Senator Christopher Dodd and other members of the Senate Banking Committee are proposing legislation that would create a special bankruptcy process for failed financial institutions.
Members are discussing a two-stage process that would create a preferential option for bankruptcy followed by a regulator-managed resolution if bankruptcy fails, the person said. The source requested anonymity because the draft is in flux and has not been made public.
Dodd's proposal would give the Federal Deposit Insurance Corp the authority to dismantle large troubled financial services firms. The FDIC would be able to guarantee debts of firms in receivership.
And while some senators say the bill goes too far, others say that it's not strict enough. Some of the committee's members want to create stricter laws that would make bankruptcy the first option and ensure that creditors and shareholders share in the loss if the financial firm fails.
Bankruptcy and financial firms have been a hot topic since the financial crisis first rocked Wall Street in 2008. But when it comes to financial firms, bankruptcy has unfortunately always been seen as the "black hole" that doesn't repair financial firms, but instead dissolves them. CIT Group proved that common notion about bankruptcy to be false. When CIT Group first filed bankruptcy, the consensus was that they would not survive the bankruptcy process. But with the help of a smart bankruptcy strategy the firm has survived their bankruptcy and is better positioned than before bankruptcy. Hopefully, in the future more financial firms facing problems will effectively use bankruptcy to discharge debt and give their firms a new start unburdened by the problems that drove them into bankruptcy in the first place.