FDIC Quarterly 31 2011, Volume 5, No. 2

Investigation Report of the Attorneys for James W. 

Giddens, Trustee for the Securities Investors Protection 

Act (SIPA) Liquidation of Lehman Brothers, Inc. The 

analysis in this paper assumes that the events leading up 

to Lehman’s bankruptcy filing took place roughly as 

described in these two reports.

Prior to 2006, Lehman had been described as being in 

the “moving business,” primarily originating or purchasing loans and then selling them through securitizations.2

Beginning in 2006, the firm shifted to an aggressivegrowth business strategy, making “principal” investments in long-term, high-risk areas such as commercial 

real estate, leveraged lending and private equity. Even 

as the sub-prime crisis grew, the firm continued its rapid 

growth strategy throughout 2007.

At the beginning of 2008, with no end of the sub-prime 

crisis in sight, Lehman again revised its business strategy 

and began the process of deleveraging. However, by the 

end of the first quarter of 2008, the firm had made no 

substantial progress in either selling assets or in raising 

large amounts of equity. Richard S. Fuld, Jr., Lehman’s 

CEO, told the Examiner that he had decided that 

Lehman would not raise equity unless it was at a 

premium above book value.3

After Bear Stearns failed and was purchased by 

JPMorgan Chase on March 15, 2008, Lehman was seen 

by many as the next most vulnerable investment bank.4

At this time, Lehman began raising equity and seeking 

investment partners. In late March, Lehman contacted 

Warren E. Buffett, unsuccessfully seeking an investment 

from either Mr. Buffett or one of Berkshire Hathaway’s 

subsidiaries. At the beginning of April, Lehman 

completed a $4 billion convertible preferred stock issuance. In late May, Lehman began talks with a consortium of Korean banks, but no deal was reached. On June 

7, Lehman announced a $2.8 billion loss for the second 

2

 Anton R. Valukas, Examiner’s Report: Bankruptcy of Lehman Brothers Holdings Inc., Vol. 2, 43, (Mar. 11, 2010) (hereinafter, Examiner’s 

Report).

3 Id. at 150–52. Lehman did raise capital at a later date. Presumably 

more could have been raised at this time if Lehman had been willing to 

consider less favorable terms to the then-current shareholders.

4 Id.

 at 612–13.

Introduction

The bankruptcy filing of Lehman Brothers Holdings 

Inc. (Lehman or LBHI) on September 15, 2008, was 

one of the signal events of the financial crisis. The 

disorderly and costly nature of the LBHI bankruptcy—

the largest, and still ongoing, financial bankruptcy in 

U.S. history—contributed to the massive financial 

disruption of late 2008. This paper examines how the 

government could have structured a resolution of 

Lehman under the orderly liquidation authority of 

Title II of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act) and how 

the outcome could have differed from the outcome 

under bankruptcy.

The Dodd-Frank Act grants the Federal Deposit Insurance Corporation (FDIC) the powers and authorities 

necessary to effect an orderly liquidation of systemically 

important financial institutions. These authorities are 

analogous to those the FDIC uses to resolve failed 

insured depository institutions under the Federal 

Deposit Insurance Act (FDI Act).1 The keys to an 

orderly resolution of a systemically important financial 

company that preserves financial stability are the ability 

to plan for the resolution and liquidation, provide 

liquidity to maintain key assets and operations, and 

conduct an open bidding process to sell the company 

and its assets and operations to the private sector as 

quickly as practicable. The FDIC has developed procedures that have allowed it to efficiently use its powers 

and authorities to resolve failed insured institutions for 

over 75 years. The FDIC expects to adapt many of these 

procedures, modified as necessary, to the liquidation of 

failed systemically important financial institutions.

The Events Leading to the Lehman Bankruptcy

Background

The events leading up to Lehman’s bankruptcy are 

documented in a number of books and articles; but 

perhaps most extensively in two documents: the Report 

of Anton R. Valukas, Examiner, Bankruptcy of Lehman 

Brothers Holdings Inc., and the Trustee’s Preliminary 

1 12 U.S.C. § 1811 et seq.

Feature Article:

The Orderly Liquidation of Lehman Brothers 

Holdings Inc. under the Dodd-Frank Act
FDIC Quarterly 32 2011, Volume 5, No. 2

financial markets following the two largest players in 

the U.S. mortgage market, Fannie Mae and Freddie 

Mac, being placed into conservatorship on September 

7, 2008, and the ensuing devaluation of those institutions’ common and preferred stock. On September 9, 

Treasury Secretary Henry M. Paulson, Jr. contacted 

Bank of America and asked it to look into purchasing 

Lehman.8 During that conversation on September 9, 

Secretary Paulson informed Bank of America that the 

government would not provide any assistance.9 Bank of 

America began due diligence, and on September 11 

told Secretary Paulson that there were so many problems with the assets on Lehman’s balance sheet that 

Bank of America was unwilling to pursue a privately 

negotiated acquisition. Secretary Paulson then told 

Bank of America that, although the government would 

not provide any assistance, he believed a consortium of 

banks could be encouraged by the government to assist 

Bank of America in an acquisition of Lehman by taking 

the bad assets in a transaction similar in certain respects 

to the 1998 rescue of Long-Term Capital Management.10 Bank of America then agreed to continue to 

consider the purchase of Lehman. At various times in 

the following two days, Bank of America discussed its 

analysis of Lehman with the Treasury Department and 

concluded that Lehman had approximately $65-67 

billion in commercial real estate and residential mortgage-related assets and private equity investments that 

it was unwilling to purchase in any acquisition without 

the government providing loss protection. Independently, on September 13, Merrill Lynch approached 

Bank of America and shortly thereafter Bank of America agreed to acquire Merrill Lynch.11

Lehman reported further losses on September 10, and 

announced plans to restructure the firm.12 The panic 

also affected Lehman’s trading counterparties, which 

began to lose confidence in the firm. Many of these 

counterparties withdrew short-term funding, demanded 

increasingly greater overcollateralization on borrowings 

or clearing exposures, demanded more collateral to 

cover their derivatives positions and subsequently began 

to move their business away from Lehman. Lehman’s 

clearing banks also began to demand billions of dollars 

of additional collateral.

8

 Henry M. Paulson, Jr., On the Brink: Inside the Race to Stop the 

Collapse of the Global Financial System, 177 (2010) (hereinafter, On 

the Brink). 9 Id. at 177, 184–85. 10 Id. at 199–206. 11 Examiner’s Report at 696–703.

12 Lehman Brothers Holdings Inc., Periodic Report on Form 8-K, Sept. 

10, 2008.

quarter and on June 12 it raised $6 billion in preferred 

and common stock, resulting in $10 billion in the aggregate of new capital for the second quarter of 2008.

By mid-June, Lehman recognized that its commercial 

real estate portfolio was a major problem and began to 

develop a “good bank-bad bank” plan to spin off the 

portfolio. It identified $31.6 billion in assets that would 

be placed in a so-called bad bank to be named SpinCo, 

which would reduce Lehman’s balance sheet and shed 

risky assets. For a number of reasons, the plan never 

came to fruition.5

Although the consortium of Korean banks withdrew 

from negotiations, one of the consortium’s banks, the 

government-owned Korean Development Bank (KDB), 

continued to express an interest in buying or making a 

substantial investment in Lehman. The talks between 

Lehman and KDB went through a number of iterations, 

with KDB becoming increasingly concerned about 

Lehman’s risky assets. In August, KDB proposed an 

investment in a “Clean Lehman,” where all risk of 

future losses (risky assets) would be spun off from 

Lehman. By late August, KDB decided that the deteriorating global financial situation and the declining 

value of Korea’s currency made that transaction too 

problematic and withdrew from further negotiations.6

In July 2008, Lehman contacted Bank of America with 

a proposal whereby Bank of America would buy a 30 

percent interest in LBHI, but the discussions never 

culminated in a transaction. In late August, Lehman 

again contacted Bank of America, this time about helping finance SpinCo. Lehman subsequently asked Bank 

of America to consider buying the entire firm, but Bank 

of America did not pursue a transaction.

MetLife had also been in contact with Lehman about a 

possible purchase. MetLife began due diligence in early 

August, but decided within a few days that Lehman’s 

commercial real estate and residential real estate assets 

were too risky. Also in August, the Investment Corporation of Dubai explored a potential investment principally 

in Lehman’s Neuberger Berman wealth and asset management business. Discussions ceased in early September.7

By the late summer of 2008, Lehman’s liquidity problems were becoming acute. Lehman’s urgent need to 

find a buyer was precipitated in part by panic in the 

5 Id. at 640–62. 6 Id.

 at 668–81. 7 Id.

 at 687–94.
FDIC Quarterly 33 2011, Volume 5, No. 2

Orderly Liquidation of LBHI under Dodd-Frank

be a disorderly, time-consuming, and expensive 

process.18 Of Lehman’s creditors, the one that experienced the most disruption was the Reserve Primary 

Fund, a $62 billion money market fund. On the day of 

the filing, the fund held $785 million of Lehman’s 

commercial paper, representing 13.8 percent of the 

amount outstanding as of May 31, 2008.19 The fund 

immediately suffered a run, facing redemptions of 

approximately $40 billion over the following two days. 

With depleted cash reserves, the fund was forced to sell 

securities in order to meet redemption requests, which 

further depressed valuations. The fund’s parent company 

announced it would “break the buck” when it re-priced 

its shares at $0.97 on September 16, 2008. During the 

remainder of the week, U.S. domestic money market 

funds experienced approximately $310 billion in withdrawals, representing 15 percent of their total assets and 

eventually prompting the U.S. Treasury to announce a 

temporary guarantee of money market funds.20

LBHI’s default also caused disruptions in the swaps and 

derivatives markets and a rapid, market-wide unwinding 

of trading positions for those financial markets contracts 

not subject to the automatic stay in bankruptcy. For 

example, LBHI’s bankruptcy filing affected LBI’s exposure in the commodities markets via its positions that 

settled on markets operated by CME Group. LBI’s assets 

on CME Group markets were largely contracts to hedge 

risk for the energy business conducted in its other entities. LBHI typically was guarantor of the swap contracts 

of its subsidiaries and affiliates. For those derivative 

financial instruments for which LBHI acted as guarantor, the Chapter 11 filing of LBHI constituted a default 

under the International Swaps and Derivatives Association agreements governing the swaps, which had the 

effect of allowing termination of those trades. This left 

naked hedges and exposed LBI to considerable pricing 

risk since it was not able to offer both sides of the hedge 

when liquidating the portfolio.21 Similarly, the Options 

Clearing Corporation (OCC) threatened to invoke its 

emergency clearing house rules which would allow it to 

18 After more than two years in bankruptcy proceedings, total fees paid 

to advisers involved in the Lehman bankruptcy have exceeded $1 

billion. See Liz Moyer, Lehman Fees Hit $1 Billion and Counting, Wall 

Street Journal, Nov. 23, 2010, available at http://online.wsj.com/article/

SB20001424052748704243904575630653803513816.html. 19 Lehman used November 30 as its year end for financial reporting 

purposes. Accordingly, May 31, 2008, was the date of the close of its 

second quarter financial period.

