Failing Banks Should Go Through Bankruptcy, Key Senators Say

Two key members of the Senate Banking committee who are negotiating how the government should deal with failing financial firms, indicated today that, in their opinions, large institutions should go through a judicial bankruptcy process, rather than being shut down by the government without court review.

"If you're going to take down a major company, there ought to be a little bit of a due process," Sen. Bob Corker (R-Tenn.) said at a forum on financial reform at the National Press Club this morning.

"Bankruptcy ought to be the primary process," Warner agreed. "Resolution should only be used as a last resort, and should be so painful that no rational man would ever want to prefer resolution."

The Senate Judiciary Committee is looking at ways to make bankruptcy proceedings work better for financial institutions, Corker said during a panel discussion with Sen. Mark Warner (D-Va.) at the forum, which was sponsored by the Pew Charitable Trusts' Economic Policy Group. If a large financial institution that could pose a "systemic risk" to the broader economy were about to fail, there could be a 24-hour period for judicial review, under proposals being discussed, Corker said.

"What we don't want to have in this country, I think, are executive branch agencies who are overzealous, who in essence take down companies without some process there to put that in check," he said.

Hope for a Bipartisan Compromise

The "slant" for dealing with financial companies that have more than $50 billion in assets is to put them through a bankruptcy-type of process under financial service reform legislation that the Banking Committee is to mark up starting Monday, Corker said. Companies that go through Chapter 11 bankruptcy proceedings often are able to continue to exist, he noted. By contrast, when a bank is subjected to the typical resolution process, "you're over and gone," Corker said.

While there are major divisions between Democrats and Republicans over the financial service reform bill, both Corker and Warner expressed optimism that a bipartisan compromise could emerge. "I can't think of an area that's going to be more necessary to have a bipartisan bill than financial [regulation]," Warner said.

There is substantial agreement between Democrats and Republicans concerning issues dealing with systemic risk and ending the idea that some financial companies are "too big to fail," and should require taxpayer bailouts, Warner said.

But Corker said that bipartisan agreement is not likely to happen until the bill is acted on by the full Senate. The bill to be marked up next week by the Banking Committee is likely to have only Democratic support, he indicated.

Status Quo Hasn't Worked for Banks' Shareholders Either

Before Warner and Corker spoke, National Economic Council Chairman Larry Summers gave a much more partisan pitch for enacting the bill that Sen. Chris Dodd (D-Conn.), chairman of the Banking Committee, put forward Monday. He blasted the financial services industry for spending "$1 million on lobbyists per member of Congress" to work against the legislation.

"The events of the last two years point something up that is profoundly problematic," Summers said. Ticking off a series of financial crises since the 1987 stock market crash, he noted that major financial meltdowns have occurred throughout the world about once every three years, disrupting millions of peoples' lives as a result.

Wall Street would benefit from reform as well, he said. "It is not as if the status quo has worked for the shareholders of major financial firms," he said, noting that financial service stocks have taken a beating over the last decade.

New restrictions requiring the largest banks to have more capital and liquidity are necessary to ensure that taxpayers don't have to bail them out if they fail, Summers said.

Other areas that need to be addressed in a reform bill include regulating dealers in the massive derivatives markets and requiring that the complex financial products be traded on exchanges and through clearinghouses where possible; creating a strong, independent consumer financial protection agency to oversee such things as credit card fees, bank overdraft charges, debt collectors, payday lenders and auto dealers; implementing restrictions against banks trading proprietary products that do not benefit consumers; and defining resolution authority.

Unlike Corker and Warner, Summers gave no hint of supporting the idea that failing financial firms should be allowed to go through a bankruptcy type of proceeding. "It is wrong that taxpayers thousands of miles from Wall Street should be at risk because our financial system gives authorities the choice of spending taxpayer money or [accepting] collapse and chaos," he said.

Summers also pushed for limits on the bonuses paid to financial industry executives. Dodd has included a provision in his bill that gives shareholders an advisory vote on executive compensation. Summers scoffed at suggestions by the financial industry that restrictions on executive pay would limit credit availability. "Let's have real debates on real issues," he said.