oversight

Bankruptcy: Agencies Continue Rulemakings for Clarifying Specific Provisions of Orderly Liquidation Authority

Published by the Government Accountability Office on 2012-07-12.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to Congressional Committees




July 2012
             BANKRUPTCY

             Agencies Continue
             Rulemakings for
             Clarifying Specific
             Provisions of Orderly
             Liquidation Authority




GAO-12-735
                                              July 2012

                                              BANKRUPTCY
                                              Agencies Continue Rulemakings for Clarifying
                                              Specific Provisions of Orderly Liquidation Authority
Highlights of GAO-12-735, a report to
congressional committees




Why GAO Did This Study                        What GAO Found
The Dodd-Frank Act created OLA for            The federal financial regulators have issued certain final rules for resolving large,
resolving failed, systemically important      complex financial companies under the Dodd-Frank Wall Street Reform and
financial companies. Since the act was        Consumer Protection Act’s (Dodd-Frank Act) established Orderly Liquidation
passed in 2010, regulators have been          Authority (OLA). Under OLA, the Federal Deposit Insurance Corporation (FDIC)
developing regulations to implement           could serve as receiver of a failing financial company instead of the company
this authority and avoid disorderly           entering the bankruptcy process. Regulators continue to address a number of
resolutions that create substantial           issues related to FDIC’s new authority, including how creditors will ensure that
losses for the financial system. In July      they receive no less than they would under a Chapter 7 bankruptcy liquidation;
2011, GAO issued the first of its
                                              how certain assets and liabilities would be treated in a new company created by
statutorily mandated reports on the
                                              FDIC under OLA; and what role the Securities Investor Protection Corporation
effectiveness of the Bankruptcy Code
for resolving or liquidating complex,
                                              would play in the resolution of a broker-dealer under OLA. Regulatory officials
internationally active financial              reported that they were continuing to draft rules to clarify how OLA would be
companies. Among the topics                   used. FDIC and the Board of Governors of the Federal Reserve (Federal
examined in this second report, GAO           Reserve) also have issued final rules requiring certain financial companies to file
reviewed: (1) federal rules or                resolution plans or “living wills” that must detail how companies would resolve
regulations relating to OLA and the           their operations through an orderly bankruptcy. Regulators told GAO that the
resolution of financial institutions,         plans also would help FDIC plan for the exercise of its resolution authority,
including living wills; and (2) status of     including OLA. The filing dates for these plans are phased in over the next year
efforts to improve coordination on            and a half, with the first group of financial companies filing their first plans on July
international resolutions, data               1, 2012. However, “nonbank financial companies” that also will need to provide
collection efforts, and the outcomes of       plans have yet to be designated.
financial institutions that were in the
bankruptcy process.                           International coordination remains a critical component in resolving the failure of
                                              a large, complex financial company and regulators have been taking steps to
To address these objectives, GAO              address this and are testing new data collection efforts. Specifically, efforts are
reviewed agencies’ draft and final rules      under way to develop a universal legal entity identifier that allows companies to
related to OLA and comment letters            identify and manage risks from companies with which they are engaged in
submitted. GAO continued to monitor           financial transactions. This additional information could help regulators in
developments related to the Lehman
                                              resolving internationally active financial companies. Data to identify financial
Brothers and Washington Mutual
                                              institutions filing for bankruptcy protection as well as their outcomes are limited.
bankruptcies, and began monitoring a
recent bankruptcy filing by MF Global.        Since neither FDIC nor federal judicial agencies have a database that tracks
GAO also studied available data on the        financial companies in bankruptcy, the Administrative Office of the U.S. Courts
number of financial company                   (AOUSC) and the Federal Judicial Center have begun a new effort to track
bankruptcies and met with relevant            financial company bankruptcies, but reported court data are untested for this
agency and court officials.                   purpose. Several large financial institution bankruptcies are still in progress. Two
                                              of the largest financial company bankruptcies, Lehman Brothers Holdings Inc.
GAO makes no new recommendations              (Lehman Brothers) and Washington Mutual, Inc.—both of which filed in
in this report. GAO provided a draft for      September 2008—recently had their reorganization plans confirmed by creditors
comment to AOUSC, the Department
                                              and approved by the courts. However, these cases are not yet fully resolved. In
of the Treasury, and federal financial
                                              the Lehman Brothers case, international litigation could take several years to
regulators. None provided written
comments and technical comments
                                              resolve. The October 2011 bankruptcy of MF Global Holdings Ltd., a holding
have been incorporated, as                    company with a securities and commodities broker, has raised concerns about
appropriate.                                  how commodity customers are treated under a liquidation regime and also
                                              involves international litigation over customer property. These financial company
                                              bankruptcies highlight the challenges FDIC and other regulators would face in
View GAO-12-735. For more information,        resolving large, complex financial companies under the OLA process.
contact Alicia Puente Cackley at (202) 512-
8678 or cackleya@gao.gov.

                                                                                         United States Government Accountability Office
Contents


Letter                                                                                  1
               Background                                                              3
               D.C. District Court Revised Its Rule for Judicial Review under OLA     15
               Although Regulators Have Issued Rules Related to OLA, Some
                 Clarifications Remain Outstanding                                    16
               Financial Company Bankruptcies Remain Difficult to Track and
                 Several Major Cases Move Forward                                     32
               Agency Comments and Our Evaluation                                     41

Appendix I     Objectives, Scope, and Methodology                                      44



Appendix II    Status of Selected Rules Related to the Orderly Liquidation
               Authority and Resolution Planning under the Dodd-Frank Act              47



Appendix III   GAO Contact and Staff Acknowledgments                                   50



Tables
               Table 1: Deadlines for Submissions of Initial Resolution Plans, by
                        Size of Financial Company                                     19
               Table 2: Chapter 11 Mega-Bankruptcy Filings, by Total Filings and
                        Financial Institution Filings, 2000 through 2011              34
               Table 3: Selected Final Rules and Actions Completed, as of May 15,
                        2012                                                          47
               Table 4: Selected Proposed Rules and Actions in Progress, as of
                        May 15, 2012                                                  48
               Table 5: Selected Required Rules That Have Not Yet Been
                        Proposed or Had Action as of May 15, 2012                     49


Figure
               Figure 1: Decision Process for Invoking OLA and Appointing FDIC
                        Receiver of a Failing Financial Company                       10




               Page i                                                GAO-12-735 Bankruptcy
Abbreviations

AOUSC             Administrative Office of the U.S. Courts
CFTC              Commodity Futures Trading Commission
DIP               debtor-in-possession
FDIC              Federal Deposit Insurance Corporation
FSOC              Financial Stability Oversight Council
LBIE              Lehman Brothers International, Europe
LEI               Legal Entity Identifier
OLA               Orderly Liquidation Authority
SEC               Securities and Exchange Commission
SIFI              systemically important financial institutions
SIPA              Securities Investor Protection Act
SIPC              Securities Investor Protection Corporation




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Page ii                                                            GAO-12-735 Bankruptcy
United States Government Accountability Office
Washington, DC 20548




                                   July 12, 2012

                                   Congressional Committees

                                   The 2008 financial crisis and the failures of large, complex financial
                                   institutions led some experts to question the effectiveness of the United
                                   States Bankruptcy Code (Code) for resolving or liquidating these
                                   institutions without causing further harm to the financial system. 1 In
                                   response, Congress created the Orderly Liquidation Authority (OLA) as
                                   part of the Dodd-Frank Wall Street Reform and Consumer Protection Act
                                   (Dodd-Frank Act). 2 Under OLA, the Secretary of the Treasury may
                                   appoint the Federal Deposit Insurance Corporation (FDIC) as a receiver
                                   for certain insolvent financial companies that pose a risk to the financial
                                   stability of the United States. The Dodd-Frank Act requires FDIC to
                                   liquidate certain financial companies to maximize the value of the
                                   companies’ assets, minimize losses, mitigate systemic risk, and minimize
                                   moral hazard. OLA created a new process for resolving large, complex
                                   financial companies, but policymakers, academic experts, and industry
                                   participants have raised questions about whether this process would
                                   achieve the stated goals more effectively than the established bankruptcy
                                   process.

                                   As well as creating OLA, the Dodd-Frank Act requires financial
                                   companies to file periodic resolution plans describing how they could be
                                   resolved in an orderly manner in the event of material financial distress or
                                   failure. These “living wills” are intended to allow companies and
                                   regulators to anticipate possible challenges to their resolution under the
                                   Code. 3 Some policymakers and other experts have questioned the
                                   usefulness of the resolution plans because of the range of scenarios that
                                   could lead to a financial institution’s failure.




                                   1
                                    Insured depository institutions and insurance companies may not file for debtor protection
                                   under the U.S. Bankruptcy Code, and broker-dealers qualify for liquidation, but not
                                   reorganization.
                                   2
                                    Pub. L. No. 111-203, 124 Stat. 1376 (2010).
                                   3
                                    Pub. L. No. 111-203, Title I, § 165 (d). 123 Stat. 1376, 1426-1427 (2010), codified at 12
                                   U.S.C. § 5365(d).




                                   Page 1                                                              GAO-12-735 Bankruptcy
In July 2011, we issued the first of our statutorily mandated reports on the
effectiveness of the Code for resolving or liquidating complex,
internationally active, financial institutions. 4 Although OLA has not been
invoked, we have been monitoring the development of rules and
regulations related to OLA as well as the bankruptcies of large financial
institutions. Specifically, this report examines: (1) actions the U.S. District
Court for the District of Columbia (D.C. District Court) has taken in
response to the judicial review provision of OLA, including any revisions
to local civil rule 85; (2) federal rules or regulations relating to OLA and
efforts to improve international coordination, including living wills, in
resolving financial companies; and (3) data collection efforts and
outcomes of financial institutions that were in the bankruptcy process.

To address these objectives, we monitored the promulgation of rules
through agency websites, legal journals, and legal searches. We
examined comment letters on draft rules, attended webinars from law
firms, and reviewed academic articles discussing the key challenges
related to OLA and resolution plan rules. 5 We continued to review court
and regulatory documents to follow developments of two large financial
company bankruptcies (Lehman Brothers Holdings, Inc. and Washington
Mutual, Inc.) that we began tracking as case studies in our 2011 report.
We also began tracking the more recent bankruptcy of MF Global
Holdings Ltd. We analyzed available data on U.S. bankruptcies and
determined that they were sufficiently reliable to provide some
background information on the number of bankruptcies of large financial



4
 See GAO, Bankruptcy: Complex Financial Institutions and International Coordination
Pose Challenges, GAO-11-707 (Washington, D.C.: July 19, 2011) for the first study
reported under this mandate. We must report on the judicial review for OLA and the
effectiveness of the Code annually for 3 years after the passage of the act and every 5
years after the date of enactment. Dodd-Frank Act § 202(e); 12 U.S.C. § 5382(e). The
Administrative Office of the United States Courts also must conduct a study of bankruptcy
and the process for orderly liquidation for financial companies. The Board of Governors of
the Federal Reserve System has a similar requirement. Dodd-Frank Act § 216.
5
 We also studied the reports related to the section 202(e) and section 216 mandates. See
Administrative Office of the United States Courts, Report Pursuant to Section 202(e) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Washington, D.C.:
July 2011) and Board of Governors for the Federal Reserve System, Study of the
Resolution of Financial Companies Under the Bankruptcy Code (Washington, D.C.: July
2011). Pursuant to Dodd-Frank Act § 215, the Financial Stability Oversight Council
(FSOC) in July 2011 published Report to Congress on Secured Creditor Haircuts, which
examined allowing regulators to treat a portion of fully secured creditors’ claims as
unsecured in a resolution proceeding.




Page 2                                                             GAO-12-735 Bankruptcy
                         institutions from January 1, 2010, through December 31, 2011. Finally,
                         we met with officials from the Administrative Office of the U.S. Courts
                         (AOUSC), D.C. District Court, the Commodity Futures Trading
                         Commission (CFTC), FDIC, the Board of Governors of the Federal
                         Reserve System (Federal Reserve), Federal Judicial Center, Department
                         of Justice (Justice), Securities and Exchange Commission (SEC),
                         Securities Investor Protection Corporation (SIPC), and the Department of
                         the Treasury (Treasury), including the Office of Financial Research. See
                         appendix I for more information on our scope and methodology.

                         We conducted this performance audit from August 2011 to July 2012 in
                         accordance with generally accepted government auditing standards.
                         Those standards require that we plan and perform the audit to obtain
                         sufficient, appropriate evidence to provide a reasonable basis for our
                         findings and conclusions based on our audit objectives. We believe that
                         the evidence obtained provides a reasonable basis for our findings and
                         conclusions based on our audit objectives.


                         Bankruptcy is a federal court procedure conducted under the Code. The
Background               goal of bankruptcy is to give individuals and businesses a “fresh start” by
                         eliminating or restructuring debts they cannot repay and help creditors
                         receive some payment in an equitable manner. The filing of a bankruptcy
                         petition operates as an “automatic stay” that stops most lawsuits,
                         foreclosures, and most other collection activities against the debtor.
                         Under the Code, secured creditors—those with liens or other secured
                         claims against the debtor’s property—are more likely to get some debt
                         repaid than unsecured creditors. Creditors typically receive payment of
                         their debts before shareholders receive any return of their equity in the
                         failed company.


Bankruptcy Proceedings   Business debtors that are eligible for protection under the Code may
                         qualify for liquidation, governed primarily by Chapter 7 of the Code, or
                         reorganization, governed by Chapter 11. Proceedings under both
                         Chapters 7 and 11 can be voluntary (initiated by the debtor) or involuntary
                         (generally initiated by at least three creditors). 6



                         6
                          Voluntary cases are permitted under 11 U.S.C. § 301. Involuntary cases are permitted
                         under 11 U.S.C. § 303.




                         Page 3                                                           GAO-12-735 Bankruptcy
•   A liquidation proceeding—under Chapter 7—is a court-supervised
    procedure by which a trustee takes over the assets of the debtor’s
    estate, reduces them to cash, and makes distributions to creditors in
    accordance with the Code’s priority scheme.