20 President’s Working Group on Financial Markets: Money Market 

Fund Reform Options (Oct. 2010), available at http://www.treasury.

gov/press-center/press-releases/Documents/10.21%20PWG%20

Report%20Final.pdf. 21 SIPA Trustee Report Section V.B., p. 66.

A final attempt at a sale of Lehman occurred on 

September 11, 2008, when Lehman was contacted by 

Barclays, a large U.K. commercial and investment 

bank.13 Barclays commenced due diligence of Lehman 

on September 12 and soon identified $52 billion in 

assets that it believed Lehman had overvalued and that 

Barclays would not purchase as part of the transaction. 

As in the case of Bank of America, these assets were 

concentrated in commercial real estate, residential real 

estate, and private equity investments. For a variety of 

reasons, Barclays could not get immediate regulatory 

approval from the U.K. authorities and the transaction 

was abandoned on September 14.14

LBHI started work on a plan for an “orderly” winddown. The plan estimated it would take six months to 

unwind Lehman’s positions and made the assumption 

that the Federal Reserve Bank of New York would assist 

Lehman during the wind-down process.15 On September 14, 2008, the Federal Reserve Bank of New York 

told LBHI that, without the Barclay’s transaction, it 

would not fund Lehman.

Chapter 11 Filing

With no firm willing to acquire LBHI and without 

funding from the central bank, LBHI filed for Chapter 

11 bankruptcy on September 15, 2008.16 On that date, 

a number of LBHI affiliates also filed for bankruptcy 

protection and Lehman’s U.K. broker-dealer, Lehman 

Brothers International (Europe) (LBIE), filed for 

administration in the United Kingdom. These events 

adversely affected the ability of Lehman’s U.S. brokerdealer, Lehman Brothers Inc. (LBI), to obtain adequate 

funding and settle trades. LBI remained in operation 

until September 19, when it was placed into a SIPA 

liquidation.17

The Lehman bankruptcy had an immediate and negative effect on U.S. financial stability and has proven to 

13 Similar to the case of Bank of America, Barclays contacted Lehman 

at Treasury’s encouragement. Barclays and Bank of America were 

proceeding under similar expectations that there would not be any 

government assistance.

14 Examiner’s Report at 703–11 and On the Brink at 203–11. 15 Examiner’s Report at 720–21.

16 LBHI filed for bankruptcy protection on Monday, September 15, 

2008, at 1:30 am EDT. Id. at 726. 17 LBHI’s demise left LBI unable to obtain adequate financing on an 

unsecured or secured basis. LBI lost customers and experienced both 

an increase in failed transactions and additional demands for collateral 

by clearing banks and others. See Trustee’s Preliminary Investigation 

Report of the Attorneys for James W. Giddens, Trustee for the SIPA 

Liquidation of Lehman Brothers, Inc., 10, 25-26, 56.
FDIC Quarterly 34 2011, Volume 5, No. 2

preserving the going-concern value of the firm, creditors could have been provided with an immediate 

payment on a portion of their claims through either 

an advance dividend or the prompt distribution of 

proceeds from the sale of assets. The panic selling that 

ensued—further precipitating a decline in asset values 

and a decline in the value of collateral underlying the 

firm’s derivatives portfolio—could have been avoided 

and markets would likely have remained more stable.

The Resolution and Receivership Process 

for Failed Banks

Resolution Process

The FDIC has been successful in using its authority 

under the FDI Act to maintain stability and confidence 

in the nation’s banking system, including in the resolution of large, complex insured depository institutions. 

The FDIC, as receiver for an insured depository institution, is given broad powers and flexibility under the 

FDI Act to resolve an insured depository institution in 

a manner that minimizes disruption to the banking 

system and maximizes value. The FDIC is given similar 

tools to those under the Dodd-Frank Act to accomplish 

these goals, including the ability to create one or more 

bridge banks, enforce cross-guarantees among sister 

banks, sell and liquidate assets, and settle claims.

When an insured bank fails, the FDIC is required by 

statute to resolve the failed bank in the least costly way, 

to minimize any loss to the deposit insurance fund, and, 

as receiver, to maximize the return on the assets of the 

failed bank.24 Banks and thrifts are typically closed by 

their chartering authority when they become critically 

undercapitalized and have not been successful in their 

plan to restore capital to the required levels.25 The 

24 The FDIC is required, pursuant to 12 U.S.C. § 1823(c)(4), to resolve 

failed insured depository institutions in the manner that is least costly 

to the deposit insurance fund. The Dodd-Frank Act does not require 

that a least cost determination be made in respect of a covered financial company, though the FDIC is required, to the greatest extent practicable, to maximize returns and minimize losses in the disposition of 

assets. See section 210(a)(9)(E) of the Dodd-Frank Act, 12 U.S.C. § 

5390(a)(9)(E).

25 Some banks, particularly large banks, may also be closed due to a 

liquidity failure (an inability to pay debts as they become due).

liquidate all of LBI’s positions unless a performing third 

party agreed to assume the positions. The Depository 

Trust & Clearing Corporation (DTCC) shared the 

same concerns as the CME Group and the OCC, and 

was unwilling to perform settlement and transfer functions for LBI unless a performing third party assumed 

all potential liability. When Barclays refused to assume 

the potential liability, the DTCC began liquidating 

LBI’s positions as a broker-dealer whose membership 

had been terminated on September 22, 2008. Consequently, account transfer requests from customers that 

were already in process were canceled. The DTCC also 

reversed all account transfers that had taken place on 

September 19, 2008, a Friday. As a result, $468 million 

of customer assets that otherwise would have been 

immune from seizure were seized.22 It was not until 

February 11, 2009, that a court order restored the 

reversed transactions.

Other unsecured creditors of LBHI are projected to 

incur substantial losses. Immediately prior to its bankruptcy filing, LBHI reported equity of approximately 

$20 billion; short-term and long-term indebtedness of 

approximately $100 billion, of which approximately 

$15 billion represented junior and subordinated indebtedness; and other liabilities in the amount of approximately $90 billion, of which approximately $88 billion 

were amounts due to affiliates. The modified Chapter 

11 plan of reorganization filed by the debtors on January 25, 2011, estimates a 21.4 percent recovery for 

senior unsecured creditors. Subordinated debt holders 

and shareholders will receive nothing under the plan of 

reorganization, and other unsecured creditors will 

recover between 11.2 percent and 16.6 percent, 

depending on their status.23

Just prior to Lehman’s bankruptcy filing, the firm had 

identified $31.6 billion in commercial real estate assets 

of questionable value. Potential acquirers of Lehman 

had identified additional problematic assets—for a total 

value between $50 billion and $70 billion. Even if there 

had been a total loss on these assets, which would have 

eliminated any shareholder and subordinated debt 

holder potential for recovery, a quick resolution of 

LBHI that maintained the operational integrity of the 

company including its systems and personnel could 

have left general unsecured creditors with substantially 

more value than projected from the bankruptcy. By 

22 Id. at 73. 23 Joseph Checkler, Lehman’s New Creditor Plan Doesn’t Factor in Key 

Group, Wall Street Journal, Jan. 27, 2011. The plan of reorganization 

is subject to approval by creditors.
FDIC Quarterly 35 2011, Volume 5, No. 2

Orderly Liquidation of LBHI under Dodd-Frank

problematic for an acquiring institution and may need 

to be retained in the receivership for disposition after 

resolution or covered by some level of risk protection. 

Qualified bidders are contacted to perform due diligence, subject to a confidentiality agreement. Due diligence is offered both on-site and off-site through the 

use of secure internet data rooms. Bidders are then 

asked to submit bids on the basis of the transaction 

structures offered by the FDIC. The FDIC analyzes the 

bids received and accepts the bid that resolves the failed 

bank in the least costly manner to the deposit insurance 

fund. The least-cost requirement ensures that the 

deposit insurance fund will not be used to protect creditors other than insured depositors and prevents differentiation between creditors except where necessary to 

achieve the least costly resolution of the failed bank. 

Then, at the point of failure, the institution is placed 

into receivership and immediately sold—with the sale 

resulting in a transfer of deposits and assets that renders 

the process seamless to insured depositors. The FDIC is 

also able to make an immediate payment, or advance 

dividend, to uninsured creditors not assumed by the 

assuming institution based upon estimated recoveries 

from the liquidation.

The Orderly Liquidation of Covered 

Financial Companies

Introduction

Title II of the Dodd-Frank Act defines the framework 

for orderly resolution proceedings and establishes the 

powers and duties of the FDIC when acting as receiver 

for a covered financial company.27 The policy goal of 

the Dodd-Frank Act is succinctly summarized in section 

204(a) as the liquidation of “failing financial companies 

that pose a significant risk to the financial stability of 

the United States in a manner that mitigates such risk 

and minimizes moral hazard.” Creditors and shareholders are to “bear the losses of the financial company” and 

the FDIC is instructed to liquidate the covered financial company in a manner that maximizes the value of 

the company’s assets, minimizes losses, mitigates risk, 

and minimizes moral hazard.28

This section discusses the key provisions of Title II and 

highlights the differences between the resolution of a 

27 A failed systemically important financial institution is deemed a 

covered financial company for purposes of Title II of the Dodd-Frank 

Act once a systemic determination has been made by the Secretary of 

the Treasury pursuant to section 203(b) thereof, 12 U.S.C. § 5383(b). 

See “—Appointment,” infra. 28 See sections 204(a)(1) and 210(a)(9)(E) of the Dodd-Frank Act, 12 

U.S.C. §§ 5384(a)(1) and 5390(a)(9)(E).

FDIC is then appointed receiver.26 When structuring a 

bank resolution, the FDIC can pay off insured depositors and liquidate the bank’s assets, sell the bank in 

whole or in part (a purchase and assumption transaction, or P&A), or establish a bridge institution—a 

temporary national bank or federal thrift—to maintain 

the functions of the failed bank during the process of 

marketing the bank’s franchise. Senior management 

and boards of directors are not retained, and no severance pay or “golden parachutes” are permitted.

Final planning and marketing for a bank resolution 

normally begins 90–100 days prior to the institution 

being placed into receivership, though the process may 

be accelerated in the event of a liquidity failure. It 

begins when a bank’s problems appear to be severe 

enough to potentially cause it to fail. During this period, 

the FDIC coordinates its actions—including the scheduling of the failure—with other regulators. When a bank 

becomes critically undercapitalized, the primary federal 

regulator (PFR) has up to 90 days to close the institution and appoint the FDIC as receiver. The FDIC and 

the PFR require that the bank seek an acquirer or 

merger partner, and insist that top management responsible for the bank’s failing condition leave in order to 

improve the prospects for such, before the FDIC has to 

exercise its powers as receiver. The FDIC’s authority to 

take over a failed or failing institution, thus wiping out 

stockholders and imposing losses on unsecured and 

uninsured creditors, not only provides an incentive for 

management to actively seek an acquirer, but also 

encourages the institution’s board of directors to approve 

(or recommend for approval to shareholders) such transactions to avoid the risk of an FDIC receivership.

