The systemic financial crisis of 2008 spurred the failure of numerous financial and non-financial entities. Regulators addressed each of these failures on an ad hoc ex-post basis, granting multiple bailouts in various forms. The refusal to extend these bailouts to one firm, Lehman Brothers, however, caused further panic and contagion throughout the already unstable market as one of the largest financial institutions of the U.S. underwent an extremely lengthy and value-destructive Chapter 11 bankruptcy. Criticism surrounding not only the bailouts, but also the decision to allow Lehman to fail under the Bankruptcy Code, led to the inclusion of the Orderly Liquidation Authority (OLA), a regulatory alternative to bankruptcy for systemically important financial institutions (SIFIs), in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The OLA, although perceived to be a radical departure from traditional bankruptcy, encompasses many familiar resolution principles. Most significant departures from the Bankruptcy Code can be explained by the necessity to ensure the maintenance of financial stability in the national and even global economy in the case of a SIFI failure. By banning future government bailouts as a means to handle a SIFI failure, the OLA also seeks to end the “Too Big To Fail” subsidy and achieve market discipline, such that moral hazard may be minimized. Although the prescribed tactics for effectuating a resolution under the OLA may in fact implicate new moral hazard concerns, many such issues in existence under the old resolution regime have indeed been eliminated. What remains to be seen is the extent to which the agencies will assume their proscribed authority to regulate these SIFIs and the extent to which the market will find their regulations credible.
- Orderly Liquidation Authority,
- Financial Regulation,
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