Orderly Liquidation Authority
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| Orderly Liquidation Authority | |
|---|---|
| Name | Orderly Liquidation Authority |
| Established | 2010 |
| Jurisdiction | United States |
| Statute | Dodd–Frank Wall Street Reform and Consumer Protection Act |
| Administering agency | Federal Deposit Insurance Corporation |
| Purpose | Resolution of failing large financial firms |
Orderly Liquidation Authority Orderly Liquidation Authority was created to provide a statutory mechanism for resolving major failing Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, Lehman Brothers, Bear Stearns-scale institutions without direct bankruptcy, aiming to mitigate systemic contagion after the 2007–2008 financial crisis. It authorizes the Federal Deposit Insurance Corporation to seize and wind down certain covered companies under a structured process distinct from traditional Chapter 11 or Chapter 7 procedures used in Bankruptcy of Lehman Brothers. The authority interacts with statutes and agencies such as the Dodd–Frank Wall Street Reform and Consumer Protection Act, the United States Department of the Treasury, and the Federal Reserve System to coordinate emergency responses to systemic risk.
Overview
Orderly Liquidation Authority is rooted in legislative responses to the collapse of firms like Lehman Brothers and interventions involving Bear Stearns and American International Group. It empowers the Federal Deposit Insurance Corporation to act when the Secretary of the Treasury determines that a firm's failure would have serious adverse effects on financial markets, referencing precedents from actions involving Fannie Mae, Freddie Mac, and emergency measures taken during the 2008 financial crisis. The authority intends to preserve critical operations, prioritize insured depositors historically protected after failures like Washington Mutual, and minimize taxpayer losses while providing a legal alternative to ad hoc bailouts such as those executed for AIG.
Legal Framework and History
Orderly Liquidation Authority was enacted in Title II of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 following intense legislative debate among factions represented by lawmakers involved in the Emergency Economic Stabilization Act of 2008 deliberations. The statute defines "covered financial companies," creates the Office of Financial Research linkage for data, and allocates roles to the Federal Deposit Insurance Corporation and the United States Department of the Treasury. Historical context includes critiques from figures associated with the Financial Stability Oversight Council, and judicial scrutiny informed by prior litigation such as challenges following the treatment of Lehman Brothers. Subsequent amendments and proposals from legislators tied to committees like the United States Senate Committee on Banking, Housing, and Urban Affairs have sought to adjust triggers, creditor-treatment priorities, and interaction with Title 11 of the United States Code.
Scope and Powers of the FDIC
Under the authority, the Federal Deposit Insurance Corporation may take possession of a covered company, transfer assets and liabilities, and sell businesses or contracts to preserve value, using powers similar to those used in resolving regional failures like Continental Illinois and IndyMac. The FDIC can bridge operations by transferring certain assets to a bridge entity, assign contracts, and repudiate onerous agreements consistent with precedents in Chapter 11 restructurings and enforcement actions by agencies like the Securities and Exchange Commission. The statute authorizes the FDIC to borrow from the Treasury to cover resolution costs and establishes a special resolution fund replenished via assessments on large institutions akin to the post-crisis banking assessments used after 2009 stabilization programs.
Triggering Events and Process
A resolution under the authority proceeds after a determination by the Secretary of the Treasury in consultation with the Federal Reserve Board and the FDIC that a covered financial company is in default or imminent default and that private sector alternatives are unavailable, mirroring decision points used during interventions for Bear Stearns and AIG. Once triggered, the FDIC becomes receiver, may create a bridge entity, and follows procedures for claims filing and asset disposition influenced by bankruptcy practice. Emergency liquidity facilities previously relied upon during the 2008 financial crisis inform operational steps, while statutory deadlines and judicial review mechanisms constrain execution, reflecting tensions seen in congressional hearings before the United States House Committee on Financial Services.
Treatment of Creditors and Claims
The statute prescribes creditor hierarchy and claims procedure, generally subordinating unsecured creditors behind secured creditors and certain administrative claims, drawing on principles from Chapter 11 priority rules and creditor protections debated in cases involving Lehman Brothers International (Europe). Covered customer obligations, including certain payments and derivatives, can be transferred to preserve market functioning, a practice paralleling steps taken by the Federal Reserve Bank of New York in crisis operations. The provision for compensation and potential litigation by creditors has produced processes analogous to proofs of claim in bankruptcy, with recoveries ultimately determined by asset realizations and statutory priorities.
Criticisms, Controversies, and Reforms
Critics including legal scholars from institutions such as Harvard Law School, Stanford Law School, and policy analysts at the Cato Institute and Brookings Institution argue the authority creates moral hazard by preserving large firms, echoing debates after the Troubled Asset Relief Program. Others, including members of the United States Senate and think tanks like the Heritage Foundation, contend the process risks overuse or insufficient transparency. Calls for reform have proposed enhancing creditor bail-in powers inspired by European Union Bank Recovery and Resolution Directive frameworks applied to Banco Santander and Deutsche Bank restructurings, tightening trigger criteria, or reverting to expanded insolvency regimes advocated by judges and professors alike.
Case Studies and Applications
Although designed for systemic failures, use of the authority has been limited; its operational design draws on case studies such as the Lehman Brothers bankruptcy, the private-sector rescue of Bear Stearns brokered by the Federal Reserve Bank of New York, and the government-assisted recapitalization of AIG. Simulations and stress tests coordinated by the Financial Stability Oversight Council and exercises by the FDIC have tested bridge entity transfers and creditor recoveries, informing proposed amendments from congressional members on the United States Senate Committee on Banking, Housing, and Urban Affairs. Continued analysis references precedents across multinational resolutions involving firms like HSBC, UBS, and BBVA as comparative models for cross-border coordination.