Developing a New Resolution Regime for Failed Systemically Important Financial Institutions : An Assessment of the Orderly Liquidation Authority

The financial crisis of 2008 spurred the failure of numerous bank and nonbank financial entities. Government regulators addressed each of these failures on an ad hoc, ex-post basis, granting multiple bailouts in various forms. The refusal to extend these bailouts to one firm, Lehman Brothers, however, caused further panic and contagion throughout the already unstable economy as one of the largest financial institutions of the United States underwent a lengthy and value-destructive bankruptcy. Criticism surrounded not only the bailouts, but also the decision to not bail out Lehman, resulting in its filing under the Bankruptcy Code. In response, Congress enacted the Orderly Liquidation Authority (“OLA”), a regulatory alternative to bankruptcy for systemically important financial institutions (“SIFIs”), included as Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The OLA, although perceived to be a radical departure from traditional bankruptcy, incorporates many familiar resolution principles. The most significant departures from the Bankruptcy Code were designed to ensure financial stability in the national and global economies in the event of a SIFI failure; because the Bankruptcy Code does not currently specifically provide for a SIFI failure, it does not address financial stability concerns at all. Furthermore, by banning future government bailouts and imposing new stays on qualified financial contracts, the OLA also seeks to correct the skewed market discipline incentives surrounding SIFIs — including those arising due to the “Too Big To Fail” subsidy —, which may have caused the “moral hazard” problems that were a contributing factor in the financial crisis. However, the prescribed tactics for accomplishing a resolution under the OLA may in fact implicate new moral hazard concerns, which must be addressed. What further remains to be seen is both the extent to which the regulatory agencies will assume their prescribed authority to regulate these SIFIs and the extent to which the market will find their regulations credible