Treasury Report on OLA (Feb. 23)

Update 251 — Treasury Report on OLA
Leaves Key Pillar of DFA Tailored but Intact

On Wednesday, the Treasury Department released a much-anticipated report with recommendations on Dodd-Frank Act’s Orderly Liquidation Authority (OLA), which provides for the resolution (closure) of non-bank firms in a crisis.

In a surprise to most observers who expected the Trump Treasury to recommend repeal, the report concluded that OLA reduces the threat of contagion and prevents taxpayer-funded bailouts in cases of extreme financial instability.

This is a relief in a world that lately seems to provide more disruption.  Details below.

Good weekends all,

Dana

——————————————————-

It appears that a key pillar of the Dodd-Frank Act is poised to come out of the Trump administration relatively unscathed.

Here, the Administration and House Republicans find themselves at odds.  House Republicans passed HFSC Chair Jeb Hensarling’s Financial Choice Act last spring, which would have repealed OLA entirely.

Treasury insists that bankruptcy is the first priority in addressing a failing firm.  A closer look at its new bankruptcy proposal reveals at best rhetoric, and at worst, a petulant lack of understanding about systemic risk with a curious concern about creditors’ rights in bankruptcy

Almost ten months after the House passed the Choice Act, this week’s report makes it clear that  OLA will endure the Trump era.

What the OLA Provides

The Orderly Liquidation Authority gives the FDIC the power to put failing financial institutions into a liquidating receivership during times of financial crisis.  Under the OLA, loans supplied to the FDIC from the Treasury would be temporary (subject to strict limits) and would be backed by the failing financial institution’s assets, rather than taxpayers.

The Treasury report tacitly acknowledged that swifter action than bankruptcy litigation is necessary to prevent a financial crisis if a systemically important financial institution begins to fail.  Under  OLA, financial crises can be staved off by acting quickly to contain the systemic impact of a failing institution over a few days, rather than relying on a more lengthy bankruptcy process.  The Fed and the FDIC have deeper knowledge of firms and the sector than bankruptcy judges.

Despite its defense of OLA, the Treasury was quick to insist that Bankruptcy is preferred to resorting to  OLA.  The report outlined a strengthened bankruptcy process but this proposal would have little real impact.  Treasury may talk about “bankruptcy first,” but its report does little to change the primacy of the OLA during times of severe economic stress.

How Did This Happen?

 

The OLA has been a target of President Trump and his administration since the Presidential campaign commitment to dismantle Dodd-Frank. Leading officials through the Administration have recommended the repeal of the OLA.  Last year, Vice President Pence’s chief economist Mark Calabria admitted his bias against the authority, remarking that he thought it would make bailouts more likely.

Calabria qualified that statement last May, indicating that the Administration had begun to research whether market participants believe it indeed raises the likelihood of bailouts and that he may reconsider his opposition to the OLA, if the evidence demonstrates otherwise.  Wednesday, we learned his conclusion was to leave OLA alone.

Did market participants urge Treasury to hold OLA harmless?  Some firms may think OLA necessary to stop a competitor’s failure from imperiling theirs. The Financial Services Roundtable quickly praised the decision, calling OLA “an important tool to ensure economic resiliency, protect taxpayers and codifies that no institution is too big to fail.”

More GOP Discord: Hensarling Upset 

 

The Treasury Report, once looked at as a potential boon for Republican efforts to “dismantle” DFA, is now seen as a bust.  House Financial Services Committee Chair Jeb Hensarling commented:  “although I have been pleased or even excited about Treasury’s previous reports, this one disappoints.”

The move is yet another sign of discord between the White House and Republicans in Congress.  After a series of minor spats, Trump and Republicans were finally able to come together to pass tax reform.  Here, it seems cooler heads at Treasury have prevailed with the preservation a vital regulatory tool.

A New Bankruptcy Code

 

Treasury attempted to placate Hensarling and other Republican critics by claiming it was taking a “bankruptcy first model,” but this amounts to little more than spin.  The report proposes a new amendment to the bankruptcy code that would create a new “Chapter 14” bankruptcy process.  The process would be designed to unwind large financial institutions that were engaged in substantial amounts of, “qualified financial transactions” such as derivatives, securities, lending transactions, and repurchase agreements.

The new chapter would operate along a two-entity recapitalization model.  A corporation filing for bankruptcy would petition a court for approval to transfer its assets to a newly-created bridge company and “leave behind” the claims of both shareholders and capital structure debt.  This would include a stay on termination rights of derivative counterparties, and financial liability would rest with financial institutions, shareholders, management, and some creditors.  The approach would attempt to appeal to private funding for the reorganization of the failed financial company.

What Happens Now? 

 

While use of Chapter 14 is perhaps imaginable in the case of a one-off bank failure, it would be next to impossible during a period of systemic stress. Treasury claims Chapter 14 would narrow the path to the OLA by making bankruptcy “the presumptive approach for all failed financial corporations.”  A closer look at the provision reveals little more than a smokescreen and one that reveals an embarrassing lack of understanding about systemic risk.

