Penn Law panelists discuss the benefits of bankruptcy law reform since the Great Recession
By Jenna Wang
On October 9, the Institute for Restructuring Studies at Penn Law brought together a panel of bankruptcy law experts to discuss the benefits of reforming bankruptcy legislation since the 2008 financial crisis.
The event, titled “Lehman & WaMu — Ten Years Later: Lessons Learned and Planning Ahead,” took place in the Berylson Family Classroom at Penn Law. The panel was comprised of Donald Bernstein, a partner at Davis Polk & Wardwell LLP; Anthony Grossi, former Bankruptcy Counsel for the United States House Committee on the Judiciary and a partner at Kirkland & Ellis LLP; Ryan Dattilo, Counsel to the United States Senate Committee on the Judiciary; and David Skeel, the S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania Law School and Co-Founder of the Penn Restructuring Institute.
The panel discussed the ways that the 2010 Dodd-Frank Act sought to alleviate the effects of the Great Recession in 2008 after the collapse of Lehman Brothers and Washington Mutual. It also covered the inception and thought process behind a reform of Dodd-Frank currently scheduled to be reviewed by the Senate, the Financial Institution Bankruptcy Act of 2017 (FIBA) and the Financial CHOICE Act of 2017.
Bernstein began the event with a review on the ways in which today’s financial system is more resilient than it was in 2008, thanks to larger amounts of capital, reduced reliance on short term wholesale funding, and the increased duration of any remaining short term wholesale funding.
However, even a decade after the crisis, Lehman Brothers is still liquidating, and none of these methods to build resilience in the economy are foolproof. One possible solution to increase confidence in and stabilize the market is a bankruptcy reform strategy known as Single Point of Entry (SPOE), which Bernstein helped found.
Under Single Point of Entry, a large, financially distressed firm would be able to create a holding company owned by a resolution trust, to which subsidiary companies could be transferred to over a weekend. The stock and long-term unsecured debt would remain behind with the old institution, and the value of the subsidiaries would be preserved in a trust solely for benefit of the estate, colossally simplifying matters. Ultimately, this would allow for the recapitalization of the distressed firm’s subsidiaries, and the prevention of further destabilization to the economy.
Grossi then took the audience through the journey that this bankruptcy reform idea underwent through Congress, from a unanimous consent vote that signaled bipartisan support in the House to support from both the Obama and Trump administrations. The bill is currently stalled in the Senate, to be rescheduled for review possibly in November of this year.
“This legislation has the hallmarks of political support from the far reaches of what you could possibly imagine,” Grossi said.
Overall, the panel deeply supported the strategy and benefits of SPOE, which included the ability to quickly transfer assets to a newly created institution in as little as 24 hours and the lack of need for taxpayers to fund the bankruptcy proceedings. Skeel also reviewed some of the criticisms of the legislation, which include due process concerns and the debate over whether bankruptcy should involve a regulatory process. However, he stressed that he thought SPOE and the reform was “a really clever solution.”
“Historically, regulators have been too slow to intervene, not too fast,” Skeel said. “Personally, I have more confidence in the managers in a troubled institution using bankruptcy rather than waiting for regulators to use Title II, especially if bankruptcy is a potential solution to the crisis.”