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GAO:
Report to Congressional Committees:
July 2011:
Bankruptcy:
Complex Financial Institutions and International Coordination Pose
Challenges:
GAO-11-707:
GAO Highlights:
Highlights of GAO-11-707, a report to congressional committees.
Why GAO Did This Study:
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) created the Orderly Liquidation Authority (OLA) that can be
used to resolve failed systemically important financial institutions.
However, questions continued to be raised about the effectiveness of
the U.S. Bankruptcy Code (Code) and current mechanisms for
international coordination in bankruptcy cases. The Dodd-Frank Act
requires GAO to report on the effectiveness of the Code in resolving
certain failed financial institutions on an ongoing basis. Among its
objectives, this report addresses (1) the effectiveness of Chapters 7
and 11 of the Code for facilitating orderly resolutions of failed
financial institutions; (2) proposals for improving the effectiveness
of liquidations and reorganizations under the Code; and (3) existing
mechanisms that facilitate international coordination under the Code
and barriers to coordination of financial institution bankruptcies.
GAO reviewed laws, judicial decisions, regulations, data, and academic
literature on resolutions, and spoke with relevant government
officials, industry representatives, and experts from the legal and
academic communities about the effectiveness of the Code.
GAO makes no recommendations in this report. GAO provided a draft for
comment to the Administrative Office of the United States Courts, the
Treasury, and the federal financial regulators, among others. All
provided technical comments that GAO has incorporated as appropriate.
What GAO Found:
The effectiveness of the Bankruptcy Code in resolving failed complex
financial institutions is unclear for several reasons, including that
criteria are not well-developed, a paucity of data, and the complex
activities and organizational structures of financial institutions.
Experts agreed that maximizing asset values and minimizing systemic
impacts are potential criteria for judging effectiveness, but the Code
does not directly address systemic factors in bankruptcies. Even if
criteria were established, few complex financial institutions have
filed for bankruptcy, and those that have, have done so recently,
making measuring effectiveness difficult. Nonetheless, experts
generally agreed that certain attributes of complex financial
institutions—highly liquid funding sources; use of derivatives;
complex legal structures, including regulated and unregulated
entities, that do not correspond to integrated, interconnected
operating structures; and international scope of operations—complicate
bankruptcy proceedings.
Financial, legal, and regulatory experts have made proposals to modify
the Code, but they do not agree on specifics. These proposals
generally focus on or combine several types of actions: (1) increasing
opportunities for bankruptcy planning, (2) providing for regulatory
input in the bankruptcy process, (3) modifying the safe harbor for
certain financial contracts, (4) treating firms on a consolidated
basis, and (5) improving court expertise on financial issues. For
example, experts generally agree that changes need to be made
regarding the safe harbor treatment of certain financial contracts.
The Code exempts these contracts from the automatic stay that, in a
bankruptcy, preserves assets and generally prevents creditors from
taking company assets in payment of debts before a case is resolved
and assets are distributed in a systematic way. However, the experts
do not agree on whether the types of contracts receiving this safe
harbor treatment need to be changed or whether, as with regulatory
processes, a temporary stay should be adopted.
Efforts to improve international coordination continue, but existing
mechanisms are not comprehensive, and international coordination
generally is limited—often because national interests can play a
determining role in resolution outcomes. For example, Chapter 15 of
the Code promotes coordination between U.S. bankruptcy courts and
foreign jurisdictions when the debtor in a U.S. bankruptcy proceeding
is a company with foreign operations. However, national interests and
other factors limit its effectiveness during bankruptcies of financial
institutions. When national interests are aligned, even during a
financial crisis, courts and regulators find ways to coordinate, but
when they diverge, the need to safeguard those interests takes
priority. Variations in countries’ insolvency laws, differences in
definitions and factors that trigger insolvencies, and limits on
information sharing also constrain international coordination.
Proposals have been made to improve international coordination for
financial institution resolutions, but most efforts focus on
regulatory, rather than judicial, processes.
View [hyperlink, http://www.gao.gov/products/GAO-11-707] or key
components. For more information, contact Alicia Puente Cackley at
(202) 512-8678 or cackleya@gao.gov.