•   A reorganization proceeding—under Chapter 11—allows debtors that
    are commercial enterprises to continue to operate some or all of the
    debtor’s operations as a way to satisfy creditor claims. The debtor
    typically remains in control of its assets under a Chapter 11
    proceeding, and is called a debtor-in-possession (DIP). However, if
    the court determines that there is cause or it is in the best interest of
    creditors, the court can direct the U.S. Trustee to appoint a Chapter
    11 trustee to take over the affairs of the debtor. A debtor (or other
    interested party) may file a reorganization plan, which ultimately may
    be confirmed by the court. The plan includes details on the operations
    of the reorganization, including disposition or retention of property,
    mergers, and issuance of securities. 7 The plan also divides creditors
    into classes and directs how the creditor classes will be paid. The
    debtor can terminate burdensome contracts and leases, recover
    assets, and rescale its operations to return to profitability. To continue
    operations, a debtor may obtain additional financing, which could be
    paid before other debts. 8 A debtor also may file a plan of liquidation
    under Chapter 11 or transfer to a Chapter 7 liquidation, which may
    provide a greater return to creditors.

The U.S. bankruptcy system involves multiple federal entities. While
bankruptcy courts are located in 90 federal judicial districts, the Southern
District of New York (which includes Manhattan) and the District of
Delaware adjudicate a majority of larger corporate or business bankruptcy
cases, many of which constitute “megacases.” 9 The Judicial Conference
of the United States recommends national policies and legislation for all
aspects of federal judicial administration. AOUSC serves as the central
administrative support entity for the Judicial Conference and the federal



7
See 11 U.S.C. § 1123.
8
This is known as DIP financing and is available under 11 U.S.C. § 364.
9
 AOUSC defines a “mega” Chapter 11 case as a single case or set of jointly administered
or consolidated cases that involves $100 million or more in assets and 1,000 or more
creditors. See GAO, Federal Bankruptcy Judges: Measuring Judges’ Case-Related
Workload, GAO-09-808T (Washington, D.C.: June 16, 2009).




Page 4                                                           GAO-12-735 Bankruptcy
courts, including bankruptcy courts. For example, AOUSC provides
administrative, legal, financial, management, and information technology
support functions for the federal courts. The Federal Judicial Center, an
education and research agency for the federal courts, assists bankruptcy
courts with education relating to case administration and management,
while the majority of Federal Judicial Center research helps inform policy
decisions of the Judicial Conference of the United States. In addition, the
Trustee Program at Justice and the Bankruptcy Administrator Program
oversee bankruptcy trustees and the administration of bankruptcy
estates, respectively. 10

It is important to note that certain financial institutions may not file as
debtors under the Code and other entities face special restrictions in
using the Code:

•     Insured depository institutions: Under the Federal Deposit Insurance
      Act, FDIC serves as the conservator or receiver for the insured
      depository institutions placed into conservatorship or receivership
      under applicable law. 11

•     Insurance companies: Insurers generally are subject to oversight by
      state insurance commissioners, who have the authority to place them
      into conservatorship, rehabilitation, or receivership.

•     Broker-dealers: Broker-dealers can be liquidated under the Securities
      Investor Protection Act (SIPA) or under a special provision of Chapter




10
  The United States Trustee Program covers 84 of the 90 bankruptcy courts and consists
of the Executive Office for U.S. Trustees which is led by a director; 21 regions managed
by U.S. Trustees; and 95 field offices supervised by Assistant U.S. Trustees. The mission
of the U.S. Trustee Program is to promote the integrity of the bankruptcy system. The U.S.
Trustee Program oversees the administration of all bankruptcy cases filed by individual
and business debtors in every federal judicial district except for Alabama and North
Carolina. The U.S. Trustee’s specific duties in a case depend on the chapter under which
a debtor files and the facts of the case. Bankruptcy Administrators, who are employees of
the federal judiciary, perform the functions of the U.S. Trustees in the remaining six
bankruptcy courts in Alabama and North Carolina. See
http://www.justice.gov/ust/eo/ust_org/index.htm.
11
    12 U.S.C. § 1821(c).




Page 5                                                            GAO-12-735 Bankruptcy
                                  7 of the Code. However, broker-dealers may not file for reorganization
                                  under Chapter 11. 12

                            •     Commodity brokers: Commodity brokers, also known as futures
                                  commission merchants, are restricted to using only a special provision
                                  of Chapter 7 for bankruptcy relief. 13



Orderly Liquidation         The OLA process could replace the bankruptcy process for certain
Authority under the Dodd-   financial companies. Title II of the Dodd-Frank Act established OLA,
Frank Act                   which requires a series of regulatory determinations and may involve
                            limited judicial action (see fig. 1). On their own initiative, or at the request
                            of the Secretary of the Treasury, regulators may consider whether to
                            make a recommendation with respect to whether the Secretary should
                            appoint FDIC as receiver for a financial company. Among other factors,
                            regulators first must determine that the company generally falls under one
                            of four categories: 14

                            •     bank holding companies (defined under the Bank Holding Company
                                  Act); 15




                            12
                              Chapter 7 of the Code contains special provisions for the liquidation of stockbrokers. 11
                            U.S.C. §§ 741-753. Under SIPA, the SIPC initiates a liquidation proceeding, the primary
                            purpose of which is to protect customers against financial losses arising from the
                            insolvency of their brokers. Once a protective decree has been applied for under SIPA,
                            any other pending bankruptcy proceeding involving the debtor stockbroker is stayed, and
                            the court where the application is filed has exclusive jurisdiction over that stockbroker.
                            SIPC participation can displace a Chapter 7 liquidation pending the SIPA liquidation, but
                            provisions of the Code apply in a SIPA liquidation to the extent they are consistent with
                            SIPA. See 15 U.S.C. §§ 78eee(b)(2)(B), 78fff(b). Because the stockbrokers discussed in
                            this report are also dealers registered with the SEC as broker-dealers, we generally use
                            the term broker-dealer rather than stockbroker in this report.
                            13
                             Chapter 7 of the Code contains special provisions for commodity broker liquidation (11
                            U.S.C. §§ 753, 761-767), and CFTC’s rules relating to bankruptcy are set forth at 17
                            C.F.R. § 190.01 et seq.
                            14
                              Dodd-Frank Act § 201(a)(11); 12 U.S.C. § 5381(a)(11). The company must be
                            incorporated or organized under federal or state law.
                            15
                                Bank Holding Company Act of 1956, 12 U.S.C. § 1841 et seq.




                            Page 6                                                             GAO-12-735 Bankruptcy
•    nonbank financial companies supervised by the Federal Reserve; 16

•    any company that is predominantly engaged in activities that the
     Federal Reserve has determined to be financial in nature or incidental
     thereto for purposes of section 4(k) of the Bank Holding Company Act
     (including broker-dealers that are registered with SEC and are
     members of SIPC); or

•    any subsidiary of a company described in the bullets above that is
     predominantly engaged in activities that the Federal Reserve has
     determined to be financial in nature or incidental thereto for purposes
     of section 4(k) of the Bank Holding Company Act (except for insured
     depository institutions and insurance companies). 17

In addition to the evaluation of whether the financial company fits within
one of the categories described above, federal regulators recommending
whether the Secretary of the Treasury should appoint FDIC as receiver
must include:

•    an evaluation of whether the financial company is in default or in
     danger of default;




16
   Under the Dodd-Frank Act, Title I, FSOC may require that a nonbank financial company
become subject to Federal Reserve Board supervision. The Federal Reserve has issued a
proposed rule on criteria for determining whether a company is predominantly engaged in
financial activities for purposes of determining whether the company is a nonbank financial
company under Title I of the Dodd-Frank Act. See appendix II for further details.
17
   Under the Dodd-Frank Act § 210(a)(1)(E), if FDIC is appointed receiver of a financial
company, it has the authority to appoint itself as receiver of any subsidiary of the financial
company if FDIC and the Secretary of the Treasury jointly determine that the subsidiary is
in danger of default, such action would mitigate serious adverse effects on the financial
stability or economic conditions in the United States, and such action would facilitate the
orderly liquidation of the financial company. Although this authority does not apply to
insurance companies or certain broker-dealers, special provisions may apply in those
cases. For example, if the Secretary makes a determination with respect to an insurance
company or if an insurance company is a subsidiary or affiliate of a financial company, the
liquidation or rehabilitation of the insurance company is to be conducted under applicable
state law. However, if the state regulator has not filed the appropriate judicial action within
60 days after the date of the Secretary’s determination, then FDIC will have the authority
to stand in place of the state regulator and file the appropriate judicial action to place the
company into orderly liquidation under state law. Dodd-Frank Act § 203(e); 12 U.S.C. §
5383(e).




Page 7                                                                GAO-12-735 Bankruptcy
•   a description of the effect that the default of the financial company
    would have on the financial stability in the United States;

•   a description of the effect that the default of the financial company
    would have on economic conditions or financial stability for low-
    income, minority, or underserved communities;

•   a recommendation on the nature and extent of actions to be taken
    under Title II of the Dodd-Frank Act regarding the financial company;

•   an evaluation of the likelihood of a private-sector alternative to prevent
    the default of the financial company;

•   an evaluation of why a case under the Code is not appropriate for the
    financial company; and

•   an evaluation of the effects on creditors, counterparties, and
    shareholders of the financial company and other market participants.

Upon recommendation, the Secretary of the Treasury, must invoke OLA if
the Secretary, in consultation with the President, determines that:

•   the financial company is in default or in danger of default;

•   the failure of the financial company and its resolution under otherwise
    applicable federal or state law would have serious adverse effects on
    the financial stability of the United States;

•   no viable private-sector alternative is available to prevent the default;

•   the effect on the claims or interests of creditors, counterparties, and
    shareholders of the financial company and other market participants
    of proceedings under Title II of the Dodd-Frank Act is appropriate,
    given the impact that any action under Title II would have on the
    financial stability of the United States;

•   an orderly liquidation would avoid or mitigate such adverse effects;
    and




Page 8                                                    GAO-12-735 Bankruptcy
•    the company meets the definition of financial company as described
     above. 18




18
  Dodd-Frank Act § 203(b); 12 U.S.C. § 5383(b). The Secretary’s determination also must
include whether a federal regulatory agency has ordered the financial company to convert
all of its convertible debt instruments that are subject to the regulatory order.




Page 9                                                           GAO-12-735 Bankruptcy
Figure 1: Decision Process for Invoking OLA and Appointing FDIC Receiver of a Failing Financial Company




                                        a
                                         If the financial company or its largest U.S. subsidiary is: (1) a broker-dealer, SEC (two-thirds of the
                                        commissioners) must approve the recommendation in consultation with FDIC; (2) an insurance
                                        company, the Director of the Federal Insurance Office in Treasury also approves the recommendation
                                        in consultation with FDIC; or (3) any other financial company, FDIC (two-thirds of the Board of
                                        Directors) must approve the recommendation.




                                        Page 10                                                                     GAO-12-735 Bankruptcy
By a two-thirds vote, the Federal Reserve and FDIC (or relevant
regulator) must agree to make the recommendation to the Secretary of
the Treasury to place the financial company into receivership. 19 The
Secretary consults with the President and then makes a determination to
place the company in receivership, and notifies the company’s board of
directors (or equivalent). If the company consents or acquiesces to the
recommendation, FDIC becomes receiver. If the company does not
consent, the Secretary through Justice must petition the D.C. District
Court for an order authorizing the appointment of FDIC as receiver. 20 The
D.C. District Court has 24 hours to determine whether the Secretary’s
determination was arbitrary and capricious, in which case FDIC would not
become receiver. 21 If the D.C. District Court failed to act within 24 hours,
then FDIC would become receiver. The financial company can appeal the
D.C. District Court’s determination, but the receivership would not be
stayed (or postponed) if it did so. If the D.C. District Court did not uphold
the Secretary’s determination, the Secretary could amend and refile or
appeal within 30 days. Upon appointment as receiver, FDIC becomes
successor to and legal custodian of the financial company, including
assets and operations. 22

Under authority provided by Title II of the Dodd-Frank Act, when FDIC is
appointed receiver of the financial company it may take over and manage
the assets of the company. FDIC must liquidate and wind up the affairs of



19
  If the financial company or its largest U.S. subsidiary is a broker-dealer, then two-thirds
of SEC Commissioners and two-thirds of the Federal Reserve Board approve the
recommendation, in consultation with FDIC. If the financial company or its largest U.S.
subsidiary is an insurance company, then the Director of the Federal Insurance Office in
Treasury approves the recommendation along with the Federal Reserve. For all other
types of companies, two-thirds of the Federal Reserve and two-thirds of the FDIC Board of
Directors approve the recommendation in consultation with FDIC. Dodd-Frank Act §
203(a); 12 U.S.C. § 5383(a).
20
  Justice files the petition on behalf of Treasury. See generally 28 U.S.C. § 516.
21
   The D.C. District Court’s review is limited to the Secretary’s determination that the
financial company is (1) in default or danger of default; and (2) satisfies the definition of a
financial company.
22
   Title II also establishes additional authorities for FDIC as receiver, such as the ability to
set up a bridge financial company, and collect funding for the OLA process from the
financial industry after a company has gone through OLA. Dodd-Frank Act, § 210(o); 12
U.S.C. § 5390(o). Under the Dodd-Frank Act, GAO must review and report on the
Treasury Secretary’s decision to appoint FDIC as receiver. Dodd-Frank Act § 203(c)(5),
12 U.S.C. § 5383(c)(5) discusses these responsibilities in more detail.




Page 11                                                                 GAO-12-735 Bankruptcy
                            the financial company, and may sell or transfer the assets to a bridge
                            financial company, which is a temporary company used to maintain the
                            failed company’s operations. A bridge financial company may purchase
                            assets, assume liabilities, and undertake other functions of the financial
                            company. FDIC also has authority to determine the validity of creditor
                            claims against the company and pay creditor claims. The Dodd-Frank Act
                            generally requires that all creditors of a financial company with similar
                            priority be treated similarly; however, in certain circumstances FDIC may
                            treat similarly situated creditors differently. In some cases, FDIC may
                            repudiate contracts to which a financial company is a party or may
                            enforce certain contracts that otherwise could have been terminated
                            because of the financial company’s insolvency.


