Bankruptcy

Did 2005 Amendments To Bankruptcy Code Lead To Failures Of Financial Institutions?

By Scott Riddle

An article in the Financial Times entitled Wall Street ‘Made Rod For Own Back’,  by Francesco Guerrera, Nicole Bullock and Julie MacIntosh, discusses the 2005 amendments ("BAPCPA") and its (unintended) consequences:
 

Wall Street unwittingly created one of the catalysts for the collapse of Bear Stearns, Lehman Brothers and American International Group by backing new bankruptcy rules that were aimed at insulating banks from the failure of a big client, lawyers and bankers say. The 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company’s assets until a court decides how to apportion them among creditors.

The new rules were intended to insulate financial companies from the collapse of a large counterparty, such as a hedge fund, by making it easier for them to unwind trades and retrieve collateral.  However, experts say the new rules might have accelerated the demise of Bear, Lehman and AIG by removing legal obstacles for banks and hedge funds that wanted to close positions and demand extra collateral from the three companies. ...

Full post as published by Georgia Bankruptcy Blog on November 01, 2008 (boomark / email).