[End of section]
Contents:
Letter:
Background:
D.C. District Court Has Issued Rules to Implement Required Judicial
Review under the Orderly Liquidation Authority:
The Effectiveness of the Bankruptcy Code in Resolving Complex and
Internationally Active Financial Institutions Is Unclear:
Bankruptcy Proposals Address Some Financial Institution Challenges,
but There Is No Consensus on Specifics:
Courts and Regulators Have Mechanisms for International Coordination,
but National Interests and Other Factors Limit Coordination:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Local Civil Rule 85:
Appendix III: CIT Group Bankruptcy:
Appendix IV: Lehman Bankruptcy:
Appendix V: Washington Mutual Bankruptcy:
Appendix VI: Other Financial Institution Failures:
Appendix VII: Safe Harbors for Contracts under the Bankruptcy Code:
Appendix VIII: Some Characteristics of Insolvency Systems in Selected
Countries:
Appendix IX: Organizational Affiliations of Experts:
Appendix X: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Chapter 11 Mega Bankruptcy Filings, by Total Filings and
Financial Institution Filings, 2000-2009:
Table 2: Thirty of the Largest International Financial Institutions
(Ranked by Size) and Their Subsidiaries and Branches:
Table 3: Timeline of Selected Events Related to the CIT Bankruptcy,
from April 2007 through December 2009:
Table 4: Timeline of Selected Events Related to the Lehman Bankruptcy,
from September 2008 through April 2011:
Table 5: Timeline of Selected Events Related to the Washington Mutual,
Inc. Bankruptcy, from September 2008 through July 2011:
Table 6: Repayment Rankings of Selected Countries:
Figure:
Figure 1: Chapter 11 Bankruptcy Process for a U.S.-Headquartered
Financial Institution as of June 2011:
Abbreviations:
ABN AMRO: ABN AMRO Holding, NV:
AOUSC: Administrative Office of the United States Courts:
AIG: American International Group, Inc.
BIA: Bankruptcy and Insolvency Act:
BHC Act: Bank Holding Company Act:
BCCI: Bank of Credit and Commerce International:
BIS: Bank of International Settlement:
BNY: Bank of New York Mellon Corporation:
Herstatt: BankHaus Herstatt:
Barclays: Barclays PLC:
BNY trustee: BNY Corporate Trustee Services Limited:
CDIC: Canada Deposit Insurance Corporation:
CDIC Act: Canada Deposit Insurance Corporation Act:
CIT: CIT Group, Inc.
CCCA: Companies' Creditors Arrangement Act:
Co-Co: contingent convertible bonds:
CDS: credit default swap:
DIP: debtor-in-possession:
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection
Act:
Drexel: Drexel Burnham Lambert Group, Inc.
EU: European Union:
FDI Act: Federal Deposit Insurance Act:
FDIC: Federal Deposit Insurance Corporation:
FRBNY: Federal Reserve Bank of New York:
Federal Reserve: Board of Governors of the Federal Reserve System:
Fortis: Fortis Bank, SA/NV:
G10: Group of Ten:
G20: Group of 20:
IMF: International Monetary Fund:
ISDA: International Swaps and Derivatives Association:
JPMC: JPMorgan Chase and Co.
LBF: Lehman Brothers Finance:
LBHI: Lehman Brothers Holdings, Inc.
Lehman: Lehman Brothers Holdings, Inc. and subsidiaries:
LBI: Lehman Brothers, Inc.
LBIE: Lehman Brothers International Europe:
LBSF: Lehman Brothers Special Financing, Inc.
LTCM: Long-Term Capital Management:
MOU: memorandum of understanding:
Nordea: Nordea Group:
Nortel: Nortel Networks, Inc.
NAFTA: North American Free Trade Agreement:
NPR: notice of proposed rulemaking:
OTS: Office of Thrift Supervision:
OLA: Orderly Liquidation Authority:
Perpetual: Perpetual Trustee Company Limited:
P&A agreement: Purchase and Assumption Agreement:
QFC: qualified financial contracts:
Saphir: Saphir Finance Public Limited Company:
Section 23A: Section 23A of the 1913 Federal Reserve Act:
SEC: Securities and Exchange Commission:
SIPA: Securities Investor Protection Act:
SIPC: Securities Investor Protection Corporation:
Swedbank: Swedbank AB:
TLGP: Temporary Liquidity Guarantee Program:
TARP: Troubled Asset Relief Program:
UK: United Kingdom:
UNCITRAL: United Nations Commission on International Trade Law:
Code: U.S. Bankruptcy Code:
D.C. District Court: U.S. District Court for the District of Columbia:
Washington Mutual: Washington Mutual, Inc.