Resolution Plans and        Among its provisions, Title I of the Dodd-Frank Act requires certain
Other Financial Stability   financial companies to provide regulators with periodic reports on their
Provisions under the        plans for rapid and orderly resolution in the event of “material financial
                            distress or failure” under the Code. 23 The resolution plan must include the
Dodd-Frank Act
                            following:

                            •    information on the manner and extent to which any insured depository
                                 institution affiliated with the company is adequately protected from
                                 risks arising from the activities of any nonbank subsidiaries of the
                                 company;

                            •    full descriptions of the ownership structure, assets, liabilities, and
                                 contractual obligations of the company;

                            •    identification of the cross-guarantees tied to different securities,
                                 identification of major counterparties, and a process for determining to
                                 whom the collateral of the company is pledged; 24 and


                            23
                              The Dodd-Frank Act, § 165(d)(1), states that the Federal Reserve and FDIC must
                            review the resolution plans. Resolution plans are often referred to as living wills. The
                            companies that must file reports are: (1) nonbank financial companies designated by
                            FSOC for supervision by the Federal Reserve, (2) bank holding companies with $50 billion
                            or more in consolidated assets, and (3) foreign banking organizations with $50 billion or
                            more in total consolidated assets that are or are treated as bank holding companies. 12
                            U.S.C. § 5365(d)(1). The resolution plans should not assume an orderly liquidation under
                            Title II.
                            24
                              Cross-guarantees are not specifically defined in the act but refer to contracts and other
                            interconnections the financial company has with other parties.




                            Page 12                                                             GAO-12-735 Bankruptcy
•     any other information that the Federal Reserve and FDIC jointly
      require by rule or order. 25

The Federal Reserve and FDIC must review the information in these
resolution plans. If they jointly determine and notify a company that its
plan is not credible or would not facilitate an orderly resolution under the
Code, the financial company would have to submit a revised plan. A
revised plan must discuss in detail revisions that address the deficiencies
jointly identified by the Federal Reserve and FDIC. The revised plan must
also address changes, if any, in its business operations or corporate
structure that the company proposes to make to facilitate implementation
of the plan. If the company fails to submit a satisfactory revised plan, the
Federal Reserve and FDIC could impose stricter requirements such as
higher capital or liquidity requirements on the company. 26 If the company
fails to submit a satisfactory revised plan within 2 years of the imposition
of stricter requirements, the Federal Reserve and FDIC, in consultation
with the Financial Stability Oversight Council (FSOC), may jointly direct a
company to divest certain assets or operations jointly identified by the
Federal Reserve and FDIC as necessary to facilitate an orderly resolution
under the Code in the event of failure of the company. 27




25
    Dodd-Frank Act § 165(d);12 U.S.C. § 5365(d).
26
    Id. at § 165(d)(5)(A); 12 U.S.C. § 5365(d)(5)(A).
27
    Id. at § 165(d)(5)(B); 12 U.S.C. § 5365(d)(5)(B).




Page 13                                                 GAO-12-735 Bankruptcy
Additional Rulemaking   The Dodd-Frank Act requires certain regulators to develop and issue
Authorities under the   rules to implement OLA and resolution plan requirements. 28 For some
Dodd-Frank Act          rules, the regulators must consult with FSOC, a new entity established by
                        the Dodd-Frank Act. 29 FDIC—in consultation with FSOC—has primary
                        responsibility for developing and issuing rules and regulations related to
                        its authority as receiver of a failed financial company. Other sections of
                        Title II of the Dodd-Frank Act also contain specific requirements for FDIC
                        to coordinate with the Federal Reserve, SEC, and other banking
                        regulators on key aspects of OLA. Under Title I, the Federal Reserve and
                        FDIC must issue joint rules on resolution plans. FSOC has the authority
                        to designate nonbank financial companies (including foreign nonbank
                        financial companies) for Federal Reserve supervision if FSOC determines
                        that such companies could pose a threat to the financial stability of the
                        United States. 30 These nonbank financial companies would have to file
                        resolution plans. 31 Appendix II lists the primary rules related to OLA and
                        resolution plans and their status as of May 15, 2012.




                        28
                          Regulatory agencies have authorizing statutes that set out their authority and
                        responsibilities for developing and issuing regulations. An agency’s statute can prescribe
                        formal rulemaking. The Administrative Procedure Act establishes procedures and broadly
                        applicable federal requirements for informal rulemaking, also known as notice and
                        comment rulemaking. This act generally requires agencies to publish a notice of proposed
                        rulemaking in the Federal Register. After giving interested persons an opportunity to
                        comment on the proposed rule, the agency may then publish the final rule. Agencies also
                        may be subject to additional requirements imposed by other statutes specific to the
                        agency.
                        29
                          FSOC consists of 14 federal and state agency heads and an independent member with
                        insurance expertise. The council was created to (1) identify risks to the financial stability of
                        the United States that could arise from the material financial distress or failure, or ongoing
                        activities, of large, interconnected bank holding companies or nonbank financial
                        companies, or that could arise outside of the financial services marketplace; (2) promote
                        market discipline, by eliminating expectations on the part of shareholders, creditors, and
                        counterparties of such companies that the U.S. government will shield them from such
                        losses in the event of failure; and (3) respond to emerging threats to the stability of the
                        U.S. financial system.
                        30
                          Dodd-Frank Act § 113; 12 U.S.C. § 5323.
                        31
                          Dodd-Frank Act § 165(d); 12 U.S.C. § 5365(d)(1).




                        Page 14                                                                GAO-12-735 Bankruptcy
                        As we previously reported, the D.C. District Court issued Local Civil Rule
D.C. District Court     85 on January 19, 2011, to implement its judicial review requirements
Revised Its Rule for    under OLA. Generally, the rule reiterated the procedural requirements in
                        the Dodd-Frank Act. It provided for a 24-hour review, and the financial
Judicial Review under   company has the right to oppose the Secretary’s petition to invoke an
OLA                     FDIC receivership under OLA. If the court did not rule on the petition
                        within 24 hours, or ruled in favor of the Secretary, the receivership would
                        proceed immediately. As the rule was originally written, the Secretary of
                        the Treasury would have had to notify the D.C. District Court under seal
                        at least 48 hours before the filing of a petition, which would give the court
                        time to prepare for the review. In addition, the original rule did not
                        specifically address Rule 6 of the Federal Rules of Civil Procedure
                        regarding the 24-hour period. Rule 6 states that if a time period ends on a
                        weekend or holiday, the period would be extended to the next business
                        day. Court officials told us that they included the original 48-hour notice
                        because they were concerned about receiving advance notice before an
                        OLA filing. Court officials also told us that the D.C. District Court was a
                        smaller court that did not hear many business cases and few large
                        bankruptcies and therefore they needed the advance notice.

                        In letters dated March 2011, FDIC and Treasury objected to notification
                        requirements in the rule that required Treasury to provide an additional
                        48-hour notification to the court before filing a petition to invoke OLA. In
                        addition, they were concerned about the possible use of Rule 6 of the
                        Federal Rules of Civil Procedure to extend the 24-hour period for the
                        court to rule and the 48-hour notification period. The agencies said that
                        Treasury may not always be able to provide the 48-hour notice because
                        of the speed with which a financial company could become insolvent.
                        FDIC and Treasury were concerned that the use of Rule 6 to calculate the
                        timing of filings and decisions effectively would expand the court’s 24-
                        hour time frame to rule on the petition and the 48-hour notice period. For
                        example, if the Secretary’s 48-hour notice period or the court’s 24-hour
                        review period ended on a weekend or holiday, Rule 6 calculations would
                        move the ends of those periods to the next business day. According to
                        agency officials, this delay could have serious adverse effects on U.S
                        financial stability. As a result, the agencies thought the court should be
                        prepared to make rulings over the weekend.

                        On July 6, 2011, the court issued a revised final rule, which added “to the
                        extent feasible” to the requirement that the Secretary of the Treasury
                        notify the court 48 hours before filing a petition. In addition the revised
                        rule added a section stating that the 48-hour notice period and the 24-
                        hour decision period were not subject to Rule 6, meaning that the time


                        Page 15                                                  GAO-12-735 Bankruptcy
                             limit would apply without regard to whether the time periods ended on a
                             weekend or holiday. FDIC and Treasury officials told us that the revisions
                             to the court’s rule addressed their concerns. The court has not yet tested
                             the effectiveness of the rule because, as of May 1, 2012, the Secretary
                             had not sought the appointment of FDIC as receiver in an OLA
                             proceeding.


                             Federal regulators have issued separate final rules for OLA and
Although Regulators          resolution plans, as required by the Dodd-Frank Act. FDIC plans to issue
Have Issued Rules            additional rules to clarify its use of OLA, such as a joint rule with SEC for
                             the resolution of broker-dealers. Because the first financial companies will
Related to OLA, Some         not begin filing resolution plans until July 2012, it is too soon to determine
Clarifications Remain        the effectiveness of the plans. Despite the issuance of rules, academics
Outstanding                  and other experts have questioned FDIC’s ability to resolve large,
                             systemically important financial institutions under OLA because of the
                             complexity of the firms involved and challenges relating to international
                             coordination. Regulators have reported progress on developing a
                             universal identifier for financial companies that would help them identify
                             and manage companies’ counterparty exposures.


Federal Regulators Have      Final Rules for OLA. On July 15, 2011, FDIC published a final rule
Issued Final Rules for OLA   (referred to as the Orderly Liquidation Authority Final Rule) under
and Resolution Plans         rulemaking authority provided by Section 209 of the Dodd-Frank Act. In
                             its discussion of the final rule, FDIC noted that the rule represented the
                             results of its initial phase of rulemaking for its OLA authority. FDIC staff
                             also told us that this final rule included topics addressed in an earlier
                             interim final rule and two notices of proposed rulemakings. 32

                             More specifically, the final rule covers topics under three broad
                             categories: (1) the definition of terms in a receivership under OLA and
                             other general provisions of an FDIC receivership; (2) the priority of
                             payments, including those for administrative expenses and to unsecured
                             creditors; and (3) the process for administering claims against the failed
                             financial company. The rule also covers other aspects of the receivership.
                             For example, the final rule addresses FDIC’s ability to recover


                             32
                               FDIC published a notice of proposed rulemaking on October 19, 2010, an interim final
                             rule on January 25, 2011, and a notice of proposed rulemaking on March 23, 2011. See
                             appendix II for a complete list of rules and other actions.




                             Page 16                                                          GAO-12-735 Bankruptcy
compensation from a current or former senior executive who is found
substantially responsible for the failure of the financial company. In
addition, the rule addresses the payment for services performed under
personal service agreements after FDIC is appointed receiver or for the
acceptance of services by a bridge financial company. FDIC’s final rule
also discusses the distribution of assets in the liquidation of a
noninsurance company subsidiary of an insurance company. FDIC has
indicated that it believes it now has in place the regulations necessary to
accomplish a resolution under OLA, even though it intends to adopt
several additional regulations over the next year.

In addition, FDIC published a final rule (the Mutual Insurance Holding
Company Treated as Insurance Company Rule) concerning the treatment
of mutual insurance holding companies on April 30, 2012. Mutual
insurance holding companies are owned by policyholders, not
stockholders, and generally have been subject to state insurance
insolvency regimes. In its final rule, FDIC sought to make the resolution of
mutual insurance companies conform to state insurance statutes for the
resolution of such companies.

Proposed Rules Related to OLA. FDIC, in consultation with FSOC, also
has issued two proposed rules related to OLA to clarify certain technical
issues. First, FDIC and Treasury jointly issued a notice of proposed
rulemaking on November 25, 2011, governing the calculation of the
maximum obligation FDIC could incur as receiver under OLA, as required
by the Dodd-Frank Act. 33 The proposed rule (the Maximum Obligation
Limitation Rule) outlines a calculation that limits the total outstanding
obligations that FDIC can incur in connection with the liquidation of a
financial company under OLA and defines terms such as “obligations.” 34
FDIC issued a second proposed rule on March 20, 2012, which relates to
its enforcement of subsidiary and affiliate contracts as the receiver of a
covered financial company. The proposed rule (Enforcement of
Subsidiary and Affiliate Contracts by the FDIC as Receiver of a Covered


33
  The Dodd-Frank Act expressly prohibits “bailouts” to a specific firm. Under OLA, FDIC
must maximize the value of the assets of the financial company under receivership in the
context of liquidation. However, the Dodd-Frank Act allows FDIC as receiver of a failed
company to borrow funds from Treasury to carry out the orderly liquidation.
34
  FDIC’s Board of Directors approved a final Maximum Obligation Limitation Rule on April
23, 2012. After we completed our analysis, Treasury approved the final rule in June 2012
and the rule was published in the Federal Register on June 22, 2012.




Page 17                                                           GAO-12-735 Bankruptcy
Financial Company Proposed Rule) clarifies FDIC’s authority to preserve
the value of a failed financial company’s assets and business lines by
enforcing certain contracts of subsidiaries and affiliates of the financial
company. FDIC as receiver has authority to enforce contracts guaranteed
by the financial company even though the counterparty has the
contractual right to terminate or accelerate the contract based on the
insolvency of the financial company. FDIC must transfer the guarantee
and all related assets to a bridge financial company or third party or
provide adequate protection for the obligations. According to FDIC, this
authority will help enable it to place a financial company at the holding
company level into receivership without placing solvent subsidiaries into
receivership, while also helping to mitigate systemic risk and maintain
financial stability.