During this planning phase, the FDIC collects as much 

information as possible about the bank and structures 

the resolution transaction. This information assists the 

FDIC in determining the best transaction structures to 

offer potential acquirers. The FDIC also values bank 

assets and determines which assets may be particularly 

26 As a receiver, the FDIC succeeds to the rights, powers, and privileges of the failed bank and its stockholders, officers, and directors. It 

may collect all obligations and money due to the institution, preserve 

and liquidate the institution’s assets and property, and perform any 

other function of the institution consistent with its appointment as 

receiver. It has the power to sell a failed bank to another insured 

bank, and to transfer the failed bank’s assets and liabilities without the 

consent or approval of any other agency, court, or party with contractual rights. The FDIC may also, as permitted by statute, repudiate 

contracts such as leases that are burdensome to the receivership and 

may rid the receivership of burdensome obligations. The FDIC operates its receiverships independently of the court or bankruptcy system, 

although certain of the FDIC’s actions are subject to judicial review.
FDIC Quarterly 36 2011, Volume 5, No. 2

default or danger of default.32 The recommendation to 

place a broker or dealer, or a financial company in 

which the largest domestic subsidiary is a broker or 

dealer, into receivership is made by the Federal Reserve 

and the Securities and Exchange Commission (SEC), 

in consultation with the FDIC. Similarly, the recommendation to place an insurance company or a financial company in which the largest domestic subsidiary is 

an insurance company, is made by the Federal Reserve 

and Director of the newly established Federal Insurance 

Office, in consultation with the FDIC.

The Secretary is responsible for making a determination 

as to whether the financial company should be placed 

into receivership, and that determination is based on, 

among other things, the Secretary’s finding that the 

financial company is in default or in danger of default; 

that the failure of the company and its resolution under 

otherwise applicable State or Federal law would have 

serious adverse consequences on the financial stability 

of the United States; and that no viable private sector 

alternative is available to prevent the default of the 

financial company.33

The Dodd-Frank Act provides an expedited judicial 

review process of the Secretary’s determination. Should 

the board of directors of the covered financial company 

object to the appointment of the FDIC as receiver, a 

hearing is held in federal district court, and the court 

must make a decision on the matter within 24 hours. 

Upon a successful petition (or should the court fail to 

act within the time provided), the Secretary is to 

appoint the FDIC receiver of the covered financial 

company.34

Special Powers under Title II

Ability to Preserve Systemic Operations of the Covered 

Financial Company. The Dodd-Frank Act provides an 

efficient mechanism—the bridge financial company—

to quickly preserve the going-concern value of the 

32 Upon a 2/3 vote by the boards of both the FDIC and the Federal 

Reserve, a written recommendation is delivered to the Secretary. The 

recommendation includes: an evaluation of whether the financial 

company is in default or is in danger of default; a description of the 

effect the failure of the financial company would have on U.S. financial 

stability; an evaluation of why a case under the Bankruptcy Code is not 

appropriate; an evaluation of the effect on creditors, counterparties, 

and shareholders of the financial company and other market participants, and certain other evaluations required by statute. See section 

203(a)(2) of the Dodd-Frank Act, 12 U.S.C. § 5383(a)(2).

33 See section 203(b) of the Dodd-Frank Act, 12 U.S.C. § 5383(b). 34 See section 202(a)(1)(A) of the Dodd-Frank Act, 12 U.S.C. § 5382(a)

(1)(A).

systemically important financial institution under Title 

II of the Dodd-Frank Act and a proceeding under the 

Bankruptcy Code.29 What follows is a brief summary of 

the appointment process and five of the most important 

elements of the authority available to the FDIC as 

receiver of a covered financial company. Those five 

elements are: (i) the ability to conduct advance resolution planning for systemically important financial institutions through a variety of mechanisms similar to 

those used for problem banks (these mechanisms will be 

enhanced by the supervisory authority and the resolution plans, or living wills, required under section 165(d) 

of Title I of the Dodd-Frank Act); (ii) an immediate 

source of liquidity for an orderly liquidation, which 

allows continuation of essential functions and maintains asset values; (iii) the ability to make advance dividends and prompt distributions to creditors based upon 

expected recoveries; (iv) the ability to continue key, 

systemically important operations, including through 

the formation of one or more bridge financial companies; and (v) the ability to transfer all qualified financial contracts30 with a given counterparty to another 

entity (such as a bridge financial company) and avoid 

their immediate termination and liquidation to preserve 

value and promote stability.31

Appointment

Under section 203 of the Dodd-Frank Act, at the 

Secretary of the Treasury’s (Secretary) request, or of 

their own initiative, the Board of Governors of the 

Federal Reserve System (Federal Reserve) and the 

FDIC are to make a written recommendation requesting 

that the Secretary appoint the FDIC as receiver for a 

systemically important financial institution that is in 

29 11 U.S.C. § 101 et seq. 30 Generally, qualified financial contracts are financial instruments such 

as securities contracts, commodities contracts, forwards contracts, 

swaps, repurchase agreements, and any similar agreements. See

section 210(c)(8)(D)(i) of the Dodd-Frank Act, 12 U.S.C. § 5390(c)(8)

(D)(i).

31 See generally section 165 of Title I of the Dodd-Frank Act, 12 U.S.C. 

§ 5365 and “The Orderly Resolution of Covered Financial Companies—

Special Powers under Title II—Oversight and Advanced Planning,” 

infra.
FDIC Quarterly 37 2011, Volume 5, No. 2

Orderly Liquidation of LBHI under Dodd-Frank

While the covered financial company’s board of directors and the most senior management responsible for its 

failure will be replaced, as required by section 204(a)(2) 

of the Dodd-Frank Act,38 operations may be continued 

by the covered financial company’s employees under the 

strategic direction of the FDIC, as receiver, and contractors employed by the FDIC to help oversee those operations. These contractors would typically include firms 

with expertise in the sector of the covered financial 

company. In addition, former executives, managers and 

other individuals with experience and expertise in 

running companies similar to the covered financial 

company would be retained to oversee those operations.

A bridge financial company also provides the receiver 

with flexibility in preserving the value of the assets of 

the covered financial company and in effecting an 

orderly liquidation. The receiver can retain certain 

assets and liabilities of the covered financial company 

in the receivership and transfer other assets and liabilities, as well as the viable operations of the covered 

financial company, to the bridge financial company. 

The receiver may also transfer certain qualified financial contracts to the bridge financial company, as 

discussed below. The bridge financial company can 

operate until the receiver is able to stabilize the 

systemic functions of the covered financial company, 

conduct marketing for its assets and find one or more 

appropriate buyers.39

Transfer of Qualified Financial Contracts. Under the 

Bankruptcy Code, counterparties to qualified financial 

contracts with the debtor company are permitted to 

terminate the contract and liquidate and net out their 

position. The debtor company or trustee has no authority to continue these contracts or to transfer the 

contracts to a third party, absent the consent of the 

38 This may be contrasted with a typical Chapter 11 resolution, in 

which the management of the pre-insolvency institution will continue 

to manage the operations of the debtor institution.

39 In 2008, the FDIC implemented a successful resolution of IndyMac 

Bank through a transaction involving a “pass-through conservatorship,” which is similar to the utilization of a bridge financial company. 

The transfer of assets to a de novo institution, named IndyMac Federal 

Bank, and its subsequent sale to a private investor in 2009 enabled the 

FDIC to sell the core business intact. This was more efficient and less 

costly than a liquidation and retained the value of the institution’s 

assets. As of January 31, 2009, IndyMac Federal Bank had total assets 

of $23.5 billion and total deposits of $6.4 billion. The assuming institution agreed to purchase all deposits and approximately $20.7 billion 

in assets at a discount of $4.7 billion. The FDIC retained the remaining 

assets for future disposition. See Press Release, FDIC, FDIC Closes 

Sale of IndyMac Federal Bank, Pasadena, California (March 20, 2009), 

available at http://www.fdic.gov/news/news/press/2009/pr09042.html.

firm’s assets and business lines. There are no specific 

parallel provisions in the Bankruptcy Code,35 and therefore it is more difficult for a debtor company operating 

under Chapter 11 of the Bankruptcy Code to achieve 

the same result as expeditiously, particularly where 

circumstances compel the debtor company to seek 

bankruptcy protection before a wind-down plan can be 

negotiated and implemented. Where maximizing or 

preserving value depends upon a quick separation of 

good assets from bad assets, implementation delays 

could adversely impact a reorganization or liquidation 

proceeding.

The Dodd-Frank Act authorizes the FDIC, as receiver 

of a covered financial company, to establish a bridge 

financial company to which assets and liabilities of the 

covered financial company may be transferred.36 Fundamental to an orderly liquidation of a covered financial 

company is the ability to continue key operations, 

services, and transactions that will maximize the value 

of the firm’s assets and operations and avoid a disorderly 

collapse in the marketplace. To facilitate this continuity of operations, the receivership can utilize one or 

more bridge financial companies. The bridge financial 

company is a newly established, federally chartered 

entity that is owned by the FDIC and includes those 

assets, liabilities, and operations of the covered financial 

company as necessary to achieve the maximum value of 

the firm. Shareholders, debt holders, and other creditors 

whose claims were not transferred to the bridge financial company will remain in the receivership and will 

receive payments on their claims based upon the priority of payments set forth in section 210(b) of the DoddFrank Act. Like the bridge banks used in the resolution 

of large insured depository institutions,37 the bridge 

financial company authority permits the FDIC to stabilize the key operations of the covered financial 

company by continuing valuable, systemically important operations.

35 Similar to the FDIC’s repudiation powers provided by section 210(c)

(1) of the Dodd-Frank Act, 12 U.S.C. § 5390(c)(1), a bankruptcy 

trustee is authorized to reject certain contracts (which may be related 

to certain problem assets) of the debtor.

36 See section 210(h) of the Dodd-Frank Act, 12 U.S.C. § 5390(h). 

There are statutorily imposed limitations upon the transfer of assets 

and liabilities from the receiver to the bridge financial company, 

including a prohibition against a bridge financial company assuming 

any liability that is regulatory capital of the covered financial company. 

See section 210(h)(1)(B)(i) of the Dodd-Frank Act, 12 U.S.C. § 

5390(h)(1)(B)(i). Additionally, the liabilities transferred from a covered 

financial company to a bridge financial company are not permitted to 

exceed the assets so transferred. See section 210(h)(5)(F) of the 

Dodd-Frank Act, 12 U.S.C. § 5390(h)(5)(F).

37 See 12 U.S.C. § 1821(n).
FDIC Quarterly 38 2011, Volume 5, No. 2

transfer of fully collateralized transactions and not 

expose the receiver to risk of loss.43 To the extent the 

derivatives portfolio included qualified financial 

contracts which were under-collateralized or unsecured, 

the FDIC, as receiver of the covered financial company, 

would determine whether to repudiate or to transfer 

those qualified financial contracts to a third party based 

upon the FDIC’s obligation to maximize value and 

minimize losses in the disposition of assets of the entire 

receivership.

