U.S. FDIC proposes financial firm liquidation rule

By Dave Clarke

WASHINGTON, Oct 12 (BestGrowthStock) – U.S. banking regulators on
Tuesday laid out rough plans for how the government would use
its new authority to dismantle large, collapsing financial
companies.

The so-called resolution authority is a main plank of the
Dodd-Frank financial reform legislation enacted in July in
response to the 2008-09 financial crisis, and is designed to
avoid massive government bailouts, such as the one more than
$80 billion bailout of insurer AIG (AIG.N: ), and destructive
bankruptcies like that of Lehman Brothers (LEHMQ.PK: ).

“The proposed rule is the first step in giving market
participants greater clarity and certainty about how certain
key components of the resolution authority will be
implemented,” said Federal Deposit Insurance Corp Chairman
Sheila Bair. “Shareholders and unsecured creditors should
understand that they, not taxpayers, are at risk.”

The FDIC has faced concerns that creditors would be treated
so harshly under this new regime that they would flee a firm at
the first sign of instability, essentially causing a run on the
financial firm’s assets.

The FDIC voted on Friday to formally propose the new rule,
and announced the vote on Tuesday.

Under the law, the government would designate certain
companies as systemically important to the financial system.
The FDIC has the power to seize and break them up if they are
heading toward collapse.

The rule seeks to clarify how certain creditors would be
treated during a liquidation, a key area of concern for market
participants; public comments can be submitted to the agency
over the next 30 days.

The rule “proposes to absolutely bar any additional
payments to holders of long-term senior debt, subordinated
debt, or equity interests that would result in those creditors
recovering more than other creditors entitled to the same
priority of payments under the law,” according to the FDIC.”

The law allows the FDIC to move certain parts of a failing
institution’s business into a separate entity so that they can
be sold at a later date.

Subordinated debt, long-term bondholders and shareholders
would not get special protection under the new rules.

The FDIC said the rule seeks to make clear that all
creditors would have to take losses during a liquidation and
that any who receive an additional payment could be called on
to repay any government funding they received to ensure
taxpayers don’t take a loss during a liquidation.

The FDIC had originally planned to propose the new rule in
late September but held off to give other regulators more time
to review the proposal.

Banks and financial firms have expressed concerns about
whether short-term creditors will receive special treatment
under the rule and the FDIC has sought to downplay this
concern.

“Short-term borrowers will get extra protection,” a senior
restructuring banker in New York, who was not authorized to
speak on the record, said last week. “That’s designed to ensure
that markets like the repo market can continue operating,
because without extra protection, those markets could dry up
quickly.”

The rule also seeks public comments over a 90 day period on
a set of broader questions related to the new resolution
authority.
(Reporting by Dave Clarke, Additional reporting by Dan
Wilchins, Editing by Leslie Adler)

U.S. FDIC proposes financial firm liquidation rule