Final Rule on Resolution Plans. On November 1, 2011, FDIC and the
Federal Reserve published a final rule (the Resolution Plans Final Rule)
implementing the Dodd-Frank Act requirement under section 165(d).
Under this requirement, bank holding companies with at least $50 billion
in total consolidated assets (including foreign banking organizations that
are treated as bank holding companies) and nonbank financial companies
supervised by the Federal Reserve must periodically submit resolution
plans. 35 Although this rule requires these types of financial institutions to
submit plans describing how they would be resolved through the
bankruptcy process, regulators reported that having companies file
resolution plans would help FDIC in planning for the exercise of the
possible use of its resolution authorities, including OLA. Regulators
anticipate the plans also would provide additional insights on these
companies’ structure and complexity, including funding sources and
counterparties. In addition, the Federal Reserve noted that the plans will
assist in its supervisory efforts to ensure that companies operate in a
manner that is both safe and sound and do not pose risks to financial
stability generally. The final rule addresses information required in the
plans, steps for submitting the plans, requirements for updating plans,
and steps regulators may take for addressing inadequate plans. 36 Under


35
  FDIC also has issued a rule requiring resolution plans for depository institutions with
total assets of $50 billion or more. These rules were promulgated under the Federal
Deposit Insurance Act.
36
  Federal Reserve staff also made some technical changes in the final rule to clarify how
companies with large depository institution subsidiaries should prepare plans when their
largest asset would be resolved outside of the bankruptcy process.




Page 18                                                              GAO-12-735 Bankruptcy
                              the rule, a company’s resolution plan must take into account different
                              economic scenarios provided to the company by the Federal Reserve; the
                              scenarios will be developed in the Federal Reserve’s rules on stress
                              testing. As shown in table 1, the deadlines for resolution plans are
                              staggered by company size. Plans for the largest bank holding companies
                              are due in July 2012.

                              Table 1: Deadlines for Submissions of Initial Resolution Plans, by Size of Financial
                              Company

                                  Size of bank holding company
                                  or nonbank financial company                                     Deadline for first
                                                     a
                                  (dollars in assets)                                              resolution plan
                                  Large (greater than $250 billion)                                July 1, 2012
                                  Medium ($100-$250 billion)                                       July 1, 2013
                                  Small (less than $100 billion)                                   December 31, 2013
                              Sources: Federal Reserve and FDIC.

                              a
                               The rule determines a U.S. company’s size by reviewing total nonbank assets as reported to the
                              Federal Reserve (or for foreign-based companies, total U.S. nonbank assets).



Regulators Plan to Issue      FDIC and other regulators noted in our discussions that although they
Additional Rules to Clarify   completed a final rule for OLA and drafted several other rules, regulators
OLA                           are working on, but have not yet issued, certain mandated rules. In
                              addition, the final rule does not address a number of important issues.
                              Most of the outstanding rules related to OLA are required under the
                              Dodd-Frank Act. Three of these are rules FDIC must issue jointly with
                              other regulators:

                              •      Orderly liquidation of broker-dealers (no statutory deadline);




                              Page 19                                                                  GAO-12-735 Bankruptcy
                         •     Recordkeeping for qualified financial contracts (due July 21, 2012); 37
                               and

                         •     Source of strength (due July 21, 2012). 38

                         FDIC officials reported that each of these three rules was in a different
                         stage of development, with the recordkeeping rule for qualified financial
                         contracts closest to being issued, potentially as an interim rule before the
                         statutory deadline in July.

Joint Rule Development   Besides addressing the complexity of OLA, regulators told us that
                         coordination and reaching consensus with different regulators
                         represented a challenge in drafting and issuing OLA-related rules,
                         particularly given the number of rulemakings required of some regulators
                         and resource constraints. As part of the OLA rule development process,
                         FDIC must consult with different members of FSOC and in some cases is
                         statutorily mandated to work with specific regulators or agencies. 39
                         Regulators also have had to address how certain rules would avoid
                         conflicts with other rules and help ensure consistency with other
                         requirements mandated under the Dodd-Frank Act.

                         For example, under the Dodd-Frank Act, FDIC and SEC must, after
                         consultation with SIPC, develop a rule for the orderly liquidation of broker-



                         37
                            Qualified financial contracts are financial agreements including securities and
                         commodities contracts, forward contracts, and repurchase and swap agreements. Certain
                         counterparties to these agreements are exempt from the automatic stay under the Code
                         and other bankruptcy provisions. The automatic stay is designed to prevent creditors from
                         taking action against or collecting assets from the debtor before approval from the
                         bankruptcy court, but the exemption allows the counterparty to the qualified financial
                         contract to close out the contract when the debtor files for bankruptcy and seize collateral
                         if the company has an obligation to the counterparty. Under OLA, qualified financial
                         contracts are subject to a 1-day stay and counterparties cannot terminate their contracts
                         until 5:00 p.m. of the day after FDIC begins its receivership. During this time, FDIC may
                         have transferred the contract to a bridge financial company or repudiated (rejected) it.
                         38
                             Dodd-Frank Act § 616(d); 12 U.S.C. § 1831o-1.
                         39
                           Agency officials told us that potential rules are discussed among FSOC members
                         through the Orderly Liquidation Authority, Resolution Plans Committee. FDIC staff told us
                         that there are protocols under which draft rules are provided to FSOC members and the
                         committee. FSOC members can put forth suggestions for rules. For example, FDIC and
                         Treasury obtained feedback on the draft Maximum Obligation Limitation proposed rule
                         through this process.




                         Page 20                                                             GAO-12-735 Bankruptcy
dealers that are subject to OLA. 40 Under OLA, FDIC, as receiver of a
failed broker-dealer, or in a case in which the largest U.S. subsidiary of a
financial company is a broker-dealer, would appoint SIPC as trustee for
the liquidation. However, in our earlier discussions with FDIC, SEC, and
SIPC officials, they noted that the Dodd-Frank Act did not clearly
delineate SIPC’s role in a broker-dealer resolution under OLA, which may
pose challenges in such a case. For instance, if FDIC as the receiver of a
broker-dealer put the broker-dealer into a bridge institution, the agencies
would need to determine what SIPC’s role would be and how creditor and
customer claims would be handled. 41 FDIC officials told us that this rule
would govern the relationship between FDIC and SIPC. Although there is
no statutory deadline for this rule, SIPC officials emphasized the
importance of the rule to clarify SIPC’s participation so as to avoid
confusion in any future resolution under OLA. FDIC and SIPC officials
told us that they met together with SEC for the first time on May 3, 2012,
to discuss developing this rule. FDIC officials reported that they anticipate
issuing a final rule by the end of 2012.

SEC officials told us that other Dodd-Frank requirements were a
complicating factor in the development of the required rule on
recordkeeping for qualified financial contracts. Under FDIC’s proposal,
financial companies would have to provide FDIC with information on
swaps and other contracts similar to the information that they would
provide regulators under other Dodd-Frank requirements. 42 FDIC officials
told us that they are actively working with other regulators on the rule,
which is due in July 2012. In another example, Federal Reserve staff told
us that rulemaking related to the source of strength rule involved
significant policy decisions, including to which bank holding companies
the rule would apply, and how this requirement relates to other




40
 Dodd-Frank Act § 205(h).
41
  SIPC uses its fund, established by SIPA, to make advances to satisfy customer claims
for missing cash and securities, including notes, stocks, bonds, and certificates of deposit.
The fund is financed through annual assessments of SIPC member firms. 15 U.S.C. §
78aaa et seq.
42
  Swaps are contracts in which two parties agree to exchange periodic interest payments,
especially when one payment is at a fixed rate and the other varies according to the
performance of a reference rate, such as the prime rate.




Page 21                                                              GAO-12-735 Bankruptcy
                            requirements for bank holding companies. 43 FDIC officials told us that
                            they have reached out to the Federal Reserve and Office of the
                            Comptroller of the Currency to start developing this rule (also due in July
                            2012) but do not have an estimated issuance date.

Development of other OLA-   FDIC officials told us that other OLA-related rules—either mandated by
Related Rules               the Dodd-Frank Act or recommended by others—detailing key aspects of
                            FDIC’s authority as receiver, as well as the treatment of creditors, were
                            still in the design phase or had not been drafted. First, the final rule on
                            FDIC’s general authority under OLA does not fully define the universe of
                            financial companies for which FDIC could be receiver. 44 In an earlier
                            proposed rule, FDIC included a definition of financial companies (under
                            its authority under Title II of the Dodd-Frank Act) but in the final rule, the
                            agency deferred finalizing this definition until the Federal Reserve issued
                            its final rule on the definition of nonbank financial companies (under its
                            authority for enhanced supervision under Title I of the Dodd-Frank Act).
                            The Federal Reserve has issued two proposed rules on the definition of
                            financial companies and officials from FDIC and the Federal Reserve told
                            us that they have been coordinating to make their definitions consistent. 45
                            FDIC officials told us that they anticipated issuing a final rule defining
                            financial companies by the end of 2012.

                            Second, the final rule on FDIC’s general authority also has not defined
                            how creditors under an OLA proceeding would receive no less than they
                            would under a Chapter 7 bankruptcy proceeding, as mandated under the
                            Dodd-Frank Act. In using this authority, FDIC would have to quickly
                            assess the valuation of the company under Chapter 7. In comments on


                            43
                               The Dodd-Frank Act § 616(d) amended the Federal Deposit Insurance Act to require
                            any company that controls an insured depository institution to serve as a source of
                            financial strength for that insured depository institution. This provision applies to bank
                            holding companies, savings and loan holding companies, and any other company that
                            controls an insured depository institution. Section 616(d) provides that “source of financial
                            strength” means the ability of the company to provide financial assistance to the
                            subsidiary insured depository institution in the event of its financial distress. 12 U.S.C. §
                            1831o-1.
                            44
                               As discussed earlier, FDIC’s authority under OLA would extend to those companies
                            “predominantly engaged in activities that the Federal Reserve has determined are
                            financial in nature or incidental thereto for purposes of section 4(k) of the Bank Holding
                            Company Act.” The final OLA rule did not define how FDIC would make this
                            determination.
                            45
                              See appendix II for a complete list of the proposed rules and their timelines.




                            Page 22                                                              GAO-12-735 Bankruptcy
the proposed rule, industry groups and a federal regulator called for
greater clarification about how FDIC would do its assessment. 46 FDIC
officials told us that they have started to develop a “minimum recovery”
rule to respond to these concerns and clarify how creditors would receive
no less than they would under a Chapter 7 bankruptcy proceeding.

Third, FDIC plans to clarify through rulemaking how it would establish and
maintain a bridge financial company. FDIC, as receiver of a failed
financial company, may organize a bridge financial company to merge the
failed financial company with another company, or to transfer any assets
and liabilities of the failed company to the bridge financial company,
without obtaining approval or consent from creditors. In the OLA final rule,
FDIC also recognized that the treatment of assets and liabilities
transferred to a bridge financial company needed additional clarification.
FDIC officials told us that they expected to issue a rule by the end of 2012
clarifying the use of bridge financial companies. In January 2012, FDIC
discussed the role of the bridge financial company and said in its view, a
bridge entity would help preserve continuity of operations for the failed
financial company and would provide time for FDIC to develop resolution
options, including merger with another company, conversion into a
recapitalized company, a stock sale, or a purchase and assumption
transaction, much as the agency does when it sells failed banks to
another institution. More recently, FDIC’s Acting Chair discussed the use
of a bridge financial company as part of FDIC’s resolution strategy. 47
Under this strategy, FDIC, as receiver, initially would own the bridge
financial company. As owner, FDIC would (1) create a capital base by
effectively converting some of the debt from the former parent company
into equity in the new bridge company, (2) obtain any necessary liquidity
from the Orderly Liquidation Fund in Treasury, and (3) appoint a new
board of directors and chief executive officer from the private sector. The




46
  Although the Dodd-Frank Act does not provide authority for FDIC to treat a portion of
secured creditors’ claims as unsecured (or take a “haircut” on recoveries), FSOC in its
study of this topic did not find that haircuts were needed to promote market discipline or
protect taxpayers. See Report to the Congress on Secured Creditor Haircuts (Washington,
DC: July 18, 2011).
47
 Martin J Gruenberg. “Remarks to the Federal Reserve Bank of Chicago Bank Structure
Conference” (Chicago, Ill.: May 10, 2012).




Page 23                                                           GAO-12-735 Bankruptcy
Dodd-Frank Act allows for a bridge financial company to be established
for 2 years, with the ability to extend it for 1 year (up to three times). 48

Furthermore, FDIC must issue rules related to its ability to impose
assessments on financial companies to pay for any losses or obligations
incurred while taking a failed company into receivership. Under the Dodd-
Frank Act, FDIC first must use the proceeds from the sale of assets from
the failed company to cover any losses. However, FDIC may borrow
Treasury funds to finance operations with the requirement that FDIC later
assess financial companies covered under OLA to pay for any losses not
covered by asset sales. 49 (The Maximum Obligation Limitation Rule
discussed earlier determines the maximum amount that FDIC can borrow
from Treasury.) FDIC, in consultation with Treasury, must develop rules
to clarify its authority to impose assessments. FDIC also must establish a
risk matrix for imposing assessments after taking into account
recommendations from FSOC. 50 However, FDIC and Treasury officials
told us that FDIC had not started drafting this rule and there is no
statutory deadline to do so.

The Dodd-Frank Act also requires FDIC to issue rules about records
retention for a financial company under OLA and purchaser eligibility




48
  The same limitation applies to bridge banks under receivership of FDIC under the
Federal Deposit Insurance Act. 12 U.S.C. § 1821(n)(9). Under the Dodd-Frank Act, FDIC’s
receivership appointment has a limit of 3 years with two possible 1-year extensions. Dodd-
Frank Act § 202(d); 12 U.S.C. § 5383(d).
49
  The Dodd-Frank Act specifically states OLA is not a bailout to individual firms. Section
214 provides that all financial companies put into OLA must be liquidated and all funds
expended in the liquidation shall be recovered through disposition of assets or
assessments on the financial sector. 12 U.S.C. § 5394, Section 1101 amended the
section 13(3) of the Federal Reserve Act to prohibit the Federal Reserve Board from
authorizing direct loans for the purpose of assisting a single and specific company to avoid
bankruptcy, as it did in the 2008 financial crisis. 12 U.S.C. § 343.
50
  FDIC would first assess creditors in the liquidation that received additional payments as
defined in the Dodd-Frank Act. If assessments imposed on claimants are insufficient,
FDIC may assess any bank holding company with total consolidated assets of at least $50
billion, any nonbank financial company supervised by the Federal Reserve Board, and
other financial companies with total consolidated assets of at least $50 billion. The
universe of companies that may be required to pay for an assessment also depends on
the definition of financial company, which has not yet been finalized. Dodd-Frank Act §
210(o)(1)(D), 12 U.S.C. § 5390(o)(1)(D).




