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Transcript of Lubben Report
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8/2/2019 Lubben Report
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Resolution,OrderlyandOtherwise:BofAinOLA
StephenJ.Lubben+SincetherecentcollapseofLehmanBrothers,theproblemsassociatedwithlarge,
complexfinancialinstitutionshavebeenfrontandcenter.1
Questionsremainabouthowbesttohandleinsolvency,bankruptcy,orresolutionofsuchaninstitution.2Thediscussionismoredifficultstillbecauseofthehighpoliticalandfinancialstakes.Forthosesteepedinthebankingindustry,maintainingthespecialnessofbanksandfinancialinstitutionsnecessitatesdenigratingthebankruptcysystem.3The
+HarveyWashingtonWileyChairinCorporateGovernance&BusinessEthics,SetonHallUniversitySchoolofLaw,Newark,NewJersey.ManythankstoAnnaGelpern,KristinN.Johnson,AdamLevitin,MichaelMacchiarola,FrankMedina,FrankPartnoy,andMichaelSimkovicfortheircommentsonanearlydraft.Thanksalsoto
theparticipantsinthe25thAnnualCorporateLawSymposiumattheUniversityofCincinnatiCollegeofLawfortheirthoughtsonthepaper.1E.g.,AnnaGelpern,FinancialCrisisContainment,41Conn.L.Rev.1051(2009);AdamJ.Levitin,InDefenseofBailouts,99Geo.L.J.435(2011);MichaelC.Macchiarola,BewareofRiskEverywhere:AnImportantLessonfromtheCurrentCreditCrisis,5HastingsBus.L.J.267(2009);KarlS.Okamoto,AftertheBailout:RegulatingSystemicMoralHazard,57UCLAL.Rev.183(2009);HalS.Scott,TheReductionofSystemicRiskintheUnitedStatesFinancialSystem,33Harv.J.L.&Pub.Pol'y671(2010);WilliamK.Sjostrom,Jr.,TheAIGBailout,66Wash.&LeeL.Rev.943(2009);CharlesK.Whitehead,ReframingFinancialRegulation,90B.U.L.Rev.1(2010);ArthurE.Wilmarth,Jr.,ReformingFinancialRegulationtoAddresstheToo-
Big-to-FailProblem,35Brook.J.Int'lL.707(2010);SarahPeiWoo,RegulatoryBankruptcy:HowBankRegulationCausesFireSales,99Geo.L.J.1615(2011).
2SeeStephenJ.Lubben,FinancialInstitutionsinBankruptcy,34SeattleU.L.Rev.1259(2011).AsDavidZaringexplains:
Resolutionauthorityisthepolitetermforseizingfailingfinancialinstitutionsandeithershuttingthemdownorsellingthemoffforthebestpossibleprice.Resolutionismeanttobeimplementedbeforecontagionsetsinandtheinstitutions'counterparties,includingcustomers,traders,andevencompetitors,alsofail,eitherthroughpanic(whichisnotthefaultofthe
counterparties)orpoorriskmanagement(whichis,butstillmayexacerbateacrisis).Itisaparticularkindofinstantbankruptcy,destroyingtheinterestsofsomecreditorsquicklyandunmercifully,whilegivingothers,especiallythebank'sdepositors,afreshandhappystart.
DavidZaring,ALackofResolution,60EmoryL.J.97,99(2010).3http://www.pewfr.org/admin/project_reports/files/Cohen-Goldstein-FINAL-TF-Correction.pdf
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FDIC,4keentodemonstrateitscompetencytowieldthenewpowersgivenitunderDodd-Frank,rushedtoproduceahypotheticalresolutionofLehmanthatamusedmanybyitsnaivet.5Ontheotherhand,othercommentators,inthralltothehealingpowersofmarkets,
haveembracedtheexistingbankruptcymechanismsasthebestwaytoaddresstheissue.6Intheprocess,theytendtoignoretheobviousdifferencesbetweenacorporationwithtangibleassetsandonewhoseprimaryassetisthetrustitscounterpartiesplaceinit.7Unlikeamanufacturingplant,trustisapttobequitevaporousintimesoffinancialdistress.8Thispapertakesastepbackfromthisdebateandconsiderstheissuefromamorepracticallevel.Whatpreciselydoesitmeantoresolvefinancialdistressinacomplexfinancialinstitution?9Whatarethegoalsliquidation,reorganization,orsimplecontagionavoidance?10And,moreprecisely,howmightsucharesolutionlookunderrealisticconditions?Embeddedinthesequestionsarelargerquestions
ofwhogetstomakethesechoices,andunderwhatcircumstancesthechoicesmightchange.Ibeginbyexaminingthelegalandfinancialstructureofaspecific,actualfinancialinstitution:BankofAmerica.ThefinancialinstitutioninquestionisoneofthereallybiginstitutionsintheUnitedStates,andisselectedasarepresentativeofits
4http://www.ft.com/intl/cms/0a72e3a2-6948-11e0-9040-00144feab49a.pdf5http://dealbook.nytimes.com/2011/04/29/the-f-d-i-c-s-lehman-fantasy/andhttp://dealbook.nytimes.com/2011/05/03/no-fantasy-in-f-d-i-c-lehman-paper/
SeeTheOrderlyLiquidationofLehmanBrothersHoldingsInc.UndertheDodd-FrankAct,FDICQUARTERLY,Vol.5,No.2(2011).6http://johnbtaylorsblog.blogspot.com/2011/05/how-to-avoid-new-bailout-authority.html7See,e.g.,BrentJ.Horton,HowDodd-Frank'sOrderlyLiquidationAuthorityforFinancialCompaniesViolatesArticleIIIoftheUnitedStatesConstitution,36J.Corp.L.869(2011).
8SeeStephenJ.Lubben,SystemicRisk&Chapter11,82Temp.L.Rev.433,447(2009)(arguingthatChapter11canbeusedtoresolvesystemicallyimportantfirmsliketheautomotivefirms,totheextenttheyaresystematicallyimportant);Ryan
Lizza,TheContrarian;SheilaBairandtheWhiteHouseFinancialDebate,NewYorker,July6,2009,at30,34.9SeeLynnM.LoPucki&JosephW.Doherty,BankruptcyFireSales,106Mich.L.Rev.1,5(2007)("Bankruptcyoffersthreealternativesforaddressingtheproblemsofalargepubliccompanyinfinancialdistress.Thedebtormayreorganizethebusiness,sellitasagoingconcern,orclosethebusinessandselltheassetspiecemeal.").10Cf.CherylD.Block,OvertandCovertBailouts:DevelopingaPublicBailoutPolicy,67Ind.L.J.951,968-72(1992).
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type.11ThisinstitutionisnotpresentlythebestIknowindangerofdefaultorinneedofresolution,butsomedayitmightbe.12IftheFDICweretoresolvethisinstitutionunderthenewOrderlyLiquidationAuthorityinDodd-Frank,13itwouldfirsthavetounderstandthebusinessin
question.ItwouldbeaidedinthisprocessbytheresolutionplansorlivingwillsthatDodd-Frankrequiressuchinstitutionstoprepareandfile.14ThefinancialinstitutionIexamineinthispaperhasyettofilesuchaplanitisnotyetrequiredtounderrecentlyenactedregulationsandwhenitdoesso,onlypartswillbepublic.15Butitispossibletogainanhonestunderstandingofthefinancialinstitutionusingexistingregulatoryreportsandotherinformationmadepublicbytheinstitution.WhatthisanalysisrevealsisthatnomatterhowcomplexLehmanwas,theremainingtoobigtofailfinancialinstitutionsareinfinitelymorecomplex.Lehmaninvolvedmyriadlegalentities,acrossseveralkeyfinancialjurisdictions,but
itlargelyinvolvedasinglelineofbusiness.16Ontheotherhand,mostoftheremaininglargefinancialinstitutionsinvolvenotonlyinvestmentbanking,butalsocommercialbankingandsometimesinsuranceunderwriting.17Thecommercialbankingoperations,inparticular,meanthattheseinstitutionsareintegratedintotherealeconomytoafargreaterdegreethanLehman,andarethereforelikelytofailinevenmoredisruptiveways.18Moreover,alloftheseinstitutionshavebalancessheetsthataremuch,muchlargerthanLehmanswhichitselfwasthelargestchapter11debtorever.19Forexample,Lehmanreportedassetsof$713billionuponfilingforbankruptcy,whereasthe
11http://www.rollingstone.com/politics/news/bank-of-america-too-crooked-to-fail-2012031412http://dealbook.nytimes.com/2011/10/06/bank-stocks-get-a-boost-from-geithner/1312USC5381-5394.1412U.S.C.5365(d).Thisprovisionrequires,amongotherthings,"fulldescriptionsoftheownershipstructure,assets,liability,andcontractualobligationsofthecompany."15http://dealbook.nytimes.com/2011/09/16/the-problem-with-living-wills-for-financial-firms/.See12C.F.R.pt.381.16SeeStephenJ.Lubben&SarahPeiWoo,ReconceptualizingLehman,WorkingPaper(onfilewithauthor).17HowellE.Jackson,TheExpandingObligationsofFinancialHoldingCompanies,107Harv.L.Rev.507,509(1994).18http://www.ft.com/intl/cms/s/0/f296cc8e-dedc-11e0-9130-00144feabdc0.html#axzz1Y7CM0c9G19SeeKristinN.Johnson,FromDiagnosingtheDilemmatoDiviningaCure:Post-CrisisRegulationofFinancialMarkets,40SetonHallL.Rev.1299,1311(2010).
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institutionIlookatinthispaperreported$2.3trillioninassetsattheendof2010.20Bywayofcontext,theWorldBankestimatestheUnitedStatesGDPwasestimatedat$14.6Trillionin2010.21Oncetherelevantpiecesoftheinstitutionareidentified,inPartIIofthepaperI
examinetherelevantlawthatwouldapplytoresolutionofthefinancialinstitutionsfinancialdistress.IbeginwiththeassumptionthatDodd-FranksOrderlyLiquidationAuthoritywillbeinvoked,butthefactthatIhavetomakesuchanassumptionitselfrevealssomebasicuncertaintyregardinghowtoanticipateandpricefinancialdistressinthiscontext.EvenafterIdecidetoinvoketheOLAregime,thequestionofwhichlawwillapplytomytargetedfinancialinstitutionremainsanissue.First,theOLApartiallyinvokesotherlegalregimestoaddresspartsofthefinancialinstitution.Second,OLAisincompleteinitspreemptionofotherinsolvencyregimes.
