[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]





                        WHO IS TOO BIG TO FAIL:
                          DOES TITLE II OF THE
                        DODD-FRANK ACT ENSHRINE
                       TAXPAYER-FUNDED BAILOUTS?

=======================================================================

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT
                           AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 15, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-19



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]







                                _____

                  U.S. GOVERNMENT PRINTING OFFICE

81-754 PDF                WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001







                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
              Subcommittee on Oversight and Investigations

              PATRICK T. McHENRY, North Carolina, Chairman

MICHAEL G. FITZPATRICK,              AL GREEN, Texas, Ranking Member
    Pennsylvania, Vice Chairman      EMANUEL CLEAVER, Missouri
PETER T. KING, New York              KEITH ELLISON, Minnesota
MICHELE BACHMANN, Minnesota          ED PERLMUTTER, Colorado
SEAN P. DUFFY, Wisconsin             CAROLYN B. MALONEY, New York
MICHAEL G. GRIMM, New York           JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee       KYRSTEN SINEMA, Arizona
RANDY HULTGREN, Illinois             JOYCE BEATTY, Ohio
DENNIS A. ROSS, Florida              DENNY HECK, Washington
ANN WAGNER, Missouri
ANDY BARR, Kentucky













                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 15, 2013.................................................     1
Appendix:
    May 15, 2013.................................................    41

                               WITNESSES
                        Wednesday, May 15, 2013

Krimminger, Michael H., Partner, Cleary Gottlieb.................    11
Rosner, Joshua, Managing Director, Graham Fisher & Co............     9
Skeel, David A., Jr., S. Samuel Arsht Professor of Corporate Law, 
  University of Pennsylvania Law School..........................     6
Taylor, John B., Mary and Robert Raymond Professor, Stanford 
  University, and George P. Schultz Senior Fellow in Economics, 
  Stanford's Hoover Institution..................................     8

                                APPENDIX

Prepared statements:
    King, Hon. Peter.............................................    42
    Krimminger, Michael H........................................    43
    Rosner, Joshua...............................................    57
    Skeel, David A., Jr..........................................    66
    Taylor, John B...............................................    70

 
                        WHO IS TOO BIG TO FAIL:
                          DOES TITLE II OF THE
                        DODD-FRANK ACT ENSHRINE
                       TAXPAYER-FUNDED BAILOUTS?

