written testimony, that you couldn’t 

be just as quick with a bankruptcy as what is being contemplated 

with the FDIC’s new single point of entry. In fact, I describe how 

that could work with an example. It could be done over the weekend, if you like. The process could be very quickly. 

We also have ways that we can have experts more involved with 

the bankruptcy judges than they are now. There is a wide range 

of things in terms of the reform side that could make this very 

smooth. 

And I would say even now when we think about what the FDIC 

might do, we don’t know. They are talking about issuing a paper. 

They are talking about issuing some procedures. That is very important to do, but that will still just be their procedures. That is 

not part of the rule of law. That could be changed on a dime. So 

it is quite different. All that discretion is still there. 

So I think those two things are the most important, I would say, 

in response to what Dr. Krimminger said. 

Mr. BARR. Mr. Rosner? 

Mr. ROSNER. I would agree. I would add, which is also in response to Mr. Green’s question, the same thing. The question is almost more importantly asked, what does the Bankruptcy Code offer 

that Dodd-Frank doesn’t, and to that end, the answer is clarity, 

certainty, due process. Those are the key features that you want 

codified in law and in judicial process and review rather than leaving it in the arbitrary hands of even the most well-intentioned and 

well-meaning regulators. 

Mr. BARR. A question for all of the witnesses generally on the 

issue of too-big-to-fail systemic risk, I have heard the argument 

made that size or largeness is not in and of itself systemic risk, 

that the real question, the real problem is overleverage, the real 

problem is liquidity risk, that is the more fundamental problem in 

a crisis situation. And in fact, I have also heard the argument— 

and I think there is a persuasive element to it—that large institutions that are highly diversified have the capacity, unlike non-diversified smaller institutions, to absorb losses. As we kind of grapple with policymakers with the issue of too-big-to-fail, could you all 

kind of comment on that, and as we approach the problem, how 

should we take that into account when we hear proposals to break 

up banks? 

Mr. ROSNER. Look, I am sympathetic to the view that if we are 

sitting here having discussions over a Title II authority as treating 

institutions differently because they pose systemic risk, we do have 

to stop, step back, and ask why we have all chosen to live with a 

gun at our head rather than figure out how to manage that so it 

doesn’t pose a threat, and I think that is really the starting point. 

And I think leverage is a key issue there. I think capital is a key 

issue there. I think clarity of structure, the ability to put through 

bankruptcy and an international structure that would allow for 

management of those operating subs in insolvency or some sort of 

a ring fencing of those makes sense. I would start there rather 

than by codifying too-big-to-fail through Title II. 

39 

Mr. BARR. I want to yield time back to my chairman, but if Mr. 

Krimminger would like to follow up on that, and then I will yield 

back to the chairman. 

Mr. KRIMMINGER. Just briefly, I think that the diversification of 

assets and operations can certainly do a lot. I think fundamentally, 

if you are looking to make sure an institution of whatever size 

doesn’t fail, it is a question of risk management. I think the largest 

institutions as well as the smaller institutions today have made a 

lot of strides in the last few years in actually looking at ways to 

better manage their risk, and I think the living will process has actually paid some dividends because there has been some significant 

changes in the way the operation has been done in reaction to 

those efforts. 

Mr. ROSNER. Non-public, non-transparent, and frankly not visible 

to the market outcome supposedly of Title I. 

Chairman MCHENRY. Will my colleague yield? 

Mr. BARR. I will. Thank you, Mr. Chairman. 

Chairman MCHENRY. Thank you, Mr. Barr. 

My question, Mr. Krimminger is, within the Act, within the 

Dodd-Frank Act, Title II authority, liquidation authority as we are 

discussing today, does the FDIC have discretion about the order of 

creditors? 

Mr. KRIMMINGER. The FDIC has authority under the Act subject 

to its own regulations to provide additional funding or additional 

payments to some creditors if they are essential to the operation 

of the receivership of the bridge. 

Chairman MCHENRY. Okay. But there is discretion for the FDIC 

in that process? 

Mr. KRIMMINGER. There is a statutory requirement, and the 

FDIC put in place a regulation that said that their board of directors had to approve any particular payments to a particular creditor, but again, that is to deal with systemic risk. 

Chairman MCHENRY. How many members are on the FDIC 

board? 

Mr. KRIMMINGER. Five. 

Chairman MCHENRY. And how many votes does it take in order 

to make that determination? 

Mr. KRIMMINGER. It requires, under that regulation, a supermajority, so I think it would end up being four. 

Chairman MCHENRY. Four. So four individuals are given discretion, just like in the crisis, they took the discretion to reach out and 

insure a set of assets that they had never previously, in the FDIC’s 

history, insured. 

Mr. Rosner, to this point, this question of discretion, does that 

increase uncertainty or decrease uncertainty? 

Mr. ROSNER. In absolute terms and relative terms, it increases 

uncertainty. It will have impact not only as an institution approaches failure, but definitionally has impact as we see in the cost 

of funds advantage long before we get there. 

Chairman MCHENRY. Dr. Taylor, you talk about discretion with 

monetary policy and the challenges there. So, if you are an unsecured creditor, unsecured debt within an institution, does this process give you greater certainty than where you would be in a bankruptcy process? 

40 

Mr. TAYLOR. The bankruptcy will be much clearer. Here, the discretion creates uncertainty. There is no question about it. 

Again, we don’t know, even now, what the FDIC’s policy is. A 

paper may help, but it will still have the discretion to change it 

when they want to. 

Chairman MCHENRY. Okay. 

Mr. TAYLOR. I think it is tremendous uncertainty, which is one 

of my biggest concerns about that whole too-big-to-fail process. 

Chairman MCHENRY. Thank you, and thank you for your testimony. I appreciate your answers to the variety of questions posed 

today. We have a few takeaways accordingly: that the Orderly Liquidation Authority leads to greater uncertainty; that greater uncertainty is not helpful to the marketplace, not helpful to our nature 

of the rule of law and a regulatory policy that is clear to the marketplace. 

Likewise, the functioning of this would—if an institution went 

into an orderly liquidation, it could result in an enormous bank 

tax, which would be put on other institutions, surviving institutions, and thereby their consumers. And finally, the overall question about taxpayers being on the hook. I think that is pretty well 

resolved now that we better understand what the Orderly Liquidation Authority actually means. 

Thank you so much for your testimony, and thank you for being 

so forthcoming. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing is now adjourned. 

[Whereupon, at 12:15 p.m., the hearing was adjourned.] 

(41) 

A P P E N D I X 

May 15, 2013 

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Rep. Peter King Statement for the Record 

Oversight and Investigations Subcommittee Hearing: "Who is Too Big to Fail: Does Title II of 

the Dodd-Frank Aet Enshrine Taxpayer-Funded Bailouts?" May 15,2013 

I want to thank Chairman McHenry for holding today's hearing. This is an issue that is 

of particular importance to New York, since many of our nation's largest financial institutions 

are headquartered or have significant operations in the state. 

The 2008 financial crisis is something we can all agree we want to avoid repeating, and I 

appreciate today's hearing for investigating how the Dodd-Frank Act handles a failing bank 

under Title II and the "Orderly Liquidation Authority." I hope to gain insight into whether OLA 

would have applied to multiple firms had it been in existence prior to 2008, and whether it would 

have slowed the recovery of the finance industry. During the crisis, would multiple firms have 

had to undergo the orderly liquidation process? Would the FDIC have been able to handle 

multiple significant financial institutions in receivership? And could some of those firms still 

have been in receivership today, since under Dodd-Frank the FDIC is able to maintain the failed 

institution in a bridge holding company for up to five years. 

I have concerns about whether this would result in a more entrenched government role in 

our financial sector, and if it would give a firm in receivership (which made poor management 

choices) a temporary advantage over its competitcrs. The health of New York's economy is 

strongly tied to the health of the U.S. financial industry. I look forward to gaining a better 

understanding of the impact of Title II of Dodd-Frank and exploring other options for addressing 

a failing significant financial institution. 
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STATEMENT 

OF 

MICHAEL H. KRIMMINGER 

on 

"Who is Too Big to Fail: 

Does Title II ofthe Dodd-Frank Act Enshrine Taxpayer Funded Bail-outs?" 

OVERSIGHT AND INVESTIGATIONS SUBCOMMITTEE 

FINANCIAL SERVICES COMMITTEE 

U.S. HOUSE OF REPRESENTATIVES 

May 15, 2013 

Washington, D.C. 
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81754.003

Chairman McHenry, Ranking Member Green, and members of the Subcommittee, thank 

you for the opportunity to testify today. The topic for loday's hearing is "Who is Too Big to 

Fail: Does Title II of the Dodd-Frank Act Enshrine Taxpayer Funded Bail-outsT 

Too Big to Fail did not begin with the recent financial crisis or with Dodd-Frank. It is the 

product of the long-time expectation by the market that some institutions are so critical to the 

functioning of the financial system and economy that the government will act to prevent their 

insolvency and resolution. This expectation over many years has distorted market pricing for 

debt and equity, and limited the incentives that should be provided by market discipline. The 

recent financial crisis transformed the expectation of a bail-out into a proven reality in 2008 

because the regulators had no option other than bankruptcy to resolve the largest non-bank 

financial companies and, as a result, had to take several difficult steps to prevent greater chaos. 