AndofcourseOLAonlyappliesdomestically.Aswillbeseen,notonlydoesthefinancialinstitutionIexamineconductextensiveoperationsabroad,butitalsospecificallytargetsinvestorsinotherjurisdictions.Forexample,ithasextensiveassetsecuritizationoperationsinCanadaandtheUnitedKingdom.AndrecentlyithasissuedseveralbilliondollarsofdebtdenominatedinAustralianDollars,SwissFrancs,CanadianDollars,JapaneseYen,andEuros.Manyofthesedebtissuancesalsoinvolveinterestratesthatfloatbasedonthemovementsofalocalinterestrateindex.Presumablytheseindicesaresensitivetolocaleconomicconditions.WhiletheFDIC,asapotentialtrusteeofthefinancialinstitutioninquestion,wouldhavebutalimitedabilitytochangethelegaloutcomesinforeignjurisdictions,it
mustplanfortheeffectsitsactionswillhaveworldwide,particularlyifthoseactionswillreboundintotheUnitedStates.Forexample,whenLehmanfiledforchapter11intheUnitedStates,itsLondonoperationsimmediatelyenteredadministrationintheUnitedKingdom.ThathadseriousconsequencesforseveralUS-basedhedgefundsthatreliedonLehmansLondonoperationsfortheirprimebrokerageaccounts.22
20TheLehmanholdingcompanyChapter11caseisInreLehmanBrothersHoldingsInc.,08-13555,whiletheliquidationproceedingundertheSecuritiesInvestorProtectionActforthebrokerageoperationisSecuritiesInvestorProtectionCorp.v.
LehmanBrothersInc.,08-01420,bothinU.S.BankruptcyCourt,SouthernDistrictofNewYork.21http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:USA&dl=en&hl=en&q=us+gdp22http://www.gibbonslaw.com/news_publications/articles.php?action=display_publication&publication_id=2563
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Havingthenprovidedapictureofthefinancialinstitutionandthelegallandscapethatwouldapplyuponfinancialdistress,PartIIIofthepaperconsiderstheinteractionofthesetwoelements.Thisisthecoreofthepaper,asitaddressesthevitalquestionofwhatwouldhappen?
IassumethattheFDICandotherkeyactorshavelearnedfromtherecentcrisis,butItrytoavoidassumingthekindofperfectionseenintheCorporationsrecentLehmanexercise.Afterall,theFrenchgovernmentlearnedthelesionsofWorldWarI,anditwaswellpoisedtoactifGermanyactedinthesamemannerasithadin1914.QuiteobviouslythatdidnotmeanthatFrancewasreadytorespondtoadifferent,yetsimilar,threatin1940.Inshort,IassumethattheFDICissomewhatprepared,wellintentioned,butnotomnipotent.InthissectionIalsoconsiderhowtheFDICseffortstoprepareaninstitutionforan
OLAproceedingmightdecreasethetimetheFDIChastoactuallymakesuchpreparations.Thisisthegreatparadoxunderstoodbyreorganizationprofessionalseverywhere:themorepreparationthatisdoneforthefiling,thegreatertheriskofanearlyoruncontrolledfiling,becauseofprematuredisclosureofthedebtorsplans.TheFDIChassomeexperiencehidingitspreliminaryworkinthebankresolutioncontext,butIalsoexaminethewaysinwhichOLAmightbedifferent.Moreover,inthespecificcontextoffinancialinstitutions,IexplorehowfinancialdistressinthefinancialinstitutionIamstudyingwilllikelyresultindoubtsabouttheviabilityofotherfinancialinstitutions(i.e.,contagion),invaryingintensitydependingonthesimilaritiesbetweentherespectiveinstitutions.Notonlydoes
thishaveafeedbackeffectwithregardtotheoriginalfinancialinstitution,butitalsolimitstheFDICsabilitytofocusitseffortssolelyonthefirstinstitution.AtsomepointthepreplanninginexorablygiveswaytoanactualDodd-FrankOLAproceeding.AsexplainedmorefullyinPartIII,thisisthepointatwhichFDICwillhavetomanagethemainproceedingwhilealsocoordinatingrelatedinsolvencyproceedingsathomeandabroad.Theliquidityneedsofthedistressedfinancialinstitutionareapttobeextremeintheseinitialdays,butprovidingsuchliquiditywillbekeytocontainingthefinancialdistresswithinasingleinstitution.TheFDICwillalsohavetobevigilant,readytorespondtounforeseencomplications
andtheunforeseenactionsofroguecounterpartieswhodecidethattheirbestcourseofactionliesinself-help.Oncethefinancialinstitutionisstabilized,theFDICmustbepreparedtodescribewhatwillhappentotheinstitutionandmustachievethatresultinrapidfashion.Atthesametime,theCorporationwillneedtogainanunderstandingoftheclaimsagainstthefinancialinstitutionandimplementplansforpayingsuchclaims.Throughoutthekeyquestionwillbe,canthisbedonequickerthanitcouldunder
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theBankruptcyCode?WhentheU.S.governmentconductedasimilarexerciseduringthefinancialcrisiswithregardtoAIG,itseemslikelythatitoverpaidAIGscounterpartiesrelativetowhattheywouldhaveobtainedinachapter11case.PartIVthenconcludesbyconsideringtheimplicationsofthestorytoldinPartIII.
WhilePartIIIrevealssomeseriousdoubtsabouttheabilityofDodd-Franktoperformasenvisioned,italsoshowshowtheBankruptcyCode,atleastascurrentlydrafted,wouldbeequallyunsuitedtothetask.Moreover,IexplainwhyadaptingtheCodetotheresolutionoflargefinancialinstitutionswouldinvolvedsomethingfarmoresubstantialthanafewtweaks,asisoftensuggested.UltimatelyitwouldinvolveadoptingsomethingthattakesmanyfeaturesfrombothOLAandchapter11,whileapplyingthenamebankruptcytotheresultingbeast.IhavearguedelsewherethatgreaterintegrationofOLAandtheBankruptcyCodewouldbehighlydesirable,butweshouldnotpretenditwillbeaneasytask.
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I. TheFinancialInstitution
InthispaperIexamineBankofAmerica,alargeuniversalbankorasclosetoauniversalbankasispossibleintheUnitedStateswhichisheadedbytheBankAmericaCorporationorBankofAmericaCorporation,aDelawarecorporation
originallycalledNationsBank(DE)Corporation.23
Alreadylarge,between2006and2008BankofAmericaacquiredseveralotherinstitutions,includingCountrywideFinancial,MerrillLynch,MBNA,USTrust,andLaSalleBank.AsofDecember31,2010,theentirebankhad$2.3trillioninassetsandapproximately288,000full-timeequivalentemployees.24Itsbroker-dealerunitsholdmorethan$2.2trillioninclientassets.ThebankreportsthatintheUnitedStatesaloneithasmorethan57millionconsumerandsmallbusinessbankingrelationships,andthebankheldmorethan$1trillioninbankingdeposits.Thecompanyhasapproximately5,900retail-bankinglocationsand18,000ATMsthroughouttheUnitedStates.
TheparentcompanysofficesarelocatedinCharlotte,NorthCarolina,anditssharesarelistedontheNewYork,London,andTokyostockexchanges.25Italsohasmorethantwo-dozentypesofpreferredsharesthatarelistedontheNYSE.Table1:BankofAmericaCapital(asofJune2011;millionsofUSD)
+PerpetualPreferred 16,562.20
+CommonStock 101.33
+Surplus 151,465.35
+UndividedProfits 53,254.47
TotalCapital 222,175.60
Inabroadsense,BankofAmericaiscomprisedoftwohalves:theoriginalBankofAmerica,andMerrillLynch,theinvestmentbankitacquiredonthesamedaythat
23WhethertheparentcompanyisBankofAmericaCorporationorBankAmericaCorporationisabitunclear,sincethecertificateofincorporationusesbothnames.ParagraphoneofcertificatedoesstatethatThenameofthecorporationisBank ofAmerica Corporation, but the introductory paragraph and the title use the other name.242010Form10-K,atpage23.25AlldatainthisinitialdiscussioncomesfromBankofAmericas2010Form10-K.WithregardtothediscussionofthesubsidiariesIrecodedthedatatocorrectobviouserrors.Forexample,thelistofsubsidiariesincludesseparatecategorieslabeledUnitedKingdom,England,andEngland&Wales,whichhavebeencombinedinTable1undertheUnitedKingdomcategory.Note,however,thatScotlandremainsaseparateentryonthetable,withfivesubsidiaries.IhaveassumedthatreferencestoGeorgiarefertotheAmericanstate.
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Lehmanfileditschapter11petition.26Butthetwohalvesofthebankhavebeensomewhatintegratedforexample,previouslyoutstandingMerrillpreferredshareswerereissuedbytheBankofAmericaparentcompanyonsubstantiallythesameterms,givingtheholdersastakeinthecombinedenterprise,ratherthanjusttheMerrillpieceoftheoperation.
A.CorporateStructureAttheendof2010BankofAmerica,theparentcompany,hadmorethan2,000subsidiariesworldwide,formedin97differentjurisdictions.Aboutforty-fivepercentoftheBankofAmericasubsidiariesareformedinDelaware.Justoverthirty-eightpercentofBankofAmericassubsidiarieswereformedunderthelawofaforeignjurisdiction.27Thesesubsidiariesconducttheirbusinessoperationsin163differentcitiesaround
theworld.AndwhilethebankhasitscorporateheadquartersinNorthCarolina,NewYorkCityisthelocationofthelargestnumberofitscompanies.Sixhundredandthirty-oneofthebanksmorethantwothousandsubsidiaries,oraboutthirty-onepercent,areoperatedfromlocationsoutsideoftheUnitedStates.WhentheonehundredandfiftycompanieslocatedinLondonarecombinedwiththeothersubsidiariessprinkledabouttheUKsuchasthetwosubsidiariesinHertfordshireandtheoneinManchesteritbecomesclearthattheUnitedKingdomisthesinglelargestforeignjurisdictionwithrespecttoBankofAmericasoverseasoperations.
26SeegenerallyGREGFARRELL,CRASHOFTHETITANS(2010)(describingtheevents,particularlyincreasinginvestmentsinCDOs,thatleadtoMerrillsneedforatakeover).27DefinedasanotherotherthanthefiftyUnitedStatesandtheDistrictofColumbia.
