FDIC’s Lehman Fantasy – NY Times
April 29, 2011
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Some of the report suggests the F.D.I.C. would have achieved exactly what was achieved in the Chapter 11 case – a quick sale to Barclays – and some of the report seems to rest on pure fantasy. The last bit helps a lot if you want to pay creditors back in full.
And some of the report does highlight real differences between Chapter 11 and the Dodd-Frank resolution authority. But the report does not explain why those differences need persist or consider whether they are really as desirable as the report implies.
Let’s address the ways in which the report simply restates what happened already in the Chapter 11 case. Many bankruptcy professionals who take the time to read the full report are apt to come away more than a bit annoyed.
The F.D.I.C. would have you believe that it is somehow a unique feature of the new resolution authority that losses are imposed on shareholders and assets are quickly transferred to a new buyer, with new money financing facilitating the whole thing. That sounds a lot like what happens in every big Chapter 11 case.
Barclays had said on Day One of the Chapter 11 cases that it was going to take Lehman’s derivatives business, you could have achieved the same result. But Barclays did not do this, and one has to wonder if it simply did not want Lehman’s derivative business. The F.D.I.C. never really explains how it might get Barclays to buy more of Lehman than it did.
Indeed, much of the F.D.I.C.’s analysis ultimately turns on the belief that “next time will be different.” Particularly, both the regulators and the management of Lehman would plan for Lehman’s insolvency in a way that did not happen in 2008.
Once a financial firm has become in need of resolution, there has already been a failure of regulation. Why the same regulators should be in charge of cleaning up the mess is something that continues to puzzle me. Certainly they deserve a say, and the special nature of financial institutions will often call for special solutions, but count me among those who remain unconvinced by the very “in house” solution adopted by Dodd-Frank.