Funding. A vital element in preserving continuity of 

systemically important operations is the availability of 

funding for those operations. A Chapter 11 debtor operating under the Bankruptcy Code will typically require 

funds in order to operate its business—referred to as 

debtor-in-possession financing (DIP financing). 

Although the Bankruptcy Code provides for a debtor 

company to obtain DIP financing with court approval, 

there are no assurances that the court will approve the 

DIP financing or that a debtor company will be able to 

obtain sufficient—or any—funding or obtain funding 

on acceptable terms, or what the timing of such funding 

might be. For a systemically important financial institution, the market may be destabilized by any delay associated with negotiating DIP financing or uncertainty as 

to whether the bankruptcy court will approve DIP 

financing. Further, the terms of the DIP financing may 

limit the debtor’s options for reorganizing or liquidating 

and may diminish the franchise value of the company, 

particularly when the DIP financing is secured with 

previously unencumbered assets or when the terms of 

the DIP financing grant the lender oversight approval 

over the use of the DIP financing.

The Dodd-Frank Act provides that the FDIC may 

borrow funds from the Department of the Treasury, 

among other things, to make loans to, or guarantee 

obligations of, a covered financial company or a bridge 

financial company to provide liquidity for the operations of the receivership and the bridge financial 

company. Section 204(d) of the Dodd-Frank Act 

provides that the FDIC may make available to the 

receivership funds for the orderly liquidation of the 

43 Title VII of the Dodd-Frank Act, 15 U.S.C. § 8301 et seq., contemplates requirements for increased initial and variation margin.

counterparty, after the debtor company’s insolvency. 

A complex, systemic financial company can hold very 

large positions in qualified financial contracts, often 

involving numerous counterparties and back-to-back 

trades, some of which may be opaque and incompletely 

documented. A disorderly unwinding of such contracts 

triggered by an event of insolvency, as each counterparty races to unwind and cover unhedged positions, 

can cause a tremendous loss of value, especially if 

lightly traded collateral covering a trade is sold into an 

artificially depressed, unstable market. Such disorderly 

unwinding can have severe negative consequences for 

the financial company, its creditors, its counterparties, 

and the financial stability of the United States.

In contrast, the Dodd-Frank Act expressly permits the 

FDIC to transfer qualified financial contracts to a 

solvent financial institution (an acquiring investor) or 

to a bridge financial company.40 In such a case, counterparties are prohibited from terminating their contracts 

and liquidating and netting out their positions on the 

grounds of an event of insolvency.41 The receiver’s ability to transfer qualified financial contracts to a third 

party in order for the contracts to continue according to 

their terms—notwithstanding the debtor company’s 

insolvency—provides market certainty and stability and 

preserves the value represented by the contracts.42

By the time of the failure of the troubled financial 

company, most if not all of its qualified financial 

contracts would be fully collateralized as counterparties 

sought to protect themselves from its growing credit 

risk. As a result, it is likely that a transfer of qualified 

financial contracts to a third party would involve the 

40 See section 210(c)(9) of the Dodd-Frank Act, 12 U.S.C. § 5390(c)(9). 41 The exemption from the automatic stay under the Bankruptcy Code 

in the case of qualified financial contracts generally works well in most 

cases. However, for systemically important financial institutions, in 

which the sudden termination and netting of a derivatives portfolio 

could have an adverse impact on U.S. financial stability, the nullification of the ipso facto clause is needed. By removing a right of termination based solely upon the failure of the counterparty, the bridge 

financial company structure provides the flexibility to incentivize qualified financial contract counterparties to either maintain their positions 

in such contracts, or exit their positions in a manner which does not 

jeopardize U.S. financial stability.

42 There are implications under the Dodd-Frank Act to transferring all 

of a covered financial company’s qualified financial contracts to a 

bridge financial company in order to avoid such contracts’ termination 

by their counterparties. As such contracts continue, following such 

transfer, to be valid and binding obligations of the bridge financial 

company (before being eventually wound down), the bridge financial 

company is required to perform the obligations thereunder, including 

in respect of meeting collateral requirements, hedging, and being liable 

for gains and losses on the contracts.
FDIC Quarterly 39 2011, Volume 5, No. 2

Orderly Liquidation of LBHI under Dodd-Frank

Advance Dividends and Prompt Distributions. The FDIC, 

as receiver for a covered financial company, satisfies 

unsecured creditor claims in accordance with the relevant order of priorities set forth in section 210(b) of the 

Dodd-Frank Act. To provide creditors with partial satisfaction of their claims as expediently as practicable, the 

FDIC, as receiver, is able—though not required—to 

make advance dividends to unsecured general creditors 

based upon expected recoveries. The FDIC may use 

funds available to the receivership, including amounts 

borrowed as discussed above under “—Funding,” to 

make these advance dividends in partial satisfaction of 

unsecured creditor claims.45 These advance dividends 

would be made at an amount less than the estimated 

value of the receivership assets so as not to leave the 

receivership with a deficit in the event the realized 

value is less than the expected value of the liquidation.

The FDIC, as receiver, also makes periodic distributions 

to unsecured creditors from the sale of assets. Accordingly, an unsecured creditor will not be required to wait 

until all claims are valued, or until all assets are 

disposed of, before receiving one or more substantial 

payments on his claim. The ability promptly to provide 

creditors with partial satisfaction of claims following the 

failure of a covered financial company serves the Title 

II mandate of mitigating systemic impact, particularly in 

the case of key counterparties. The FDIC has successfully provided advance dividends to unsecured creditors 

(including uninsured depositors) and distributions from 

the sale of assets to unsecured creditors in the resolution 

of insured depository institutions under the FDI Act to 

quickly move funds to claimants and to help to stabilize 

local markets.

In large, complex bankruptcy cases such as Lehman, a 

creditor may not receive any payment on his claim for a 

considerable period of time following the commencement of the bankruptcy case. One reason for this is that 

it often takes a great deal of time to establish both the 

size of the pool of assets available for general unsecured 

creditors and the legitimate amounts of the claims held 

by such creditors. Litigation is typically needed to establish both of these numbers, which can require years of 

discovery followed by trial, then more years of appeals 

and remands.

If sufficient certainty can be attained regarding a portion 

of the claims, the Chapter 7 trustee will petition the 

45 Amounts which may be borrowed from the Department of the Treasury are based upon the assets, or assets available for repayment, of 

the covered financial company. See footnote 44, supra.

covered financial company.44 Funds provided by the 

FDIC under section 204(d) of the Dodd-Frank Act are 

to be given a priority as administrative expenses of the 

receiver or as amounts owed to the United States when 

used for the orderly resolution of the covered financial 

company, including, inter alia, to: (i) make loans to or 

purchase debt of the covered financial company or a 

covered subsidiary; (ii) purchase (or guarantee) the 

assets of the covered financial company or a covered 

subsidiary; (iii) assume or guarantee the obligations of a 

covered financial company or a covered subsidiary; and 

(iv) make additional payments or pay additional 

amounts to certain creditors. In the unlikely event that 

recoveries from the disposition of assets are insufficient 

to repay amounts owed to the United States, there will 

be a subsequent assessment on the industry to repay 

those amounts. By law, no taxpayer losses from the 

liquidation process are allowed.

Once the new bridge financial company’s operations 

have stabilized as the market recognizes that it has 

adequate funding and will continue key operations, the 

FDIC would move as expeditiously as possible to sell 

operations and assets back into the private sector. Under 

certain circumstances the establishment of a bridge 

financial company may not be necessary, particularly 

when the FDIC has the ability to pre-plan for the sale of 

a substantial portion of the firm’s assets and liabilities to 

a third party purchaser at the time of failure.

The rapid response, preservation of systemically important operations and immediate funding availability 

under the Dodd-Frank Act may be expected to provide 

certainty to the market, employees, and potential 

buyers. This promotes both financial stability and maximization of value in the sale of the assets of the covered 

financial company.

44 The FDIC may issue or incur obligations pursuant to an approved 

orderly liquidation plan (up to 10 percent of the total consolidated 

assets of the covered financial company) and pursuant to an approved 

mandatory repayment plan (up to 90 percent of the fair value of the 

total consolidated assets of the covered financial company that are 

available for repayment). See section 210(n)(6) and (9) of the DoddFrank Act, 12 U.S.C. § 5390(n)(6) and (9). To the extent that the 

assets in the receivership are insufficient to repay Treasury for any 

borrowed funds, any creditor who received an additional payment in 

excess of what other similarly situated creditors received, which additional payment was not essential to the implementation of the receivership or the bridge financial company, may have the additional payment 

clawed back. See section 210(o)(1)(D)(i) of the Dodd-Frank Act, 12 

U.S.C. § 5390(o)(1)(D)(i). This provision is consistent with Title II’s 

directive to minimize moral hazard. To the extent that the clawbacks of 

additional payments are insufficient to repay Treasury for any 

borrowed funds, the FDIC is required to assess the industry. See 

section 210(o)(1)(B) of the Dodd-Frank Act, 12 U.S.C. § 5390(o)(1)(B).
FDIC Quarterly 40 2011, Volume 5, No. 2

upon the management of such institution for requisite 

information.

Title I of the Dodd-Frank Act significantly enhances 

regulators’ ability to conduct advance resolution planning in respect of systemically important financial institutions through a variety of mechanisms, including 

heightened supervisory authority and the resolution 

plans, or living wills, required under section 165(d) of 

Title I of the Dodd-Frank Act.47 The examination 

authority provided by Title I of the Dodd-Frank Act 

will provide the FDIC with on-site access to systemically important financial institutions, including the 

ability to access real-time data.48 This will enable the 

FDIC, working in tandem with the Federal Reserve and 

other regulators, to collect and analyze information for 

resolution planning purposes in advance of the impending failure of the institution.

An essential part of such plans will be to describe how 

this process can be accomplished without posing 

systemic risk to the public and the financial system. If 

the company does not submit a credible resolution plan, 

the statute permits increasingly stringent requirements 

to be imposed that, ultimately, can lead to divestiture of 

assets or operations identified by the FDIC and the 

Federal Reserve to facilitate an orderly resolution. The 

Dodd-Frank Act requires each designated financial 

company to produce a resolution plan, or living will, 

that maps its business lines to legal entities and provides 

integrated analyses of its corporate structure; credit and 

other exposures; funding, capital, and cash flows; 

domestic and foreign jurisdictions in which it operates; 

its supporting information systems and other essential 

services; and other key components of its business operations, all as part of the plan for its rapid and orderly 

resolution. The credit exposure reports required by the 

statute will also provide important information critical 

to the FDIC’s planning processes by identifying the 

company’s significant credit exposures, its component 

exposures, and other key information across the entity 

and its affiliates. The elements contained in a resolution plan will not only help the FDIC and other domestic regulators to better understand a firm’s business and 

how that entity may be resolved, but the plans will also 

enhance the FDIC’s ability to coordinate with foreign 

47 See generally section 165 of Title I of the Dodd-Frank Act, 12 U.S.C. 

§ 5365.