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Table2:BankofAmericaKeyOperatingSubsidiaries(asofJune2011)
Description Location FormationJurisdiction
OutstandingDebt
(namedentityonly)
MBNACanadaBank Creditcards Gloucester,Canada Canada 0
MerrillLynchCanadaInc. Investmentbank Toronto,Ontario,Canada Canada 0
MerrillLynchCapitalServices,Inc. Derivatives NewYork,NY Delaware 0
MerrillLynchCommodities,Inc. Unknown(energytrading?) Houston,TX Delaware 0
MerrillLynchGovernmentSecuritiesInc. USGovernmentsecurities NewYork,NY Delaware 0
MerrillLynchProfessionalClearingCorp. Unknown NewYork,NY Delaware 0
MerrillLynch,Pierce,Fenner&SmithIncorporated investmentbank;holdingco. NewYork,NY Delaware 0
MerrillLynchInternationalBankLimited Universalbanking;f/xtradinginLondon Dublin,Ireland Ireland 0
MerrillLynchJapanSecuritiesCo.,Ltd. Investmentbank Tokyo,Japan Japan 0
MerrillLynchS.A. Investmentbank Luxembourg,Luxembourg Luxembourg 3,285
BancofAmericaSecuritiesLimited Unknown(investmentbank?) London,U.K. UnitedKingdom 0
MBNAEuropeBankLimited Holdingcompany--consumerlendingsub Chester,England UnitedKingdom 0
MerrillLynchCommodities(Europe)Limited Derivatives London,U.K. UnitedKingdom 0
MerrillLynchInternational Broker-dealer London,U.K. UnitedKingdom 0
BankofAmericaRhodeIsland,NationalAssociation Commercialbank Providence,RI USA 0
BankofAmerica,NationalAssociation Commercialbank Charlotte,NC USA 6,659
FIACardServices,NationalAssociation Creditcards Wilmington,DE USA 1,000
Sources:http://investor.bankofamerica.com/andBloomberg
DollarsinMillionsofUSD
Thelargestnumberofsubsidiariesarelocatedinobviousfinancialcenters,andthebankscorporateheadquarters,buttherearesomesurprisestoo.WithallduerespecttoMontevideo,sixsubsidiariesoperatingoutofthatcitymightgiveuspause.ManyofthecompaniesamongthethousandsthatmakeupBankofAmericaarelikelytobeoflittlesignificance.Butinaworldwherearecentcollegegraduatecanincur$2billioninlossesatamajorbank,weshouldnotbetooquicktodismissanyseeminglysmallpieceoftheoverallpicture.Withthatproviso,inJuneof2011BankofAmericaidentifiedseventeensubsidiariesasamongitsmajoroperatingsubsidiaries.28AsshownonTable2,thesecompaniesarelocatedinavarietyofjurisdictionsintheUnitedStates,Canada,Japan,andEurope.Thesecompaniesincludethreenationallycharteredbanks,whicharesubjecttodirectregulationbytheControlleroftheCurrencyandtheFDIC.
28http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9OTk3OTF8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
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Table 3: Bank of America Assets by Location (2010)
USD %
Total Assets 2,264,909.00 100
Domestic 1,938,417.00 85.58
Total Foreign excluding North America 310,392.00 13.7
Europe, Middle East and Africa 186,045.00 8.21Asia 106,186.00 4.69
Latin America and the Caribbean 18,161.00 0.8
Canada 16,100.00 0.71
MBNACanadaBankisamajorcreditcardissuerinCanada,whichBankofAmericasoldtoTDBankinlate2011.29MerrillLynchCapitalServices,Inc.isprimaryderivativescounterpartyintheMerrillLynchpartofBankofAmerica.MerrillLynchCanadaInc.isaninvestment-bankingarmofMerrillLynch&Co.CanadaLtd.,whichitselfisasubsidiaryofMerrilyLynchCanadaHoldingsCo.,
MerrillstoplevelCanadianholdingcompany.ThismakesMerrillLynchCanadasimilartoMerrillLynchSA,whichisMerrillscontinentalEuropeaninvestmentbankingarm.Interestingly,someoftheentitieslistedbyBankofAmericaaskeysubsidiariesdonotappearinBloombergorotherkeyfinancialdatabases.Forexample,MerrillLynchCommodities,Inc.isasubsidiaryofMLCIHoldings,Inc.,whichitselfisasubsidiaryofMerrillLynchCapitalServices,thederivativestradernotedearlier.WhatpreciselyMerrillLynchCommoditiesdoesisapparentlyunknowntoBloomberg.Ihazardaguessthatthisentityisinvolvedinenergyrelatedtrading,givenitsplaceintheoverallcorporatestructureanditslocationinHouston,butwecanhopethattheFDICwillhavebetterinformationthanBloombergonpointslikethese.EvenmoreinterestingishowlittleofBankofAmericasbalancesheetappearsonTable2.Forexample,thebankreportsmorethan$800billionintotaloutstandingdebt.Justunder$11billionofthatappearsonthetable.ButthisisconsistentwithpriorresearchthatthelateSarahWooandmyselfpreviouslyconductedonLehman:muchofthedebtwasissuedbyrelativelyinsignificantsubsidiaries,createdtotakeadvantageofregulatoryortaxadvantagesofaparticularjurisdiction.30Similarly,subsidiarieslikeMerrillLynchUKHoldingsLimiteddonotappearonTable2,despitereportingmorethan$155billioninrisk-weightedassets.31Asit
29CanadianBigDeals,Am.Law.,Dec.2011atp.41.30SeeLubben&Woo,supranote16.Seealsohttp://www.ft.com/cms/s/0/098ac1ec-882d-11de-82e4-00144feabdc0.html.31http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-basel
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turnsout,thismakessenseinthestrictlyliteralsensethatMerrillLynchUKHoldingsisaholdingcompany,withnoindependentoperations.ButgiventhatTable3showsthatBankofAmericahasbut$188billionofassetsinthewholeofEurope,theMiddleEast,andAfrica,MerrillLynchUKHoldings
subsidiariesmustcarryaparticulardegreeofrisk(asdefinedintheBaselaccords)orsignificance.32Infact,MerrillLynchUKHoldingsistheholdingcompanyforMerrillLynchInternational(MLI)andMerrillLynchCommodities(Europe)Limited(MLCE),twoofthekeysubsidiariesidentifiedonTable2.AsreportedbyBankofAmerica,MLIactsasabroker/dealerinfinancialinstrumentsandprovidescorporatefinanceservices.MLCEisatraderofnaturalgas,electricity,coal,emissionsandweatherderivatives. 33
Table 4: Bank of America Revenues by Location (2010)USD %
Net Revenues 110,220.00 100
Domestic 87,179.00 79.1
Total Foreign Excluding North America 21,541.00 19.54
Europe, Middle East and Africa 12,369.00 11.22
Asia 6,115.00 5.55
Latin America and the Caribbean 3,057.00 2.77
Canada 1,500.00 1.36
Takentogether,Tables2through4provideapictureofabankwhosekey
subsidiariesarespreadacrosstheglobe,whilemuchofitsassetsandrevenuesarestillassociatedwiththeUnitedStates.Thatis,eventhoughmanyBankofAmericaentitiesoperateoversees,theyoftenfacilitatetradingwithAmericancounterparties.Thefollowingtable,reproducedfromtheBaselIIPillar3ReportonMLI,bestillustratesthis.RecallthatMLIisaLondon-basedbroker-dealer,yetmorethanhalfofitscreditexposurerelatesbacktotheAmericas,arathervaguetermtobesure.AnditispossiblethatthelocationoftheassetsseeTable3maybesomethingofamirage,oncetheriskofrehypothecationistakenintoaccount.34Rehypothecation
ofcollateralinvolvesthereuseofclientassetsinanewtransaction,asifapawnshopcouldgrantitsownlendersalienorsimilarrightsinitemsleftatthestoreby
32See,infraTable__,formoreonMLI.33http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NzUwMjB8Q2hpbGRJRD0tMXxUeXBlPTM=&t=134http://www.imf.org/external/pubs/ft/wp/2010/wp10172.pdf
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customers.ManyofLehmansprimebrokeragecustomersclaimedtobesurprisedthattheirassetshadmovedtoEurope.Whilecontractingwilladdressthatspecificproblem,otherrelatedissuesremain.
Table 5: Merrill Lynch International Counterparty Exposure
B.CapitalStructure
Whileapotentialdebtorscapitalstructureisimportantinalltypesofinsolvencyproceedings,intheinsolvencyofafinancialinstitutionunderstandingthecapitalstructureisevenmoreimportantsincesuchacompanyisrootedinitsbalancesheet.35Andfinancialinstitutionsarequiteoftenmoredependentonshort-termborrowingthanotherfirms,whichleavesthemexposedtoextremeliquidityneedsupontheonsetoffinancialdistress.36Table6setsforthbalancesheetinformationforBankofAmerica,whichshowsthistypicalpatternofborrowingforafinancialinstitution.37Justover90%ofthisbankscapitalstructureiscomprisedofdebt.Thekeyimplicationforpresent
purposesisthatboththepreferredandcommonshareholderscanbequicklydismissedifweassumemorethana10%declineinassetvalues,asmightoccurwhenafinancialinstitutionexperiencesfinancialdistress.38Table 6: Bank of America Balance Sheet (USD Millions)
FQ2 2011
Balance Sheet - Assets
+ Cash and Due from Depository Institutions 138,389.21
+ Trading Account Assets 253,123.18
35SeeSarahPeiWoo,SimultaneousDistressofResidentialDevelopersandTheirSecuredLenders:AnAnalysisofBankruptcy&BankRegulation,15FordhamJ.Corp.&Fin.L.617,666-68(2010).36SeeMacchiarola,supranote1,at297-98.37JohnC.Coffee,Jr.,SystemicRiskAfterDodd-Frank:ContingentCapitalandtheNeedforRegulatoryStrategiesBeyondOversight,111Colum.L.Rev.795,815(2011).38SeeFaheyv.Mallone,332U.S.245,250(1947);ElizabethWarren,BankruptcyPolicy,54U.Chi.L.Rev.775,792(1987).
!
!
Exposure Value - Geographical Distribution
$ millions Asia Americas EME
!
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! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !
! ! ! ! ! ! ! ! ! ! ! ! ! ! !!!!!
!
A Total Asia Americas EMEA Total
Central governments or central banks 39 270 1,259 1,568 146 6,021 1,059 7,226
Corporates 1,704 41,299 22,523 65,526 2,306 70,881 27,416 100,603
Institutions 3,025 24,559 42,193 69,777 3,433 23,760 51,699 78,892
Total Exposure Value 4,768 66,128 65,975 136,871 5,885 100,662 80,174 186,721
2008
Merrill Lynch International
2009
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+ Total Securities 351,463.11
+ Federal Funds & Reverse Repos 259,708.37
+ Net Loans and Leases 923,898.92
+ Bank Premises and Fixed Assets 13,792.69
+ Other Real Estate Owned 3,915.80
+ Goodwill and Other Intangibles 92,891.39+ All Other Assets 194,135.15
Total Assets 2,264,435.84
Balance Sheet - Liabilities
+ Total Deposits 1,040,171.86
+ Federal Funds & Repurchase Agreements 239,520.83
+ Trading Liabilities 128,299.95
+ Other Borrowed Funds 406,814.47
+ Subordinated Debt 45,678.69
+ All Other Liabilities 154,843.60
Total Liabilities 2,041,102.95
Balance Sheet - Equity
+ Perpetual Preferred 16,562.20
+ Common Stock 101.33
+ Surplus 151,465.35
+ Undivided Profits 53,254.47
Total Capital 222,175.60
Thebankreports$420billioninshorttermborrowing,includingabout$50billioninmoneymarketborrowingand$250billioninreporelatedborrowing,andmorethan$1trillionindeposits,dividedbetweenalmost$950billionindomesticdepositsand$90billioninforeigndeposits.Thesesourcesoffundingareapttobetheunstablewhenafinancialinstitutionencountersfinancialdistress.39Forexample,theforeigndepositorsdonotbenefitfromFDICinsurance,andthusmightbeespeciallylikelytofleeatthefirstsignsofstress.AndaruninrepofinancingiswidelyblamedforLehmansultimatecollapse.40
39http://www.reuters.com/article/2012/02/09/financial-regulation-triparty-fed-idUSL2E8D9HJU2012020940SeegenerallyGARYGORTON,SLAPPEDBYTHEINVISIBLEHAND:THEPANICOF2007(2010);ActionsbytheNewYorkFedinResponsetoLiquidityPressuresinFinancialMarkets:BeforetheU.S.SenateComm.onBanking,HousingandUrbanAffairs,110thCong.(Apr.3,2008)(testimonyofTimothyF.Geithner,PresidentandChiefExecutiveOfficer,Fed.ReserveBankofN.Y.).
