Bankruptcy

Atomic

By Stephen Lubben

Having been thinking about resolution authority for a while now, I'm coming to the conclusion that the resolution authority is not really designed to be used. Rather it is there for its deterrent effect. Like a nuclear bomb. It's atomic.

The resolution authority as drafted leaves a good deal unanswered. For example, who will run the bridge financial institution? FDIC? Resolving Citigroup as a whole is a lot different from resolving Citibank. And I tend to doubt many of the employees will stick around, since it has been made plain that the goal is a quick death for financial institutions. And because the resolution authority lacks a provision like §363(f), how is FDIC going to handle all the loss sharing that will be needed to make this work? All this uncertainty will undoubtedly foster a run on any institution that gets anywhere near the resolution authority.

So the goal must be deterrence -- make the executives so afraid of resolution authority that they become risk adverse. That might work for entities that are clearly "too big to fail," but what about a large hedge fund? At some point ex post they might be deemed systemically important, but ex ante what do they do?

Once again I'm left wishing the banking people had talked with the insolvency people before developing this resolution authority thing.

Full post as published by Credit Slips on May 25, 2010 (boomark / email).