To be succinct in response to the question posed for today's hearing, Title II of DoddFrank does not enshrine Too Big to Fail. Title II provides an alternative to the Bankruptcy Code 

to ensure that the tools are available in a crisis to close the largest financial companies and to 

impose the losses on their shareholders and creditors, while mitigating the potential for more 

widespread dislocations in the financial system and economy. These tools are based on those 

long used by the Federal Deposit Insurance Corporation to resolve failed insured banks. I think 

it beyond dispute that we our statutory framework in 2008 did not have all of the tools necessary. 

Title II provides that statutory framework. 
45 


81754.004

Any consideration of Title II has to examine why it was created and the alternatives. In a 

properly functioning market economy there will be winners and losers, and some firms will 

become insolvent and should fail. Actions that prevent firms from failing ultimately distort 

market mechanisms, including the market's incentive to monitor the actions of similarly situated 

firms. Title II was a reaction to the fact that in 2008 the regulators did not have the legal 

authority to close the largest financial holding companies, impose losses on their shareholders 

and creditors, and resolve them. In 2008, the only alternative was the Bankruptcy Code and no 

one wanted to replicate the experience of the Lehman Brothers' bankruptcy. 

One explanation for the market reaction to the Lehman failure was that it shocked 

investors because, following Bear Stearns, they had assumed Lehman was too big to fail and its 

creditors would garner government support. Others feel that the bankruptcy process itself had a 

destabilizing effect on markets and investor confidence. While the underlying causes of the 

market disruption that followed the Lehman failure will likely be debated for years to come, both 

explanations pointed to the need for a new resolutions process for systemically important nonbank financial institutions. 

It was clear in the United States and internationaJ1y that some alternative to impose 

shareholder and creditor discipline through an insolvency process without the consequences of 

widespread economic dislocation was necessary. Title II was designed to provide that alternative 

in the rare cases where the Bankruptcy Code could not meet those needs. 

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81754.005

I served with the Federal Deposit Insurance Corporation for more than twenty-one years, 

and represented the FDIC on the Financial Stability Board's Resolutions Steering Group after the 

financial crisis began in 2008. During this time, it became obvious to virtually everyone in the 

international arena that you could not close a complex financial company operating 

internationally under then-existing U.S. or foreign laws without creating havoc in national and 

international markets with potentially devastating consequences for the citizens of those 

countries. In the absence of the essential legal tools, such as those in Title II, other countries like 

the United States opted for bail-outs in 2008 because the consequences of a disorderly collapse 

were too dire. 

The universality of the recognition that certain statutory tools are essential to resolve a 

complex financial company is reflected in the Key Attributes of Effective Resolution Regimes 

for Financial Institutions adopted by the G-20 heads of state in 201 I. The Key Attributes 

incorporate virtually all of the powers contained in Title II, which itself was based on the longstanding authority used by the FDIC to resolved failed banks. The Financial Stability Board is 

now regularly evaluating the progress of member countries in implementing those authorities. 

The insolvency tools included in Title II are now being incorporated into law in the European 

Union, the United Kingdom and other jurisdictions because those tools are basic building blocks 

to resolve large, complex financial companies. It is no exaggeration to say that Title II is, in fact, 

the international standard. 

3 
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81754.006

The Role of Bankruptcy 

Bankruptcy has a long and honored history under U.S. law. For the vast majority of the 

business bankruptcies in the United States, the current system has worked very well. In fact, the 

U.S. bankruptcy process is aptly considered a strength of our commercial and economic system. 

Many thousands of businesses have been successfully reorganized or liquidated under the 

Bankruptcy Code. The bankruptcy process has even been an effective tool for restructuring large 

commercial companies, such as General Motors and Chrysler. 

However, experience has shown that an alternative is necessary as a back-up for dealing 

with the resolution of some financial institutions during periods of financial crisis. During those 

rare cases where the Bankruptcy Code could create a potential for wider systemic consequences, 

we need an alternative to address several key issues. In a crisis, immediate action may be 

necessary that is more difficult under the current Bankruptcy Code. It is essential that someone 

have the power to act immediately after failure to take over the business, preserve critical 

financial operations, establish an operating institution - such as a so-called bridge institution, and 

provide continuity for those critical operations. During the uncertainty of a market crisis 

threatening a spiral of market dislocations, a response to an insolvency that can stabilize the 

failed operations quickly allows the markets, both domestic and international, to make 

investment, pricing and liquidity decisions with greater certainty and reduce the likelihood of 

market disruptions. 

In addition, it is important to have features in the applicable insolvency law - such as 

bridge financial companies and the ability to transfer financial contracts without immediate 

termination - that are essential to the continuity of the business of a large, complex financial 

4 
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company. Continuity is critical in order to maximize value for the creditors of large financial 

companies and to avoid potential systemic consequences. Both the Bankruptcy Code's 

automatic stay and the immediate termination of financial contracts can make this more difficult. 

The option of a bridge financial institution, such as available in bank receiverships, allows the 

receiver to transfer assets and contracts from the failed firm to the bridge institution in order to 

retain franchise value and to avoid dumping financial contracts on the markets. The Bankruptcy 

Code also allows counterparties to certain financial contracts to terminate the contracts and retain 

net collateral immediately after initiation of the bankruptcy. While this protection can be 

important to protect financial markets in normal times, it can create a rapid unraveling of the 

failed company, and broader problems for the financial markets, during the failure of larger 

financial companies. The bridge financial institution also can maintain other systemically 

significant functions such as payments processing, securities lending, and the continuity of 

ongoing government securities or other transactions. 

An effective insolvency process for complex financial companies that can be subject to 

market runs may also require a ready source of liquidity. The Bankruptcy Code currently lacks 

access to such a source and, during a crisis, it has so far proven difficult to arrange adequate 

financing under the existing "debtor-in-possession" framework. This is particularly crucial 

because in virtually all cases large financial companies fail because they lack sufficient liquidity. 

While work to improve the availability of debtor-in-possession financing should be pursued, this 

remains a significant challenge in financial bankruptcies. 

Finally, a resolution of the most complex financial firms requires pre-planning. An 

essential element in this advance planning is consideration of what steps are necessary to protect 

5 
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81754.008

the public interest. The bankruptcy process focuses on resolving creditor claims and not 

protection of the broader public interest. For almost all insolvencies, this is the appropriate focus, 

but in extraordinary cases it may be necessary to consider the consequences for the broader 

economy. 

An essential element in the FDIC's process for resolving failed insured banks is extensive 

pre-planning of the resolution and the ability to develop expertise in quickly implementing a 

resolution that preserves critical financial operations once the bank is closed. As a useful 

comparison, without the ability to pre-plan for the closure of an insured bank, the FDIC could 

not achieve success in giving insured depositors virtually immediate access to their deposits. 

This factor, so critical to preserving liquidity for even the smallest failed bank, is self-evidently 

indispensable to avoid broader market and economic disarray in the resolution of the largest 

financial firms in a crisis. 

The Bankruptcy Code can be improved and provide a much more effective tool to 

address the insolvency of large financial companies. There are certain discrete improvements 

that can be made to substantially improve the ability of the Bankruptcy Code to address the 

failure of financial companies. However, in my view, we will always need the tools in Title II 

for some insolvencics because of the foregoing inherent limitations ofthe Bankruptcy Code. 

The Title II Process 

In examining whether Title II enshrines Too Big to Fail, it is worth recognizing that the 

powers provided to the FDIC are drawn from those used for many for decades to manage 

receiverships of failed banks - and include many parallels to those in the Bankruptcy Code. In 

fact, the provisions in Title II specifically follow the Bankruptcy Code wherever possible with 

6 
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81754.009

the differences focused on those provisions essential to address the missing elements noted 

previously. The reason is simply that since Title II is a back-up option for those extraordinary 

circumstances where bankruptcy appears likely to lead to systemic consequences, it should 

mimic bankruptcy except in those areas needed to address systemic risks. As a result, Title II is 

structured so that the market evaluation of debt or equity issued by a company potentially subject 

to Title II should not differ in substance from their evaluation in a bankruptcy scenario. Of 

course, because Title II will rarely be invoked, it is critically important for both markets and nonU.S. regulators that the FDIC provide as much transparency as possible - in advance about its 

preferred course of action for this type of resolution. I understand that the FDIC is preparing a 

statement of policy to better describe this process. To be helpful, this statement must be 

sufficiently detailed to provide market participants with clear direction on the expected steps and 

the parameters for action. Application of Title II is not an area for vague and uncertain 

standards. 

The Orderly Liquidation Authority includes the elements that are needed to deal with a 

rapidly changing environment surrounding a large, complex financial company. This new 

process is only initiated in extraordinary circumstances, under specific standards, by a process 

requiring the recommendation of a super majority of the Board of Governors and the FDIC 

Board, or alternatively the Securities and Exchange Commission or Director of the Federal 

Insurance Office in the case of a broker and dealer or insurance company, respectively. It is 

designed to be a rarely used option and only as a last resort. 