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Evenmoreimportantlyforpurposesofthispaper,theseunstableshorttermsourcesoffundingshowthepotentialliquidityneedsofthebankduringaresolutionprocess.Asnotedinthebanks2010Form10-K:
IfBankofAmericaCorporation'sorBankofAmerica,N.A.'scommercial
paperorshort-termcreditratingsweredowngradedbyoneormorelevels,thepotentiallossofshort-termfundingsourcessuchascommercialpaperorrepurchaseagreementfinancingandtheeffectonourincrementalcostoffundswouldbematerial.41
AsofSeptember2011,BankofAmericahadexactlyonethousanddifferenttypesofdebttraded,withanaverage(median)durationofjustover5.6(5.0)years.42Muchofthelongerdateddebtwasissuedinthemidtolate1990s.Table7showsthecurrencyofeachofthesedebtinstruments.WhilenoneofthebankssignificantoperatingcompanieswerelocatedinAustraliaorinContinental
Europe,wecanseefromthetablethatthesetwojurisdictionsareasubstantialsourceofthebanksfunds.
Table7:OutstandingBankofAmericaDebtbyCurrency(September2011)
Freq. Percent Cum.Percent
USD 824 82.4 82.4
EUR 41 4.1 86.5
AUD 35 3.5 90
JPY 34 3.4 93.4
SGD 10 1 94.4
CHF 9 0.9 95.3
NZD 9 0.9 96.2
CAD 8 0.8 97
GBP 6 0.6 97.6
BRL 5 0.5 98.1
MXN 4 0.4 98.5
INR 3 0.3 98.8
SEK 3 0.3 99.1
NOK 2 0.2 99.3
TRY 2 0.2 99.5
ZAR 2 0.2 99.7
CZK 1 0.1 99.8
HKD 1 0.1 99.9
RUB 1 0.1 100
Source:Bloomberg
41BankofAmericaCorporation2010Form10-K,atpage7.42AsreportedonBloomberg.
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Thebankalsoreportsmorethan$354billioninsecuritiesamongitsassets.Table8providessomefurtherinformationaboutthosesecurities.Table 8: Bank of America Securities (June 2011)
+ US Government Securities 49,269.15US Treasury Securities 46,571.54US Govt Agencies 2,697.61
+ Municipals 7,645.96
+ Asset Backed Securities 8,048.56+ Other Domestic Debt 3,624.13+ Foreign Debt Securities 4,579.59+ Equities 20,431.88
Total Securities 351,463.11
Source: Bloomberg
ThepurposeofthispaperisnottoidentifywhatmightcauseBankofAmericatofail,butrathertoexamine,assumingsuchfailure,howsuchfailuremightbeaddressed.Inthatcontext,Table8isnotsomuchrelevantinidentifyingpossibleriskatthebank,butinsteadbecausewhichmightassumethatsomeoftheseassetscoulddeclineinvalueduringafinancialcrisisthatmightaccompanythefailureofamajorbankinginstitution.Thatis,manyofBankofAmericasassetsareapttobecorrelatedwithitsownfinancialcondition,givenitsprominenceinthefinancialmarkets.Independentofwhatevermightcausethebanktoexperiencefinancialdistress,a
moregeneralizeddeclineinfinancialmarketswouldhitthispartofBankofAmericasbalancesheet.ItdoesbearnotingthattheUSTreasuryportionofTable8willlikelyoffsetsomeofthedownwardmovementinotherpartsofthebankssecuritiesholdings,giventhetypicalflighttoqualitythatoccursintimesoffinancialstress.
***ButthisdiscussionoftheBankofAmericabalancesheethastothispointconsideredthebankasawhole.Financialinstitutionsfailasawhole,butareresolvedinpieces.EvenaftertheenactmentofDodd-Frank,andaswillbediscussedmorefullyinPart
II,uponfailureafinancialinstitutionwillbedeconstructedintoitsconstituentparts.Thus,whiletheconsolidatedbalancesheetcanhighlightthescopeoftheissueathand,ultimatelyonlytheindividual,company-by-companybalancesheetsofafinancialinstitutionarerelevant.Andsometimesthefocusonthetraditionalbalancesheetcanhidetherealitiesofmodernfinance.
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Bothpointsarewellillustratedbythefinaltableinthissection,whichreturnstoMLI,theLondon-basedbroker-dealerdiscussedearlier.Table9againreproducesatablefromtheMLIBaselIIreport,thistimedisclosingMLIscreditdefaultswapexposure.43
Table 9: Merrill Lynch International CDS Exposure (USD Millions)
Thebottomsub-tableshowsthatMLIhasbought$3.2trillionofCDSprotection
meaningMLIwillgetpaidifthereisadefaultontherelevantreferenceentity.Similarly,MLIhasalsosold$3.2trillionincreditprotectionthatitmightsomedayhavetopayout.Ingoodtimesthesetwoamountsmaycanceleachotherout,especiallyifMLIsbookislargelybalanced.Inbadtimes,MLIsitsinthemiddleofmorethan$6trillionoftotaltransactions,perhapspayingoutononesidewhilefacingatroubledcounterpartyontheotherside.AsseenfromTable10,MLIapparentlyholdsthebulkofBankofAmericasCDSbook.Overall,thebankhasthesecondlargestderivativesportfoliointhenation,
comprisedofmorethan$74trillion(notionalamount).44Intheinsuredbanking
43ForbackgroundonCDScontracts,seeStephenJ.Lubben,CreditDerivatives&theFutureofChapter11,81Am.Bankr.L.J.405,423-24(2007).44Onthebalancesheetdiscussedabove,BankofAmericalistsmorethan$66.5billionofderivativecontractsasassets.SeeKristinN.Johnson,ThingsFallApart:RegulatingtheCreditDefaultSwapCommons,82U.Colo.L.Rev.167,169-73(2011);
!
Counterparty Credit Risk - Credit Derivativesbought sold bought sold
Credit derivative products used for own credit portfolio
Credit default swaps 7,426 3,241 12,471 5,317
Total return swaps 1,316 3,496 1,351 16,170
Total notional value 8,742 6,737 13,822 21,487
Credit derivative products used for intermediation
Credit default swaps 3,156,461 3,156,461 4,058,936 4,058,936
Total return swaps - - - -
Total notional value 3,156,461 3,156,461 4,058,936 4,058,936
Credit derivative products by credit exposure
Institutions 1,383,470 1,478,807 1,827,995 1,929,053
Corporate 1,781,733 1,684,391 2,244,762 2,151,370
Total notional value 3,165,203 3,163,198 4,072,757 4,080,423
2009 2008
!
!! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !
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! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !
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partofBankofAmerica,OCCrecordsshowthatthebankheldjustover$48trillionofderivatives,ofwhichabout$45.5trillionwasheldfortradingpurposes.RecentpressreportsindicatethatBankofAmericaisfacingincreasingpressuretomovederivativestradestoitsinsuredbankingaffiliates,andoutofMerrillLynchentities,astheresultofrecentdowngradesorthreateneddowngradesinthebankscredit
ratings.45
InitsoverseesBaselIIdisclosurereports,BankofAmericanotesthat
AtDecember31,2009,theamountofadditionalcollateralandterminationpaymentsthatwouldberequiredforsuchderivativesandtradingagreementswasapproximately$2.1billionifthelong-termcreditratingofBACanditssubsidiarieswasincrementallydowngradedbyonelevelbyallratingsagencies.Asecondincrementaloneleveldowngradebytheratingsagencieswouldrequireapproximately$1.2billioninadditionalcollateral.
Thatis,thereisacontingentliabilityorobligationassociatedwiththebanksderivativetrading,whichturnsonthestatusofBankofAmericascreditrating.AsseeninAIG,thesesortsofcollateralcallshavetheeffectofdrainingdesirableassetsfromafinancialinstitutionduringthedevelopmentoffinancialdistress,potentiallyincreasingthedownwardpressureontheinstitution.46
Table10:NotionalAmountofDerivativeContracts,Top5HoldingCompanies(June2011,USDMillions)
Rank HoldingCompany
Total
Derivatives
Futures
(EXCHTR)
Options
(EXCHTR)
Forwards
(OTC)
SWAPS
(OTC)
Options
(OTC)
Credit
Derivatives
(OTC)
Spo
F
1 JPMorganChase&Co. 78,977,450 1,693,438 2,164,699 11,569,472 47,598,956 9,845,448 6,105,437 469,15
2 BankofAmericaCorporation 74,811,101 3,288,994 1,546,806 12,519,496 46,529,779 6,787,645 4,138,382 413,11
3 MorganStanley 56,401,634 158,931 1,038,336 7,918,712 35,162,310 6,365,230 5,758,115 442,53
4 CitigroupInc. 55,186,164 877,517 3,342,856 7,974,039 31,250,476 8,916,014 2,825,262 567,40
5 GoldmanSachsGroup,Inc. 53,405,245 1,812,343 3,249,493 4,764,925 29,888,177 9,386,342 4,303,965 359,69
Source:OCC
Theexchangeofcollateralinconnectionwithderivativestradingandothertransactionsalsoexposesthebankanditscounterpartiestorisksassociatedwiththerehypothecationofthecollateral.AsBankofAmericaexplainsinits201010-K
StephenJ.Lubben,DerivativesandBankruptcy:TheFlawedCaseforSpecialTreatment,12U.Pa.J.Bus.L.61(2009).45http://www.bloomberg.com/news/print/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html46SeeCONG.OVERSIGHTPANEL,JUNEOVERSIGHTREPORT:THEAIGRESCUE,ITSIMPACTONMARKETS,ANDTHEGOVERNMENT'SEXITSTRATEGY(2010).
