More than 120 law professors, economists, and other scholars have signed onto a letter co-drafted by Columbia Law School Professor Jeffrey N. Gordon and Harvard Law School Professor Mark J. Roe that warns Congress about the dangers of eliminating an important element of financial reform under the Dodd-Frank Act.
The provision at the center of the May 23 letter is the Orderly Liquidation Authority (OLA), part of the Dodd-Frank Act that was passed in the wake of the 2008 financial crisis. OLA appoints the Federal Deposit Insurance Corporation as a receiver to liquidate any “systemically important financial institution” that fails. The House Financial Services Committee’s Financial Choice Act, which advanced to the House floor earlier this month, would do away with that provision, replacing it with a new bankruptcy procedure.
Republicans have criticized the Dodd-Frank Act since it was passed, and Gordon’s letter acknowledges that OLA isn’t perfect. Still, eliminating that provision would be a “dangerous error,” a “grave mistake,” and a “reckless gamble,” according to the letter, sent to the House Financial Services and Judiciary committees and the Senate Judiciary and Banking committees.
“Bankruptcy institutions alone cannot manage a full-blown financial crisis,” the letter states. “Repealing OLA would leave bankruptcy courts with the entire responsibility in a crisis for handling restructurings in ways that they have never done before.”
The letter was signed by Columbia Law School Professors Merritt B. Fox, Ronald J. Gilson, Kathryn Judge, Ronald Mann, Edward R. Morrison, Katharina Pistor, Robert E. Scott, and Eric Talley, as well as Adjunct Senior Research Scholar Edward Greene, Lecturer Georges Ugeux, and dozens of other scholars, including two recipients of the Nobel Prize in Economics and two former members of the Federal Reserve’s Board of Governors. Patricia C. Mosser, a senior research scholar at Columbia University’s School of International and Public Affairs, and Columbia Business School Professors Lawrence Glosten, Frederic S. Mishkin, Martin Oehmke, and Suresh Sundaresan also signed on.
In opposing the Choice Act’s repeal of OLA, the signatories point out four limitations of bankruptcy courts that make the involvement of the FDIC and other regulators essential:
- Unlike the FDIC, bankruptcy courts do not have the power to manage a global response to a financial institution’s failure, which could prevent worldwide panic.
- The Choice Act is a sweeping bill introduced by Committee Chairman Rep. Jeb Hensarling (R-Texas) that aims to eliminate or replace key provisions of the Dodd–Frank Wall Street Reform and Consumer Protection Act. IF passed, it would eliminate regulators’ authority to designate additional financial firms as systemically important, meaning future such firms would not be required to plan for their own demise as existing firms are.
- Bankruptcy courts cannot carry out the kind of coordinated response—perhaps involving multiple failing institutions—a financial crisis might require and that regulators are equipped to provide.
- Bankruptcy courts cannot provide liquidity to stabilize a firm through the crisis.
“At a minimum, an OLA backstop will be needed to avoid a financial crisis—in case a major firm uses [the proposed new bankruptcy procedure] but… fails,” Gordon and Roe write in the letter.
Gordon is the Richard Paul Richman Professor of Law at Columbia Law School, where he also co-directs the Millstein Center for Global Markets and Corporate Ownership and the Richman Center for Business, Law, and Public Policy.
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Posted on May 26, 2017