Page 24                                                            GAO-12-735 Bankruptcy
                           under OLA. 51 FDIC faces no statutory deadline for completing these rules,
                           and FDIC officials told us that they considered them to be of lower
                           priority. Lastly, FDIC may issue additional rulemakings through its general
                           authority under Title II of the Dodd-Frank Act, in consultation with
                           FSOC. 52 FDIC plans to issue a rule about the orderly liquidation of a
                           commodity broker, but officials told us that they would coordinate any
                           rulemaking with changes CFTC might make to its rule related to
                           commodity broker bankruptcies. 53


Concerns Have Been         Although FDIC and other regulatory officials noted that resolution plans
Raised about FDIC’s        could help prepare for the possible failure of a large financial company,
Limited Experience with    not enough time has passed to determine the effectiveness of the living
                           will requirement in assisting financial companies to prepare for
Resolving Large, Complex   bankruptcy (as discussed earlier) as well as aiding FDIC in the use of its
Institutions               Title II authority. As mentioned previously, the largest bank holding
                           companies are required to submit resolution plans by July 1, 2012. As of
                           May 2012, FSOC had not yet designated the systemically important
                           nonbank financial companies, and the resolution plan final rule states that
                           these companies do not have to file earlier than 270 days from their date
                           of designation. 54 Federal Reserve and FDIC staff told us that they
                           anticipated that 9 or 10 bank holding companies would file in the first
                           wave of submissions. Federal Reserve officials told us that they have
                           been in discussions with the largest bank holding companies since the
                           rule was finalized. 55 Although entities commenting on the draft rule for
                           resolution plan requirements brought up concerns about the definition of
                           government support to financial companies and the confidentiality of


                           51
                             For regulations regarding records retention, see § 210(a)(16)(D), and for purchaser
                           eligibility, see §210(r). FDIC may issue rules on termination of a receivership; see Dodd-
                           Frank Act § 202(d)(5).
                           52
                             Dodd-Frank Act § 209; 12 U.S.C. § 5389. FDIC has developed the Office of Complex
                           Financial Institutions for carrying out its Title II responsibilities and has begun to track
                           potential circumstances under which OLA would be warranted.
                           53
                             17 C.F.R. § 190.01 et seq.
                           54
                             Financial Stability Oversight Council, Authority to Require Supervision and Regulation of
                           Certain Nonbank Financial Companies, 77 Fed. Reg. 21637 (April 11, 2012),12 C.F.R. §§
                           243.3(a)(2), 381.3(a)(2).
                           55
                             The resolution plans rule was published in November 2011. See appendix II for further
                           details.




                           Page 25                                                               GAO-12-735 Bankruptcy
proprietary data, regulatory officials believe that they have largely
addressed these issues in the final rule. As of May 2012, details on the
credit exposure reporting requirements had not been specified. Federal
Reserve officials told us that the requirement for credit exposure reports
will be included in a separate rulemaking related to single-party credit
exposure limitation. 56

In the bankruptcy process, the resolution or liquidation of large, complex,
internationally active financial firms involves multiple challenges. As we
discussed in our 2011 report, these challenges include identifying funding
sources and counterparties and dealing with complex corporate
structures across international jurisdictions. 57 Financial and legal experts
have noted that resolution plans might not be as helpful as hoped during
times of financial distress because of the need for current information—
much of a company’s contracts, assets, and liabilities could change
dramatically from day to day. The final rule for resolution plans under Title
I requires financial companies to stress test their portfolios under multiple
scenarios to identify the financial firm’s risks. However, the scenarios may
not anticipate the type of financial crisis that could eventually lead to a
firm’s insolvency. Because of these challenges and the reported burden
associated with developing the plans, some industry and academic
experts have questioned the merits of the plans. FDIC noted their
expectation that the plans, when complete, would provide important
information for its advance planning to facilitate any necessary liquidation
of a firm, irrespective of the cause of the firm’s failure.

Furthermore, although FDIC has been working to further clarify its
authority under OLA, several academic and other experts have raised
concerns about FDIC’s overall ability to effectively initiate the resolution of


56
   Under the Dodd-Frank Act, the Federal Reserve must issue regulations that prohibit
each nonbank financial company supervised by the Federal Reserve and bank holding
company with at least $50 billion in assets from having credit exposure to any unaffiliated
company that exceeds 25 percent of the capital stock and surplus. Dodd-Frank Act §
165(e)(1); 12 U.S.C. § 5365(e)(1). The Dodd-Frank Act also requires that the Federal
Reserve require supervised nonbank financial companies and bank holding companies to
file credit exposure reports that generally would include (1) the nature and extent to which
the company has credit exposure to other significant nonbank financial companies and
significant bank holding companies, and (2) the nature and extent to which other
significant nonbank financial companies and significant bank holding companies have
credit exposure to that company. Dodd-Frank Act § 165(d)(2); 12 U.S.C. § 5365(d)(2).
57
 See GAO-11-707.




Page 26                                                             GAO-12-735 Bankruptcy
large and complex firms without causing broader market disruption. As
we discussed in our 2011 report, FDIC has issued an analysis of how it
would have handled the failure of Lehman under OLA; some criticized the
analysis for its assumptions about Barclays Capital Inc.(Barclays)’s ability
to obtain regulatory approval to purchase Lehman’s distressed assets at
a time of widespread weakness in the financial markets. 58 According to
Lehman’s bankruptcy examiner, Barclays was interested in acquiring
Lehman prior to Lehman’s bankruptcy and did purchase certain assets of
Lehman’s following bankruptcy. According to FDIC, its willingness to
absorb the first $40 billion in Lehman’s losses would have addressed
concerns of Barclays’ U.K. regulators. FDIC officials told us that they
have been given sufficient powers to resolve such firms in order to limit
further market disruption. FDIC officials reported that having access to
funding would allow the receiver to make payments to creditors shortly
after the time of failure and would help to maintain financial stability. In
addition, they noted that the receiver would be able to establish a bridge
financial company, as discussed earlier, to maintain the operations of the
company without engaging in a bailout of stockholders of the failed firm.
FDIC reported it received strong support for its proposals under OLA
during a public forum with academic experts in January 2012. 59

Others have noted FDIC’s lack of experience in resolving financial
companies as complex as Lehman with multiple international
subsidiaries. As one SIPC official told us, Lehman collapsed within 24
hours—a much shorter planning period than that to which FDIC is
accustomed when resolving failed banks. In response, FDIC officials
noted that they likely would have reviewed a firm’s resolution plan and
been kept abreast of actions taken by the firm’s supervisor. As FDIC
notes in its paper on the hypothetical liquidation of Lehman under OLA,
FDIC would have been engaged for months prior to the failure of the firm.
In addition, we noted in our 2011 report, there have been few large scale
bankruptcies of complex, internationally active financial firms.

However, others have noted that today’s largest financial companies have
structures and asset sizes that dwarf those of Lehman, which remains the
largest Chapter 11 debtor in U.S. history. FDIC also could be limited in its


58
  See GAO-11-707 and FDIC, “The Orderly Liquidation of Lehman Brothers Holdings Inc.
under the Dodd-Frank Act,” FDIC Quarterly, vol. 5, no. 2 (May 2011).
59
 FDIC Systemic Resolution Advisory Committee meeting, January 2012.




Page 27                                                       GAO-12-735 Bankruptcy
                             ability to manage the failure of an internationally active financial institution
                             because it would be responsible for resolving the domestic subsidiaries of
                             a failed company. Certain subsidiaries, assets, and creditors would be
                             subject to separate insolvency regimes in various countries. 60


International Coordination
Remains a Key Challenge,
Although Regulators Have
Made Progress on a
Universal Identifier
International Coordination   As discussed in our 2011 report, cross-border resolutions of
Efforts                      internationally active financial institutions such as Lehman Brothers
                             remain a challenge, due to the manner in which different countries’
                             insolvency proceedings interact. In comments on the proposed resolution
                             plan rules, several entities called for international coordination on the
                             submission and approval of resolution plan requirements, as many
                             internationally active financial institutions will be subject to resolution
                             regimes in multiple countries. U.S. and international regulators have
                             recognized this challenge and in July 2011 the Financial Stability Board
                             issued a consultative document that proposed a requirement to mandate
                             that all designated global systemically important financial institutions
                             (SIFI) have recovery and resolution plans. 61 In addition, the document
                             called for cross-border cooperation agreements to enable countries’
                             resolution authorities to act collectively to resolve internationally active
                             financial institutions in an orderly and less-costly way.




                             60
                               FDIC could maintain certain subsidiaries, assets, and relationships with certain creditors
                             in other countries in order to avoid insolvency regimes in those countries and maintain the
                             value of the failed U.S. company. As we discuss later in this report, international
                             insolvency regimes have created challenges for those resolving Lehman and MF Global.
                             61
                                The Financial Stability Board brings together central bank officials, finance and treasury
                             officials, and financial institution regulators as well as representatives from the
                             International Monetary Fund and the World Bank to address issues related to global
                             financial stability. In November 2011, the Financial Stability Board defined SIFIs as
                             “financial institutions whose distress or disorderly failure, because of their size, complexity
                             and systemic interconnectedness, would cause significant disruption to the wider financial
                             system and economic activity.” The Financial Stability Board identified 29 companies as
                             global SIFIs in the November 2011 statement and plans to update the list each year.




                             Page 28                                                               GAO-12-735 Bankruptcy
After receiving comments on its proposal, the Financial Stability Board
released an updated list of key attributes of effective regimes for resolving
failed SIFIs in October 2011. 62 These attributes addressed issues such as
the scope and independence of the country’s resolution authority, the
essential powers and authorities of the resolution authority, and how
jurisdictions can facilitate cross-border cooperation in resolutions of SIFIs.
Members of the G20 endorsed the attributes in November 2011. 63 FDIC
and Federal Reserve officials report that the Dodd-Frank Act’s Title II
authority for FDIC to resolve systemically important financial institutions
and its Title I requirement for these institutions to file periodic resolution
plans follow the key attributes designated by the Financial Stability Board.
Federal Reserve staff told us that the United States was ahead of some
jurisdictions in adopting these provisions. In a November 2011 update
(the latest available), the Financial Stability Board wrote that many
jurisdictions had not implemented adequate legal frameworks for
resolving global SIFIs and substantial further work on recovery and
resolution plans as well as cross-border cooperation was needed.

FDIC, the Federal Reserve, and other international regulators that are
members of the Financial Stability Board have formed “crisis
management groups” to review the recovery and resolution plans for
global SIFIs. Officials from both U.S. agencies told us that the crisis-
management groups for five of the U.S. global SIFIs have met with their
international regulatory counterparts during the past year. In particular,
they discussed progress for the planning efforts of these institutions.
FDIC also has reported starting bilateral discussions with the foreign
regulators of U.S.-based global SIFIs to identify any impediments to
orderly resolution and implement any changes to address those
challenges. FDIC noted that these discussions have led to the drafting of
several memorandums of understanding with international regulators.
FDIC further reported in January 2012 that their analysis has shown that
in a crisis the U.S.-based global SIFIs would have a limited number of
international regulators with which to work. For these financial institutions,
more than 90 percent of the “total reported foreign activity” was located in



62
  Financial Stability Board, “Key Attributes of Effective Resolution Regimes for Financial
Institutions” (October 2011).
63
  The G20 or Group of Twenty includes representatives of nations with major economies.
During its summits, heads of state, financial ministers, and heads of central banks consult
and coordinate on issues related to the international financial system.




Page 29                                                             GAO-12-735 Bankruptcy
                              from one to three foreign jurisdictions and more than 80 percent of this
                              activity came from legal entities in the United Kingdom.

                              However, Federal Reserve staff told us developing plans for cross-border
                              resolution under the Bankruptcy Code remains a challenge. While the
                              United States is requiring companies to file resolution plans that must
                              detail how companies would resolve themselves under the Code, in some
                              countries, regulators complete a resolution plan that discusses resolving
                              the company without further market disruptions. In contrast, financial
                              companies in those countries only have to complete a recovery plan that
                              discusses ways to restore strength to a company under financial stress.
                              Therefore, foreign banking organizations, which must file resolution plans
                              in the United States, could face a different set of requirements in their
                              home countries.

Development of Global Legal   U.S. and international regulators have cited the development of the Legal
Entity Identifier             Entity Identifier (LEI) as a code for financial institutions and regulators to
                              better identify and manage institutions’ relationships with other
                              institutions—allowing them to more effectively measure and monitor
                              systemic risk. In addition, FDIC officials told us that the use of an LEI
                              should help regulators in resolving a financial company during the OLA
                              process because its adoption would allow large, systemically important
                              financial companies to identify their many component entities, which
                              generally are organized along business rather than legal lines. As we
                              discussed in our 2011 report, the resolution of these companies involves
                              unwinding the complex interrelationships among the entities in order to
                              address creditor claims. 64

                              Currently, a single financial institution may be identified or coded in
                              different ways by a firm doing business with that institution. For example,
                              JP Morgan Chase, Inc. may be referred to as JPMC, Chase, and
                              JPMorgan. Regulators have cited a universal identifier for financial
                              institutions as particularly helpful in the identification of parties in
                              transactions involving over-the-counter derivatives. 65 When Lehman
                              collapsed in 2008, other financial institutions struggled to determine their
                              counterparty exposure to the firm, causing further market disruptions.



                              64
                               See GAO-11-707.
                              65
                               Over-the-counter derivatives refer to derivatives not traded on a formal exchange.