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TheCorporationacceptscollateralthatitispermittedbycontractorcustomtosellorrepledgeandsuchcollateralisrecordedontheConsolidatedBalanceSheet.AtDecember31,2010and2009,thefairvalueofthiscollateralwas$401.7billionand$418.2billionofwhich$257.6billionand$310.2billionweresoldorrepledged.Theprimarysourcesofthiscollateral
arerepurchaseagreementsandsecuritiesborrowed.TheCorporationalsopledgessecuritiesandloansascollateralintransactionsthatincluderepurchaseagreements,securitiesloaned,publicandtrustdeposits,U.S.Treasurytaxandloannotes,andothershort-termborrowings.Thiscollateralcanbesoldorrepledgedbythecounterpartiestothetransactions.47
Rehypothecationofthissortcanmakeitmoredifficulttounwindafinancialinstitutionsaffairsininsolvency,asthedebtorsassetswillbesubjecttocompetingandconflictingclaims.48
ReturningtothespecificcaseofMLI,importantlyforpurposesofthispaper,uponthehypotheticalfailureofBankofAmerica,MLIhasasubstantialpieceoftheCDSmarketthatwilleitherhavetomovedtoanotherfinancialinstitutionwithextremehaste,ortheCDSmarketwillexperiencesignificantdislocationaspartiesrushtoterminatetheirMLIcontractsandreplacethemwithnewtrades.49Andasdiscussedinthenextpartofthepaper,MLIwillremainoutsideofanyOrderlyLiquidationProceedingcommencedwithregardtoBankofAmerica,asMLIisbasedinLondonandthereforenotsubjecttotheFDICsortheUSCongressjurisdiction.ThisisanissuefortheroughlythirtypercentofBankofAmericaentitiesthatoperateoutsidetheUnitedStates,butitisespeciallyimportantwith
regardtoentitieslikeMLIthathavesignificantoperations.Finally,asdiscussedinthenextpartofthispaper,differentfinancialinstitutionsaresubjecttodifferentresolutionprocedures,eveniftheinstitutionsinquestionareallsubsidiariesofthesamefinancialholdingcompany.Accordingly,Table11identifiesthedomesticBankofAmericasubsidiariesthataresubjecttospecialregulatorytreatment,andthusspecialresolutionprocedures.
47201010-Katpage142.48StephenJ.Lubben,TheBankruptcyCodeWithoutSafeHarbors,84Am.Bankr.L.J.123,n.20andtext(2010).49Lubben,TheBankruptcyCodeWithoutSafeHarbors,supranote48,at123-24;seealsoPatriciaA.McCoy,AndreyD.Pavlov&SusanM.Wachter,SystemicRiskThroughSecuritization:TheResultofDeregulationandRegulatoryFailure,41Conn.L.Rev.1327,1343-44(2009);MichaelSimkovic,SecretLiensandtheFinancialCrisisof2008,83Am.Bankr.L.J.253,253(2009).
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Thetableisapttobebothoverandunderinclusive,sinceanoutsiderobviouslymaynotcorrectlyidentifythepurposeofallofBankofAmericasmyriadsubsidiaries.50Alsonotethatthetableonlyincludesdomesticentities:thereareclearlyseveralforeigndepositorybanks,insurancecompanies,andbroker-dealersinthebankscorporatestructure.51
Table11:BankofAmericaDomesticRegulatedSubs
Location
Formation
Jurisdiction
Assets(if
available;
USD
millions)
InsuranceCompanies:
BalboaInsuranceCompany Irvine,CA California 2,581.00
BalboaLifeInsuranceCompany Irvine,CA California 43.25
BalboaLifeInsuranceCompanyofNewYork Irvine,CA NewYork 18.30
MeritplanInsuranceCompany Irvine,CA California 184.00
NewportInsuranceCompany Irvine,CA Arizona 146.10
BankofAmericaReinsuranceCorporation Burlington,VT Vermont CWReinsuranceCompany Burlington,VT Vermont
InvestorProtectionInsuranceCompany Burlington,VT Vermont
GeneralFidelityLifeInsuranceCompany Columbia,SC SouthCarolina 210.30
IndependenceOneLifeInsuranceCompany Phoenix,AZ Arizona
RIHTLifeInsuranceCompany Phoenix,AZ Arizona
SummitCreditLifeInsuranceCompany Phoenix,AZ Arizona
Banks(depositoryandtrust):
BankofAmerica,NationalAssociation Charlotte,NC USA 1,454.05
BankofAmericaOregon,NationalAssociation Portland,OR USA 8.82
BankofAmericaRhodeIsland,NationalAssociation Providence,RI USA 17.81
BankofAmericaCalifornia,NationalAssociation SanFrancisco,CA USA 15.98
BankofAmericaNationalTrustDelaware Wilmington,DE USA 2.90
U.S.TrustCompanyofDelaware Wilmington,DE Delaware
Broker-Dealers(activeonly,includingalltypesofbrokersanddealers):
MerrillLynchGovernmentSecuritiesInc. NewYork,NY Delaware
MerrillLynch,Pierce,Fenner&SmithIncorporated NewYork,NY Delaware 297,900.00
MerrillLynchProfessionalClearingCorp. NewYork,NY Delaware 18,145.00
BancofAmericaSpecialist,Inc. NewYork,NY NewYork 6,028.00
50Forexample,Ihaveattemptedtoexcludeinsuranceagenciesfromthelist,butsometimesaparticularsubsidiarysfunctionislessthanclear.51LikelyexamplesincludeMLInsurance(IOM)Limited(incorporatedinDouglas,IsleofMan),MerrillLynchCreditReinsuranceLimited(Hamilton,Bermuda),MerrillLynchBank(Suisse)S.A.(Geneva,Switzerland),andMerrillLynchYatirimBankA.S.(Istanbul,Turkey).
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Sources:BankofAmericaCorporation201010-K;OCC;FDICCallReports;SEC;FINRA;TexasDepartmentof
InsuranceandNAICWebPages
II. ResolutionLawforFinancialInstitutionsAmericanregulationoffinancialinstitutionshashistoricallyfocusesonafunction-by-functionapproach,andthisholdstruefortheinsolvencylawoffinancialinstitutionsaswell.Eachspecializedareaofthefinancialinstitutionistypicallysubjecttoitsownspecialinsolvencyregime,meaningthatalargefinancialholdingcompanywithmyriadsubsidiarieslikeBankofAmericawillbesubjectedtoseveraldifferentinsolvencyregimes.Thisrealityhasonlypartiallyimprovedwith
theenactmentofDodd-FranksnewOrderlyLiquidationAuthority.BeforediscussingOLA,itishelpfultobrieflysketchthepre-Dodd-Frankrulesforfinancialinstitutioninsolvency,togetabettersenseofwhathaschanged.Table12summarizesthisdiscussion.Table12:FinancialInstitutionResolution(Pre-DoddFrank)
Banks,whetherstateorfederallychartered,aresubjecttoreceivershipsinstitutedbytheFDIC,andoverseenbyaDivisionofResolutionsandReceiverships.Thereceivershipisquiteoftencenteredaroundoneormorepurchaseandassumption
Banks FDICReceivership
InsuranceCompany
Statecourtreceivership
Broker-Dealer
SPIALiquidation(Bankruptcy
Court)
FinancialHolding
CompaniesChapter11
EverythingElseChapter11
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agreements,wherebytheCorporationsellsthefailedbanksassetsanddepositstoanotherbank.ThesalemaybefacilitatedbysomesortofriskretentionbytheFDIC,butthekeyaimistominimizedisruptiontothebankingsystemandlossestotheFDICascreditor(byvirtueofitsroleasdepositinsurer).Thisstandsincontrastwiththetypicalgoalofchapter11,whichisoftenstatedasmaximizationofthe
debtorsoverallvalue.BecauseoftheMcCarran-FergusonAct,52Congresshaspassedregulationofinsurancetothestates.ThusinsurancecompanyinsolvenciesareamatterofstatelawbyvirtueofthecombinedeffectsofMcCarran-FergusonandanexpressexemptionfromtheBankruptcyCode.53Unlikebankreceiverships,insurancecompanyreceivershipstypicallyfeaturecourtoversight.Aswithbanks,appointmentofareceiversuspendsthepowersofmanagementandplacesthecontrolofthecompanyinthehandsofthereceiver.54Claimsarefixedasofthedateoftheappointment.Aninsurer'spoliciesaretypicallydeemedcancelled
onappointmentofareceiver.Theestateisnotliableforfuturelosses,butpolicyholdershavevalidclaimsforlossesincurredtothatpoint.Inmanycasesthepolicyholderswillalsohaveclaimsforbreachofcontractagainsttheestate.Andoftenpolicyholderclaimshaveapriorityoverotherunsecuredcreditorclaims.55SIPAisthefinalspecializedresolutionprocedurerelevanttothisdiscussion.Enactedinthe1970stodealwiththefailureofbrokeragehousesduringthebackofficecrisis,56SIPAprovidesforsomebasicinsuranceprotectionforcustomersof
5215U.S.C.1011-1015.5311U.S.C.109.Theexemptionmaybeimportant,giventhattheBankruptcyCodeisenactedunderexpressConstitutionalauthority,andthusmighttrumptheMcCarran-FergusonAct.SeeWilliamGoddard,InBetweentheTrenches:TheJurisdictionalConflictBetweenaBankruptcyCourtandaStateInsuranceReceivership
Court,9Conn.Ins.L.J.567,574(2002).54http://www.delawareinsurance.gov/departments/berg/FederalMotor_Files/FederalMotors_StipLiqInjOrder-WithConvSignature-20110818.pdf55PatrickCollins,Note,HMOEligibilityforBankruptcy:TheCaseforFederalDefinitionsof109(b)(2)Entities,2Am.Bankr.Inst.L.Rev.425,431(1994).56Thebackofficecrisisdevelopedinthelate1960s,whensecuritiestradeswerestillprocessedinpaperform,butthesizeofthestockmarketbegantoovertakebrokersabilitytoprocessthepaperwork.Becauseofanunderinvestmentininfrastructure,severalbrokersfailedandotherscameclosetofailing.SeeThomasW.Joo,WhoWatchestheWatchers?TheSecuritiesInvestorProtectionAct,InvestorConfidence,andtheSubsidizationofFailure,72S.Cal.L.Rev.1071,1076-78(1999);seealsoTheSecuritiesInvestorProtectionActof1970:AnEarlyAssessment,73Colum.L.Rev.802(1973).
