The FDIC has approved an “interim” rule on the orderly liquidation of large financial company here. Dodd-Frank (Title II) moves on. According to the law, in the event of the failure of a financial institution whose failure poses significant systemic risks, the FDIC can be made receiver and rapidly impose losses on equity and debt holders. The idea is that rapid sale of assets can preserve business value, reduce actual bankruptcy (legal) costs (over a billion now for the Lehman bankruptcy), and reduce the uncertainty and illiquidity that affects claims during the bankruptcy process. This may be a big step in limiting too big to fail. The legal hurdles however are very large – can this mechanism resolve an incomplete contract in a complex institution without a big fight? I would rather we never find out.
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