                              Page 30                                                           GAO-12-735 Bankruptcy
The financial industry has been exploring a universal identifier for
decades, but recently regulators have pushed for a global mandate. The
Dodd-Frank-created Office of Financial Research issued a policy
statement in 2010 seeking comment on the development of an LEI. 66
Since then, the Office of Financial Research and the Financial Stability
Board have held roundtables and the financial industry has convened
panels on the development of an LEI. In January 2012, the Financial
Stability Board convened an expert group of regulators (supported by an
industry advisory panel of experts) to provide recommendations on the
governance framework for the LEI with a goal of endorsement by the G20
summit in June 2012. On May 30, the Financial Stability Board endorsed
the expert group’s recommendations for a governance and operational
framework for an LEI. In addition, the Financial Stability Board’s
specification for an LEI standard is derived from the technical standard for
a 20-digit alphanumeric code published in May 2012 by the International
Organization for Standardization.

Global acceptance of an LEI requires determining its governance and
regulatory oversight. An Office of Financial Research official told us that
the Financial Stability Board’s LEI Expert Group has broken into
committees to discuss issues including governance, operating model,
reference data and confidentiality, funding, and implementation. The
official said that the governance committee also has been considering a
model in which a nonprofit entity would administer the process. According
to Treasury, the Financial Stability Board published a report in mid-June
2012 including recommendations for the appropriate governance
framework for a global LEI. U.S. regulators reported that the first iteration
of LEI structure will be limited to the code itself and a minimal set of
reference data, not information about ownership hierarchies, because of
confidentiality concerns. In its commodity swap reporting rule (which goes
into effect July 16, 2012), CFTC became the first U.S. regulator to require
financial companies to use LEIs. 67 SEC also has published a proposed
securities swap reporting rule that requires the use of an LEI provided by


66
  The Office of Financial Research supports the Financial Stability Oversight Council and
member agencies by collecting and standardizing financial data, performing applied and
essential long-term research, developing tools for risk measurement and monitoring,
performing other related services, and making the results of the activities of the office
available to financial regulatory agencies. The office operates as part of Treasury.
67
 CFTC has clarified its rule that financial institutions may use an interim identifier if the
LEI was not adopted by July 16, 2012. See 77 Fed. Reg. 2136 (Jan. 13, 2012).




Page 31                                                                GAO-12-735 Bankruptcy
                         an international organization when available. 68 The Financial Stability
                         Board has recommended a target for global implementation of the LEI
                         standard by March 2013.


                         In the 2011 report, we found that comprehensive data on the number of
Financial Company        financial companies in bankruptcy are not readily available. Bankruptcy
Bankruptcies Remain      data are collected for provisions relevant to the Code and for
                         management of cases. While federal agencies currently do not collect
Difficult to Track and   information to identify certain bankrupt entities, the Federal Judicial
Several Major Cases      Center is starting to assemble a specialized database of financial
Move Forward             company bankruptcies from the past 10 years. Two large cases we began
                         tracking in our 2011 report, Lehman Brothers and Washington Mutual, are
                         moving forward, but these cases along with the more recent bankruptcy
                         of MF Global illustrate the challenges in resolving large, complex financial
                         institutions.


Data on Financial        As we reported last year, tracking financial company bankruptcies is
Company Bankruptcies     difficult because data are limited. Specifically, data on the number of
Are Limited              financial company bankruptcies and their outcomes have been difficult to
                         obtain. Neither AOUSC, the Trustees’ Office in Justice, nor FDIC collect
                         information on the number of financial companies in bankruptcy. We
                         previously reported that AOUSC collects some data on bankruptcy
                         outcomes, such as the closing date for large cases. However, AOUSC
                         does not specifically include information on bankruptcy cases involving
                         financial institutions, or track outcomes such as the value of creditor
                         returns or the value of firms emerging from bankruptcy. The bankruptcy
                         courts only collect data on the type of business in which an institution is
                         engaged if the data are pertinent to provisions of the Code (for example if
                         the business was a broker-dealer subject to a SIPA proceeding) and
                         these data are used for case processing rather than overall study.
                         AOUSC officials told us they have been considering having the
                         bankruptcy courts include the North American Industry Classification


                         68
                           See 75 Fed. Reg. 75208 (Dec. 2, 2010) for the proposed securities swap reporting rule.
                         In addition, an SEC official told us that under a form all SEC-registered investment
                         advisers must file with SEC, they are requested to include an LEI for either themselves or
                         their fund. Similarly private funds (hedge funds) also will be requested to list an LEI. Under
                         a proposed rule, SEC would provide stock exchanges with the option of using LEIs to
                         identify broker-dealers and all entities with which the broker-dealer executes trades. 75
                         Fed. Reg. 32556 (June 8, 2010).




                         Page 32                                                              GAO-12-735 Bankruptcy
System code when a company files for bankruptcy. However, AOUSC
and Federal Judicial Center officials told us that this new requirement
would require a modification to the Official Bankruptcy Forms. These
officials told us that this process generally takes 2 years and follows the
process for amending the Federal Rules of Bankruptcy Procedure, except
the process does not require approval by the Supreme Court or an
opportunity for review by Congress.

AOUSC provides the Trustee Program’s bankruptcy filing data. Officials
told us these data include whether the debtor is a person or a corporation,
whether it is a small business, the case number, the name and address of
the debtor, and the status of the case (that is, whether a plan has been
filed or if the case has been dismissed), and other types of information.
However, officials told us they do not flag financial companies and cannot
track them separately. FDIC officials told us that although they track
individual cases of bank holding companies in bankruptcy, such as
Washington Mutual, Inc. and Colonial Bank, they do not have a database
that aggregates these case records.

Although AOUSC officials told us that they currently were not routinely
collecting any data that would allow the identification and tracking of
financial company bankruptcies, AOUSC and the Federal Judicial Center
have undertaken a collaborative effort to create a specialized database of
financial companies that have filed for bankruptcy protection from 2000 to
2010, but they have concerns about the reliability of these data as they
are untested for this purpose. 69 According to a Federal Judicial Center
official, the purpose of the database is to compile information useful in
understanding the effectiveness of Chapter 7 and Chapter 11 of the Code
in facilitating the orderly liquidation or reorganization of financial
companies. Officials told us developing such a database has been
challenging, due to the resources needed and coding concerns. 70 A
Federal Judicial Center official told us they had developed an online
coding form to document more information about each case and held a
training session for the student coders. One of the items researchers



69
  AOUSC officials told us the reported court data are reliable for the purpose of reporting
required statutory case statistics.
70
  Because of the time needed to review individual court dockets, AOUSC and Federal
Judicial Center staff have recruited University of Maryland law students to assist in the
initial coding effort.




Page 33                                                             GAO-12-735 Bankruptcy
must code is the type of financial company, which is not information the
courts currently collect. Some outcomes included in the database, such
as details about the sale of all assets, are more difficult to find in court
dockets. In addition, the official told us determining the level of detail on
each case to include in the database has been a challenge. For example,
the official told us they attempted to limit the complexity of information for
staff to code, while still documenting the necessary data for further study.
To address this issue, the official told us that the Federal Judicial Center
is undertaking various data verification processes, including a process by
which two independent coders will code the same information and a third,
more experienced researcher will reconcile any differences between
them. 71 Despite these efforts, AOUSC officials told us that they currently
are not able to determine how effective this database will be in allowing
them to track large financial company bankruptcies, partly because of
concerns over using data reported by the companies filing for bankruptcy.

As in our 2011 report, to examine the number of large financial
companies filing for bankruptcy protection, we matched AOUSC data on
Chapter 11 megacases with data from a private firm on financial company
bankruptcies to determine the number of financial companies in
bankruptcy during the past decade. Table 2 describes both the total
megacase filings and those megacases that are financial companies.

Table 2: Chapter 11 Mega-Bankruptcy Filings, by Total Filings and Financial
Institution Filings, 2000 through 2011

                                           Chapter 11 mega-case filings
                                     Total number of           Number of financial
Year                                          filings            institution filings
2000                                                63                            2
2001                                               101                            1
2002                                                88                            2
2003                                                73                            1
2004                                                54                            0
2005                                                31                            2
2006                                                25                            0
2007                                                13                            4




71
 This process is also known as “double-coding for inter-rater reliability.”




Page 34                                                              GAO-12-735 Bankruptcy
                                                                                     Chapter 11 mega-case filings
                                                                          Total number of            Number of financial
                           Year                                                    filings             institution filings
                           2008                                                             79                          4
                           2009                                                            118                          6
                           2010                                                             40                          1
                           2011                                                             35                          1
                           Total                                                           720                         24
                          Sources: GAO analysis of AOUSC and New Generations data.




Three Major Financial     We continued to monitor two financial megacases, Washington Mutual,
Institution Bankruptcy    Inc. (Washington Mutual) and Lehman Brothers Holdings, Inc. (Lehman)
Cases Continued to Move   and began monitoring a third, MF Global Holdings Ltd. (MF Global).
                          Washington Mutual and Lehman are making progress in their bankruptcy
Forward                   proceedings, with several issues outstanding. Both financial institutions
                          filed for Chapter 11 protection in September 2008. A new case involves
                          MF Global, a holding company with a broker-dealer and commodity
                          broker, which filed for Chapter 11 protection in October 2011. Each case
                          illustrates the complexities of liquidating large financial institutions.

                          Washington Mutual. As we discussed in our 2011 report, the parties to
                          the bankruptcy had agreed to a revised settlement report in late 2010, but
                          confirmation of that plan was delayed due to various claims by
                          shareholders and some creditors. These delays continued throughout
                          2011 because of additional hearings to discuss allegations of insider
                          trading by hedge funds. Shareholders alleged that several hedge funds
                          had access to discussions about the settlement plan through their
                          attorneys and later bid on creditor claims. The parties entered mediation
                          in October 2011 and reached a settlement and submitted a plan on
                          December 12, 2011. A Delaware bankruptcy court judge confirmed the
                          plan on February 17, 2012. As discussed in the 2011 report, the plan set
                          forth the allocation of the tax refund among all of the parties: up to $2.2
                          billion to Washington Mutual’s holding company; up to $2.2 billion to J.P.
                          Morgan Chase, Inc. (the new owner of the depository bank); up to $850
                          million to FDIC; and $335 million to the bank’s bondholders. As of May
                          2012, the judge told us that she had been advised that the majority of the
                          claims had been resolved. Further payouts will be distributed through a
                          liquidating trust. Washington Mutual, Inc. is being reorganized as a
                          reinsurance company that will be funded by capital contributions from
                          new bondholders, not by the creditors from the original debtor.




                          Page 35                                                                          GAO-12-735 Bankruptcy
Lehman Brothers. On June 29, 2011, Lehman filed a disclosure
statement that set out the plan for distribution of assets to the creditors of
23 Lehman debtor entities. This plan was made after extensive
negotiations with representatives of major creditor groups, including those
that supported substantive consolidation and those that did not. This plan
represents a compromise between the parties by providing for
adjustments in payments to creditors. In November 2011, creditors
approved Lehman’s reorganization plan. The bankruptcy court confirmed
the plan in December 2011. The plan included numerous settlements
between the holding company and other counterparties, including a series
of bilateral settlements with foreign affiliates and creditors. As a result,
creditors reduced the amount of claims asserted against Lehman by more
than $295 billion. According to Lehman, distributions to creditors totaling
$22.5 billion began on April 17, 2012. A second distribution is planned for
September 2012.

The resolution of Lehman’s broker-dealer, Lehman Brothers Inc.,
continues through the SIPC process. According to SIPC officials, almost
all of the 100,000 claims had been satisfied as of May 2012. However,
some of the remaining claims are among the largest and involve complex
litigation over who meets the definition of “customer” under SIPA. 72
According to the SIPA Trustee, there are over 2,100 claims with a total
value of nearly $42 billion that are still unresolved. One of the largest of
these claims involves Lehman’s overseas affiliate—Lehman Brothers
International, Europe (LBIE)—which is pursuing two types of claims
against Lehman Brothers Inc. 73 The first is an “omnibus customer claim”
on behalf of approximately 1,100 LBIE clients against Lehman Brothers
Inc., of which $6 billion in claims for securities and $2 billion in claims for
cash have been allowed by the SIPA Trustee. A remaining $6.7 billion
remains under dispute. 74 The second is a “house claim” on its own behalf
against Lehman Brothers Inc., of which $8.9 billion remains under
dispute. The trustee said he does not recognize LBIE as a “customer” of
Lehman Brothers Inc. because it does not meet the definition of


72
  Under SIPA, customers generally receive their distribution before any other group.
Generally, a “customer” means any person who has a claim on account of securities
received, acquired, or held by the debtor in the ordinary course of business. 15 U.S.C. §
78lll(2).
73
 LBIE was Lehman’s principal European broker-dealer.
74
 See SIPA Trustee report.




Page 36                                                            GAO-12-735 Bankruptcy
“customer” under SIPA. According to SIPC officials, Lehman Brothers Inc.
never held reserves on behalf of LBIE. These issues remain in litigation
and may go to trial in 2013.

