July 12, 2020

Tennessee Republican Bob Corker helps propose a plan for setting up a new bankruptcy court for failing financial firms

The U.S. Senate is likely to propose setting up a new bankruptcy court for failing financial firms. The plan has been crafted by Senators Mark Warner, a Virginia Democrat, and Bob Corker, a Tennessee Republican, who want a specially trained judge, rather than a government agency, to preside over the takedown of financial firms whose failure could destabilize the system.

While details of the plan are still being worked out and will be released by the banking committee as part of the regulatory revamp, Corker said, “We absolutely want to eliminate from the American vocabulary that any company is too big to fail.” Both Corker and Warner have come to a strong preference for bankruptcy.

The lawmakers are among a number of bipartisan teams that Banking Committee Chairman Christopher Dodd, who announced his retirement last week, has assigned to draft pieces of the overhaul bill. They are in charge of crafting rules for how large, interconnected financial institutions should be regulated.

Both the banking committee bill and one that passed the House late last year will be part of the government’s effort to support financial system rules and to avoid the chain reaction of panic and failures that resulted from the 2008 collapse of Lehman Brothers Holdings Inc.

According to the Obama administration, the Lehman Brothers bankruptcy is an example of why the government should have power to recover complex financial companies outside of the courts. “Taxpayers simply must not be put in the position of paying for losses incurred by private institutions,” Obama wrote in a letter to House Financial Services Committee Chairman Barney Frank last October. “When major financial firms fail, government must have the ability to dissolve them in an orderly way, with losses absorbed by equity holders and creditors.”

Both FDIC Chairman Sheila Bair and Fed Chairman Ben S. Bernanke have also argued against the proposed plan, and oppose putting too-big-to fail firms in bankruptcy. “We feel very strongly that bankruptcy frequently does not work,” said Bair.

Corker and Warner’s plan offers a compromise. While it would require the firms to go into bankruptcy, the firm would then be subject to a government-controlled takedown. The group of regulators deciding if the resolution should be removed from the courts would include the Treasury, the Federal Reserve and a member of a newly created systemic risk council.