Politics and Money

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Washington’s Quiet Bankruptcy Rewrite

A plan backed by big banks and their regulators gets a vote.

Nov. 28, 2014 7:10 p.m. ET

The holidays can be a magical time of year, especially for politicians who enjoy operating with little public scrutiny. On Monday the House is scheduled to vote on a bankruptcy plan for big banks that deserves more attention from taxpayers.

The Financial Institution Bankruptcy Act enjoys broad bipartisan support and has received little public examination. Not much will be said about it on Monday either. The bill will be considered under suspension of the rules, meaning it cannot be amended and will be subject to limited debate, though to pass the House it will need to attract a two-thirds vote.

Co-sponsored by Reps. Spencer Bachus (R., Ala.), John Conyers (D., Mich.), and Bob Goodlatte (R., Va.), the bill creates a new section of the bankruptcy code for big financial firms. So far so good for taxpayers. Bankruptcy courts would be better for resolving failing giants than the “orderly liquidation authority” created by the 2010 Dodd-Frank law that allows regulators to rescue these institutions and then discriminate among their creditors.

This is no doubt why so many Republicans are supporting the new plan. But they should also read the fine print.

Nothing in the bill repeals the rescue authorities given to regulators under Dodd-Frank and there’s no ban on taxpayer assistance to the failing giants put through the new bankruptcy process.

If the idea is to take power from bureaucrats and give it back to markets and judges, it’s odd that not only the failing firm but also the Federal Reserve Board of Governors can trigger the bankruptcy filing if “necessary to prevent serious adverse effects on financial stability in the United States.” The affected company can contest the Fed’s decision privately before the court.

The House bill would also largely codify and expand an agreement this fall between the biggest banks and the Fed. The big banks agreed not to exercise all their contractual rights with each other, allowing a failing giant some relief as regulators try to ensure that its subsidiaries can keep operating.

Under the new bill, counterparties to the big banks would have to accept a 48-hour stay before exercising their rights to cancel derivatives contracts. In other words, it’s a big win for a failing banking giant at the expense of various other companies with which it does business.

It’s puzzling that Republicans would want to rush this bill through in the waning days of a lame duck session with a Democratic Senate that will soon vanish, unless they have some private deal with the Senate to sneak this into law without scrutiny. The GOP should try again next year with a reform that begins with a larger Dodd-Frank rewrite and includes a prohibition on taxpayer bailouts.

http://online.wsj.com/articles/washingtons-quiet-bankruptcy-rewrite-1417219846