The SIPA Trustee for Lehman Brothers Inc. has initiated litigation against
other counterparties over payment distribution, which also remains
ongoing. In the first case, the SIPA Trustee is in litigation with Barclays
involving issues surrounding its purchase of assets of Lehman Brothers
Inc., immediately after Lehman filed for bankruptcy. According to the
SIPA Trustee’s report, the dispute centers on competing interpretations of
the Asset Purchase Agreement (defining the terms of the sale of certain
Lehman Brothers Inc. assets to Barclays) between Lehman, Barclays,
and Lehman Brothers, Inc. and involves contested claims to
approximately $7 billion of “disputed assets.” 75 This case is currently on
appeal. 76

In a second case, SIPC officials told us the SIPA Trustee has filed an
adversary proceeding against Citibank seeking the return of a $1 billion
deposit Lehman Brothers Inc. made with Citibank during Lehman
Brothers Inc.’s last week in operation. The case involves Citibank’s setoff
of Lehman Brothers Inc.’s obligations against Lehman Brothers Inc.’s
deposits at Citibank and affiliated entities. 77 Citibank claims it set off the
deposit shortly before Lehman Brothers Inc.’s SIPA liquidation process
began in September 2008. The SIPA Trustee also has been seeking the
turnover of approximately $300 million deposited in Lehman Brothers Inc.
accounts at various Citibank locations around the world. According to the
SIPA Trustee, Citibank has been attempting to set off these deposits
against a component of the Lehman Brothers Inc. obligations




75
   The “disputed assets” consist of assets in Lehman Brothers Inc.’s Rule 15c3-3 customer
reserve accounts (the “Rule 15c3-3 Assets”), margin used to support derivatives trading
(the “Margin Assets”), and certain assets in LBI’s clearance boxes at the Depository Trust
and Clearing Corporation (the “Clearance Box Assets”).
76
  According to the SIPA Trustee, both he and Barclays appealed portions of the
bankruptcy court’s opinion to the U.S. District Court for the Southern District of New York.
On June 5, 2012, the District Court issued its order, and the SIPA Trustee has filed an
appeal to the Second Circuit.
77
 Setoff is essentially the right to balance and cancel mutual claims between parties.




Page 37                                                             GAO-12-735 Bankruptcy
(approximately $1.26 billion) that are related to a settlement service
provided by Citibank. 78

In addition, the SIPA Trustee has been pursuing claims against LBIE on
behalf of the broker-dealer’s customers. The SIPA Trustee alleges that
LBIE has assets that belong to Lehman Brothers Inc. customers.
According to the SIPA Trustee, due to the hundreds of thousands of
transactions between Lehman Brothers Inc. and LBIE, the final outcome
and amounts available for SIPC’s customer distribution are heavily
dependent on LBIE’s own resolution in the United Kingdom. The SIPA
Trustee has filed claims against LBIE totaling almost $16 billion.
According to the SIPA Trustee, he and his advisers have been engaged
in discussions with LBIE about the extent to which LBIE will allow the
SIPA Trustee’s claim. The SIPA Trustee said the result of this process will
have a major impact on the resolution of the U.S.-based Lehman Brothers
Inc. estate and the SIPA Trustee’s ability to satisfy claims of customers
and other creditors of the broker-dealer.

MF Global. MF Global has been in the bankruptcy process since October
31, 2011, and has faced challenges due to missing customer funds and
property. MF Global was a large, globally active company with a
commodity and securities broker-dealer. The firm was based in the United
States, with operations in multiple countries, including Australia, Canada,
Hong Kong, India, Japan, Singapore, and the United Kingdom. As of mid-
2011, the holding company had total assets of almost $46 billion. MF
Global’s stock price declined during 2011, falling from about $8 a share at
the start of the year to below $4 in early October and below $2 by late
October. According to the SIPA Trustee, MF Global’s exposure to
European debt and poor earnings reports led to credit downgrades and
increased demands for collateral from MF Global’s counterparties. This in
turn led to an increased loss of confidence in MF Global as customers
began to close their accounts and withdraw funds.

According to CFTC, the failure of the MF Global commodity broker (MF
Global Inc.) is unprecedented in the size and scope of missing customer
funds. Ordinarily, the designated self-regulatory organization, in
coordination with CFTC, would have arranged for the sale of a failed



78
  Specifically, the settlement service related to payments for foreign exchange
transactions through the Continuous Linked Settlement system.




Page 38                                                            GAO-12-735 Bankruptcy
commodity broker to another commodity broker, but in the case of MF
Global Inc., the missing customer funds and possible fraud prevented this
from occurring, according to CFTC officials. These officials said they
increased their involvement in the MF Global case after the company was
downgraded by credit rating agencies on October 27, 2011. Despite
repeated inquiries, MF Global Inc. was not able to provide supporting
records for its calculations of segregated customer accounts. Because
CFTC lacks authority to put the commodity broker into bankruptcy, when
customer money was found missing, SEC and CFTC determined that a
SIPC-led bankruptcy was the appropriate course of action to protect
customer accounts and assets.

The MF Global bankruptcy has highlighted issues related to resolving an
international broker-dealer and commodity broker and the effect on
customer payments. According to SIPC officials, for the securities estate,
the SIPA Trustee is using SIPA, and for the commodities estate, the
Trustee is applying subchapter IV of Chapter 7 of the Code to the extent
consistent with SIPA, as well as applicable commodities law. 79 While a
SIPA proceeding and the bankruptcy process for a commodity broker are
similar, there are important differences. Under the bankruptcy process for
a commodity broker, to the extent that the debtor’s general estate is
insufficient to pay for the estate’s administrative expenses, these
expenses are paid from customer property ahead of the claims of
customers. However, under the SIPA process, customer property is used
to pay customers, and is available to pay estate expenses only if all
customers have been satisfied in full. These differences could have a
distinct effect on the funds available to customers, depending on the
amount of the administrative expenses being paid compared to the
amount of the general estate and the amount of the customer claims. In
addition, SIPC may advance up to $500,000 for each customer holding
securities (and a maximum of $250,000 for customers holding cash) while
the liquidation is ongoing, which enables the trustee to provide some
relief to securities customers relatively quickly. SIPC has no authority to
make advances to satisfy commodities claims and the liquidation process
for a commodity broker has no such provision. In MF Global, more than
30,000 commodity customer claims were filed compared with
approximately 300 securities customer claims.




79
 15 U.S.C. § 78fff-1(b).




Page 39                                                GAO-12-735 Bankruptcy
Because different customer estates are available to securities and
commodity customers, each type of customer is receiving a different
recovery percentage. CFTC officials told us they have been working to
identify customer property for these estates, and SIPC officials told us the
CFTC has closely cooperated with the SIPA Trustee. 80 However, SIPC
officials said the CFTC’s regulations that implement bankruptcies for
commodity brokers have been cumbersome to follow. In addition,
according to SIPC officials, the SIPA Trustee’s authority to conduct bulk
transfers from the insolvent commodity broker-dealer to other broker-
dealers is vague.

According to the SIPA Trustee, a large volume of transactions occurred in
the final week of MF Global’s operations. The SIPA Trustee’s report
stated that the company’s information technology system could not
handle this increased volume, leading to transactions that were not
recorded or recorded incorrectly. The report estimated that “fail
transactions” (in which a counterparty fails to deliver cash or securities)
were five times the normal volume in the final week. Following the
bankruptcy filing, the SIPA Trustee conducted an investigation examining
840 cash transactions in excess of $10 million that totaled $327 billion
and 20,000 cash transfers below $10 million that totaled $9 billion. In
addition the SIPA Trustee has been examining securities transactions
valued at more than $100 billion. The SIPA Trustee has sought to
connect cash transfers from counterparties to the transfers of securities
from MF Global to locate more customer funds.

The resolution of MF Global Inc. also has been hampered by differences
in laws of various jurisdictions and the location of foreign assets.
According to the SIPA Trustee, differences in insolvency laws and a lack
of legal precedent have contributed to significant gaps in commodity
customer protection between the United States and foreign jurisdictions.
SIPC officials and the SIPA Trustee said customers who had accounts for
trading on domestic exchanges and customers who had accounts to take
physical delivery of commodities received an 80 percent return on their
account from the first interim distribution; however, the customers with
accounts for trading on foreign exchanges will receive only a 10 percent
return from this distribution. The officials explained that most of the


80
  Commodity customer property includes property unlawfully converted that is still part of
the estate, 17 CFR § 190.08(a)(ii)(F), and received by margin that was withdrawn and
recovered by avoidance powers of the trustee.17 CFR § 190.08(a)(ii)(D).




Page 40                                                            GAO-12-735 Bankruptcy
                     property for customers on foreign exchanges is in the United Kingdom
                     and according to the SIPA Trustee, these assets are now under the
                     control of foreign bankruptcy trustees, similar to other international
                     bankruptcies. The SIPA Trustee said that recovery of foreign assets was
                     uncertain and would take time, adding that these issues were usually the
                     last to be resolved and only after litigation. 81 At a June 1, 2012, hearing, a
                     target date of April 9, 2013, was set by the U.K. court.

                     The recent bankruptcy cases involving large complex financial institutions
                     illustrate the potential challenges FDIC will have in an OLA proceeding,
                     including resolving a securities and commodity broker, a company with
                     significant international presence, and cases involving complex litigation.
                     As described previously, MF Global customer property may be located in
                     other countries, complicating the trustee’s efforts to obtain it. The trustee
                     for Lehman’s broker-dealer has been involved in litigation with one of
                     Lehman’s foreign affiliates for several years. Because OLA will only apply
                     to domestic entities, international coordination and voluntary cooperation
                     with foreign regulators will be essential for the resolution of a global
                     company. As discussed earlier, FDIC and other regulators have been
                     taking steps to improve international coordination of the resolution of
                     large, systemically important financial institutions but challenges remain.
                     Regulators have yet to clarify the roles and responsibilities of FDIC and
                     SIPC during the liquidation of a broker-dealer under OLA, including the
                     treatment of securities customers, commodity customers, and general
                     creditors. On May 3, 2012, FDIC conducted an exercise with SEC and
                     CFTC simulating a hypothetical failure of a systemically important
                     financial institution with both a securities broker and commodity broker to
                     better understand gaps in the OLA process and assist in their rulemaking
                     process.


                     We provided a draft of this report to AOUSC, CFTC, Departments of
Agency Comments      Justice and the Treasury, FDIC, Federal Judicial Center, Federal
and Our Evaluation   Reserve, National Association of Insurance Commissioners, SEC, and



                     81
                       As noted in GAO-11-707, regulators and legal officials have mechanisms to coordinate
                     the bankruptcies of international companies, such as the United Nations Commission on
                     International Trade Law’s Model Law on Cross-Border Insolvency (adopted in the United
                     States as Chapter 15 of the Bankruptcy Code), insolvency protocols, and memorandums
                     of understanding, but these are not comprehensive. Commodity brokers and entities
                     subject to SIPA proceedings are outside Chapter 15. 11 U.S.C. § 1501(c).




                     Page 41                                                         GAO-12-735 Bankruptcy
SIPC for review and comment. The National Association of Insurance
Commissioners did not provide comments. We received technical
comments from the remaining agencies, which we incorporated as
appropriate.


We are sending copies of this report to the appropriate congressional
committees, the Director of the Administrative Office of the U.S. Courts,
the Chairman of the Commodity Futures Trading Commission, the
Assistant Attorney General for Administration at the Department of
Justice, the Secretary of the Treasury, the Chairman of the Federal
Deposit Insurance Corporation, the Director of the Federal Judicial
Center, the Chairman of the Board of Governors of the Federal Reserve
System, the Chief Executive Officer of the National Association of
Insurance Commissioners, the Chairman of the Securities and Exchange
Commission, and the Chairman of the Securities Investor Protection
Corporation, and other interested parties. The report also is available at
no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please
contact Alicia Puente Cackley at (202) 512-8678 or cackleya@gao.gov.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. Major contributors to
this report are listed in appendix III.




Alicia Puente Cackley
Director, Financial Markets and
    Community Investment




Page 42                                                GAO-12-735 Bankruptcy
List of Committees

The Honorable Tim Johnson
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate

The Honorable Patrick Leahy
Chairman
The Honorable Charles E. Grassley
Ranking Member
Committee on the Judiciary
United States Senate

The Honorable Spencer Bachus
Chairman
The Honorable Barney Frank
Ranking Member
Committee on Financial Services
House of Representatives

The Honorable Lamar Smith
Chairman
The Honorable John Conyers, Jr.
Ranking Member
Committee on the Judiciary
House of Representatives




Page 43                                            GAO-12-735 Bankruptcy
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              As required under section 202 of the Dodd-Frank Wall Street Reform and
              Consumer Protection Act (Dodd-Frank Act), this report examines: (1)
              actions the U.S. District Court for the District of Columbia (D.C. District
              Court) has taken in response to the judicial review provision of Orderly
              Liquidation Authority (OLA), including any revisions to Local Civil Rule 85;
              (2) federal rules or regulations relating to OLA and efforts to improve
              international coordination, including living wills, in resolving financial
              companies; and (3) data collection efforts and the outcomes of financial
              institutions that were in the bankruptcy process.

              Generally to address our objectives, we reviewed the Dodd-Frank Wall
              Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010
              and its rulemaking requirements. We also conducted interviews with
              officials at the Administrative Office of the U.S. Courts (AOUSC);
              Commodity Futures Trading Commission; Federal Deposit Insurance
              Corporation (FDIC); Board of Governors of the Federal Reserve System
              (Federal Reserve); Federal Judicial Center; Securities and Exchange
              Commission; Securities Investor Protection Corporation; Department of
              the Treasury (Treasury); and the U.S. District Court for the District of
              Columbia (D.C. District Court). We reviewed relevant literature and
              reports issued since our last report, including those written by AOUSC
              and the Federal Reserve in response to mandates in the Dodd-Frank Act.

              Specifically to address the first objective on actions the D.C. District Court
              took in response to the judicial review provision of the OLA, we monitored
              the website for the D.C. District Court for changes in Local Civil Rule 85.
              We interviewed the Chief Judge and other officials from the court to
              discuss how the rule would be implemented in case of a petition under
              OLA and the changes made to the rule in response to comments from
              FDIC and Treasury. We also discussed these changes with officials from
              FDIC and Treasury to obtain their views on the amended rule and how
              they expected the rule to be implemented.

              To address the second objective on federal regulations relating to OLA
              and the resolution of financial institutions, we searched the Federal
              Register and monitored the websites of FDIC and the Federal Reserve to
              determine if relevant rules related to FDIC’s authority under Title II and
              resolution planning had been issued. We also monitored the development
              of other related rules, including the Federal Reserve’s rule related to the
              definition of nonbank financial companies and the Financial Stability
              Oversight Council’s designation of systemically important financial
              institutions. We reviewed proposed, interim final, and final rules under
              these authorities; they are presented in appendix II. We reviewed


              Page 44                                                  GAO-12-735 Bankruptcy
Appendix I: Objectives, Scope, and
Methodology




comment letters on the rules, testimonies by regulatory officials,
roundtable discussions held by FDIC, legal opinions and law firm client
updates, and seminars conducted by law firms on FDIC’s new authority
under Title II. We reviewed updates from the Financial Stability Board on
international coordination of related resolution and recovery planning and
monitored the websites of the Financial Stability Board and Treasury’s
Office of Financial Research for developments on the Legal Entity
Identifier. We also participated in financial industry presentations on the
development and challenges of adoption of the Legal Entity Identifier.

