Financial Institution Bankruptcy Act of 2016

Floor Speech

H.R. 2947, the Financial Institution Bankruptcy Act of 2016, amends the Bankruptcy Code to establish a process for the expedited judicial resolution of large financial institutions in order to soften the disruptive effects of their collapse.

As we all know, the Great Recession was triggered by the widespread issuance and limited regulation of high-risk and, possibly, fraudulent mortgage-backed securities. Fueled by adjustable rate and predatory subprime mortgages, these securities were issued without regard to careful underwriting standards, caused a housing bubble that trapped countless homeowners in unaffordable mortgages, and led to a massive wave of foreclosures that resulted in the worst financial crisis since the Great Depression. In the wake of this crisis, the President signed the Dodd-Frank Act into law so as to provide comprehensive measures to reduce systemic risk through heightened financial stability requirements for large financial institutions.

Among many other requirements, title I of Dodd-Frank requires that certain large financial institutions have living wills to ensure a rapid and orderly resolution in the event of material distress or failure. Title II of the law provides for an administrative process to wind down these institutions so as to avoid adverse effects on the entire financial system; but there is no such process under the current bankruptcy law.

I applaud Congressman Trott and the chairman of the full committee, Chairman Goodlatte, for addressing this concern by offering this legislation to revise the Bankruptcy Code in order to establish a specialized form of bankruptcy relief that would facilitate the expeditious resolution of large financial institutions and would minimize the disruptive impact of a company's collapse on the financial system. The legislation largely accomplishes this goal by establishing a resolution process that authorizes a court to provide relief by transferring a debtor's assets to a bridge company, under an expedited timeline, while minimizing the adverse effects of the bankruptcy on the financial system.

While these aspects of the bill are commendable, I remain concerned, however, that this legislation lacks a funding mechanism that would allow the Federal Government to provide liquidity to the company, which is a key difference between an orderly resolution under Dodd-Frank and the resolution contemplated by H.R. 2947.

In a typical bankruptcy case, the debtor's reorganization may be funded by private parties or by the Federal Government, as illustrated by the General Motors bankruptcy. In many instances, liquidity provided by the U.S. Government to prevent the collapse of a financial institution has either returned a profit to the taxpayers or is likely to be repaid.

Leading bankruptcy experts have found that providing liquidity to distressed financial institutions ``is essential to successfully resolving the firm without creating undue systemic risk.'' This critical mechanism has prevented the collapses of several major financial institutions without cost to the taxpayer.

Lastly, I would caution against efforts to combine H.R. 2947 with legislation that would strike title II of the Dodd-Frank Act. As the National Bankruptcy Conference has observed, laws that are currently in place, such as title II of the Dodd-Frank Act, should remain in effect because the ability of U.S. regulators to assume full control of the resolution process to elicit the cooperation from non-U.S. regulators is an essential insurance policy against systemic risk and potential conflict and dysfunction among the multinational components of these institutions. I would also note that title II of the Dodd-Frank Act will serve as a valuable backstop to the bankruptcy process should this bill become law.

Notwithstanding these concerns, I thank, once again, the gentleman from Virginia, the gentleman from Michigan, and also my friend and chair of the relevant subcommittee, Tom Marino from Pennsylvania, for their leadership on this issue and for the bipartisan process in developing this legislation. I also thank the Democratic and Republican counsel of the Judiciary Committee, Susan Jensen and Anthony Grossi, for their tireless work and substantive expertise in developing this legislation.

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Mr. JOHNSON of Georgia. Mr. Speaker, I ask that my colleagues pass this measure.

I yield back the remainder of my time.

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