WMPF: Washington Mutual Preferred Funding LLC:
WURA: Winding Up and Restructuring Act:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
the link is here,
United States Government Accountability Office:
GAO:
Report to Congressional Committees:
July 2011:
Bankruptcy:
Complex Financial Institutions and International Coordination Pose
Challenges:
GAO-11-707:
GAO Highlights:
Highlights of GAO-11-707, a report to congressional committees.
Why GAO Did This Study:
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) created the Orderly Liquidation Authority (OLA) that can be
used to resolve failed systemically important financial institutions.
However, questions continued to be raised about the effectiveness of
the U.S. Bankruptcy Code (Code) and current mechanisms for
international coordination in bankruptcy cases. The Dodd-Frank Act
requires GAO to report on the effectiveness of the Code in resolving
certain failed financial institutions on an ongoing basis. Among its
objectives, this report addresses (1) the effectiveness of Chapters 7
and 11 of the Code for facilitating orderly resolutions of failed
financial institutions; (2) proposals for improving the effectiveness
of liquidations and reorganizations under the Code; and (3) existing
mechanisms that facilitate international coordination under the Code
and barriers to coordination of financial institution bankruptcies.
GAO reviewed laws, judicial decisions, regulations, data, and academic
literature on resolutions, and spoke with relevant government
officials, industry representatives, and experts from the legal and
academic communities about the effectiveness of the Code.
GAO makes no recommendations in this report. GAO provided a draft for
comment to the Administrative Office of the United States Courts, the
Treasury, and the federal financial regulators, among others. All
provided technical comments that GAO has incorporated as appropriate.
What GAO Found:
The effectiveness of the Bankruptcy Code in resolving failed complex
financial institutions is unclear for several reasons, including that
criteria are not well-developed, a paucity of data, and the complex
activities and organizational structures of financial institutions.
Experts agreed that maximizing asset values and minimizing systemic
impacts are potential criteria for judging effectiveness, but the Code
does not directly address systemic factors in bankruptcies. Even if
criteria were established, few complex financial institutions have
filed for bankruptcy, and those that have, have done so recently,
making measuring effectiveness difficult. Nonetheless, experts
generally agreed that certain attributes of complex financial
institutions—highly liquid funding sources; use of derivatives;
complex legal structures, including regulated and unregulated
entities, that do not correspond to integrated, interconnected
operating structures; and international scope of operations—complicate
bankruptcy proceedings.
Financial, legal, and regulatory experts have made proposals to modify
the Code, but they do not agree on specifics. These proposals
generally focus on or combine several types of actions: (1) increasing
opportunities for bankruptcy planning, (2) providing for regulatory
input in the bankruptcy process, (3) modifying the safe harbor for
certain financial contracts, (4) treating firms on a consolidated
basis, and (5) improving court expertise on financial issues. For
example, experts generally agree that changes need to be made
regarding the safe harbor treatment of certain financial contracts.
The Code exempts these contracts from the automatic stay that, in a
bankruptcy, preserves assets and generally prevents creditors from
taking company assets in payment of debts before a case is resolved
and assets are distributed in a systematic way. However, the experts
do not agree on whether the types of contracts receiving this safe
harbor treatment need to be changed or whether, as with regulatory
processes, a temporary stay should be adopted.
Efforts to improve international coordination continue, but existing
mechanisms are not comprehensive, and international coordination
generally is limited—often because national interests can play a
determining role in resolution outcomes. For example, Chapter 15 of
the Code promotes coordination between U.S. bankruptcy courts and
foreign jurisdictions when the debtor in a U.S. bankruptcy proceeding
is a company with foreign operations. However, national interests and
other factors limit its effectiveness during bankruptcies of financial
institutions. When national interests are aligned, even during a
financial crisis, courts and regulators find ways to coordinate, but
when they diverge, the need to safeguard those interests takes
priority. Variations in countries’ insolvency laws, differences in
definitions and factors that trigger insolvencies, and limits on
information sharing also constrain international coordination.
Proposals have been made to improve international coordination for
financial institution resolutions, but most efforts focus on
regulatory, rather than judicial, processes.
View [hyperlink, http://www.gao.gov/products/GAO-11-707] or key
components. For more information, contact Alicia Puente Cackley at
(202) 512-8678 or cackleya@gao.gov.