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securitiesbrokers,butnotcommoditiesorfuturesbrokers,andsetsforthaspecialinsolvencyschemeforbrokerages.57SIPAspecificallyprovidesfortheapplicationofchapters1,3and5andsubchaptersIandIIofchapter7oftheBankruptcyCodetotheextentsuchprovisionsarenot
inconsistentwithSIPA.58
Bothchapter11andSIPAproceedingsdrawonthesamegeneralpartsoftheBankruptcyCodetoresolveclaimsanddefinethebasicelementsoftheprocess.59ButSIPAisstrictlyaliquidationprocedure,whichmakesitsoutcomebothmorecertainandlessflexiblethanachapter11case.SIPAproceedingsarecommencedindistrictcourtandtypicallyquicklyremovedtothelocalbankruptcycourt.60AtrusteeisappointedbySIPCorSIPCitselfactsastrusteewhenasmallbrokerageisinvolvedandthetrusteedirectedtodistributesecuritiestocustomerstothegreatestextentpracticableinsatisfactionoftheirclaimsagainstthedebtor.Throughsuchdistributions,thecustomersofabroker-dealerreceiveapriorityoverother,generalunsecuredcreditorswhohavetoawait
amorebankruptcy-likedistribution,ifthereareanyassetstomakesuchadistribution.61SIPAtypicallyappliestoinvestmentbanks,oratleastkeypartsofinvestmentbanks(i.e.,thebroker-dealerbits).Thus,whileLehmanBrothersHoldings,Inc.famouslyfiledachapter11petitiononSeptember15,2008,oneweeklatteritskeybroker-dealersubsidiary,LehmanBrothers,Inc.,filedaSIPApetitiontofacilitatetheLehmanBrothersHoldingssaleofassetstoBarclaysCapital.InaworldbeforeDodd-Frank,anypartofthefinancialcompanynotcoveredbyoneoftheforegoingspecialinsolvencyregimes,includingbankholdingcompanies,was
resolvedundertheBankruptcyCode.62Intheorymanyforeignpartsofthefinancial57RichardCarlucci,HarmonizingU.S.SecuritiesandFuturesRegulations,2Brook.J.Corp.Fin.&Com.L.461,473(2008);OnnigH.Dombalagian,SelfandSelf-Regulation:ResolvingtheSROIdentityCrisis,1Brook.J.Corp.Fin.&Com.L.317,326(2007).5815U.S.C.78fff(b)59SIPAitselfisonlyapplicabletobroker-dealersrequiredtoregisterunderthe1934ExchangeAct,leavingsmallbroker-dealersandcertainforeignbroker-dealerssubjecttocertainspecializedprovisionsofchapter7oftheBankruptcyCode.Byallaccounts,theseexceptionsareasmallminorityofbroker-dealers.6015U.S.C.78eee(b)(4).SeealsoPelorov.UnitedStates,488F.3d163,172(3dCir.2007).6115U.S.C.78fff-3(a).62UntilpassageoftheDodd-FrankAct,aBankHoldingCompanywassubjecttoregulationbytheFederalReserve,buttherewasnospecializedinsolvencysystemfortheseentities.TheBankHoldingCompanyActdefinesbankholdingcompanyasanycompanythathascontroloveranybankoroveranycompanythatisorbecomesabankholdingcompanybyvirtueoftheAct.Anycompanyhascontrol
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institutioncouldalsofileabankruptcypetition,althoughtheremaybedifficultiesingettingsuchapetitionrespected,especiallyifthesubsidiaryinquestionwasengageinsignificantactivityintheforeignjurisdiction.HowdoesthecreationofOLAchangethis?
Table13summarizesthechange,but,inshort,OLApotentiallyreplaceschapter11astheresolutiontoolforbankholdingcompaniesandtheirnon-regulatedsubsidiaries.Itonlypotentiallydisplaceschapter11becausechapter11remainsinplaceunlessfinancialregulatorsdecidetoinvokeOLA,63throughacomicallybyzantineprocessthatculminateswiththeD.C.Districtcourthaving24hourstosaynounderverylimitedcircumstances.64AndOLAdoesnotsupplantFDICbankreceiverships,stateinsurancereceiverships,orSIPAliquidationprocedures,althoughthestorywithregardtoSIPAisnotquiteasclearthatwouldsuggest.65Asexplainedbelow,OLAlargelyoverridesthe
provisionsofSIPA,withoutwantingtoappeartodoso.Inessence,OLAexpandstheFDICsbankreceivershippowerstocoveragreaterpartofthefinancialinstitution.66ThisallowstheFDICtoconductapurchaseandassumptiontransactionwithregardtonon-bankpartsoftheinstitution,ortransfertheinstitutiontoanewlycreatedbridgebank.67ThelatterallowstheFDICtosplitthegoodassetsfromthebad,inaprocessthatisverymuchlikethatusedin363salesunderchapter11,widelypublicizedbytheautomotivechapter11cases.68
overabankoroveranycompanyif:(1)thecompanydirectlyorindirectlyoractingthroughoneormoreotherpersonsowns,controls,orhaspowertovote25%percentormoreofanyclassofvotingsecuritiesofthebankorcompany;(2)thecompanycontrolsinanymannertheelectionofamajorityofthedirectorsortrusteesofthebankorcompany;or(3)theboarddetermines,afternoticeandopportunityforhearing,thatthecompanydirectlyorindirectlyexercisesacontrollinginfluenceoverthemanagementorpoliciesofthebankorcompany.12USC1841(a).6312USCS5382(c)(1);see12USC5388,5383(b)(2).6412USC5382;seealso12USC5383.6512USCS5383(e);5385;5381(a)(8).6612USCS5384(b).6712USC5390.68StephenJ.Lubben,NoBigDeal:TheGMandChryslerCasesinContext,83Am.Bankr.L.J.531(2009).SeealsoStephanieBen-Ishai&StephenJ.Lubben,SalesorPlans:AComparativeAccountoftheNewCorporateReorganization,56McGillL.J.591(2011).
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Thekeydistinctionwithchapter11isthattheFDICactswithoutcourtoversightortheneedtogivenoticebeforeitacts.69Thus,whiletheLehman363salehappenedafteroneweeksnoticetothestakeholders,theOLAequivalentcouldhappenwithinsecondsoftheOLAproceedingscommencement.70
TheFDICisalsograntedaone-daystayoncounterpartiesabilitytoterminatetheirderivativecontracts.71ThiscontrastswiththeBankruptcyCodewhich,particularlyafter2005,exceptsawiderangeofderivativecontractsandthingsthatlooklikederivativecontractsfromthenormaloperationoftheCode.Andequallyimportantly,theOLAprocedurecanbeself-fundedbytheFDIC.72ThisobviatestheneedtosecureprivateDIPfinancing,73somethingthatmightbeespeciallydifficulttoobtainduringafinancialcrisis,especiallyifoneconsidersthescaleofthefundingneedsofmostlargefinancialinstitutions.74
69PaulL.Lee,TheDodd-FrankActOrderlyLiquidationAuthority:APreliminaryAnalysisandCritique-PartII,128BankingL.J.867,899(2011).70MarkA.McDermott&DavidM.Turetsky,RestructuringLarge,Systemically-Important,FinancialCompaniesanAnalysisoftheOrderlyLiquidationAuthority,Title
IIoftheDodd-FrankWallStreetReformandConsumerProtectionAct,19Am.Bankr.Inst.L.Rev.401,421(2011).71DouglasE.Deutsch&EricDaucher,Dodd-Frank'sLiquidationScheme:BasicsforBankruptcyPractitioners,Am.Bankr.Inst.J.,July/August2011,at54,55.72JamiesonL.Hardee,TheOrderlyLiquidationAuthority:TheCreditor'sPerspective,15N.C.BankingInst.259,275(2011).7311U.S.C.364.7412U.S.C.5384(d).
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Thismightbeproblematic.78Obviouslythecostofanybailoutintermsoftaxpayercosts,moralhazard,andreducedmarketdiscipline,willsometimesoverwhelmthecostsofallowinganyparticularinstitutiontofail.Butinthespecificcasesofdepositorybanks,sincethe1930sthegeneralassumptionhasbeenthatanybank
failuremightresultincontagion,hencetheneedforsystemwidedepositinsurance.Andintimesofmarket-widedislocation,ithaslongbeenacceptedthatitcanbesociallyusefulforcentralbankstoprovideliquidity,andevenrecapitalization,toavoidthepanicthatwouldresultfromthefailureofaspecificfinancialinstitution.79ThatsuchlendingnowcanbedoneonlyafterthefailureoftheinstitutionisannouncedrepresentsabetthattheannouncementofanOLAproceedingwillnotitselfoverwhelmthebenefitsoftheFDICslendingtotheinstitution.ItseemsequallylikelythatputtinganinstitutionintoOLAwilltriggerachainreactionofpanicandfailuresthroughoutthesystemthatcouldresultinaseverecontractionofmoneyandcreditinthefinancialsystem,whichcouldresultintheneedtoconduct
severalOLAproceedingsinparallel.ThereisalsothequestionofwhethertheanalogythatDodd-Frankmakesbetweenbankreceivershipandfinancialinstitutionfailureholdsuptocarefulscrutiny.80Forexample,theFDICstechniqueofchoiceistofindabuyertowhomtosellthetroubledbank,butintimesofsystemiccrisistheremightwellbenobuyerslargeenoughorconfidentenoughtoperformasimilarfunctionwithregardtoalargefinancialinstitution.81AttheveryleasttheremightbeaneedforFDICtoheavilysubsidizethesale,apointinsometensionwiththenotionthatDodd-Frankhasendedbailouts.Moreover,giventhelimitednumberofbuyersineventhebestoftimes,arguablythemarketforverylargefinancialinstitutionswillneverbe
competitive,andwillalwaysfunctionasabuyersmarket.Similarly,althoughtheFDIChasconsiderableexperienceresolvingbanksunderitsbankreceivershippowers,ithasnoexperienceresolvingadomesticorglobaldiversifiedfinancialinstitution.82TheFDICcouldbeaddedintheOLAprocessby
controversialTARPprogram,andarguablyplayedakeyroleinstabilizingthefinancialsystem.78SeeJeffreyManns,BuildingBetterBailouts:TheCaseforALong-TermInvestmentApproach,63Fla.L.Rev.1349,1382(2011).79http://krugman.blogs.nytimes.com/2011/10/09/financial-romanticism/80PaulL.Lee,TheDodd-FrankActOrderlyLiquidationAuthority:APreliminaryAnalysisandCritique-PartI,128BankingL.J.771,781(2011).81{citetoZaringhere}82Thenewregimeisalsodifferentfromabankresolutioninthatlossesmustbeimposedontheunsecuredcreditors,eventotheextentofclawingbackpaymentspreviouslymadeundertheFDICsliquiditypowers.Anyremaininglossesaftercreditorshaverepaidtheirsharearetobecoveredbyexpostassessmentsonsurvivinglargefinancialinstitutions.Inshort,unlikebankreceivershipwhereanex
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therequirementthatfinancialinstitutionsfileresolutionplansbeforethefirstsignsoftrouble,andthepowersthatregulatorshavetoorderfinancialinstitutionstorationalizetheircorporatestructures.Butsomecommentatorshaveraisedlegitimateissuesaboutwhetherregulatorswillhavethelong-termwillpowertoenforcetheseprovisionstotheirfullestextent.83
TheinterfacebetweenOLAandFDICbankreceiverships,stateinsurancereceiverships,orSIPAliquidationproceduresisalsosomewhatproblematic.Asnotedattheoutset,OLAdoesnotsupplantanyofthesespecializedprocedures.84Andparticularlywithregardtobankandinsurancecompanyreceiverships,thestatusquoprevailsandtheFDICasOLAreceiverwillhavetointeractwiththereceiversofthesepiecesofthefinancialinstitution.Ofcourse,inthecaseofabank,theFDICwillbeinteractingwithitself,buttheFDICasbankreceiveroperatesunderadifferentsetofstatutoryinstructions85thantheFDICasOLAreceiver.86
Inthecaseofbroker-dealers,theprocessissomewhatmoreconfused.87AclosereadingoftherelevantprovisionactuallysuggeststhattheFDICcanbeappointedreceiverofabroker-dealerunderOLA. 88ButthestatutetheninstructstheFDICtoappointSIPCastrusteeforthebroker-dealer.SIPCistheninstructedtopromptlyfileaSIPApetitionwiththewithanyFederaldistrictcourtofcompetentjurisdictionspecifiedinsection21or27oftheSecuritiesExchangeActof1934.89ThuscommencesaSIPAcase,withsomenotableexceptions.First,SIPCnormallyappointsanoutsidetrusteeinallbutthesmallestcases.UnderOLA,SIPC,wholacks
anteinsurancefundexiststopaylosses,Dodd-Frankrestsonthepremisethatsuch
afundcanbecreatedexpost.PrefundingmayhavemadeOLAmoreusable,andonecansurmisethisisexactlywhytheargumentthatpre-fundingwouldinstitutionalizebailoutswassurfaced.OnecanalsoreasonablydoubtCongresswilltoimposeexpostassessmentsonfinancialinstitutionsinthefaceofconcertedlobbyingandgeneralconcernsaboutcausinganewroundofdistressinthefinancialindustry.SeegenerallyJeffreyN.Gordon&ChrisMuller,ConfrontingFinancialCrisis:Dodd-FranksDangersandtheCaseforaSystemicEmergencyInsuranceFund,28YaleJ.onReg.151(2011).Cf.12USC5394.83SeeJonathanR.Macey&JamesP.Holdcroft,Jr.,FailureIsanOption:AnErsatz-AntitrustApproachtoFinancialRegulation,120YaleL.J.1368,1390(2011).84HollaceT.Cohen,OrderlyLiquidationAuthority:ANewInsolvencyRegimeto
AddressSystemicRisk,45U.Rich.L.Rev.1143,1151(2011).85E.g.,12USC1823(c)(4).8612USC5386.8712USC5385.8812USCS5385(a)(UpontheappointmentoftheCorporationasreceiverforanycoveredbrokerordealer,theCorporationshall...).895385(b).Notably,thisisnotapttobetheD.C.DistrictCourt,whomayhavehadtheinitialtaskofreviewingtheOLApetition.
