Big Bank Bankruptcy Court In The Works; The Beginning Of The End Of TBTF, Or Just Less Competition For Goldman?
Could the gridlock of dealing with massively underwater big banks (yes, the CRE problem is not going away on its own) be coming to an end? A report from Dow Jones indicates that things may finally be moving in the right direction: "Key members of the Senate Banking Committee are in discussions to create a special bankruptcy court for "too-big-to-fail" banks, according to people familiar with discussions on the panel." Reading between the lines, however, one can not help but be skeptical about the ultimate outcome. And is the motive just a little more sinister courtesy of various tentacles reaching deep in the legislative apparatus: is Goldman preparing to take down some more competitors in its quest to becoming the one and only go-to bank for any and every financial transaction? It worked miracles for FICC revenue post Bear and Lehman, is it time for Goldman to get a little more active in all other verticals?
More from Dow Jones:
The court would work in tandem with a process to dismantle a Lehman Brothers-like failing super-sized bank in a way that doesn't cause collateral damage to the markets.
Lawmakers in the committee are working to see if they can create a broad bipartisan bank-reform bill in response to the financial system's near collapse in 2008. Sens. Mark Warner (D-Va.), and Bob Corker (R-Tenn.), two Senate Banking Committee members, have been charged with reaching a bipartisan deal on systemic risk issues.
Public Citizen policy analyst Graham Steele said a newly formed special bankruptcy court could act as a gatekeeper to decide whether traditional bankruptcy or a resolution process would take place.
Presumably the new proposal would take taxpayers off the hook. Which is precisely why we are rather convinced this is merely more chatter, that will result in no firm implementation whatsoever:
The process would allow the FDIC to use taxpayer funds to make payouts to counterparties and creditors of the failing institution so that they don't fail as well. After that, the costs of those payouts would be recouped by fees charged to financial institutions with more than $10 billion in assets.
However, Corker and Warner are looking at creating a special bankruptcy court that could decide whether the institution should go through a traditional bankruptcy process or be subjected to the FDIC's dismantling approach, also known as a "resolution process," according to people familiar with the panel.
With this approach, if U.S. government bank regulators agree a resolution process makes sense, they would need to file that decision to the court, which would make the final decision about whether it made sense to use the resolution process.
In summary, the bankruptcy court will be merely a figurehead with the final bill as always coming straight out of the already empty pockets of US citizens:
Two people familiar with the discussions said the panel is basing their discussions, in part, on a section in a report released last year by a bipartisan Pew Institute task force for regulatory reform.
The report calls for a new Federal Financial Institutions Bankruptcy Court that would have the sole jurisdiction to resolve failing super-sized banks.
The report also said the bankruptcy code should be amended so that bankruptcy can be the default process for managing failing mega-financial institutions; however, it added that a resolution process should be set up for failing big banks to be used in "exceptional occasions when bankruptcy poses unacceptable systemic risk."
The time before this proposal results in anything actionable will likely be many years, and long after the next collapse, and subsequent second round of bailouts, is a fact. But at least our politicians can mark the fact that they are actively "considering" alternatives to the aboslute lack of change in the system since the last collapse.