Creating a new bankruptcy chapter is far beyond the Treasury’s regulatory capacities and would require legislative change. In previous administrations, a Treasury report would almost certainly be accompanied by supporting legislation by friendly members of Congress.  Given GOP hostility to OLA, especially in the House, it is not clear what kind of reception Treasury’s bankruptcy proposal will get across Capitol Hill.

Even in the unlikely event that Chapter 14 becomes law, it is unlikely to have a major impact during a time of systemic stress. The new bankruptcy provision might work for a one-off failure of a given financial institution, but applying it to multiple organizations at once during a severe economic downturn is simply infeasible.  OLA is the law of the land, for now.

27 thoughts on “Treasury Report on OLA (Feb. 23)”

  1. I do not even know how I ended up here, but I thought this post was good.
    I do not know who you are but certainly you’re going to a famous blogger if you aren’t already 😉 Cheers!

    asmr 0mniartist

  2. You are so interesting! I do not think I’ve truly read through anything like that before.
    So wonderful to discover someone with some original thoughts on this subject.

    Really.. thanks for starting this up. This website is something that’s
    needed on the internet, someone with a bit of originality!
    asmr 0mniartist

  3. Woah! I’m really loving the template/theme of this blog.
    It’s simple, yet effective. A lot of times it’s
    tough to get that “perfect balance” between user friendliness and visual appeal.
    I must say that you’ve done a fantastic job with this.
    Also, the blog loads very quick for me on Chrome. Outstanding Blog!
    0mniartist asmr

  4. Hello there, I discovered your web site via Google while looking for a comparable subject,
    your web site came up, it looks great. I have bookmarked it in my google bookmarks.

    Hello there, simply turned into aware of your blog via Google, and found that it’s truly
    informative. I am gonna watch out for brussels. I’ll be grateful should you proceed this in future.
    Many other folks will likely be benefited from your writing.
    Cheers!

  5. Thank you a lot for sharing this with all folks you actually recognize what you are speaking
    about! Bookmarked. Kindly additionally consult with my website =).
    We may have a hyperlink change contract among us

  6. Good day! This is kind of off topic but I need some help from an established
    blog. Is it very difficult to set up your own blog?
    I’m not very techincal but I can figure things out pretty fast.

    I’m thinking about creating my own but I’m not
    sure where to start. Do you have any ideas or suggestions?
    Appreciate it

  7. I was recommended this blog by my cousin. I’m not sure whether
    or not this publish is written by him as nobody else recognise such unique approximately
    my problem. You’re wonderful! Thanks!

  8. Hi there! This is kind of off topic but I need some advice from
    an established blog. Is it very hard to set up
    your own blog? I’m not very techincal but I can figure things out pretty
    quick. I’m thinking about setting up my own but I’m not sure where to begin.
    Do you have any points or suggestions? Cheers

  9. It’s a pity you don’t have a donate button! I’d most certainly donate to this outstanding blog!
    I suppose for now i’ll settle for bookmarking and adding your RSS feed to my
    Google account. I look forward to new updates and will talk about this site
    with my Facebook group. Chat soon!

  10. scoliosis
    I’m gone to convey my little brother, that he should also visit this
    weblog on regular basis to obtain updated from most
    up-to-date news. scoliosis

  11. free dating sites
    Hiya! Quick question that’s totally off topic. Do you know how to make your
    site mobile friendly? My site looks weird when viewing
    from my iphone 4. I’m trying to find a template or plugin that might
    be able to correct this problem. If you have any suggestions, please share.
    Thanks! https://785days.tumblr.com/ free dating
    sites

  12. dating sites
    Hi there! This is kind of off topic but I need some guidance from an established blog.
    Is it very difficult to set up your own blog?
    I’m not very techincal but I can figure things out pretty quick.
    I’m thinking about setting up my own but I’m not sure where to begin. Do you have any tips or suggestions?
    Appreciate it dating sites

  13. Pretty nice post. I just stumbled upon your blog and wanted
    to say that I’ve truly loved browsing your weblog posts.
    In any case I will be subscribing on your feed and I hope you write again very soon!

  14. Its like you read my mind! You appear to know so much about this, like you wrote the book in it or something.
    I think that you can do with a few pics to drive the message home a bit,
    but instead of that, this is magnificent blog. An excellent read.
    I’ll definitely be back.

  15. I’m really impressed with your writing talents and also with the layout in your weblog.
    Is this a paid theme or did you customize it your self?
    Anyway keep up the nice high quality writing, it’s rare to peer a great weblog like this one these days..

  16. Greetings! Quick question that’s entirely off topic. Do you know how to
    make your site mobile friendly? My blog looks weird when browsing from my iphone.
    I’m trying to find a template or plugin that might be able to fix this
    issue. If you have any recommendations, please share.
    Cheers!

Leave a Comment

Your email address will not be published. Required fields are marked *