48 See “Orderly Resolution of Lehman under the Dodd-Frank Act—

March–July, Due Diligence and Structuring the Resolution—Planning 

in the Crisis Environment,” infra.

court for permission to make an interim distribution, 

or the Chapter11 trustee or debtor-in-possession will 

provide in the plan of reorganization or plan of liquidation for interim distributions as various stages of the 

restructuring are reached.46 However, except in the 

case of “prepackaged” plans of reorganization, even an 

interim distribution can take months or years to materialize. In the case of LBHI, there has been no distribution to general unsecured creditors more than two years 

after LBHI’s initial bankruptcy filing.

Oversight and Advanced Planning. An essential prerequisite for any effective resolution is advance planning, a 

well-developed resolution plan, and access to the 

supporting information needed to undertake such 

planning.

Bankruptcy proceedings are typically challenging in the 

case of systemically important financial institutions in 

part because the participants have little notice or 

opportunity for advance preparation or coordination. 

The bankruptcy court, which must approve actions by 

the debtor outside of the ordinary course of business, 

may have little or no knowledge about the systemically 

important financial institution, and would have to rely 

46 In recent years a common practice has developed in bankruptcy 

cases of allowing payments shortly after the filing of a Chapter 11 petition to certain priority creditors (wage claimants (up to $11,725), 

employee benefits claimants (up to $11,725), taxing authorities and 

several less frequently used groups) if sufficient assets are at hand, on 

the theory that such creditors will be paid first anyway at the time final 

distributions are made (thus, no creditor’s rights will be impaired so 

long as the equity in available assets clearly exceeds the total priority 

claims). Permission to make such payments is generally sought as 

part of the debtor-in-possession’s “first day motions,” and such creditors generally receive payment within three to five days of the date of 

filing of the petition. A secondary consideration for paying prepetition 

wages is the desire on the part of management to retain an experienced work force at a time of turmoil. A second practice has developed in large Chapter 11 bankruptcy cases of paying “critical vendors” 

after obtaining a “first day order” shortly after the petition is filed. 

While such vendors have the status of general unsecured creditors, an 

argument is typically made to the Bankruptcy Court that certain trade 

creditors are considered key suppliers to the debtor-in-possession, 

and may refuse to do business with the Chapter 11 debtor unless they 

receive immediate payment on their prepetition claim, thus causing the 

entire reorganization effort to fail through loss of the going concern. 

This practice is more controversial than that of paying priority claimants, since (except in “prepackaged” bankruptcy cases) it is often very 

difficult to predict at the outset of the case what the percentage payout 

to general unsecured creditors will be at the end of the case. The practice has also come under criticism in recent years and has been cut 

back. One reason for the cutback is that there is little formal support in 

the Bankruptcy Code for the practice. See In re Kmart Corp., 359 F. 3d 

866 (7th Cir. 2004) and discussion in Turner, Travis N., “Kmart and 

Beyond: A ‘Critical’ Look at Critical Vendor Orders and the Doctrine of 

Necessity,” 63 Wash. & Lee L.Rev. 431 (2006).
FDIC Quarterly 41 2011, Volume 5, No. 2

Orderly Liquidation of LBHI under Dodd-Frank

ing these plans and any additional information that the 

FDIC and Federal Reserve would have received through 

on-site discussions with the firms during their review of 

the resolution plans would have provided the FDIC 

with valuable information necessary for effective resolution planning, information not available to the FDIC 

prior to the passage of the Dodd-Frank Act. In this 

regard the FDIC’s presence would not be indicative that 

a resolution is imminent, but rather that in a crisis the 

FDIC seeks to assure that all firms’ resolution plans are 

sufficiently robust to allow an orderly liquidation of any 

particular firm that might fail.

For Lehman, if senior management had not found an 

early private sector solution, the FDIC would have 

needed to establish an on-site presence to begin due 

diligence and to plan for a potential Title II resolution. 

Lehman was not the only firm in possible trouble and 

the FDIC would likely have had a heightened presence 

in other subject firms at the time. Thus, the market 

would not necessarily have taken the FDIC’s heightened presence as a signal that a failure was imminent as 

the market already was aware of Lehman’s problems. 

While it is possible in this situation or in other situations that the FDIC’s on site presence could create 

signaling concerns, this argues for the FDIC having a 

continuous on-site presence for resolution planning 

during good times.

Discussions with Lehman: In the various accounts of the 

failure of Lehman it is noteworthy that senior management discounted the possibility of failure until the very 

last moment.51 There was apparently a belief, following 

the government’s actions in respect of Bear Stearns, 

that the government, despite statements to the 

contrary, would step in and provide financial assistance 

and Lehman would be rescued. If Title II of the DoddFrank Act had been in effect, the outcome would have 

been considerably different. Lehman’s senior management would have understood clearly that the government would not and could not extend financial 

assistance outside of a resolution because of the clear 

requirements in the Dodd-Frank Act that losses are to 

be borne by equity holders and unsecured creditors, and 

management and directors responsible for the condition 

of the failed financial company are not to be retained.

51 According to the Examiner’s Report, following the near collapse of 

Bear Stearns in March 2008, “Lehman knew that its survival was in 

question.” Lehman’s management believed, however, that government 

assistance would be forthcoming to prevent a failure. See Examiner’s 

Report at 609, 618.

regulators in an effort to develop a comprehensive and 

coordinated resolution strategy for a cross-border firm.49

Structure and Bidding

Once the structure is developed, the FDIC would seek 

bids from qualified, interested bidders for the business 

lines or units that have going-concern value. The FDIC 

would analyze the bids received and choose the bid or 

bids that would provide the highest recovery to the 

receivership. The winning bidder would be informed 

and would take control of the business lines or units 

concurrent with the closing of the institution. Losses 

would be borne by equity holders, unsecured debt holders, and other unsecured creditors that remain in the 

receivership. These creditors would receive payment on 

their claims in accordance with the priority of payment 

rules set forth in the Dodd-Frank Act.50 The FDIC 

could make advance dividend payments to creditors 

based upon an upfront conservative valuation of total 

recoveries. As recoveries are realized, the FDIC could 

also pay out distributions to creditors as it has done 

successfully with failed insured banks. See “—Special 

Powers under Title II—Advance Dividends and Prompt 

Distributions,” above.

Orderly Resolution of Lehman under the 

Dodd-Frank Act

March–July, Due Diligence and Structuring the 

Resolution

Planning in the Crisis Environment: As the financial crisis 

enveloped Bear Stearns, the FDIC would have worked 

closely with the Federal Reserve and other appropriate 

regulators to gather information about the systemically 

important firms that may fall under the FDIC’s resolution authority. At a minimum, the firms’ resolution 

plans would have been reviewed jointly by the FDIC 

and the Federal Reserve to make sure that the plans 

were credible and up-to-date. The information support49 Domestic and foreign regulators are currently actively involved 

through the Financial Stability Board’s Cross-Border Crisis Management Group to develop essential elements of recovery and resolution 

plans that will aid authorities in understanding subject firms’ global 

operations and planning for the orderly resolution of a firm across 

borders. A number of jurisdictions are currently working to develop 

legislative and regulatory requirements for recovery and resolution 

plans, and domestic U.S. authorities are working to align regulatory 

initiatives in order to have a comprehensive and coordinated approach 

to resolution planning. For example, in January 2010, the FDIC and the 

Bank of England entered into a Memorandum of Understanding 

concerning the consultation, cooperation, and exchange of information 

related to the resolution of insured depository institutions with crossborder operations in the United States and the United Kingdom.

50 See section 210(b)(1) of the Dodd-Frank Act, 12 U.S.C. § 5390(b)(1).
FDIC Quarterly 42 2011, Volume 5, No. 2

The preferred outcome under the Dodd-Frank Act is for 

a troubled financial company to find a strategic investor 

or to recapitalize without direct government involvement or the FDIC being appointed receiver. To that 

end, the recommendation and determination prescribed 

by section 203(a)(2)(E) and (b)(3) of the Dodd-Frank 

Act, respectively, concern the availability of a viable 

private sector alternative. Requiring a troubled financial 

company to aggressively market itself pre-failure helps 

to ensure that exercise of the orderly resolution authority in Title II is a last resort. In this matter, the FDIC’s 

experience with troubled banks is instructive. The 

commencement of the FDIC’s due diligence process has 

frequently provided the motivation senior management 

has needed to pursue sale or recapitalization more 

aggressively. Between 1995 and the end of 2007, the 

FDIC prepared to resolve 150 institutions. Of this 

number, only 56—that is, 37 percent—eventually 

failed. Of course, many fewer problem banks have been 

able to find merger partners or recapitalize since the 

crisis began. However, from 2008 to 2010, of the 432 

banks where the FDIC began the resolution process, 

110—25 percent—avoided failure, either by finding an 

acquirer or recapitalizing.

Due Diligence: Just as when an insured depository institution is a likely candidate for an FDI Act receivership, 

the FDIC will need to gather as much information as 

possible about a systemically important financial institution in advance of any Title II resolution. In the case 

of LBHI, the SEC and the Federal Reserve Bank of 

New York began on-site daily monitoring in March 

2008, following the collapse and sale of Bear Stearns, at 

which point the FDIC would already have been on-site 

at Lehman to facilitate the FDIC’s Title I resolution 

planning and monitoring activities.53 The FDIC would 

have determined, jointly with other supervisors, the 

condition of the company for the purposes of ordering 

corrective actions to avoid failure, and it otherwise 

would have prepared for a Title II orderly resolution.

The FDIC would continue assembling information 

about the condition and value of Lehman’s assets and 

various lines of business. In preparing for a Title II resolution of a company subject to heightened prudential 

standards under Title I, the FDIC will have access to 

the information included in such company’s resolution 

53 See “Orderly Resolution of Lehman under the Dodd-Frank Act—

March–July, Due Diligence and Structuring the Resolution—Planning 

in the Crisis Environment,” supra.

To convey this point to Lehman and its Board of Directors, the FDIC could have participated in a meeting in 

the spring of 2008, together with Lehman’s Board of 

Directors, the Federal Reserve, and the SEC, to outline 

the circumstances that would lead to the appointment 

of the FDIC as receiver for one or more Lehman entities, and what that resolution would entail. The regulators would have emphasized that any open-company 

assistance or “too big to fail” transaction would be 

unavailable,52 and that the alternative to a sale of the 

company or a substantial capital raising would be a 

bankruptcy under the Bankruptcy Code or a resolution 

under Title II with no expectation of any return to 

shareholders.

The regulators could have set a deadline of July to sell 

the company or raise capital. This would have clearly 

focused Lehman’s Board of Directors on the urgency of 

the matter and encouraged the Board to accept the best 

non-government offer it received notwithstanding its 

dilutive nature; virtually any private sale would yield a 

better return for shareholders than the likely negligible 

proceeds shareholders would receive in an FDIC receivership, as equity holders have the lowest priority claims 

in a receivership.

