How Well Does Bankruptcy Work When Large Financial Firms Fail? Some Lessons from Lehman Brothers

Thomas J. Fitzpatrick IV, Federal Reserve Bank of Cleveland
James B. Thomson, Federal Reserve Bank of Cleveland

Abstract

There is disagreement about whether large and complex financial institutions should be allowed to use U.S. bankruptcy law to reorganize when they get into financial difficulty. We look at the Lehman example for lessons about whether bankruptcy law might be a better alternative to bailouts or to resolution under the Dodd-Frank Act’s orderly liquidation authority. We find that there is no clear evidence that bankruptcy law is insufficient to handle the resolution of large complex financial firms.