To address the third objective on data collection and the status of
financial institutions in the bankruptcy process, we spoke to officials from
AOUSC, the Federal Judicial Center, and the Trustee Program at the
Department of Justice to learn more about potential sources of financial
company bankruptcy data. However, as discussed in our report, we found
that no single source for financial company bankruptcy data is available.
To provide some background information on the number of bankruptcies
of large financial institutions from January 1, 2010, through December 31,
2011, we used data (as we did for last year’s report) on Chapter 11
megacases collected by AOUSC and compared these cases with
bankruptcy data from New Generations Research, Inc. New Generations,
Inc., is a private company that takes data from U.S. bankruptcy filings and
augments it with industry-specific data, including the type of industry of
the debtor. We spoke with federal officials familiar with New Generations,
Inc., and they consider it to be reliable for tracking bankruptcy cases. We
also spoke to representatives from New Generations, Inc. regarding their
data collection and reliability methods. We concluded that the data were
reliable for tracking bankruptcy cases. AOUSC provided lead case data
on megacases (involving assets of more than $100 million and more than
1,000 creditors) that included date and location of filing and some
information on how closed cases were concluded (such as by sale,
liquidation, or reorganization). By matching data on bankruptcies of
financial institutions from New Generations with the AOUSC-provided
megacase data, we were able to provide some context on the number of
Chapter 11 megacases that represented financial institutions. We decided
the data were sufficiently reliable for that purpose because there was a
reasonable match between cases in the two data sets. As with our
previous report, AOUSC provided only data on Chapter 11 cases and not
Chapter 7. According to AOUSC officials, virtually all megacases were
originally filed as Chapter 11 cases.

In addition to our general tracking of financial institution bankruptcies, we
continued to monitor two major financial company bankruptcies—Lehman


Page 45                                                  GAO-12-735 Bankruptcy
Appendix I: Objectives, Scope, and
Methodology




Brothers Holdings, Inc. and Washington Mutual, Inc.—on which we
reported as case studies in 2011. 1 We also began monitoring a new
major financial company bankruptcy, MF Global Holdings, Inc., that filed
for Chapter 11 protection in October 2011. For each of these cases, we
reviewed court documents such as court orders, trustee reports, and
reorganization plans. We also interviewed federal officials on their
involvement in these cases. We reviewed these data to provide illustrative
examples of some of the challenges and complexities of financial
company megacases; for example, challenges in resolving an
internationally active company or cases involving complex legal issues.
We verified information about these cases with federal officials. We
concluded that the information in these sources was sufficiently reliable
for our purposes.

We conducted this performance audit from August 2011 to July 2012, in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




1
 We also reported on the bankruptcy of CIT Group in our 2011 report, but this case was
completed.




Page 46                                                          GAO-12-735 Bankruptcy
Appendix II: Status of Selected Rules Related
                                            Appendix II: Status of Selected Rules Related
                                            to the Orderly Liquidation Authority and
                                            Resolution Planning under the Dodd-Frank Act


to the Orderly Liquidation Authority and
Resolution Planning under the Dodd-Frank Act
                                            The following are rules either mandated by the Dodd-Frank Wall Street
                                            Reform and Consumer Protection Act (Dodd-Frank Act) or initiated by the
                                            Federal Deposit Insurance Corporation (FDIC) or other agencies. As
                                            discussed in the report, FDIC has been considering additional rules under
                                            its Title II authority. Table 3 includes a list of rules and actions that have
                                            been completed by the regulators and the courts related to the orderly
                                            liquidation authority (OLA), resolution planning, or bankruptcy.

Table 3: Selected Final Rules and Actions Completed, as of May 15, 2012

                Section of
Agency/         Dodd-Frank
court           Act              Rule                                                              Status
FDIC and the    Section 165(d)   Resolution Plans Final Rule.                                      FDIC and the Federal Reserve published the final
                                                                                                                                                     a
Board of                                                                                           rule on November 1, 2011 (76 Fed. Reg. 67323).
Governors of                                                                                       The first plans are due in July 2012.
the Federal                                                                                        The final rule was based on a proposed rule from
Reserve                                                                                            April 2011 (76 Fed. Reg. 22648).
System
(Federal                                                                                           FDIC also issued a resolution plans rule for
Reserve)                                                                                           depository institutions with $50 billion in total
                                                                                                   assets effective April 1, 2012 (77 Fed. Reg. 3075,
                                                                                                   published January 23, 2012).
                                                                                                   The April rule supercedes the interim final rule
                                                                                                   effective January 1, 2012 (76 Fed. Reg. 58379,
                                                                                                   published September 21, 2011).
U.S. District   Section 202(b)   Local Civil Rule 85: Outlines the court’s judicial                The court issued the rule January 19, 2011, and
Court for the                    review of a petition from the Secretary of the                    amended the rule on July 6, 2011, after receiving
District of                      Treasury to allow FDIC to act as a receiver for                   comments from FDIC and the Department of the
Columbia                         a potentially insolvent financial company.                        Treasury (Treasury).
FDIC                             Establishment of the FDIC Systemic                                Office was established. Signed April 28, 2011 (76
                                 Resolution Advisory Committee.                                    Fed. Reg. 25352, May 4, 2011).
FDIC            Section 209      Orderly Liquidation Authority Final Rule:                         FDIC issued this final rule on July 15, 2011, and it
                                 Final rule to implement certain provisions to                     became effective August 15, 2011 (76 Fed. Reg.
                                 resolve covered financial companies, including                    41626).
                                 (i) recoupment of compensation from senior                        This final rule incorporates aspects of earlier
                                 executives and directors; (ii) the clarification of               rulemakings:
                                 power to avoid fraudulent or preferential                         •   A notice of proposed rulemaking from October
                                 transfers; (iii) the priorities of expenses and                       19, 2010, described as “Phase I” (75 Fed.
                                 unsecured claims; and (iv) the administrative                         Reg. 64173).
                                 process for initial determination of claims.
                                                                                                   •   An interim final rule on Phase I issued January
                                                                                                       25, 2011 (76 Fed. Reg. 4207).
                                                                                                   •   A proposed rulemaking from March 23, 2011
                                                                                                       (“Phase II”) (76 Fed. Reg. 16324).
FDIC            Section 209      Mutual Insurance Holding Company Treated                          FDIC issued the final rule on April 30, 2012 (77
                                 as Insurance Company Final Rule.                                  Fed. Reg. 25349).
                                            Sources: Dodd-Frank Act, D.C. District Court, FDIC, Federal Reserve, and Treasury.




                                            Page 47                                                                              GAO-12-735 Bankruptcy
                                           Appendix II: Status of Selected Rules Related
                                           to the Orderly Liquidation Authority and
                                           Resolution Planning under the Dodd-Frank Act




                                           a
                                            We have listed the dates published in the Federal Register, rather than the date the agencies
                                           published on their websites.

                                           See table 4 for the status of various rules that have yet to be finalized.

Table 4: Selected Proposed Rules and Actions in Progress, as of May 15, 2012

                  Section of
Agency/           Dodd-Frank
court             Act              Rule                                                          Status
Treasury-Office   Sections 151-    Global Initiative to Establish a Legal Entity                 Treasury issued a proposed policy statement for
of Financial      154              Identifier (LEI) for Financial Institutions.                  comment on November 30, 2010. Comments were
Research                                                                                         due January 31, 2011 (75 Fed. Reg. 74146).
                                                                                                 The Financial Stability Board (an international
                                                                                                 body of regulators that addresses issues related to
                                                                                                 global financial stability) has created an LEI Expert
                                                                                                 Panel with the goal of introducing a global
                                                                                                 proposal for adoption by the G-20 summit in June
                                                                                                      a
                                                                                                 2012.
Federal Reserve   Section 102(b)   Definition of Company “Predominantly                          The Federal Reserve published a Supplemental
                                   Engaged in Financial Activities.”                             Notice of Proposed Rulemaking and Request for
                                                                                                 Comment on April 10, 2012 (77 Fed. Reg. 21494).
                                                                                                 Comments are due May 25, 2012.
                                                                                                 This was based on an earlier proposed rule that
                                                                                                 was published on February 11, 2011 (76 Fed.
                                                                                                 Reg. 7731).
FDIC              Section 209      Definition of Company Predominantly                           As part of a proposed rule on OLA, FDIC
                                   Engaged in Activities That Are Financial in                   proposed criteria for this definition (76 Fed. Reg.
                                   Nature.                                                       16324). However, in the final rule on OLA, FDIC
                                                                                                 stated that it would wait to finalize the criteria until
                                                                                                 the Federal Reserve issued its rule defining
                                                                                                 nonbank financial companies under Title I (76 Fed.
                                                                                                                b
                                                                                                 Reg. 41626). The Federal Reserve’s proposed
                                                                                                 rule is not yet final (see above).
FDIC and          Section          Calculation of the Maximum Obligation                         Proposed rule published November 25, 2011, for
Treasury          210(n)(7)        Limitation under OLA.                                         60-day comment period ending January 24, 2012
                                                                                                 (76 Fed. Reg. 72645). FDIC approved a final rule
                                                                                                 on April 23, 2012, but Treasury has not given final
                                                                                                           c
                                                                                                 approval.
FDIC              Section          Enforcement of Subsidiary and Affiliate    Proposed rule published March 27, 2012, for a 60-
                  210(c)(16)       Contracts by FDIC as Receiver of a Covered day comment period ending May 29, 2012 (77
                                   Financial Company.                         Fed. Reg. 18127).
                                           Sources: Dodd-Frank Act, FDIC, Federal Reserve, and Treasury.

                                           a
                                            Treasury reported delivering global LEI governance recommendations for endorsement by the G20
                                           in June 2012.
                                           b
                                            After we completed our analysis, FDIC published an amendment to the proposed criteria on June 18,
                                           2012, that clarified the activities that would be considered financial in nature or incidental thereto for
                                           the purposes of Title II (77 Fed. Reg. 36194).
                                           c
                                            Treasury approved the rule, and it was published on the June 22, 2012 (77 Fed. Reg. 37554).




                                           Page 48                                                                             GAO-12-735 Bankruptcy
                                           Appendix II: Status of Selected Rules Related
                                           to the Orderly Liquidation Authority and
                                           Resolution Planning under the Dodd-Frank Act




                                           Finally, table 5 provides the status of selected required rules that have yet
                                           to be proposed or had any action taken.

Table 5: Selected Required Rules That Have Not Yet Been Proposed or Had Action as of May 15, 2012

Agency/               Section of
court                 Dodd-Frank    Rule                                                         Status
FDIC/Securities and   Section       Orderly Liquidation Procedures for Broker-                   Rule has not been proposed. No mandated
Exchange              205(h)        Dealers: Issue joint rules, in consultation                  timeline.
Commission (SEC)                    with Securities Investor Protection
                                    Corporation (SIPC), establishing
                                    procedures for FDIC, SEC, and SIPC to
                                    implement orderly liquidation for covered
                                    brokers and dealers.
FDIC/Primary          Section       Joint Rulemaking on Recordkeeping for                        According to interviews with agency officials, FDIC
                    a
Financial Regulators 210(c)(8)(H)   Qualified Financial Contracts: The Dodd-                     has circulated a draft for review among regulators,
                                    Frank Act requires the primary financial                     but it has not been publicly released. A final or
                                    regulatory agencies to adopt rules                           interim rule is required to be finalized by July 21,
                                    regarding recordkeeping requirements for                     2012.
                                    qualified financial contracts of financial
                                    companies necessary or appropriate to
                                    assist FDIC in the event of an orderly
                                    liquidation. If no rule is in place by July 21,
                                    2012, then the chairperson of the Financial
                                    Stability Oversight Council (Secretary of
                                    the Treasury), in consultation with FDIC,
                                    shall develop a rule.
FDIC/Treasury         Section       Risk-Based Assessment: The Dodd-Frank Treasury officials told us that they had not been
                      210(o)(6)     Act requires FDIC to issue rules to carry  consulted on the drafting this rule. There is no
                                    out risk-based assessments of covered      statutory deadline.
                                    financial companies to cover obligations
                                    incurred by FDIC in becoming receiver of a
                                    failed financial company.
FDIC/Federal          Section       Source of Strength Proposed Rule: The                        FDIC and Federal Reserve staff told us that they
Banking Agencies      616(d)        Dodd-Frank Act requires the appropriate                      are working with the Office of the Comptroller of
                                    federal banking agencies to jointly issue                    the Currency on this rule, which is required by July
                                    rules requiring bank holding companies,                      21, 2012.
                                    savings and loan holding companies, and
                                    other companies that control insured
                                    depository institutions to serve as sources
                                    of financial strength for their subsidiary
                                    depository institutions.
                                           Sources: Dodd-Frank Act, FDIC, Federal Reserve, and Treasury.

                                           a
                                           Primary Financial Regulators are defined in Section 2 of the Dodd-Frank Act.




                                           Page 49                                                                           GAO-12-735 Bankruptcy
Appendix III: GAO Contact and Staff
                  Appendix III: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov
GAO Contact
                  In addition to the individual named above, Debra Johnson, Assistant
Staff             Director; Nancy Barry; Rachel DeMarcus; Katherine Bittinger Eikel;
Acknowledgments   William R. Chatlos; Dean P. Gudicello; Jonathan M. Kucskar; Marc W.
                  Molino; Barbara M. Roesmann; and Jessica Sandler made major
                  contributions to this report. Technical assistance was provided by JoAnna
                  Berry and David Martin.




(250629)
                  Page 50                                               GAO-12-735 Bankruptcy
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