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experienceliquidatinglargebroker-dealers,isplacedincharge.ButSIPCwillnothavethefullpowersofanormalSIPAtrustee,insteaditsispowerlesstointerferewiththeFDICsdecisiontotransferassetstoanewpurchaserorbridgeinstitution.SIPCsroleisprimarilylimitedtodealingwiththedebrisremainingaftertheFDIC
takeschargeofthebroker-dealer.SIPCisplacedinthedifficultposition.Forexample,theyaretoldtoessentiallyleavetheFDICtodoitsthing,whilethestatutealsoprovidesthatSIPCshouldnotdoanythingtoadverselyaffecttherightsofacustomertocustomerpropertyorcustomernamesecurities.90FortunatelyforSIPCthestatutealsotellsthedistrictcourttostanddownoncetheSIPApetitionisgranted.91EssentiallyDodd-FrankusestheOLAprocesstorideovertheexistingSIPAprocess,withouthavingthewillingnesstosayso.Inthislight,theotherwisepuzzlingdecisiontoappointSIPCastrusteemakessensesinceanoutsidermightfinditdifficulttobeatrusteeundertheconditionsimposedbyDodd-Frank.
OLAwillgivetheFDICstrongpowersovermuchofafinancialinstitution,saveforinsurancecompaniesandbanks.CoordinationofthebankresolutionprocesswiththeOLAprocessshouldbepossiblegiventheunitaryidentityoftheOLAtrusteeandthebankreceiverbutitwillrequiretheFDICtoglossoveritsschizophrenicresponsibilitiesunderDodd-Frankontheonehand,andthegeneralbankingstatutes,ontheother.OLAisalsosomewhatlessglobalthanchapter11mostofitsprovisionsareexpresslylimitedtodomesticentities,whereaschapter11potentiallyappliestoanyentitywithassetsintheUnitedStates.92Giventhenatureofmodernfinancial
institutionstherereallyisnosuchthinkasapurelydomesticfinancialinstitutioncoordinationacrossbordersiskey,andthatissueremainsunresolvedbyDodd-Frank.93Thuswecanexpectthatanycross-bordercoordinationofresolutionprocedureswillhavetohappenonaninformalbasis,amongregulators.AsseeninLehman,however,sometimestheregulatorsarenotfullyawareoftheglobalinsolvencysystem.Onecanonlyhopethatthisimprovesinlightofrecentevents.ButnomatterwhathappensinthisregardinvestorsareunlikelytogetthecertaintytheymighthavehoppedforfromDodd-Frank.
905385(d).915385(c).9211U.S.C.109(a).93SeeMATHIASDEWATRIPONT,BALANCETHEBANKS:GLOBALLESSONSFROMTHEFINANCIALCRISIS122-29(2010).
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Weshouldalsorememberthatthereisalotthathaschangedinthepastfewyearsthatmightmakefinancialinstitutionfailurelesslikely,oratleastlesstraumatic.NewregulationsoffinancialinstitutionsunderDodd-Frank,BaselIII,andotherinitiativesallwillinfluencehowOLAoperates,andwhetheriteverneedstobeinvoked.Morebroadly,thebettertheexanteregulation,thelesslikelyOLAwill
everbeneeded.
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III. BankofAmericainOLA
BankofAmericasentryintotheorderlyliquidationprocesswouldtriggerstateinsurancereceivershipsinCalifornia,NewYork,Arizona,SouthCarolina,andVermont.SixFDICbankreceivershipswouldcommence.AtleastfourSIPA
brokerageliquidationswouldbefiled.Andtheholdingcompanyandanyunregulated,domesticsubsidiarieswouldenterOLAproceedings,wheretheywouldcomeunderthecontroloftheFDIC.Theassetsintheforegoingentitieswouldbeimmediatelyseveredfromtheassetsinkeyforeignsubsidiaries,likeMerrillLynchS.A.orBancofAmericaSecuritiesLimited.94BasedontheexperienceinLehman,thismayresultinthesesubsidiarieslosingaccesstosharedcomputerandcashmanagementsystems,threateningtheirabilitytosurviveasindependententities.Thus,evenifthesecompaniesareseparatelycapitalizedandotherwiseviable,theywillexperienceextremebusiness
disruptionunlesscontingencyplansareinplacewellbeforetheoccurrenceoffinancialdistress.Giventhatitwasreportedthatalargepartapproximately85%--ofBankofAmericaassetsarereportedlyintheUnitedStates,itwouldbeeasytoassumethattheFDICinoneofitscapacitieswillquicklytakechargeofthebulkofthecompany.95Butitisequallypossiblethatforeignsubsidiariesofthebankmighthaveclaimsonthoseassets,nomatterwhattheirlocation.Moreover,thereportingofderivativestradesonanetbasismeansthatassumingassetlocationcorrelateswithimportancemaybeextremelyimprudent.Inshort,itisunclearpreciselyhowmuchofBankofAmericawillfallunderFDICcontrol,actingaseitherasOLAtrustee
orbankreceiver.ButwhateverpartofthebankfallswithintheFDICsjurisdiction,itwillhavetoactfasttoprotectthevalueofthedebtor,especiallywithregardtoitsderivativestradingbook(assumingitisdomesticallyheldatthetimeoftheOLAfiling).Assuch,thepathFDICwillfollowseemsrelativelyclear.First,theFDICwillmovethevaluableandsystemicallyimportantpartsofthecompanytoabridgebank.Next,itwillmovetheentirederivativeportfoliooratleasttheentiredomesticderivativesportfoliotothebridgebankaswell.Whilehereitmightbetemptingtoonlymovethegoodorinthemoneytradestothe
bridgebank,Dodd-Franksprohibitiononsplittingpositionsagainstanysinglecounterparty,andtherealitythattheFDICmustactwith24hoursmakesanydeepanalysisofderivativetradesunlikely.Thissortofwholesaletransferdoes,of
94SeesupraTable2foralistofBankofAmericasself-identifiedkeyoperatingsubsidiaries.95SeesupraTable3.
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course,amounttoawindfallforsomecounterpartieswhosuddenlygetthebenefitofamuchmorecreditorworthypartner.ThethirdstepwouldbetoremoveBankofAmericasseniormanagement.Dodd-Frankrequiresnoless.
Finally,theFDICwouldhavetoarrangeasensibleliquidationoftheremainderoftheBankofAmerica.Thatis,thescrapsleftoutofthenewbridgebankwouldhavetobefinancedtofacilitatetheirliquidation.Eventuallyitseemslikelythatsomesortofliquidatingtrust,asisoftenusedinlargechapter11cases,mightbeusedtoallowthecreditorsofthebadbanktomanagetheirownrecoveryinsomesortofcollectivesense.Thetrickherewillbemanagingthetensionbetweencreditorswhowantrapidrepayment,whileavoidingfiresalesofdistressedsecurities,thatmighthavefurthereffectsonanalreadydepressedmarket.That,ataveryabstractlevel,ishowOLAmightbeappliedtoBankofAmerica.Of
course,eachofthesebroadstepsraisesimportantconcernsandquestions.Mostfundamentally,willitbepossibletocleanlyseparateBankofAmericaintoitsgoodandbadparts?ThisistheareawheretheFDIC,throughthelivingwillsprovisionsanditsotheroversighttools,mustbothunderstandandreformatBankofAmericainawaythatwillfacilitatethetransfertothebridgebank.Atpresent,itseemshighlyunlikelythatthebank,withitsmorethan2,000subsidiaries,couldbesplitintogoodandbadbankswithoutseriousdisruptiontothebank,andthustheentirefinancialsystem.Thisisalsoanareawheretheinternationalcomponentofthebankshouldbe
addressed.Inparticular,thelivingwillforanyglobalfinancialinstitutionshouldexplainhowtheforeignpiecesofthebankwouldbeseparatedfromtheAmericanbank.AsRichardW.Fisher,PresidentoftheFederalReserveBankofDallas,statedrecently,thereisscantchancethatmanagersof$1trillionor$2trillionbankingenterprisescanpossiblyknowtheircustomer,followtime-honoredprinciplesofbankingandfashionreliableriskmanagementmodelsfororganizationsascomplexasthesemegabankshavebecome.96Thisrealitywouldbecomeevenmoreacuteduringafinancialcrisis,whentheFDICasreceiverisevenlesslikelytohavesuchknowledge.
96RichardW.Fisher,TamingtheToo-Big-to-Fails:WillDoddFrankBetheTicketorIsLap-BandSurgeryRequired?RemarksbeforeColumbiaUniversitysPoliticsandBusinessClub,November15,2011,availableathttp://bit.ly/vUPkmk.Asaremedy,Fisherproposeddownsizingthebehemothsovertimeintoinstitutionsthatcanbeprudentlymanaged....