                              ----------                              


                        Wednesday, May 15, 2013

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2128, Rayburn House Office Building, Hon. Patrick T. 
McHenry [chairman of the subcommittee] presiding.
    Members present: Representatives McHenry, Fitzpatrick, 
Duffy, Hultgren, Ross, Wagner, Barr; Green, Cleaver, Delaney, 
Sinema, Beatty, and Heck.
    Ex officio present: Representative Hensarling.
    Also present: Representative Sherman.
    Chairman McHenry. The Oversight and Investigations 
Subcommittee of the Financial Services Committee will come to 
order. We are pleased to begin a hearing entitled, ``Who Is Too 
Big To Fail: Does Title II of the Dodd-Frank Act Enshrine 
Taxpayer-Funded Bailouts?''
    We have a distinguished panel composed of 4 witnesses. 
Three of them are currently here, and one is en route.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time, and the Chair would like 
to announce that the intention is to adjourn this subcommittee 
by noon today. We have one witness who has to depart by 11:45, 
and that witness is Professor Skeel, who has to catch a flight.
    So, with that, I recognize myself for 5 minutes for an 
opening statement.
    Two-and-a-half years ago, when the Dodd-Frank Act was 
signed into law, President Obama declared that too-big-to-fail 
had ended. Today, there seems to be much debate as to whether 
that is true. Across the ideological spectrum, elected 
officials, members of the media, Federal Reserve Presidents, 
and even the Chairman of the Federal Reserve have acknowledged 
that this problem still persists.
    Just this past week, Chairman Bernanke, in his speech to 
the Federal Reserve Bank of Chicago, said, ``I think that too-
big-to-fail is a very big issue and we will not have completed 
the goals of financial regulatory reform unless we have 
adequately addressed this issue.''
    The Administration's Attorney General Eric Holder 
highlighted the problem from the perspective of prosecuting 
Federal crime. Testifying in front of the Senate he said, ``I 
am concerned the size of some of these institutions has become 
so large that it does become difficult for us to prosecute them 
when we are hit with indications that if you do prosecute, it 
will have a negative impact on the national economy, perhaps 
even the world economy.''
    The fact is that Dodd-Frank did not end too-big-to-fail but 
instead enshrined it. Title II of Dodd-Frank, which created the 
Orderly Liquidation Authority (OLA), made government guarantees 
for Systemically Important Financial Institutions (SIFI) 
explicit. The Orderly Liquidation Authority is less than 
orderly. Liquidity is provided by the government, but it does 
have enormous authorities within it. And it is this explicit 
guarantee that not only provides an unfair advantage to the 
biggest and most powerful companies and institutions, but in 
doing so has the potential to seriously distort our 
marketplace.
    However, relatively little has been done in terms of the 
halls of Congress and policymakers here in regard to the actual 
process that takes place within the Orderly Liquidation 
Authority (OLA). The competitive advantages that OLA provides 
to large, troubled institutions are real, and whether these 
advantages will be applied to save large, troubled financial 
institutions while harming otherwise healthy competitors 
remains to be seen, as well.
    OLA imposes a bank restructuring process in lieu of 
bankruptcy that is intended to allow troubled financial 
institutions to continue operating while undergoing 
recapitalization. The general idea is that the parent company 
suffers equity in debt write-downs while the operating 
subsidiary remains solvent and proceeds with business as usual. 
The FDIC calls this the single point of entry process.
    While this process provides attractive benefits such as 
avoiding a loss of franchise value that often results from a 
run on a failed bank, the benefits of continuity come with an 
extraordinarily great price and a price to the taxpayers and to 
those who bank with other institutions, potentially, as well.
    Protecting the franchise value requires a bailout. While 
the government provides liquidity to a bridge holding company 
while exempting it from taxes and potentially exempting it from 
capital requirements or other regulatory requirements, the cost 
of these subsidies is ultimately backed by attacks on banks and 
thereby attacks on those that utilize banking services, which, 
as we know, is clearly passed on to customers in my district 
and across the country.
    The FDIC and Treasury--their discretion to provide these 
advantages is paired with the political value of saving a 
Systemically Important Financial Institution. When faced with a 
failed institution, and an open wallet from the Treasury backed 
by a bank tax, what do we expect the regulators to do? To 
advantage these corporations, these new entities, or 
disadvantage them?
    These are the questions that we have today. As reflected in 
the continued lower cost of borrowing available to Systemically 
Important Financial Institutions, this bailout perpetuates too-
big-to-fail and the moral hazard associated with it.
    I recognize that our witnesses have a variety of opinions 
on this matter, and we look forward to their talking through 
this process to policymakers here so that we can more deeply 
understand the Orderly Liquidation Authority, what that bridge 
holding company looks like, and the terms under which they will 
operate, potentially operate, and what the letter of the law 
actually says.
    So, I look forward to your testimony. And I look forward to 
Members' questions and getting to a deeper understanding of the 