7 
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81754.010

Once the FDIC is appointed as receiver, it can move immediately to transfer operations to 

other financial companies or to a bridge financial company to preserve value and mitigate 

systemic consequences. This allows the immediate authority to act decisively that is essential to 

respond to the vagaries of a rapidly changing financial environment. The FDIC would have the 

authority to sell or transfer operations to a buyer or newly created bridge financial company so 

that synergistic value and critical operations can be maintained. While there are important due 

process rights to which creditors are entitled, those rights are fully protected by the ability to sue 

the FDIC as receiver for damages after the fact - Title n preserves this important protection by 

providing for jurisdiction in the federal courts for claims against the receiver. 

Crucial to the ability to preserve value and prevent systemic consequences, as noted 

previously, is having statutory authority to continue the financial company's systemically 

important operations. Naturally, as noted above, a precondition to doing this is to prevent the 

immediate termination of market-based contracts once the receiver is appointed, while providing 

for the continuation of those contracts in a purchasing company or in a bridge financial company. 

Equally vital is the ability to address the fundamental reason the financial company failed 

in the first place - the evaporation of liquidity. Title II does this by providing a source of 

temporary liquidity funding if private market funding is not available that the FDIC may obtain 

from the Treasury Department in order to lend to the failed company. This temporary 

government funding cannot be used as a taxpayer bailout in disguise, because the statute flatly 

prohibits the use of this funding as a means to shift losses of the failed institution to taxpayers. 

8 
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81754.011

In addition, Title II expressly precludes any use of this liquidity source in order to prevent the 

closing and resolution of any entity. 

Title II includes important safeguards to ensure that taxpayers never sustain losses from 

such funding. First, any money that the Treasury makes available must be repaid from the sale 

of the failed company's assets before any other creditors recover a dime. This alone should be 

more than adequate to ensure repayment of any loans made by the FDIC in nearly all 

circumstances. Second, the amount of money that Treasury can provide is capped at less than 

the value of the company's assets further supporting repayment by the sale of those assets. 

Third, no money can be made available without a specific plan and repayment schedule for full 

repayment between the Secretary of the Treasury and the FDIC based on the resources available 

to repay the amounts requested. Fourth, in the highly unlikely event that the assets of the failed 

company prove inadequate to fully repay the temporary funding, the FDIC can "clawback" 

certain monies from creditors. Finally, in the even more unlikely event that the proceeds from 

the assets and the clawback payments are insufficient to fully repay the amounts outstanding, the 

FDIC must recover the balance due through risk-based assessments on the large, complex 

financial institutions subject to special Board of Governors' oversight. 

Another key element in Title II is the ability, coupled with the living wills requirement in 

Title I and the additional supervisory authorities granted to the Board of Governors, to undertake 

advance planning. Advance planning is particularly critical to develop the framework for 

resolution of the cross-border operations of a large, complex company. Past experience leads to 

the conclusion that U.S. and foreign regulators are unlikely to cooperate in a way that will 

9 
53 


81754.012

achieve a cooperative resolution of a cross-border financial company. The failed cooperation 

involving Lehman Brothers, the sub-optimal resolution of Fortis Bank between the Netherlands 

and Belgium, and the problematic issues created by the collapse of severallcelandic banks are 

simply recent examples. The Financial Stability Board, during and after my service, has 

recognized these problems - as have all national regulators. They have also recognized that, in a 

world without an international insolvency process, cooperation in a crisis by national supervisory 

and resolution authorities must be based on common statutory powers, extensive pre-erisis 

information sharing and planning cooperation, and by a sober appreciation that cooperation in a 

crisis can only be reliable when each countries' domestic interests are promoted by doing so. 

These foundational elernents revolve around regular and detailed pre-planning both to test 

approaches and to test confidence. Title II is the first U.S. law to provide the basis for this preplanning by creating the statutory framework to resolve banks and complex non-bank financial 

companies. In this way, the authorities in Title II - along with the planning requirernents in Title 

I are essential to improved international cooperation. 

The FDIC has been engaged in an ongoing domestic and international planning process 

for some time, but much remains to be done. The largest financial companies, and the largest 

insured banks now prepare living wills under regulations required by Title I of the Dodd-Frank 

Act. The requirement of a detailed, credible resolution plan for each financial company with 

assets greater than $50 billion is a major undertaking and the financial companies themselves 

have devoted enormous resources to meeting the requirements. The FDIC and the Board of 

Governors, as well as individual Federal Reserve Banks, have likewise focused significant 

resources on evaluating these plans and working with the companies to improve them. This is a 

10 
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81754.013

critical step forward. After all, the court-appointed trustee overseeing the liquidation of Lehman 

Brothers Inc. found that the lack of a disaster plan "contributed to the chaos" of the Lehman 

bankruptcy, the loss of billions of dollars in value, and the liquidation of its U.S. broker-dealer. 

When a large, complex financial institution gets into trouble, time is the enemy. The 

larger, more complex, and more interconnected a financial company is, the longer it takes to 

assemble a full and accurate picture of its operations and develop a resolution strategy. By 

requiring detailed resolution plans in advance, the Dodd-Frank Act gives the FDIC and the 

Board of Governors information that will allow for extensive advance planning both by 

regulators and by the companies themselves. 

Today, the FDIC is working with other regulators and the financial services industry to 

actively evaluate how to resolve the most complex financial companies. The FDIC's "single 

point of entry" approach offers significant advantages in addressing a number of the major 

challenges in the resolution of the largest financial companies. This work is an important step 

forward, but it must continue to be strengthened and deepened. The FDIC must convince the 

marketplace that its plans will, in fact, allow it to resolve a systemically important financial 

institution without creating widespread financial and economic disruptions. Only if the 

marketplace, and the public, are convinced that a Title II resolution is realistic will market 

discipline operate more effectively on financial companies of all sizes. This is the real question. 

The FDIC has done an admirable job of explaining its plans and how its process will work. But, 

the job it not complete because questions and doubts remain. To complete the job will require a 

much more explicit and detailed public statement of how the resolution will be conducted. 

11 
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81754.014

Today, market participants generally understand the fact that Title II does not allow the FDIC, or 

any other regulator, to simply keep a financial company open and hail-out its shareholders. 

What they question is whether the Title II process will be invoked or whether the laws will be 

changed to allow another bailout in the next crisis. 

Where Do We Go From Here? 

While Title II is a vital foundation, it is not sufficient to end Too Big to Fail. The 

expectation of a government bail-out will end only when the market fully incorporates into its 

pricing and other interactions an expectation that in the next crisis the largest institutions will be 

closed and resolved. While Title II provides a legal framework for the resolution of a large, 

complex financial company, more must be done. We must continue ongoing efforts to achieve 

greater international coordination and we must continue the ongoing resolution planning that the 

large U.S. financial companies and the FDIC and Board of Governors are pursuing. 

The history of the recent crisis is replete with examples of missed opportunities to sell or 

recapitalize troubled institutions before they failed. The market cannot operate effectively unless 

bailout is kept off the table by providing a statutory framework for a resolution that imposes the 

costs on shareholders and creditors. Bailout is now off the table by legislative decision. It must 

remain off the table. Removing Title II might be read many market observers as simply 

signaling that the next crisis is more likely to return to past practice and bailout the largest 

financial companies. We need to support market discipline by ensuring that we have insolvency 

procedures that are effective for all scenarios. Market discipline, if allowed to act, can prevent 

12 
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81754.015

failures by incentivizing action by management and creditors alike. We need a Title II process to 

help market discipline make its mark. 

Conclusion 

Too Big to Fail should be eliminated because of its distortion of market discipline and 

market practices, and ultimately its negative consequences for the real economy. However, Too 

Big to Fail was not created or enshrined by the Dodd-Frank Act. Too Big to Fail simply reflects 

the expectation that the government will step in to prevent the insolvency of the largest financial 

companies. In 2008, this expectation became a proven reality. Title II of the Dodd-Frank Act 

directly prohibits such a bailout. In fact, the statutory insolvency tools provided by Title II helps 

support other insolvency tools by serving as a back-up to ensure that market discipline will be 

effective even in the extraordinary cases. However, the elimination of Too Big to Fail is a work 

in progress. Much work remains to be done. 

13 
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81754.016

GRAHAMFISHER 

Statement of Joshua Rosner 

Managing Director, Graham Fisher & Co. 

before the 

House Committee on Financial Services 

Subcommittee on Oversight and Investigations 

"Who is Too Big to Fail: Does Title II of the Dodd-Frank Act Enshrine Taxpayer Funded 

Bailouts?" 

May 14,2013 

Chairman McHenry, Ranking Member Green and Members of the Subcommittee: 

Thank you for inviting me to testify on the important topic of Title II's effectiveness 

in ending "Too Big to Fail". Before I begin my discussion of the limitations and 

failures of Title II, I should express my concern that my criticism will be used as an 

argument for repeal of a flawed rule before a workable replacement or fix is created. 

That is not my intent. 

Recent passage, in this body, of bills that eliminate unworkable Dodd Frank rules, 

without first proffering the replacements necessary to correct failures has resulted 

in a renewed and inappropriate deregulatory push. This type of response must be 

avoided if Congress choses to accept the reality that Title II does not address the 

"too big to fail" problem or its implications for future taxpayer funded bailouts. It is 

also important to recognize many of the failures of Title II result less from the 

legislation than from the failure of regulators to promulgate rules, and to vigorously 

pursue goals on Title I, that are consistent with congressional intent. 

Before addreSSing specific key failures of Title II, it is important to highlight some of 

the problems that exist with Title I and its implementation. The clear intention of 

Title I was to legislate a process under which all too-big-to-fail firms would be small 

enough and simple enough to be unwound through a standard bankruptcy regime. 

