Lawmakers introduce bill to replace orderly liquidation authority with bankruptcy process

170px-Seal_of_the_United_States_Senate.svgSens. John Cornyn (R-Texas) and Pat Toomey (R-Penn.) introduced legislation last week that would repeal Dodd-Frank’s orderly liquidation authority and replace it with a bankruptcy process for failing institutions.

“In recent years, our nation’s economy has been haunted by the specter that the federal government will prop up failing financial institutions,” Cornyn, a member of the Senate Finance Committee, said. “This legislation, which I am proud to introduce with Sen. Toomey, will put an end to that threat. Once these institutions know that the government can and will let them fail, they will be forced to become better stewards of their clients’ resources or risk going out of business, rather than becoming a taxpayer liability.”

The bill—the Taxpayer Protection and Responsible Resolution Act—would eliminate the Dodd-Frank’s orderly liquidation authority, which appoints the FDIC as receiver to liquidate and wind-down a failing financial institution, and replace it with a new Chapter 14 bankruptcy chapter.

Under the new bankruptcy process, the failed institution’s owners and creditors would be exposed to losses, and all of the bank’s assets and risky liabilities would be transferred to a “bridge” company, which would be owned by the bankrupt estate but would operate as a new solvent company.

“My bill with Senator Cornyn will instead repeal this provision of Dodd-Frank and ensure the failure of a large institution is handled in a predictable, orderly, and legal way that eliminates bailouts,” Toomey, who serves on the Senate Budget Committee, said. “Instituting a bankruptcy process, would allow the market to impose discipline on large financial institutions by pricing their risks appropriately.”

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