Lehman’s senior management and Board of Directors 

may have been more willing to recommend offers that 

were below the then-current market price if they knew 

with certainty that there would be no extraordinary 

government assistance made available to the company 

and that Lehman would be put into receivership. Such 

avenues may have been available. For instance, KDB is 

reported to have suggested paying $6.40 per share when 

Lehman’s stock was trading at $17.50 on August 31—

just 15 days prior to Lehman’s bankruptcy filing.

Forcing Lehman to more earnestly market itself to a 

potential acquirer or strategic investor well in advance 

of Lehman’s failure would serve several other goals, 

even if such private sector transaction were unsuccessful. The FDIC would be able to use this marketing 

information to identify appropriate bidders who would 

be invited to join in the FDIC-led due diligence and 

bidding process as described in “—Due Diligence” and 

“—Structuring the Transaction,” below. 

52 The Preamble to the Dodd-Frank Act notes that it was enacted, inter 

alia, “to end ‘too big to fail’ [and] to protect the American taxpayer by 

ending bailouts.”
FDIC Quarterly 43 2011, Volume 5, No. 2

Orderly Liquidation of LBHI under Dodd-Frank

iaries. LBI was also the owner and operator of key IT 

systems used throughout the company and provided 

custody and trade execution services for clients of 

foreign Lehman entities, primarily for trades conducted 

by LBIE in the United States. Likewise, LBIE provided 

custody and trade execution services for clients of LBI 

conducting trades outside of the United States. The 

interconnected nature of Lehman’s operations would 

have argued for maintaining maximum franchise value 

by developing a deal structure that would have maintained the continuing uninterrupted operation of the 

major business lines of the firm by transferring those 

assets and operations to an acquirer immediately upon 

the failure of the parent holding company.56

During the FDIC’s investigation of the Lehman group, 

it would have identified subsidiaries which would be 

likely to fail in the event of a failure of LBHI but 

would likely not be systemic and would provide little 

or no value to the consolidated franchise. The FDIC 

would not have recommended a resolution under Title 

II for those subsidiaries, and they would likely have 

been resolved under the Bankruptcy Code or other 

applicable insolvency regime.57 The assets of these 

subsidiaries would not have been part of a Title II 

receivership, other than the receiver’s equity claim; 

the FDIC would have had no expected return on the 

equity for any such non-systemic subsidiary placed into 

bankruptcy. The FDIC also would have identified any 

subsidiary that would be likely to fail in the event of a 

failure of LBHI, and whose failure likely would be 

systemic. The FDIC would have made an evaluation as 

to whether the resolution of any such subsidiary under 

56 By completing a sale at the time of failure of the parent holding 

company, the acquirer would have been able to “step into the shoes” 

of LBHI and provide liquidity, guarantees, or other credit support to 

the newly acquired subsidiaries. Were the FDIC unable to promptly 

complete such a transaction, it could provide any necessary liquidity 

to certain key subsidiaries, such as LBIE, pending a sale of those 

assets. See footnote 58, infra. 57 See section 202(c)(1) of the Dodd-Frank Act, 12 U.S.C. § 5382(c)

(1).

plan, or living will.54 Though that resolution plan is 

designed to provide for the resolution of the systemically important financial institution under the Bankruptcy Code, it would provide regulators with 

invaluable information about the institution’s structure, 

organization, and key operations that could form the 

basis for an orderly liquidation under Title II. It is the 

FDIC’s experience that management of a troubled institution often has an overly optimistic view of the value 

of its franchise and the firm’s prospect for recovery. 

Thus, while the resolution plan would provide key 

financial and other data about the consolidated entity, 

an independent examination of the troubled firm may 

have been necessary. The FDIC will also have access to 

real-time data from on-site monitoring conducted by 

the FDIC and other prudential regulators.

The FDIC’s participation in gathering information and 

in exercising its examination authority would be done 

in coordination with the on-site monitoring activities 

of the SEC and the Federal Reserve Bank of New York. 

The development of additional information to facilitate 

a potential resolution would be done in a manner that 

would not disrupt the business operations or indicate an 

imminent failure of the financial company. As regulated 

entities under the Dodd-Frank Act, heightened supervision by the FDIC, the Federal Reserve, and other 

prudential regulators will be normal. As a result, these 

information-gathering activities should neither signal 

increased distress nor precipitate market reaction.

While conducting due diligence, the FDIC would have 

begun developing the transaction and bid framework by 

analyzing the legal structure of the firm, its operations, 

and its financial data. In this case, LBHI was a large 

holding company with major overseas operations.55 As 

with any large, complex financial company, there were 

many interrelations among the major affiliates of the 

group. LBHI was the guarantor of all obligations of 

LBI and the source of funding for a number of other 

Lehman entities. LBI was the employer of record for 

much of the company, including various foreign subsid54 Had the Dodd-Frank Act been enacted sufficiently far in advance of 

Lehman’s failure, undoubtedly much more supervisory information 

would have been available in March 2008. The Federal Reserve and the 

FDIC would have had the detailed information presented in Leh-man’s 

statutorily required resolution plan under Title I of the Dodd-Frank Act. 

See section 165(d) of Title I of the Dodd-Frank Act, 12 U.S.C. § 

5365(d).

55 The principal operating entities in the holding company were LBI, 

the U.S. broker-dealer, and LBIE, the U.K.-based broker-dealer. 

Lehman also had a smaller Asian trading operation headquartered in 

Japan, and various smaller subsidiaries in other countries.
FDIC Quarterly 44 2011, Volume 5, No. 2

almost 40 percent of the approximately $5.7 billion in 

commercial paper outstanding enterprise wide.

By March 2008, Lehman had recognized that its 

commercial real estate related holdings were a major 

impediment to finding a merger partner. Its SpinCo 

proposal identified $31.7 billion in significantly underperforming commercial real estate related assets. During 

the week leading up to Lehman’s bankruptcy filing, 

Bank of America identified an additional $38.3 billion 

in suspect residential real estate related assets and 

private equity assets that it would not purchase in an 

acquisition. Barclay’s identified $20.3 billion of similar 

potentially additional problem assets in its due diligence. In the FDIC’s resolution process, the FDIC’s 

structuring team as well as prospective bidders would 

have had sufficient time to perform due diligence and 

identify problem asset pools. While Lehman was seeking an investor pre-failure, the FDIC would have identified and valued these problem asset pools in order to set 

a defined bid structure for Lehman. The bid structure 

would have allowed prospective acquirers to bid upon 

options to purchase all of Lehman’s assets in a whole 

financial company P&A with loss sharing on defined 

pools of problem assets, or a purchase which excludes 

those problem asset pools. In the latter bid option, the 

receivership estate would have purchased the problem 

assets out of Lehman’s subsidiaries at their fair market 

value prior to consummating the purchase agreement 

with the acquirer. These problem assets, in addition to 

those directly owned by the holding company, could 

have been retained in the receivership or placed into a 

bridge financial company prior to future disposition. 

Either bid would have allowed a further option for the 

prospective acquirer to pay to assume the commercial 

paper and other critical short-term securities of 

Lehman. The bidding structure is discussed more fully 

in “—August, Begin Marketing Lehman,” below.

Both bid structures are intended to provide comfort to 

not only the potential acquirer, but also to its regulators, concerning the potential down-side exposure to 

problem assets. In excluding pools of identified problem 

assets from a bid, an acquirer is protected directly by 

effectively capping its exposure to such assets—which 

are left with the receivership—at zero. This risk minimization comes at the cost of lost potential upside from 

returns on servicing the troubled assets, higher administrative costs of the receiver, and a less attractive bid. In 

the loss-sharing structure, a potential acquirer receives 

tail-risk protection: the acquirer is able to cap its exposure to an identified pool of problem assets at set levels. 

This comfort is particularly important where a potential 

Title II would have aided in the orderly resolution of 

the parent company.58

As is the case with insured depository institutions that 

have foreign operations, the FDIC would have begun 

contacting key foreign financial authorities on a 

discrete basis to discuss what legal or financial issues 

might arise out of an FDIC receivership, or out of 

foreign resolution regimes in the case of Lehman entities operating outside of the United States, and how 

those resolutions could be coordinated. In addition, 

foreign financial authorities would have been consulted 

when foreign financial companies and investors 

expressed interest in investing in or purchasing 

Lehman. These discussions would have addressed, at a 

minimum, the financial strength of the acquirer, types 

of approvals that would be required to consummate a 

transaction, and any identified impediments to the 

transaction. Regular, ongoing contact would be particularly important after the transaction structure was determined and qualified bidders had been contacted and 

had expressed interest.

Valuation and Identification of Problem Assets: On a 

consolidated basis, LBHI and its subsidiaries had total 

assets of $639 billion, with $26.3 billion in book equity 

and total unsecured long-term and short-term borrowings of $162.8 billion as of May 31, 2008. The parent 

company, LBHI, had $231 billion in assets, with $26.3 

billion in book equity and $114.6 billion in unsecured 

long-term and short-term borrowings. On September 14 

(just prior to bankruptcy), LBHI (unconsolidated) was 

slightly smaller with $209 billion in assets, $20.3 billion 

in book equity, and $99.5 billion in long-term and 

short-term unsecured debt, including $15 billion in 

subordinated debt. In addition, LBHI’s short-term unsecured debt included $2.3 billion in commercial paper—

58 Upon a parent entering a Title II receivership, the FDIC may appoint 

itself receiver over one or more domestic covered subsidiaries of a 

covered financial company in receivership in accordance with the selfappointment process set forth in section 210(a)(1)(E) of the DoddFrank Act, 12 U.S.C. § 5390(a)(1)(E). This appointment process 

requires a joint determination by the FDIC and the Secretary of the 

Treasury that the covered subsidiary is in default or danger of default, 

that putting it into receivership would avoid or mitigate serious 

adverse effects on U.S. financial stability, and that such action would 

facilitate the orderly liquidation of the covered financial company 

parent. Once in receivership, the covered subsidiary would be treated 

in a similar manner to any other covered financial company: its shareholders and unsecured creditors would bear the losses of the 

company, and management and directors responsible for the company’s failure would not be retained. The receiver, to aid in the orderly 

liquidation of the company, could extend liquidity to it in accordance 

with section 204(d) of the Dodd-Frank Act, 12 U.S.C. § 5384(d).
FDIC Quarterly 45 2011, Volume 5, No. 2

Orderly Liquidation of LBHI under Dodd-Frank

those resolutions could be coordinated.61 Specifically, 

the FDIC would address issues of ring-fencing of assets, 

particularly of Lehman’s U.K.-based broker-dealer. See 

“—Due Diligence,” above.

August, Begin Marketing Lehman

Assuming Lehman were unable to sell itself, the FDIC 

would have commenced with marketing Lehman.62

The FDIC would have set a defined bidding structure. 