Recognizing the impossibility of achieving such an end without forcing designated 

firms to alter their structures, the official sector is writing off the effectiveness of 

Title I. To do so without ever really having tried to fully implement it is a clear 

violation of legislative intent. 

Today, the effect of Title I and Title II of Dodd-Frank is to re-create a class of special 

public companies that, because of their ties to the government, receive the benefit of 

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a GSE-like "implied government guarantee". For background, for the better part of 

the first decade of this millennium, market participants were increasingly convinced 

the GSEs (Fannie and Freddie) could become unstable. Nevertheless domestic and 

foreign bondholders and foreign central banks viewed the companies as low credit 

risks. It was assumed that if they got into trouble they would be bailed out with 

taxpayer dollars and without significant losses being forced upon bondholders. As a 

result, the GSEs had a significantly lower cost of capital than their non-"special" and 

fully private competitors. They also benefit from a government-imposed monopoly 

on the best credits in the mortgage sector, leaving the subprime world to private 

lenders. 

No matter how frequently Treasury, the Fed, the White House or Congress said that 

the government did not stand behind the obligations of the GSEs, the markets did 

not accept that view. When push came to shove in September 2008, the GSEs were 

taken over by the government, placing taxpayers on the hook for any potential GSE 

losses. GSE creditors walked away from the accident and even equity holders, who 

had always been paid to take the first loss, were not wiped out. 

So, are we expected to believe that today's TBTF institutions are not provided a 

lower cost of capital, by the markets and rating agencies, based on the 

understanding that the government will always stand ready to fund their losses? 

Moreover, from where in history can we draw comfort that when a macro crisis hits, 

regulators and policymakers will assess to other TBTF institutions the realized 

losses rather than arguing that that might lead to a contagion risk? 

As witnessed in this crisis, a withdrawal of liquidity from one systemically risky 

institution can lead to both a withdrawal of liquidity to its peers and also a 

contagious decline in asset values leaving all undercapitalized at the same time. 

Nearly three years after its passage, Dodd-Frank, and especially Title II, have done 

almost nothing to mitigate the TBTF problem. In fact, Title II operates under the 

completely implausible and economically unsound notion that in a crisis, TBTF 

firms will be taxed to fund losses at other failing TBTF firms. 

If there is a positive to the GSE model and the "implied government guarantee" it is 

for the Washington political class. TBTF companies will provide all legislators, 

regardless of their political affiliation, with a constant stream of lobbying dollars in 

return for help in stymieing regulators. Washington welcomes the lobbying and 

campaign dollars spent by TBTF banks to convince officials that their derivatives 

books were never at risk and their credit trends are stronger. One of the ironies of 

Dodd-Frank is that is discourages banks from making mortgage loans, but 

encourages derivatives trading and investment banking activities. The ongoing 

failure to proactively create a banking system where all firms are small and simple 

enough to be managed through the bankruptcy process is a testament to 

Washington's love affair with the campaign financing prOVided by large financial 

firms. There is still a massive lobbying dollar hole left by the withdrawal of the 

largess that accompanied the collapse of Fannie and Freddie. 

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Tit!~ I - Congressjonallntent Ignored 

Title I, specifically mandates firms designated as "systemically important" create, 

and submit to the Federal Reserve, "living wills" that detail how they can be 

resolved through the Bankruptcy Code. If legislators and regulators followed 

through on this mandate and ensured that these firms could be resolved under the 

Bankruptcy Code, as intended by law, a special liquidation authority under Title II 

would be entirely unnecessary. 

I should also point out that Dodd-Frank has no method to deal with cross-border 

insolvencies. The Federal Reserve Board knows this, and this is why they have 

proposed the intermediate holding company structure for foreign banks operating 

in the US. Only with the subsidy of the Treasury funding through the "Orderly 

Liquidation Fund" (OLF) does an international resolution have hope of success. 

While various jurisdictions have entered into memorandums of understanding 

those are unworkable and would likely fail in crisis given the various jurisdictional 

prohibitions on backstops and support. 

Because various cross-border legal regimes exist, the management of these 

problems should not wait to be dealt with in the next crisis nor should they be left to 

unelected officials within the regulatory community. There are some examples of 

cooperation in cross-border resolution during insolvencies, including the MF Global 

collapse but these examples are not evidence against the significant and 

unavoidable conflicts. Governments must abide by applicable local insolvency laws, 

regardless of problems that may result in other countries in which a multi-national 

company operates. Title I should be proactively and specifically implemented to 

manage the shrinking of these firms to reduce the complexity of insolvencies so they 

create no future risks to taxpayers. 

We absolutely need to eliminate the problems posed by the anti-competitive, 

market distorting, highly complex, highly interconnected and highly correlated toobig-to-fail firms. Title II is seriously flawed in that it provides significant benefits to 

designated firms, benefits that exist even prior to the point at which the "Orderly 

Liquidation Authority" (OLA) is invoked. 

Title II - Undermining any Resolution to Too Big to Fail 

Section 165(d) of Title I could work if Title II didn't exist - the problem is that the 

very existence of the FDIC's single point of entry approach in Title II obviates any 

need to require that "systemically important" companies become smaller or less 

complex. That is a key reason why these systemically risky banks support Title II - it 

purports to fix the problem that 165(d) was intended to fix. In reality it is little more 

than a new form of bailout. 

Title II is supposed to define an OLA, a backup plan if a firm cannot be resolved 

under bankruptcy. Congress could have named it "Orderly Restructuring Authority" 

but chose not to. It, therefore, is clear that intended it to be a very distasteful, 

unpleasant exercise that results in resolution, not reform, of failed firms. Because of 

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81754.019

the explicit and implicit subsidies, created by its design, the industry prefers it to 

bankruptcy. 

Those who argue that Title II provides no subsidy should be asked to answer they 

question of why it should not be available to all companies. The answer is clear; 

allowing every company access to government financed dip financing is absurd and 

would eliminate the need for prudence by banks and investors. Based on the 

possibility they would have access to the Treasury's OLF if it became insolvent value 

accrues even to healthy firms that are designated as "systemically important". The 

fact that this financing is available to only a few firms is unfair. 

As a reSUlt, Title II authority must be eliminated if we are to give Title I the chance to 

work. The financial crisis made clear that the resolution of large financial firms 

under bankruptcy would have been disorderly. This is not because of flaws in the 

bankruptcy process; it is due to certain parts of the financial institution - most 

notably the trillion-dollar derivatives books - that create interconnectivity among 

the largest financial institutions. 

Title II - Uncertainty and Subsidy 

While a true liquidation would result in the replacement of management, in the 

FDIC's proposed regime, key management of failed operating subsidiaries would be 

able to continue to manage the newly recapitalized firm. Although the FDIC claims 

they would replace personnel there is no requirement to do so. Their deciSions will 

be arbitrary and driven by both the perceptions of regulators and market realities. 

The risk remains that, even in instances in which it is clear that management should 

be replaced there may be a lack of a deep bench of available industry management. 

This was the reality during the past crisis. Artificial enrichment of personnel 

responsible for corporate failure is only one of the major problems with Title II. 

The FDIC recognized that a "liquidation" authority would be deleterious to financial 

markets in a moment of crisis. Restructuring a firm, not liquidating a firm, is the 

proven way to preserve an institution's value. So the FDIC revised the Orderly 

Liquidation Authority to fund a corporate restructuring through a single point of 

entry method. Bankruptcy has and should continue to be the preferred means to 

restructure the assets of failed firms. Instead, OLA is effectively a cram down that 

requires a huge amount of debtor-in-possession (DIP) financing from the Treasury. 

This financing is a taxpayer-funded and anti-competitive subsidy. It supports the 

continuation of a banking system in which "All animals are equal but some animals 

are more equal than others". This is perhaps the easiest way to understand that 

these companies are far too large; the system simply can't fund them in bankruptcy. 

Furthermore, it is easy to imagine non-"systemically important" firms innovating to 

provide services and functions better than "systemically important" financial 

institutions. Evidence of this can be found in the development of standalone 

investment banking partnerships, monoline mortgage originators (such as 

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Household International, Beneficial Mortgage and Quicken Loans), monoline credit 

card lenders (American Express and Capital One) and asset managers. 

Unfortunately, innovation has been stifled by the protections and benefits afforded 

to our largest bank holding companies. The barriers to entry provided by Title II will 

only serve to further reduce competition. Specifically, under the FDIC's single entry 

method, all operating subsidiaries (which include some very large banks and broker 

dealers) would remain open and operating while the top tier holding company 

would be subjected to an OLA resolution. Effectively, this means that creditors of 

these subsidiaries face greatly diminished chances of losses in a bankruptcy because 

the FDIC has declared that these subsidiary banks and broker dealers will probably 

never face insolvency proceedings. Why would potential creditors choose to do 

business with a company that faces normal market discipline and bankruptcy when 

they could deal with a company that can offer subsidized pricing and assurances 

from the FDIC that it would probably never fail? Taking it a step further, how could 

any smaller firm enter a market that a "systemically important" firm is in? The 

"systemically important" firm will have an artificially low cost of capital because the 

FDIC has signaled that it will likely not face bankruptcy. This feature promises to 

stifle innovation in financial services to only the things that behemoth companies 

choose to provide. It's un-American, and it's happening because of Title II and other 

unwarranted benefits we provide to overly influential firms. 

