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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

    !

    !

    ! ! ! ! ! ! ! ! ! ! ! ! ! !

    ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

    ! ! ! ! ! ! ! ! ! ! ! ! ! ! !!!!!

    !

    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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    !

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    ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

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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).