Prospective acquirers previously identified (as discussed 

in “—March–July, Due Diligence and Structuring the 

Resolution—Structuring the Transaction,” above) would 

have been invited to bid based on the following options:

Option A: Whole financial company purchase and 

assumption with partial loss share (loss-sharing 

P&A). Under this option, the assets and operations 

of Lehman are transferred to the acquirer with no 

government control and no ongoing servicing of 

Lehman assets by the government. Due to the problem assets discussed above, however, it may be 

necessary for the receivership estate to offer a potential acquirer protection from loss in respect of that 

identified pool of problem assets. In this type of 

transaction, the acquirer purchases the assets at their 

gross book value, and assumes, at a minimum, the 

secured liabilities. Depending on the bid, other 

liability classes may be assumed as well. Since the 

book value of assets must always exceed the amount 

of liabilities assumed in this structure, the acquirer, 

after factoring its discount bid for the assets, must 

also provide a combination of cash and a note 

payable to the receivership estate to balance out the 

transaction.63 The receivership estate’s share of loss 

61 For example, in the case of East West Bank’s acquisition of United 

Commercial Bank, San Francisco, California, the FDIC engaged with 

the China Banking Regulatory Commission and the Hong Kong Monetary Authority in advance of the resolution to discuss potential acquirers, regulatory approvals and options for resolving or selling the 

assets and liabilities of United Commercial Bank’s wholly owned 

subsidiary in China and its foreign branch in Hong Kong.

62 Any agreement reached in respect of Lehman would be contingent 

upon its failure, a systemic determination under sections 203(b) or 

210(a)(1)(E) of the Dodd-Frank Act, 12 U.S.C. §§ 5383(b) or 5390(a)

(1)(E), as applicable, and the appointment of the FDIC as receiver 

under section 202 of the Dodd-Frank Act, 12 U.S.C. § 5382. In the 

case of Lehman, and for purposes of our analysis, had there been a 

viable acquirer or strategic investor pre-failure, no Title II resolution 

would be required. As discussed in “The Events Leading to the 

Lehman Bankruptcy,” supra, and in footnote 68, infra, no such private 

sector alternative was available.

63 A simple formula to reflect the amount of the acquirer’s note payable 

is: Book value of assets purchased less the sum of (book value of 

liabilities assumed plus discount bid plus cash payment) is equal to 

note payable.

acquirer is unable to undertake in-depth due diligence 

on such assets, or must do so on an abbreviated time 

table. This down-side protection will also be important 

to regulators, as it mitigates the risk of an acquirer experiencing financial distress due to the problem assets of 

an acquiree.59

Structuring the Resolution: During due diligence, the 

FDIC would have identified certain pools of assets of 

Lehman—including certain commercial real estate, 

residential real estate, and private equity assets—that 

would make a whole financial company P&A transaction difficult. See “—Valuation and Identification of 

Problem Assets,” above. These troubled assets were estimated to be between $50 and $70 billion in book value.

The FDIC would have set up a data room to enable 

potential acquirers to conduct due diligence, and would 

have begun developing a marketing structure for 

Lehman and its assets. The FDIC would have identified 

potential acquirers of Lehman. Criteria would have 

included maximization of value on the sale, the stability 

of the potential acquirer, and the ability of the acquirer 

expediently to consummate an acquisition.60 Having 

identified the potential acquirers, the FDIC would have 

explained the bid structure and invited the firms to 

conduct (or continue) due diligence of Lehman.

During this time, the FDIC would have continued to 

monitor Lehman’s progress in marketing itself. This 

would have encouraged Lehman to consummate a nongovernment transaction, which remained the best 

outcome for all parties. It would also have provided the 

FDIC with key information concerning interested 

acquirers and potential issues and concerns of such 

acquirers in completing a transaction.

Also during this time, as is the case with insured depository institutions that have foreign operations, the FDIC 

would have continued a dialogue with key foreign 

financial authorities to discuss what legal or financial 

issues might arise out of an FDIC receivership, or out of 

foreign resolution regimes in the case of Lehman entities operating outside of the United States, and how 

59 Both Barclays and its U.K. regulators were concerned with exposure 

to problem assets of Lehman following a potential acquisition by 

Barclays. See footnote 68, infra. 60 We also note the impact of section 622 of the Dodd-Frank Act, 12 

U.S.C. § 1852, which could prohibit a large financial company from 

entering into a transaction to acquire another financial company if the 

pro forma liabilities would exceed certain statutory levels.
FDIC Quarterly 46 2011, Volume 5, No. 2

transferred to the acquirer. Identified pools of problem assets would not be included in the transaction, 

but retained for disposition at a later date.65

Liabilities: While the FDIC would transfer the assets 

of Lehman to the acquirer in accordance with 

Option A or Option B described above, most unsecured creditor claims would remain with the receivership, including shareholder claims and claims of 

holders of unsecured, long-term indebtedness. Fully 

secured claims would be transferred, along with the 

collateral, to the acquirer. The bid participants 

would have the opportunity to bid on acquiring 

certain short-term indebtedness of Lehman, particularly Lehman’s outstanding commercial paper. In 

order for this bid structure to be successful, bidders 

would need to bid an amount sufficient to cover the 

loss that the commercial paper and other short-term 

creditors would have otherwise incurred had the 

creditors remained in the receivership.

In comparing bids under Option A and Option B, the 

receivership estate’s cost of managing and disposing of 

the identified problem assets would be taken into 

consideration. Depending on the bid, the acquirer would 

purchase the acquired assets through a combination of 

one or more of cash, notes, and assumed liabilities.

It should be noted that the proposed bid structure 

represented by Option A and Option B represents one 

set of options for disposing of the assets and operations 

of a covered financial company in an efficient manner. 

The FDIC would have the flexibility to restructure 

these bids as the facts and circumstances of a particular 

covered financial company warrant in order to satisfy 

the FDIC’s statutory mandates of promoting financial 

stability, maximizing recoveries, and minimizing losses.

Early September, Closing

Following due diligence, interested parties would have 

submitted closed, or sealed, bids. The FDIC would have 

evaluated the bids based upon the requirement under 

the Dodd-Frank Act to maximize value upon any disposition of assets.66 Bids would have been evaluated on a 

65 As discussed under “—March–July, Due Diligence and Structuring 

the Resolution—Due Diligence,” supra, subsidiaries holding such 

assets would generally be resolved under the Bankruptcy Code. To the 

extent any subsidiary was deemed systemic, it could be put into a 

separate receivership under Title II, its assets liquidated and its claims 

resolved in accordance with the Dodd-Frank Act.

66 See section 210(a)(9)(E) of the Dodd-Frank Act, 12 U.S.C. § 5390(a)

(9)(E).

payments are made through reductions in the 

outstanding balance of the note payable as loss 

claims occur over time.

Transactions offering an option for a sharing of 

potential future losses between the acquirer and the 

FDIC have been frequently used to resolve failed 

banks. Loss-share transactions allow the FDIC to 

obtain better bids from potential assuming institutions by sharing a portion of the risk on a pool of 

assets. This has been particularly important during 

periods of uncertainty about the value of assets. The 

FDIC’s experience has been that these transactions 

result in both better bid prices and improved recoveries for the receivership and receivership creditors.

Another benefit of loss sharing is that the FDIC is 

able to transfer administration of the failed financial 

company’s problem assets to the assuming institution and receive a premium for the failed company’s 

franchise value, thereby maximizing value. By 

having the assuming company absorb a portion of 

the loss, the FDIC induces rational and responsible 

credit management behavior from the assuming 

institution to minimize credit losses. Compared to 

the alternative of retaining problem assets in receivership, the loss-share structure tends to be more efficient, as it limits losses and administrative costs of 

the receivership.

The FDIC would therefore permit bidders to bid on 

a structure based on a sale of the whole financial 

company, with partial but substantial coverage of 

losses on those identified problem assets.64 The lossshare structure encourages bidders to maximize their 

bids by offering downside credit risk protection from 

loss on an identified pool of problem assets. This 

can produce a more efficient outcome as it incentivizes the acquirer to maximize recoveries while reducing administrative costs of the receivership. See 

“The Resolution and Receivership Process for Failed 

Banks—Loss Share,” above.

Option B: Modified purchase and assumption without 

loss share, which excludes certain identified problem 

assets (modified P&A, similar to a good bank–bad 

bank resolution strategy). Under this option, the 

majority of the assets and operations of Lehman are 

64 To the extent problem assets were held directly by LBHI, or LBHI 

experienced significant intercompany exposures to losses in subsidiaries and affiliates, loss sharing would be more likely to be a preferred 

bid structure.
FDIC Quarterly 47 2011, Volume 5, No. 2

Orderly Liquidation of LBHI under Dodd-Frank

the extent assumed by Barclays, commercial paper.71 To 

the extent Barclays’ winning bid had been based upon a 

whole financial company with loss share, it would have 

been responsible for servicing problem assets in accordance with the terms of the loss-sharing P&A 

agreement.

Lehman’s derivatives trading was conducted almost 

exclusively in its broker-dealer, LBI, and in LBI’s 

subsidiaries.72 As a result, Barclays’ acquisition of the 

broker-dealer group would have transferred the derivatives operations, together with the related collateral, to 

Barclays in its entirety as an ongoing operation. At the 

moment of failure, Barclays would have assumed any 

parent guarantee by Lehman outstanding in respect of 

the subsidiaries’ qualified financial contracts. This 

action should have substantially eliminated any 

commercial basis for the subsidiaries’ counterparties to 

engage in termination and close-out netting of qualified 

financial contracts based upon the insolvency of the 

parent guarantor. This would have removed any financial incentive to do so as well, as a financially secure 

acquirer would have assumed the obligations and 

provided guarantees to the same extent as its predecessor, in part to preserve the significant franchise value of 

the derivatives portfolio (including the underlying 

collateral).73 The more limited derivatives operations 

conducted by LBHI would have been subjected to haircuts to the extent that any net amount due to a counterparty was not collateralized or hedged. Particularly in 

the future, it is expected that the vast majority of the 

derivatives transactions of a covered financial company 

will be fully collateralized.

Barclays would have purchased the acquired assets 

through a combination of one or more of the following: 

cash, notes, and the assumption of liabilities. The 

FDIC, as receiver for Lehman, would have disposed of 

any problem assets left behind in the receivership or 

71 Despite paying a premium to assume the commercial paper obligations, an acquirer may have been incentivized to bid on such business 

due to the incremental franchise value of the business line and to 

preserve customer goodwill.

72 LBHI conducted its derivatives activities primarily in subsidiaries of 

LBI (the broker-dealer), including Lehman Brothers Special Financing 

Inc., Lehman Brothers Derivatives Products, Inc., and Lehman Brothers Financial Products, Inc.