Because of the FDIC's "single point of entry" and the fact that it will aggregate losses 

to the holding company while seeking to preserve the operating companies, the 

ability of the holding company to remain a source of strength to the subsidiaries, 

including the bank, will be imperiled. It creates incentives for management and 

creditors to starve the holding companies of needed funding and to, instead, raise 

capital at the operating company level. This will further weaken the ability of the 

holding company to act as a source of strength. 

Regulatory capital requirements are intended to ensure that there are adequate 

levels of capital to prevent insolvency, but without requiring significant amounts of 

stable capital to serve as a buffer in case of insolvency, investors will become 

increasingly uncomfortable buying the debt of the holding company. The Federal 

Reserve has yet to issue rules defining the amount of 'buffer' capital that will be 

required but it appears likely it will require far less than the 20-30% of equity and 

unsecured debt relative to assets that should be required. 

Moreover, it appears, from comments made by several members of the Board of 

Governors, that they will support the use of contingent capital instead of long-term 

debt. Contingent capital, such as "Trups" and "CoCos" are neither contingent nor 

capital. Equity is equity and there is no substitute. As long as the Federal Reserve 

retains any "13.3" emergency powers, one must expect that when a TBTF institution 

is imperiled or required to convert their contingent debt to contingent equity, the 

"too big to fail" institution will hold legislators and regulators hostage to the notion 

that such a conversion would cause a market panic and lead counterparties to pull 

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secured lines and withdrawing liquidity. This is not a hypothetical argument but is a 

reality we suffered in the crisis. 

In addition, unless there are clear prohibitions against banks investing in each 

other's "contingent capital notes", the use of contingent capital will increase 

systemic risk by engendering precisely the entanglement and interconnectedness 

that defines systemic risk. We have witnessed the problem of interconnectedness in 

this last crisis in at least two situations; banks and insurers investing in each other's 

trust preferred securities (TRUPS) and becoming exposed to not only declines in the 

equity value of their TRUPS but also to losses on their investments in other banks' 

TRUPS. We have also seen the damage caused by regional banks outsized exposure 

to GSE preferreds. Lastly, unless market participants saw through the contingent 

capital notion and considered it to carry an "implied government guarantee", the 

cost of issuance of the notes would be at a prohibitively high rates. Given the failures 

in the "CoCo" and "Trups" markets during the crisis this is an inappropriate and 

unstable form of funding. 

Furthermore, rules promulgated by the FDIC create further distortions of capital 

markets and of existing debt contracts by allowing regulated entities, under the 

guise of protecting critical functions, to justify dissimilar treatment of Similarly 

situated creditors. Given the interconnectedness of these firms it is likely that, to 

stave off the risk of contagion at the time a large firm approaches insolvency, they 

would choose to favor other large and correlated firms over less "systemically 

important" firms. 

As market participants become concerned about the potential failure of a 

"systemically important" firm they will likely exacerbate the firm's troubles and 

increase systemic risk by selling their holdings into an increasingly illiquid market 

to avoid the potential that they are treated unfairly relative to other, similarly 

situated, creditors. It paradoxically provides benefits to any company or claimant 

that can convince regulators of its systemic importance. 

Uncertainty among creditors about which regime, Title II or the Bankruptcy Code, 

will be used to address the failing of a "systemically important" firm as it approaches 

insolvency, will only serve to increase the role of regulators. It is very problematic, 

for creditors, if the same institution has the possibility of going into two different 

insolvency regimes, depending on the whim of regulators. Returns to creditors are 

different under each regime (and somewhat unknowable in the Title II regime), 

making it difficult for creditors to make investment decisions. All institutions must 

be required to fail through the same legal process; otherwise institutions that go 

through the special Title II process will always be deemed "too big to fail". 

From the perspective of market partiCipants, the regulatory discretion in Title II will 

make it difficult for creditors to hold any claims against the institution at the 

moment that market participants believe it's in distress. This too will create a selffulfilling downward spiral where creditors will quickly sell their positions (if they 

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can sell them at all) at very deep discounts, dramatically raising the cost of capital of 

the institution and ensuring a quicker-than-normal demise. 

These uncertainties will extend beyond the largest and designated firms. If investors 

believe that a large and complex non-designated firm is at risk of failure there would 

be a natural basis for concern that regulators could decide that a heretofore nondesignated firm must be designated so on an emergency basis. The result would be 

increasing capital flight at precisely the time regulators would need to be able to 

operate in a stable environment. 

Each of these distortions will compound. Because counterparties will be less 

prudent if they think creditors of the holding company are on the hook, and the 

government stands behind the holding company market monitoring will go down 

leading to further distortions in capital market functioning. 

Perhaps the greatest impact of using Title II as a restructuring regime, rather than as 

an intended orderly liquidation regime is that there will be no cost of failure and no 

clear process to move assets from weaker hands to stronger and better-managed 

hands. 

Simply stated, Title II creates further subsidies for a handful of firms that will be 

costly to taxpayers and bestow further advantages to systemically important 

financial institutions (SIFls) relative to non-SIFI firms. I expect that based on the 

precedent from 2008, in a future crisis, a CEO from a large banking company that 

has been very aggressive in taking on badly managed risks will call his friends and 

former colleagues at the Federal Reserve Board and Treasury to get access to cheap 

OLF financing. The company will be bigger and more complicated than it was in 

2008 because 165(d) will have been long since forgotten. He may have funding 

options, but none on terms as favorable as the OLF. They will band together to spin 

a tale of looming systemic crisis, and will force a reluctant FDIC to join them in 

approving the use of OLA. The OLF will be cheap and will provide great benefitonly the non-systemically holding company creditors will take losses, and the 

company will emerge from OLA much as it entered, to do it all again. We can't allow 

this to happen - OLA rewards companies for becoming "systemically important" and 

overly influential, it hurts smaller companies, and stifles innovation. The 

government created it and the government can and should take it away. 

Under 210(n)5 ofthe Dodd-Frank Act, the bridge borrows from the FDIC, and the 

FDIC borrows from Treasury at treasuries plus a spread over treasuries for average 

corporate bond yields. Nowhere in Dodd-Frank does it state which index should be 

used for determining these bond yield. As a result, if the FDIC chooses to index to a 

"AAA" corporate average, funding may be at rates that the market confers on only 

the healthiest institutions. How does one begin to value an option to obtain funding, 

at any price, when all other funds providers have abandoned an institution? It is far 

larger than the spread between junk and whichever index the FDIC uses because 

without it the firm is dead. This subsidy has value all the time (not just upon failure), 

because "systemically important firms" and their creditors understand that, in good 

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times, you get to play fast and loose in search of returns, without fear of the 

Treasury, as the fund provider of last resort, abandoning you. 

Adding to these subsidies, but less often considered, is that the government has the 

authority to leave behind as much debt as it wants, potentially engendering a 

massive debt crisis. The funding needs for some of these firms could reasonably be 

expected to be in the lOs of billions of dollars, with the need at larger companies 

being close to 100 billion dollars. At the high end of this range it can begin to strain 

even the Treasury's ability to access funds, this is the basis of the preference for 

guarantees over cash borrowing. Moreover, if they overdo it, they are able to turn 

the worst capitalized bank in the world into the best. This could be pretty 

destabilizing and inflict great damage to relatively healthy companies that should 

have the ability to compete on a level playing field. 

The proper approach to ending the too-big-to-fail problem would be to consider 

fairness, which is at the core of the TBTF problem. It is essential that large firms be 

subject to the same insolvency regime that smaller firms are: the Bankruptcy Code. 

Making these firms small enough and simple enough to fail, through standard 

bankruptcy is clearly the best path forward. Not only would such an approach 

reinforce market discipline and eliminate the Orwellian approach to equality, it 

would reduce the risks of capital market uncertainty, reduce risk of capital market 

flight in times of crisis and would support the FDIC's intended mission as deposit 

insurer to the narrow banking sector. 

Finally, it can be expected that those arguing against a more proactive reduction in 

risk and size of TBTF institutions will revert to an argument that strikes a natural 

chord in every American's heart: 'Doing so would put our institutions at a 

disadvantage among international competitors: Level playing fields are a worthy 

goal, but this is not a relevant argument. Instead, this tired bromide must be 

resoundingly dismissed on several counts: 

Those countries with the largest banks as a percentage of GDP (Iceland, 

Ireland, Switzerland) demonstrated that a concentration of banking power 

can cause significant sovereign risk and tilt global economic playing fields 

away from that country. 

The likely breakups of lNG, Lloyds and KBC suggest that it is we who seek to 

support an unleveled playing field where we subsidize our TBTF banks while 

other nations recognize the policy failures of moral hazard. If we continue 

down this path we will likely be at risk of violating international fair trade 

regimes. 

• When the "unleveled playing field" argument is cited, in the name of 

protecting big banks from governmentally- subsidized international 

competition, keep in mind this reasoning supports the disadvantaging of 

7,000+ community banks relative to our largest banks. 

