Corporate Governance

Shock and Awe: From Massachusetts to the Obama ?Volcker Rule? (Part 9 of 10)

By Jennifer S. Taub

Meeting with Staff for Tennessee Senator Bob Corker (R)

Defensive Posture: Darlene Rosenkoetter was mostly answering our questions, not inquisitive, not engaged in thinking through the issues. Obviously a smart person, it appeared she was only behaving this way because she was in defensive mode.

Don't Re-Invent the Wheel – Use the House Bill Model for Too Big to Fail Banks: Dana mentioned Kanjorski's approach in the House bill and said that it made sure the burden didn't fall on the taxpayer.

Prevention: Dana asked what the Corker-Warner team was doing about leverage, capital requirements and other preventative measures. Shockingly, Darlene said that the prevention plan was to have better disclosure and more people watching. She also indicated that they would never need to use the resolution authority due to this type of prevention sans any operational changes. This seemed uncanny.

Volcker Rule: She said that she had read about Volker/Obama, but indicated we'd have to see how it all fit in, in light of Massachusetts. However, she agreed that the discount window should not be open for those who engage in proprietary trading.

Warner-Corker Plan:  Darlene described the current state of the Warner-Corker legislative plan. The focus is on how to deal with too big to fail firms that start to fail. The concept would be to put them into bankruptcy first and possibly as a last resort resolution (i.e. receivership) by the government – similar to how the FDIC takes care of insolvent depository institutions. She explained that the decision whether a financial holding company would be sent the resolution pathway would be made within 24 hours after filing for bankruptcy. The deciders would be a panel from treasury, the President, and 2/3 of some other entity.  All firms would as a first step file, then the deciders would determine if the entity was systemically important. If so, it would go into resolution and out of bankruptcy. I had heard a different version of this elsewhere, that the criterion would be whether the firm was truly insolvent. This other source indicated that the 'systemically important' test would happen upon bankruptcy filing – ie. If systemically important, then the special panel convenes to determine whether it's insolvent. I'd also heard that it would not be a special panel, but instead a special court.

Community Banks: Rene of the ICBA made clear that they want a pre-funded receivership type resolution managed by the FDIC rather than bankruptcy for too-big-to-fail firms.

Who Pays?  Darlene did not know what the funding mechanism would be in a Chapter 11 scenario but did know a lot about funding for the receivership type solution. She said it would be ex-post by Treasury and that the US would get senior priority. We had a focused discussion about pre-funding. She explained the concern was moral hazard, but we pointed out that post-funding also creates an equal hazard.  She claimed there was bipartisan support for post funding. We pointed out that the American people don't want it another bailout even if there's bipartisan support for it.

Full post as published by The Race to the Bottom on January 30, 2010 (boomark / email).