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Nonetheless,FDICwouldhavetooperatethebridgebank,whichcontainsthebetterpartsofBankofAmerica.Thiswillmeanfundingthebridgebank,withtheideathatitwillgetbackitscostsfromtheindustryatsomepointinthefuture.HereIthinkwehavetoworryaboutFDICsabilitytorunamajorfinancial
institution,markedlylargerthananybankithaseveroperatedunderitsreceivershippowers.Moreover,marketconditionsareapttoberatherturbulentfollowingthetakeoverofaninstitutionofBankofAmericassize.TraditionallytheFDIChasfavoredsalestootherbankswhenithashadtodealwithabigbankfailure.97ButwillanyonebeableorinterestedinbuyingBankofAmericafollowingitsfailure?Certainlyitwouldseemtomakelittlesensetoaddeventhegoodbitsofthebanktoanyoftheexisting,verylargedomesticbanks.98ThatleavesthesecondtierbanksthinkUSBancorpandPNCFinancialServicesGroupaspotentialsuitors,orforeignfinancialinstitutions,likeBarclays,who
boughtLehmanoutofchapter11.Thequestioniswhetheranyofthesecondtierbankswouldwanttojointhetoptier,andwhetherregulatorsshouldallowthemtodoso.Asimilarcalculuswillbeatworkwithforeignentities,whoseregulatorsmustworryaboutrecreatingtoobigtoofailproblemsinthebuyinginstitution.AndalsorememberthatBofAhasbeensomewhatdismemberedatthispointbothbythelimitedscopeofOLAandbytheinternationalpiecesbeingpulledoutsosomeofitsattractionmaybegone.Lehmanhadexactlyonebidderforitsassets,andnowthatbankhasaU.S.broker-dealer.Whoremains?FDICgetsoutofthisproblemintheirLehmanhypotheticalbyassumingabuyer
whoiswillingtopaybookvaluebutthepresentexerciseisaimedatasomewhatmorerealisticanalysis.Asanalternative,FDICcouldcontinuetofundthebridgebankuntilthemarketsstabilizeandthebridgecanthenberecapitalizedthroughanIPO.99ThiswillexposeFDICtohighdegreesofmarketandpoliticalrisk,butendinthebestoveralloutcome.Nonetheless,thismodellooksmuchmorelikethemodelusedintheGMcasewhichmostpeoplewouldnottermaliquidation,despiteDodd-Franksputativerulethatallfuturefinancialinstitutionsshouldsufferthatfate.Ultimately,theremaybemanygoodreasonstobreakupthelargestU.S.banks.In
manyrespects,theyarenotunliketheconglomeratesofthe1960s,pursuingseverallinesofbusinessonthebasisofpurportedeconomiesofscalethatmayexistmorein
97http://www.fdic.gov/news/news/press/2012/pr12013.html98AnddoingsowouldrequirewaiverofDodd-Franksconcentrationlimits.99SeeMichaelSimkovic,CompetitionandCrisisinMortgageSecuritization,88Ind.L.J.____(forthcoming2013),availableathttp://ssrn.com/abstract=1924831.
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themindsoftheirCEOthaninreality.100Butinanyevent,itseemsunlikelythattheidealmomenttobreakupthesebankswillbeatthepointofcrisis.AnditseemsequallyunlikelythattheseinstitutionswilldivideneatlyalonggeographicallinesyetthatispreciselywhatDodd-FranksOLAispremisedon.
IV. ConcludingThoughts
GivenOLAsadmittedlyshakiness,whynotusetheBankruptcyCode?Afterall,chapter11benefitsfromdecadesofunderstandingabouthowtorestructureafinanciallydistressedcompany.Andseveralextremelylargecompanies,includingfinancialinstitutionslikeLehmanandDrexelBurnhamLambert,havesuccessfullyusedchapter11.ThemostprominentproposaltousetheCodeinplaceofOLAactuallycallsforanewchapter14,proposedbymembersoftheResolutionProjectatStanford
University'sHooverInstitution.101Inshort,proposedchapter14wouldapplytoallfinancialinstitutionswithassetsofmorethan$100billion.102Petitionscouldbefiledeithervoluntarily(bytheinstitution)orinvoluntarily(byregulators).Caseswouldbeoverseenbyasmallandspecializedpanelofdistrictcourtjudgesandspecialmasters.103OtherwisethecaseswouldproceedundernormalprovisionsoftheBankruptcyCode,subjecttomodifiedtreatmentofderivativesandrepos,asoutlinedinacompanionarticlebySkeelandJackson.104Thestategoalistotakethegovernmentoutoftheinsolvencyprocess,astheproponentsarguethatinvolvespoliticaldistortionofthemarket.ThekeydifficultywithanysuchuseoftheBankruptcyCoderestsonfunding.The
chapter14proposalsupposestheuseofamodifiedversionofthepresentsection364oftheBankruptcyCode,thestatutorysupportforthewell-knownDIPloansinchapter11cases.105Beforethefinancialcrisis,LyondellChemicalreceivedthelargestcommercialDIPloanonrecord:$8billion.ThatloanwasarrangedbyMerrillLynch,Goldman
100http://finance.fortune.cnn.com/2012/01/18/big-banks-break-up-bair/?iid=SF_F_Lead101http://www.federalreserve.gov/SECRS/2011/June/20110620/OP-1418/OP-1418_061511_81311_544434921739_1.pdf10224bankorfinancialholdingcompaniesfitthatdefinitionattheendof2011,majorregionalbankslikeUnionBankofCaliforniaandKeyCorpwouldnotbecovered.103Id.at1-6.104DavidA.Skeel,Jr.&ThomasH.Jackson,TransactionConsistencyandtheNewFinanceinBankruptcy,112Colum.L.Rev.152,153-54(2012).105JamesonRice,III.ChangesinDebtor-in-PossessionFinancingFollowingtheFinancialCollapseof2008,29Rev.Banking&Fin.L.312,313(2010).
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Sachs,Citigroup,andtheRoyalBankofScotland,andfundedbythirteenfinancialinstitutions,includingcommercialbanks,investmentbanks,hedgefunds,andprivateequityfunds.GeneralMotorsreceiveda$33billionDIPloan,fromtheU.S.Treasury.106That
remainsthelargestDIPloanever.ThetotalvalueofthetenlargestDIPloansinthe2011was$3billion,onethirdofwhichinvolvedasingleloanarrangedbyBankofAmerica.In2010thetotalvalueofthefifteenlargestDIPloanswas$7billion,ofwhich$725million,comprisingfourloans,wasarrangedbyBankofAmerica.BankofAmericacurrentlyhasliquidityneedsofmorethan$400billion.RelyingonthecommercialDIPmarketespeciallyduringafinancialcrisisforaDIPloanofanythingnearthissizeseemsmorethanimplausible.Thenumberof
financialinstitutionsthatwouldhavetobeinvolvedwouldbemassiveperhapsasmanyas650,iftheproportionwerethesameastheLyondellDIPloan.ThereisnowayaloanofthissizecouldbearrangedwithoutstartingarunonBankofAmerica.Dodd-Franksolvesthisproblemwiththefundingmechanismdiscussedearlier,andthatmechanismorsomethinglikeitisaprerequisitetoaviableresolutionauthority.107Andonceweconcedetheneedforgovernmentfunding,thenotionthatthegovernmentwillnotultimatelybeincontroloftheprocessseemslittlemorethannave.Afterall,untiltheautomotivecases,itwaswidelyagreedthataprivate
lenderwasentitledtocalltheshotsinanycaseinwhichitprovidedthedebtorsmeanstokeepoperating. 108Similarly,thechapter14proposaltoutsitsbenefitasatransparent,court-basedprocess,itdoeslittletoaddressthespeedneededtoaddressfinancialdistressinthiscontext.ThenewOLAobtainsmostofitsbenefitsfromitsratherlimited
106http://dealbook.nytimes.com/2009/06/25/gm-wins-final-approval-of-dip-financing/107MichaelS.Barr,TheFinancialCrisisandthePathofReform,29YaleJ.onReg.91,101(2012).108DouglasG.Baird&RobertK.Rasmussen,TheEndofBankruptcy,55Stan.L.Rev.751,784-85(2002);M.ToddHenderson,PayingCeosinBankruptcy:ExecutiveCompensationWhenAgencyCostsAreLow,101Nw.U.L.Rev.1543,1570(2007);DavidA.Skeel,Jr.,Creditors'Ball:The"New"NewCorporateGovernanceinChapter11,152U.Pa.L.Rev.917,923(2003).Aftertheautomotivecases,certainproponentsofthatviewseemedtochangetheirmind.SeeLubben,NoBigDeal,supranote68.SeealsoMarkJ.Roe&DavidA.Skeel,AssessingtheChryslerBankruptcy,108Mich.L.Rev.727,731-32(2010)
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versionofdueprocess,whichisbothtroublingandnecessary.109Lehmanwasabletousetheordinarybankruptcyprocesstoachieveasaleofitsbroker-dealerwithinoneweek,butthatonlycameaboutasaresultoftheFederalReserveswillingnesstosupportthesaleprocess.ArguablytheFednolongerhasthatpower,andtheproponentsofchapter14donotseemtoprovideanyalternative.
Moreimportantly,rememberagainthatLehmaniscomparativelysmallwhenmeasuredagainstthelikesofBankofAmerica.Thefinancialmarketsneedtoknowtheplan,andtheyneedtoknowitquicklywhenamajorbankfails.110OLAclearlywinsonthispoint,and,asnotedabove,manyofthedueprocessconcernswillfadeifFDICcanprovidegreaterclarityonwhenOLAmightbeinvoked.111Finally,itwouldseemthatthechapter14proponentswantedjudicialexpertise,butwereunwillingtoembracethatexpertisewhenitcameintheformofnon-ArticleIIIbankruptcyjudges.112Iftruerestructuringexperienceisdesired,thebankruptcyjudgesinDelawareandtheSouthernDistrictofNewYorkseemliketheobvious
choice,butthechapter14proposalinsteadgoeswithdistrictcourtjudges,whoseechapter11casesonappeal,ifatall.113AsbetweenadistrictjudgeandFDIC,itappearsthatthereislittletobegainfromreplacingOLAwithchapter14.Inshort,whileabankruptcy-basedprocesswouldundoubtedlybepreferable,giventhegainsintransparencyandlegitimacy,itwouldnecessarilyinvolveOLA-likefundingandtimingprovisions.114Thisissomethingmorethanbankruptcywithafewtweaks.Andchapter14doesnothingtosolvetheinternationalcomponentoftheproblem,whicharguablyisthebiggestissueloomingovertheentiretopic.Afterall,while
Lehmanisoutofchapter11,itsNewYorkbroker-dealeranditsLondonbroker-dealercontinuetofightoverownershipofassetsinbothbankruptcyestates.Giventhatalllargefinancialinstitutionsareinternationalfinancialinstitutions,thefailuretotacklethekeyissueleavesthebiggestpieceoftheproblemunaddressed.
109RandallD.Guynn,AreBailoutsInevitable?,29YaleJ.onReg.121,153(2012).110AlisonM.Hashmall,AftertheFall:ANewFrameworktoRegulate"TooBigtoFail"Non-BankFinancialInstitutions,85N.Y.U.L.Rev.829,851(2010).111AcknowledgingthatFDICisonlypartiallyabletocommittoanystrategyinthisregard,giventheroleoftheSecretary.112SeeSternv.Marshall,131S.Ct.2594(2011).113TroyA.McKenzie,JudicialIndependence,Autonomy,andtheBankruptcyCourts,62STAN.L.REV.747,781(2010).