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There is no longer any evidence that, beyond a cost of capital advantage that 

comes with implied government support, there are sustainable and tangible 

economies of scale arising from being the largest firm. The financial 

supermarket concept has been proven a failure. The only ones who benefit 

are top-level executives. The notion that you need large banks to finance 

global companies is false. For centuries, syndicates of banks have financed 

trade and finance quite effectively. More banks involved in providing credit 

helps to better understand and diversify risk. 

We must demand that our legislators no longer allow unelected officials at 

the Federal Reserve to sign international accords created by the TBTF banks 

through supra-national bodies like the Basel Committee. This accord should 

be subject to the advice and consent of the Senate. 

Are we to believe that if we did not have such large and globally dominant 

firms, US borrowers might be paying more that the 29% interest that several 

of the TBTF firms now charge to their credit card customers? Perhaps we 

should think about what, if any advantages American consumers have 

received as a result of our financial institutions being such a large part of our 

economy. 

• Since when did we accept a national strategy of following rather than 

leading? When we do what is right, others follow. As example, consider the 

bank secrecy havens - they made money for a bit. Now, even the Swiss and 

the Cayman authorities are coming around to our view. 

We are already at a disadvantage given that the largest foreign banks operate 

in the US with very little Tier 1 capital, yet most large foreign banks have not 

built a bricks and mortar presence here. Nobody screams about their 

undercapitalization nor has that undercapitalization caused deposits to 

migrate to foreign banks. 

By getting out of the TBTF game, we will have a more robust and economically 

competitive economy where no players have a governmentally-conferred advantage 

or subsidy. Such a leveled playing field will begin the process of reinstating credible 

markets and attracting stable foreign capital. Let other nations pursue misguided 

policies of protecting uneconomic and anti-competitive businesses. Such an 

approach will allow our taxpayers to avoid having to be part of the next banking 

bailout crisis. The fact remains that most of the companies and functions that claim 

to be "systemically important" really are not. They simply claim to be because the 

government supports those claims and rewards them mightily as a result. 

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81754.025

Written Testimony of David A. Skeel, Jr. 

Before the Subcommittee on Oversight and Investigations 

Committee on Financial Services 

United States House of Representatives 

May 15,2013 

Thank you for the opportunity to testifY on the question of "Who is Too Big to Fail: Does 

Title II of the Dodd-Frank Act Enshrine Taxpayer-Funded Bailouts?" My name is David Skeel, 

and I am the S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania Law 

School. It is a great honor to appear before you today. 

Perhaps the biggest question about the Dodd-Frank Act since the moment it was enacted 

in July 2010 has been whether it could or did end "Too Big to Fail." Although the 

administration and the giant financial institutions themselves have insisted that Too Big to Fail 

has ended, a growing number of observers are concemed that the Too Big to Fail problem has 

not been solved at all. Those who hold this view include at least one member of the Board of 

Governors of the Federal Reserve, Daniel Tarullo, as well as others at the Fed. Governor Tarullo 

has given several speeches raising the alarm about Too Big to Fail, and has suggested that 

Congress should act to impose limits on the size of the largest financial institutions. 

Our particular focus in this hearing is on the implications of Title II of the Dodd-Frank 

Act-also known as the Orderly Liquidation Authority, OLA, or the Dodd-Frank resolution 

rules-for Too Big to Fail. The largest financial institutions have pointed to Title II as evidence 

that the Too Big to Fail issue has been solved, and some Americans may be under the impression 

that it has been. But in my view, Title II does not end Too Big to Fail at all. To the contrary, it 

perpetuates these problems in several important respects. 

After very briefly describing how Title II works, I'll divide my remarks into two parts. In 

the first part, I will describe several problematic features of Title II as it is drafted. In the second, 

I'll focus on the "Single Point of Entry" strategy the Federal Deposit Insurance Corporation 

(FDIC) has developed over the past year or so for implementing Title II. The single point of 

entry approach is designed to preserve a systemically important financial institution that 

threatens to default. Even if the strategy were actually used, it would not end the Two Big to 

Fail problem. I will conclude by arguing that Title II should be amended, and that the Too Big to 

Fail issue should be addressed in other ways, such as bankruptcy. 

The Basic Mechanics of Title II 

Resolution under Dodd-Frank begins when "the three keys turn"-Treasury proposes to 

take over a systemically important financial company that is in or near default, and the Fed and 

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FDIC concur by a two thirds vote.! If the company does not agree to the intervention, resolution 

is commenced by the filing of a petition in the federal district court in Washington, DC. The 

court has 24 hours to consider the petition.2 The only grounds for rejecting the petition are that 

the company in question is not a financial company, or that it is neither in default nor in danger 

of default. 3 The FDIC has nearly unfettered discretion to sell the company or any of its parts, 

either directly or after transferring the assets to a bridge financial company. 

The resolution rules include a variety of provisions that are designed to counter 

complaints that the new framework would institutionalize bailouts. One provision explicitly 

requires that the financial institution's managers be removed if they were responsible for the 

financial distress, that shareholders be wiped out, and creditors take losses. 4 The framework also 

instructs regulators to liquidate the institution rather than reorganizing it. 5 Although these 

provisions sound like harsh medicine, the FDIC also is given ample discretion to sidestep them. 

Title II's Contributions to Too Big to Fail 

I should perhaps start by noting that it is quite possible that regulators would simply bail 

out a giant financial institution that threatened to fail, rather than invoking the resolution rules in 

Title II. Although the Dodd-Frank Act tries to make bailouts more difficult, it certainly hasn't 

eliminated the possibility of a bailout. 6 With the six largest institutions in particular, there is a 

very good chance that regulators would never invoke Title II, particularly if more than one of the 

institutions were at risk. 

If regulators did invoke Title II, they would probably transfer some or all of the assets 

and liabilities of the holding company to a newly created bridge financial institution. Title II 

authorizes the FDIC to create a bridge institution, and permits the FDIC to keep it in place for up 

to five years. 7 During this five year period, the bridge institution has major competitive 

advantages as compared to other financial institutions. One benefit (available to the FDIC 

whether or not it sets up a bridge institution) is access to copious amounts of funding from the 

United States Treasury. Although there are some constraints on this funding, the Treasury and 

the FDIC can structure the funding in ways that give the bridge institution low cost funding. 

Bridge institutions also are given a sweeping exemption from taxes. While the bridge 

institution is in existence, it is not required to pay any taxes on the value of its franchise, property 

1 Dodd-Frank Act § 203. The discussion in this section is drawn from Thomas H. Jackson & David A. Skeel, Jr., 

Dynamic Resolution of Large Financial Institutions, 2 HARV. BUS. L. REV. 435, 439-40 (2012), available at 

http:/{ssrn.com{abstract=2247599. I give a much fuller overview and analysis of Tille II and the Dodd-Frank Act 

as a whole in David Skeel, The New Financial Deal: Understanding the Dodd-Frank Act and its (Unintended) 

Consequences (Wiley, 2011). 

2 Dodd-Frank Act § 202. 

3 Id 

4 Dodd-Frank Act § 206. 

S Dodd-Frank Act § 214. 

6 The Dodd-Frank Act prohibits the Federal Reserve from making extraordinary loans to individual institutions, for 

instance, but it would not preclude support framed in more general terms. 

7 Dodd-Frank Act § 210(h)(l2). 

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or income. 8 This tax free status gives the bridge institution an enormous advantage over other 

financial institutions. In my view, there is simply no justification for this special treatment. 

Notice that these features not only give the bridge institution a competitive advantage 

over other financial institutions. They also are at odds with the frequent claim that Title II will 

not impose any costs on taxpayers. 

The FDIC's "Single Point of Entry" Strategy 

For more than a year, the FDIC has been developing a strategy for implementing the 

resolution rules that it refers to as a "single point of entry" approach. Under single point of 

entry, the FDIC would intervene with the holding company of a troubled financial institution, 

and it would seek to leave most or all of the troubled company's subsidiaries intact. After 

establishing a new bridge financial institution, the FDIC would transfer all of the holding 

company's assets and short-term liabilities to the new bridge institution, leaving its longterm 

debt-primarily, bonds-behind in the old institution. Some or all of the stock of the new bridge 

institution would eventually be distributed to the long-term creditors of the old institution. 

Although I think this is a very clever strategy for resolving a large bank's financial 

distress, it seems to me to raise three very important concerns. First, the single point of entry 

strategy assumes that all of the derivatives contracts and other short term obligations of a 

troubled financial institution will be bailed out. These eomplicated financial instruments were 

one of the major problems during the 2008 crisis, yet the single point of entry strategy proposes 

to continue to fully protect them. This will encourage the big banks to use even more of the 

derivatives and other complex financial contracts that caused so much trouble five years ago. 

Second, although Title II explicitly requires that its provisions be used for liquidation, 

single point of entry is essentially a reorganization. It thus stands in tension with the explicit 

requirements of Title II. 

Finally, the single point of entry strategy won't end too big to fail at all. It will 

essentially rescue the troubled financial institution, and is designed to ensure that a giant 

financial institution retains just as dominant a position after a financial crisis as before it. 

Defenders of Title II insist that no taxpayer money will be used in connection with the 

resolution of a giant financial institution. But this is highly misleading. It is based on the fact 

that Title II authorizes bank regulators to impose a surcharge on other big banks to recoup the 

costs of the resolution process if they are not repaid as part of the process. First of all, this 

surcharge is essentially a tax imposed on one particular group of taxpayers, the banking industry. 