[End of section]
Contents:
Letter:
Background:
D.C. District Court Has Issued Rules to Implement Required Judicial
Review under the Orderly Liquidation Authority:
The Effectiveness of the Bankruptcy Code in Resolving Complex and
Internationally Active Financial Institutions Is Unclear:
Bankruptcy Proposals Address Some Financial Institution Challenges,
but There Is No Consensus on Specifics:
Courts and Regulators Have Mechanisms for International Coordination,
but National Interests and Other Factors Limit Coordination:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Local Civil Rule 85:
Appendix III: CIT Group Bankruptcy:
Appendix IV: Lehman Bankruptcy:
Appendix V: Washington Mutual Bankruptcy:
Appendix VI: Other Financial Institution Failures:
Appendix VII: Safe Harbors for Contracts under the Bankruptcy Code:
Appendix VIII: Some Characteristics of Insolvency Systems in Selected
Countries:
Appendix IX: Organizational Affiliations of Experts:
Appendix X: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Chapter 11 Mega Bankruptcy Filings, by Total Filings and
Financial Institution Filings, 2000-2009:
Table 2: Thirty of the Largest International Financial Institutions
(Ranked by Size) and Their Subsidiaries and Branches:
Table 3: Timeline of Selected Events Related to the CIT Bankruptcy,
from April 2007 through December 2009:
Table 4: Timeline of Selected Events Related to the Lehman Bankruptcy,
from September 2008 through April 2011:
Table 5: Timeline of Selected Events Related to the Washington Mutual,
Inc. Bankruptcy, from September 2008 through July 2011:
Table 6: Repayment Rankings of Selected Countries:
Figure:
Figure 1: Chapter 11 Bankruptcy Process for a U.S.-Headquartered
Financial Institution as of June 2011:
Abbreviations:
ABN AMRO: ABN AMRO Holding, NV:
AOUSC: Administrative Office of the United States Courts:
AIG: American International Group, Inc.
BIA: Bankruptcy and Insolvency Act:
BHC Act: Bank Holding Company Act:
BCCI: Bank of Credit and Commerce International:
BIS: Bank of International Settlement:
BNY: Bank of New York Mellon Corporation:
Herstatt: BankHaus Herstatt:
Barclays: Barclays PLC:
BNY trustee: BNY Corporate Trustee Services Limited:
CDIC: Canada Deposit Insurance Corporation:
CDIC Act: Canada Deposit Insurance Corporation Act:
CIT: CIT Group, Inc.
CCCA: Companies' Creditors Arrangement Act:
Co-Co: contingent convertible bonds:
CDS: credit default swap:
DIP: debtor-in-possession:
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection
Act:
Drexel: Drexel Burnham Lambert Group, Inc.
EU: European Union:
FDI Act: Federal Deposit Insurance Act:
FDIC: Federal Deposit Insurance Corporation:
FRBNY: Federal Reserve Bank of New York:
Federal Reserve: Board of Governors of the Federal Reserve System:
Fortis: Fortis Bank, SA/NV:
G10: Group of Ten:
G20: Group of 20:
IMF: International Monetary Fund:
ISDA: International Swaps and Derivatives Association:
JPMC: JPMorgan Chase and Co.
LBF: Lehman Brothers Finance:
LBHI: Lehman Brothers Holdings, Inc.
Lehman: Lehman Brothers Holdings, Inc. and subsidiaries:
LBI: Lehman Brothers, Inc.
LBIE: Lehman Brothers International Europe:
LBSF: Lehman Brothers Special Financing, Inc.
LTCM: Long-Term Capital Management:
MOU: memorandum of understanding:
Nordea: Nordea Group:
Nortel: Nortel Networks, Inc.
NAFTA: North American Free Trade Agreement:
NPR: notice of proposed rulemaking:
OTS: Office of Thrift Supervision:
OLA: Orderly Liquidation Authority:
Perpetual: Perpetual Trustee Company Limited:
P&A agreement: Purchase and Assumption Agreement:
QFC: qualified financial contracts:
Saphir: Saphir Finance Public Limited Company:
Section 23A: Section 23A of the 1913 Federal Reserve Act:
SEC: Securities and Exchange Commission:
SIPA: Securities Investor Protection Act:
SIPC: Securities Investor Protection Corporation:
Swedbank: Swedbank AB:
TLGP: Temporary Liquidity Guarantee Program:
TARP: Troubled Asset Relief Program:
UK: United Kingdom:
UNCITRAL: United Nations Commission on International Trade Law:
Code: U.S. Bankruptcy Code:
D.C. District Court: U.S. District Court for the District of Columbia:
Washington Mutual: Washington Mutual, Inc.
WMPF: Washington Mutual Preferred Funding LLC:
WURA: Winding Up and Restructuring Act:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
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