73 Under the International Swaps and Derivatives Association master 

agreements (and trades placed thereunder), parties may choose 

whether to be governed by New York or English law. To the extent that 

parties to a particular qualified financial contract are validly governed 

by English law (and a court recognizes and applies such choice of 

law), such contract may not be subject to the Dodd-Frank Act in terms 

of nullification of its ipso facto clause.

present-value basis. The FDIC would have selected the 

winning bid, and the acquirer and the FDIC, as the 

receiver for LBHI, would enter into a conditional P&A 

agreement based upon the agreed upon bid structure.67

We have assumed, for the limited purpose of this discussion, that Barclays would have provided a winning bid 

to complete an acquisition of Lehman.68

We have further assumed that, as LBHI reached a point 

at which it was in default or in danger of default, a 

systemic determination would have been made by the 

Secretary of the Treasury and the FDIC would have 

been appointed receiver of LBHI.69

At the time a determination was made that Lehman 

should be put into receivership and the FDIC named 

receiver, the assets and select liabilities of Lehman 

would have been transferred to Barclays as the acquiring institution based upon the structure of the winning 

bid.70 Barclays would have maintained the key operations of Lehman in a seamless manner, integrating 

those operations over time. Disruptions to the market 

likely would have been minimal. Barclays would have 

continued to make scheduled payments on liabilities 

transferred to it, including secured indebtedness and, to 

67 See footnote 62, supra. 68 We note that this analysis is purely hypothetical in nature, and a bid 

conducted by the FDIC could have produced strong bids by a number 

of potential acquirers. Barclays, however, was close to completing a 

transaction with Lehman in September 2008. It was unable to proceed 

based upon the risk of financial loss due to problem assets it identified 

in its due diligence and the inability to gain an exemption from U.K. 

regulators from the requirement to hold a shareholder vote prior to 

approving a transaction with Lehman based upon the proposed structure. The FDIC believes it would have been able to alleviate Barclays’ 

concerns—and facilitate requisite regulatory approvals—by structuring the transaction as a loss-sharing P&A or as a modified P&A. For 

the purpose of this discussion, therefore, a winning bid from Barclays 

would be one reasonable outcome from the bidding process outlined 

in “—August, Begin Marketing Lehman,” supra. 69 For a detailed discussion of the recommendation, determination, and 

appointment process under sections 203 and 202 of the Dodd-Frank 

Act, 12 U.S.C. §§ 5383 and 5382, see “The Orderly Liquidation of 

Covered Financial Companies—Appointment,” supra. 70 There is a danger of value dissipation—in proportion to the size and 

complexity of the covered financial company—the longer such 

covered financial company stays in receivership prior to a sale being 

consummated. Accordingly, the FDIC would generally prefer, where 

possible, to time a sale of the assets and operations of the covered 

financial company at or near the date of failure. The FDIC may also 

transfer key operations to a bridge financial company, as described 

under “The Orderly Resolution of Covered Financial Companies—

Special Powers under Title II—Ability to Preserve Systemic Operations 

of the Covered Financial Company,” supra. These same challenges are 

faced in the resolution of larger insured depository institutions under 

the FDI Act.
FDIC Quarterly 48 2011, Volume 5, No. 2

receivership.76 These borrowed funds could have been 

made available to creditors immediately in the form of 

advance dividends to satisfy a portion of creditor claims 

based upon the total expected recovery in the resolution. This is in contrast to the actual circumstances of 

the LBHI bankruptcy, in which there has been no 

confirmed plan of reorganization or cash distribution to 

unsecured creditors of LBHI more than two years after 

the failure of Lehman.

Conclusion

Title II of the Dodd-Frank Act provides “the necessary 

authority to liquidate failing financial companies that 

pose a systemic risk to the financial stability of the 

United States in a manner that mitigates such risk and 

minimizes moral hazard.”77 These powers and authorities are analogous to those the FDIC uses to resolve 

failed insured depository institutions under the FDI Act. 

In the case of Lehman, following appointment by the 

Secretary of the Treasury, the FDIC could have used its 

power as receiver and the ability to facilitate a sale 

under Title II of the Dodd-Frank Act to preserve the 

institution’s franchise value and transfer Lehman’s 

assets and operations to an acquirer. The FDIC would 

have imposed losses on equity holders and unsecured 

creditors, terminated senior management responsible for 

the failure of the covered financial company, maintained Lehman’s liquidity, and, most importantly, 

attempted to mitigate and prevent disruption to the 

U.S. financial system, including the commercial paper 

and derivatives markets. The very availability of a 

comprehensive resolution system that sets forth in 

advance the rules under which the government will act 

following the appointment of a receiver could have 

helped to prevent a “run on the bank” and the resulting 

financial instability. By maintaining franchise value and 

mitigating severe disruption in the financial markets, it 

is more likely that debt holders and other general creditors will receive greater recoveries on their claims under 

the Dodd-Frank Act than they would have otherwise 

received in a Chapter 7 liquidation or a Chapter 11 

reorganization.

The key to an orderly resolution and liquidation of a 

systemically important financial institution is the ability 

to plan for its resolution and liquidation, provide liquidity to maintain key assets and operations, and preserve 

financial stability. During the planning phase, the 

FDIC, working in tandem with the Federal Reserve and 

76 See footnote 44 and accompanying discussion, supra. 77 Section 204(a) of the Dodd-Frank Act, 12 U.S.C. § 5384(a).

managed the loss-share agreement with Barclays in 

respect of those assets, and would have settled creditor 

claims in accordance with the priority for repayment set 

forth in the Dodd-Frank Act.74

The Likely Treatment of Creditors

As mentioned earlier, by September of 2008, LBHI’s 

book equity was down to $20 billion and it had $15 

billion of subordinated debt, $85 billion in other 

outstanding short- and long-term debt, and $90 billion 

of other liabilities, most of which represented intracompany funding. The equity and subordinated debt 

represented a buffer of $35 billion to absorb losses 

before other creditors took losses. Of the $210 billion in 

assets, potential acquirers had identified $50 to $70 

billion as impaired or of questionable value. If losses on 

those assets had been $40 billion (which would represent a loss rate in the range of 60 to 80 percent), then 

the entire $35 billion buffer of equity and subordinated 

debt would have been eliminated and losses of $5 

billion would have remained. The distribution of these 

losses would depend on the extent of collateralization 

and other features of the debt instruments.

If losses had been distributed equally among all of 

Lehman’s remaining general unsecured creditors, the $5 

billion in losses would have resulted in a recovery rate 

of approximately $0.97 for every claim of $1.00, assuming that no affiliate guarantee claims would be triggered. This is significantly more than what these 

creditors are expected to receive under the Lehman 

bankruptcy. This benefit to creditors derives primarily 

from the ability to plan, arrange due diligence, and 

conduct a well structured competitive bidding process.

The Dodd-Frank Act provides a further potential benefit to creditors: earlier access to liquidity. As described 

above, the acquirer would have provided a combination 

of cash and a note to the receiver. Under the DoddFrank Act, the FDIC could have promptly distributed 

the cash proceeds from the sale of assets to claimants in 

partial satisfaction of unsecured creditor claims.75 The 

FDIC would also have been able to borrow up to 90 

percent of the fair value of the note available for repayment—together with the fair value of any assets left in 

the receivership available for repayment—from the 

orderly liquidation fund and advance those funds to the 

74 See section 210(b)(1) of the Dodd-Frank Act, 12 U.S.C. § 5390(b)(1). 75 See “The Orderly Resolution of Covered Financial Companies—

Special Powers under Title II—Advance Dividends and Prompt Distributions,” supra, for a discussion of the ability to make both prompt 

distributions and advance dividends in a Title II receivership.
FDIC Quarterly 49 2011, Volume 5, No. 2

Orderly Liquidation of LBHI under Dodd-Frank

We have also stuck closely to the facts in identifying 

the most likely acquirer of Lehman as Barclays, while 

also discussing the potential role played by Bank of 

America and KDB. Lehman, while a complex firm, had 

value primarily as an investment bank. Thus, its resolution was focused on keeping the investment bank’s 

operations intact in order to preserve its going-concern 

value. In other cases, a large financial firm with many 

pieces such as a large commercial bank, an insurance 

company, and a broker-dealer, might represent a financial firm that is no longer too big to fail, but may be too 

big to continue to exist as one entity.78 Over the longer 

term, the development of resolution plans will enable 

the FDIC to prepare to split up such a firm in order to 

facilitate a Title II liquidation. The FDIC could pursue 

a number of alternatives instead of a whole financial 

company purchase-and-assumption transaction, including a spin-off of assets, an initial public offering, a debtto-equity conversion, or some other transaction that 

would satisfy regulatory concerns about concentration 

while minimizing losses to the failed company’s 

creditors.

78 See e.g., Simon Johnson & James Kwak, 13 Bankers: The Wall 

Street Takeover and the Next Financial Meltdown (2010); Michael 

McKee and Scott Lanman, “Greenspan Says U.S. Should Consider 

Breaking Up Large Banks,” Bloomberg, Oct. 15, 2009, available at 

http://www.bloomberg.com/apps/news?pid= newsarchive&sid=

aJ8HPmNUfchg; Lita Epstein, “Breaking up ‘too big to fail’ banks: 

Britain leads, will U.S. follow,” DailyFinance, Nov. 2, 2009, 

available at http://www.dailyfinance.com/story/ investing/breaking-upbanks-too-big-to-fail-britian-leads-but-will-u-s/19220380/. The DoddFrank Act includes provisions intended to prevent the creation of 

ever-larger financial companies, including section 622 thereof, 12 

U.S.C. § 1852. See footnote 60, supra.

the SEC, would have been able to identify problem 

assets; require management to raise capital or find an 

acquirer; gather information about the institution’s 

structure, organization, and key operations; prepare the 

resolution transaction structure and bids; and seek 

potential acquirers. During this phase, the FDIC would 

have contacted the relevant foreign and domestic regulatory authorities and governments to coordinate the 

resolution. Through this process, the FDIC would have 

minimized losses and maximized recoveries in the event 

the systemically important financial institution failed 

and was put into receivership.

Perhaps most importantly, the Dodd-Frank Act 

provides the means to preserve systemically important 

operations and reduce systemic consequences while 

limiting moral hazard by imposing losses on the stockholders and unsecured creditors of the failed systemically important financial institution rather than on the 

U.S. taxpayer. In so doing, the FDIC is able to fulfill its 

statutory mandate to preserve financial stability and 

serve the public interest.

Afterword

This paper has focused on how the government could 

have structured a resolution of Lehman under Title II of 

the Dodd-Frank Act following the failure of such firm. 

In so doing, we have made a number of assumptions 

and caveats to provide a framework for the analysis and 

to maintain consistency with the historical record. That 

is, while we have assumed that the Dodd-Frank Act 

had been enacted pre-failure, and that the FDIC would 

have been able to avail itself of the pre-planning powers 

available under Title I, including having access to key 

data of subject institutions through resolution plans and 

on-site monitoring, we have not assumed-away the failure of Lehman.

The orderly liquidation authority of Title II would be a 

remedy of last resort, to be used only after the remedies 

available under Title I—including the increased informational and supervisory powers—are unable to stave 

off a failure. In particular, it is expected that the mere 

knowledge of the consequences of a Title II resolution, 

including the understanding that financial assistance is 

no longer an option, would encourage a troubled institution to find an acquirer or strategic partner on its own 

well in advance of failure. Likewise, on-site monitoring 

and access to real-time data provided under Title I is 

expected to provide an early-warning system to the 

FDIC and other regulators well in advance of a subject 

institution’s imminent failure.