In addition, as I have already noted, the resolution process imposes costs that are not taken into 

account in this calculation, such as the cost of exempting the bridge institution from taxes. 

8 Dodd-Frank Act § 210(h)(10) states that: "Notwithstanding any other provision of Federal or State law, a bridge 

financial company, its franchise, property, and income shall be exempt from all taxation now or hereafter imposed 

by the United States, by any territory, dependency, or possession thereof, or by any State, county, municipality, or 

local taxing authority." 

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Implications 

Let me suggest three implications of these comments about the likely effect of DoddFrank's resolution rules. First, I believe it is very important to amend Title II to fix some of 

these problems. I do not think that Title II needs to be repealed. But I do think it should be 

amended to address problems such as the unjustifiable tax advantages given to bridge financial 

institutions. 

Second, Title II is not a solution to the Too Big to Fail problem. The largest financial 

institutions have a dominant position in American finance. Among other benefits, they are able 

to borrow money much more cheaply than other financial institutions, because their cost of credit 

is artificially reduced by the Too Big to Fail subsidy. The small and medium sized banks that are 

most likely to lend to small and medium sized industries are at a particular disadvantage. None 

of the proposed solutions to this problem, including the Brown-Vitter proposal, is ideal. But I 

think the problem needs to be addressed, in order to level the playing field in the financial 

services industry. 

Finally, I believe that it is important to recognize that bankruptcy is a very effective 

alternative to Title II for addressing the financial distress of large financial institutions. In its 

living will requirements and in other areas, the Dodd-Frank Act itself suggests that bankruptcy 

should be the resolution strategy of choice wherever possible. It is interesting to note, in this 

regard, that the single point of entry strategy can be replicated in bankruptcy, through a prompt 

sale to a newly created entity. The bankruptcy alternative would not have any of the anticompetitive characteristics that are found in Title II. The new entity would pay taxes like 

everyone else, for instance, and it would compete in the market on the same terms as other 

financial institutions. 

A working group at the Hoover Institution of which I am a part has proposed a new 

Chapter J 4, which consists of a handful of amendments to the Bankruptcy Code that we believe 

would make it even more effective as a mechanism for handling the default of a large financial 

institution. 9 I believe that one of the best things Congress could do is to enact these proposed 

changes, which would reduce the need to resort to Title II in the next crisis. 

9 The Chapter 14 proposal is set forth and analyzed in Banla'uptcy Not Bailout: A Special Chapter 14 (Kenneth E. 

Scott & John B. Taylor, eds., 2012). 

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Too Big to Fail, Title II of the Dodd-Frank Act and Bankruptcy Reform 

John B. Taylorl 

Testimony Before The 

Oversight and Investigations Subcommittee 

Committee on Financial Services 

U.S. House of Representatives 

May 15,2013 

Chairman McHenry, Ranking Member Green and other members of the Subcommittee, 

thank you for the opportunity to testify at this hearing on "Who Is Too Big to Fail: Does Title II 

of the Dodd Frank Act Enshrine Taxpayer-Funded Bailouts?" My testimony endeavors to 

address the questions raised in the invitation letter about the continuing likelihood of bailouts and 

incentive effects under Title II of the Dodd-Frank Act. 

Concerns about Bailouts with Title II 

Large financial firms still seem to be enjoying a huge subsidy on their borrowing costs 

due to market expeetations of bailouts. For example, according to a widely-cited Bloomberg 

calculation, based on an International Monetary Fund study, the subsidy mounts to $83 billion 

per year. 

To be sure there is disagreement about this assessment of the likelihood of bailouts. For 

example, in response to questions about market expectations of firm bailouts in recent 

Congressional testimony, Federal Reserve Chairman Ben Bernanke argued that "Those 

expectations are incorrect" because "We have an Orderly Liquidation Authority," referring to 

Title II of the Dodd-Frank Act which gives the Federal Deposit Insurance Corporation (FDIC) 

the authority to resolve those large financial firms if they fail. 2 However, Federal Reserve Board 

Governor Jerome Powell-reflecting on his experience with government bailout decisions going 

back a quarter century, questions whether the FDIC's new resolution authority under Title II 

would prevent bailouts. "The too-big-to-fail reform project is massive in scope," he says, 

predicting it "will take years to complete. Success is not assured."J And Jeffrey Lacker, 

President of the Federal Reserve Bank of Richmond, argues that the FDIC's "considerable 

regulatory discretion" under Title II "could encourage creditors to believe they may continue to 

receive protection from losses," summing up that "we didn't end too big to fail.,,4 Charles 

Plosser, President of the Federal Reserve Bank of Philadelphia argues that "Title II resolution is 

likely to be biased toward bailouts," because of the "wide range of discretionary powers" granted 

to the FDIC and the likely "excessive delay" in implementing the procedure.5 

1 Mary and Robert Raymond Professor at Stanford University and George P. Shultz Senior Fellow in Economics at 

Stanford's Hoover Institution. This testimony draws on my keynote speech at the April 9, 2013, Atlanta Fed 

Financial Markets Conference (Taylor, 2013). 

2 Bemanke (2013) 

1 Powell (2013) 

4 Lacker (2013) 

5 Plosser (2013) 
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Understanding these alternative views and taking a position on the likelihood of bailouts 

requires defining what one means by bailout, examining the Orderly Liquidation Authority 

(OLA) of Title II, and assessing-based on practical experience-how it would actually work. 

Doing so leads me to take the position that bailouts and too-big-to-fail are preserved rather than 

eliminated under Title II. 

To see this, first note that while full liquidation with wiped out shareholders was a major 

selling point of the Dodd-Frank Act-that is the reason for the in Lin OLA-in the years since 

the Act was passed the focus of the FDIC has been on how to resolve and reorganize the failing 

firm into an ongoing concern, rather than on how to liquidate it. That is how simulations of the 

new authority-such as the one organized by The Clearing House-have played out. 6 To 

achieve such a re-organization under this new authority the FDIC would transfer part of a failing 

firm's balance sheet and its operations to a new bridge institution. 

In order to carry out this task, the FDIC would have to exercise considerable discretion. 

The degree of discretion would be especially large in comparison with more transparent and less 

uncertain bankruptcy proceedings through which nonfinancial firms are regularly resolved and 

reorganized through the rules of the bankruptcy laws. As a result there is confusion about how 

the reorganization process would operate under Title II, especially in the case of complex 

international firms. Indeed, some argue that this uncertainty about the Title II process would lead 

policymakers to ignore it in the hcat of a crisis and resort to massive taxpayer bailouts as in the 

past. Hence, the concern about bailouts remains. 

But even if the Title II process was used, bailouts would be likely. As the FDIC 

exercised its discretion to form a bridge bank, it would most likely give some creditors more 

funds than they would have expected or been entitled to under bankruptcy law. For example, 

they might wish to hold some creditors harmless, or nearly harmless, in order to prevent a 

perceived contagion of the firm's failure to other parts of the financial system. This action would 

violate the priority rules that underlie decisions about borrowing and lending in the entire credit 

market. Under the reasonable definition that bailout means that some creditors get more than 

they would under bankruptcy laws or under the normal workings of the market, such action 

would, by definition, be a bailout of the favored creditors. 

This expectation of bailout of some creditors increases the risk of financial instability. 

Government regulation through capital or liquidity requirements and supervision is not the only 

way a financial firm's risk-taking decisions are constrained. Discipline is also imposed on the 

firm by its counterparties, so long as they perceive a need to monitor the firm and protect 

themselves from losses by demanding collateral or simply cutting off credit. 

Creditors have significant advantages over government regulators, in terms of current 

knowledge, ability to act quickly, and financial stakes. And they are less subject to regulatory 

capture. As Mervyn King, Governor of the Bank of England recently explained, regulatory 

capture does not necessarily mean that "people werc bought off, but that the sheer weight of 

6 The Clearing House (2012) 

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resources, time and legal effort put in by banks to try to persuade regulators that what they were 

doing was compliant with the rules made life extraordinarily difficult for the regulators.,,7 

The expectation of bailouts of creditors weakens the incentives for them to monitor their 

loans and thereby provide this constraint on risk taking. Because the bailout reduces the risk 

incurred by large creditors expecting to be favored, they charge a lower interest rate, creating the 

subsidy of big financial firms. 

It is important to recognize that the perverse effects of such bailouts occur whether or not 

the source of the extra payment comes from the Treasury financed by taxpayers, from an 

assessment fund financed by financial institutions and their customers, or from smaller payments 

for less favored creditors. 

Thus, bailouts and too-big-to-fail are still alive and well with Title II. Even if 

shareholders are not protected, some important creditors will likely be. And discretionary 

actions will determine who the bailed out creditors will be. 

Other Concerns 

Contrasting the resolution of a failing financial firm under Title II with resolution under 

bankruptcy procedures reveals additional concerns with Title II. Under bankruptcy 

reorganization, private parties, motivated and incentivized by profit and loss considerations, 

make key decisions about the direction of the new firm, perhaps subject to bankruptcy court 

oversight. But under Title II a government agency, the FDIC and its bridge bank, would make 

the decisions. This creates the possibility that the FDIC would be pressured to ask the bridge 

firm to grant special favors to certain creditors as in the case of the Government Sponsored 

Enterprises. 

In addition, the resolution of a firm through a government-administered bridge company 

could give the new firm advantages over its competitors in comparison with a bankruptcy 

resolution. The Treasury is authorized to fund the FDIC which can fund of the bridge firm, 

creating a subsidy, and under Title II the bridge firm can be given lower capital requirements and 

forgiven tax liabilities. 

One can understand why the FDIC or any government agency in charge of resolutions 

would want to use such legal provisions to nurse the bridge firm with special advantages for a 

while before setting it free to compete on a level playing field. But with such a large amount of 

discretion and strong incentives to make the resolved firms a success, there is a concern that in 

practice these advantages granted by a government agency could become excessive and 

prolonged. 

7 Question and answer session reported by Edwards (2013), p. 20. In the same session, Mervyn King also says that 

"One of the major problems in regulation in the last 10 to 20 years has been that of regulatory capture." 

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A Bankruptcy Reform Proposal 

A reform of the bankruptcy code designed to handle the big interconnected firms would 

alleviate too-big-to-fail and the problems it creates. In the five years since the financial crisis, 

there has been much useful work and discussion on why and how to proceed with bankruptcy 

reform-both before and since the passage of the Dodd-Frank Act. Books and articles have been 

written8 and reports have been issued by the Federal Reserve Board and the Government 

Accountability Office. 9 

Under bankruptcy, a failing firm can either go into liquidation under Chapter 7 or 

reorganization under Chapter 11. Let us focus on reorganization. Under bankruptcy law, losses 

are calculated according to prescribed and open procedures, known in advance. If the failed 

firm's liabilities exceed its assets, then the shareholders are wiped out. The remaining difference 

between liabilities and assets is then allocated among creditors in the order of priority stipulated 

by the law, which is also known in advance. The creditors' debts are written down and, 

sometimes, converted into equity in the reorganized firm. In the end, the firm continues in 

business with either the old or new managers. 

The bankruptcy law, however, is now designed as a general procedure for a wide variety 

of businesses. Large financial institutions present special considerations which warrant the 

enactment of a new chapter in the U.S. bankruptcy code. Certain principles should guide such a 

reform: 

The new chapter should apply to all financial groups with assets over a certain 

amount-say $100 billion. 

The bankruptcy should include, in a single proceeding, all the parent's 

subsidiaries, including insurance and brokerage services unlike current law where 

insurance and brokerage services are treated separately, adding considerable complexity. 

The one exception would be insured depository institutions, which would continue to be 

handled by the FDIC 

The proceedings should be overseen by a specializcd panel of Article III judges 

and special masters with financial expertise. 

The new chapter should allow the primary federal regulator of the firm to file a 

bankruptcy petition in addition to creditors and management. This would expedite the 

process especially in cases where management, fearing a loss of equity or employment, 

has incentives to put off a filing. The examiner's report on Lehman makes it very clear 

there was no preparation for bankruptcy proceedings before the filing, which increased 

the size of the disruption. 

8 See, for example, Scott, Shultz and Taylor (2010), Fitzpatrick and Thomson (2011), Scott and Taylor 

(2012). The following discussion draws on the studies in the Scott and Taylor (2012) book .. 

9 See Board of Governors of the Federal Reserve (2011). Government Accountability Office (2011). 

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The procedure to determine asset values, liabilities, sales of some lines of 

business, write-downs of claims, and recapitalization should be based on the rule of law 

with judicial hearings and creditor participation. 

The strict priority rules of bankruptcy should govern. 

The new chapter should provide special treatment for derivatives, stays and 

preferential transfers. 

The new chapter should provide the court with the authority to give post-petition 

debt to support advances a top priority, so as to allow the firm to obtain ample debtor-inpossession (DIP) financing from the private sector and to permit limited advance 

payments. 

The goal of these provisions is to let a failing financial firm go into bankruptcy in a 

predictable, rules-based manner without causing disruptive spillovers in the economy while 

permitting people to continue to use its financial services without running-just as people flew 

on American Airlines planes, bought Kmart sundries and tried on Hartmax suits when those 

firms were in bankruptcy. These provisions make it possible to create a new fully capitalized 

entity which would credibly provide most of the financial services the failed firm was providing 

before it got into trouble. Modularization of the firm, which is in principle made easier by the 

living wills, would expedite the process.!O 

I have found that a simple example is helpful to illustrate the process. Consider the 

hypothetical dealer bank Alpha, which my Stanford colleague Darrell Duffie (2010) used to 

illustrate how dealer banks get into financial trouble. Alpha is a holding company involved in a 

host of financial activities with many subsidiaries. Its business lines include securities trading 

and market making, underwriting, financial advising, over-the counter derivatives, prime 

brokerage, private wealth management, and even commercial banking. 

Trouble begins when Alpha experiences a gigantic trading loss on both its own account 

and that of its clients. Then a natural series of events takes place. First, the company tries 

unsuccessfully to raise more capital. Next it uses some capital to compensate its clients for the 

trading losses. Then it sees its prime brokerage clients (mainly hedge funds who are hearing the 

news about Alpha) remove their cash and securities, and its derivative counterparties cut their 

exposure. Finally Alpha's clearing bank senses Alpha's insolvency and stops processing Alpha's 

cash and securities transactions in order to cut off its intra-day exposure. 

At this time-suppose it is close of business on Friday-Alpha's primary regulator, who 

has been following these developments, must take action, whether Alpha's management likes it 

or not. It determines that Alpha is insolvent: its debts exceed the value of its assets. It then 

decides to place Alpha into the new bankruptcy chapter. The automatic stay and other 

bankruptcy rules are triggered, and the bankruptcy proceeding starts, overseen by the Article III 

judges and their master experts. 

10 Lacker (2013) discusses the general advantages of living wills and subsidiari7.ation. 

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By Saturday morning a new holding company, Alpha Nu, is created consisting of all the 

subsidiaries of Alpha and its other assets, and assuming all its secured long-term debt, executory 

contracts, and short-term liabilities. II Alpha, which is now in bankruptcy, is the owner of Alpha 

Nu: Alpha's long term unsecured creditors remain in the receivership. Importantly, however, 

Alpha Nu is not in bankruptcy. Indeed, it is ready to open for business on Monday morning. 

Alpha Nu no longer has its original long-term unsecured liabilities and is now solvent 

with its equity owned by Alpha, or more precisely by Alpha's un-transferred creditors. Note 

how this approach lets Alpha Nu remain open for business on Monday morning providing key 

financial services without experiencing runs. The firm and its operating subsidiaries are now 

capitalized, so there is little incentive for counterparties to run, and liquidity should be available 

from the market on appropriate terms. And because Alpha Nu is a v·iable firm, there is little 

chance of contagion. 

Of course this process will have to be explained clearly to all participants. The 

availability of living wills, advanced preparation, and the expert masters working with judges 

would be essential to make the process credible. ft is important to have a clear understanding 

with regulators that large financial firms should have sufficient long-term liabilities subordinated 

to short-term debt to capitalize the new firm. Such an understanding could be formalized by law, 

regulatory rule-making, or private contractual agreement. 

Note also how the pressure to bailout has been reduced by making it possible for the 

failing firm to go through bankruptcy without causing disruption to the financial system and the 

economy. 

Conclusion and a Way Forward 

In this testimony I explained why one should be concerned that bailouts and too-big-to -

fail have been preserved rather than eliminated by Title II of the Dodd-Frank Act. 

I also suggested a proposal for reform-a new Chapter 14 for the bankruptcy codewhich would reduce the likelihood of bailouts and deal with the too-big-to-fail problem. Even if 

Title II remains in the law, such a reform would at least reduce the use of Title II. 

Achieving such a reform in practice will be difficult, but experience shows that it is 

doable with the right strategy. Ten years ago, when I was Treasury Under Secretary for 

International Affairs, I argued in favor of a proposal to reform the resolution procedures for 

sovereign debt of emerging market countries and thereby prevent bailouts. 12 The proposal was to 

incorporate "collective action clauses" into the sovereign debt of emerging market countries-an 

idea which is analogous to the orderly bankruptcy reform proposal made here. The reform was 

actually implemented but only because financial institutions, lawyers, investors, academics and 

government officials worked together to craft specifics which were eventually applied in 

practice. We need a similar process now. 

11 Technically this is accomplished according to the bankruptcy law through a Section 363 sale. 

12 Taylor (2002) 

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References 

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Congress,'" Committee on Banking, Housing, and Urban Affairs, U.S. Senate, 

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Duffie, Darrell, (2010), "The Failure Mechanics of Dealer Banks," Journal of Economic 

Perspectives, Volume 24, Number I, pp. 51-72 

Edmonds, Timothy (2013), "The Independent Commission on Banking: The Vickers Report," 

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Fitzpatrick, Thomas J. IV and James B. Thomson (2011), "How Well Does Bankruptcy Work 

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Hoenig, Thomas (2013), "Tangible Equity Capital Ratios for Global Systemically Important 

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Scott, Kenneth E. and John B. Taylor (Editors), (2012), Bankruptcy Not Bailout: A Special 

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William F. Kroener III, Kenneth E. Scott, David A. Skeel, Kimberly Anne Sum me, John 

B. Taylor, and Kevin M. Warsh. Hoover Press, Stanford, California 

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The Clearing House (2012), "Title II OLA-Resolution Symposium and Simulation Exercise," 

Slides 

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