Orderly Liquidation Authority within Dodd-Frank.
    With that, I now recognize the ranking member, Mr. Green, 
for 5 minutes. Oh, the ranking member wishes Mr. Sherman to be 
recognized first on his side.
    Mr. Sherman is recognized for 3 minutes.
    Mr. Sherman. I thank the ranking member.
    Chairman McHenry. I'm sorry. Recognizing that you are not a 
member of the subcommittee, we have to ask unanimous consent 
for you to make a statement, since we allow subcommittee 
members to speak first, but hearing no objection, we will 
recognize you for 3 minutes for an opening statement.
    Mr. Sherman. I thank both the ranking member and my 
colleagues.
    TARP stood for Troubled Asset Recovery Program. We put a 
big light on it, we stopped it for a while, and in the end they 
didn't dare buy a single toxic asset, a single bad bond from 
the big banks. Instead, they bought preferred stock, and that 
is why we are getting most of our money back, but it was still 
a bailout.
    The Orderly Liquidation Authority in Dodd-Frank has some 
problems, but compare it the first four drafts of the bill, 
which I described and it was quoted by a few on the other side 
as TARP on steroids because it provided permanent unlimited 
bailout authority. The current bill limits the amount of cash 
the taxpayers put out to the value of the assets securing that 
cash, and while that does provide some advantages, it certainly 
is a pale shadow of what was intended by those who started that 
legislation.
    Ultimately, though, you don't need legislation to get a 
bailout. They didn't have one in 2008. They were credibly able 
to tell the country that if we didn't bail them out, they would 
take us down with them, and as long as there are institutions 
that can credibly make that claim, we have seen once that 
Congress is willing to pass whatever statute eventually they 
propose. So what we need to do is make sure that no private 
entity can make the claim that they can pull down the entire 
economy. We ought to break up those who are too-big-to-fail, 
and as I think the chairman pointed out, too big to jail, no 
institution should be so large that its creditors believe that 
they will be bailed out and its executives believe that they 
are immune from the criminal laws that affect us all.
    So, I look forward to ending the--not just changing the 
statute but changing the economic reality that we were 
confronted with in 2008, and that I hope we are not confronted 
with again.
    I again thank the chairman, and I yield back.
    Chairman McHenry. The gentleman yields back. I now 
recognize the vice chairman of the subcommittee, Mr. 
Fitzpatrick, for 2 minutes.
    Mr. Fitzpatrick. Thank you, Mr. Chairman, for holding this 
important hearing. The Orderly Liquidation Authority, or the 
OLA, provides an alternative to bankruptcy that will most 
likely arise when a financial institution's failure threatens 
the broader economy. The FDIC has decided to implement the OLA 
through the single point of entry approach, or SPOE. The SPOE 
approach is an attempt to reduce the complexity associated with 
resolving massive and enormously complex financial 
institutions. SPOE calls for the equity and debt issued at the 
holding company level to be written down during the OLA process 
as a means to convert a failed financial institution into a new 
and stable financial institution, thereby imposing losses on 
the former owners and unsecured creditors of the firm.
    Due to the complexity of Systemically Important Financial 
Institutions, the drafters of Dodd-Frank provided a great deal 
of discretion to the FDIC and Treasury in how and whether to 
recapitalize or liquidate a firm that is resolved under the 
OLA. Ultimately, the vast discretion embeds a permanent level 
of uncertainty.
    Central to this point is the funding authority provided to 
the FDIC through the Orderly Liquidation Fund, or the OLF. When 
a troubled financial institution enters the OLA process, the 
FDIC is authorized to provide funding up to 90 percent of total 
consolidated assets in the financial institution. The FDIC 
alternatively could provide 0 percent and instead maximize 
capital via the write-down of debt. The difference between 90 
percent of a trillion dollars and 0 percent of a trillion 
dollars is enormous. How can creditors of Systemically 
Important Financial Institutions accurately evaluate risk when 
the FDIC holds so much discretion? This is only one component 
of the vast discretion provided to the FDIC and to the 
Treasury.
    I look forward to the testimony of our witnesses, and I 
yield back the balance of my time.
    Chairman McHenry. I thank the vice chairman, and we will 
now recognize the ranking member of the subcommittee, Mr. 
Green, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank you, and I want 
to especially thank the staff, if I may take a moment to do so, 
for the outstanding work that they have done in compiling 
information for us for this hearing.
    I think this hearing will provide us an opportunity to get 
some answers to many questions that are being posed with 
reference to Dodd-Frank, but I would like to take a moment and 
deal with the issue that the hearing is designed to address: 
Does Title II of Dodd-Frank Enshrine Taxpayer-Funded Bailouts? 
Stated another way, does Title II of Dodd-Frank--which is the 
law--enshrine--which is to legalize, memorialize, perpetuate--a 
taxpayer-funded bailout? As you know, bailouts are monies that 
go to these institutions to keep them afloat. That is the way 
the public views this and that is the way I interpret what we 
are talking about today, the proposition that is before us.
    And the question is to be answered in the following manner, 
pursuant to some of the material that the staff has given to 
us, and I am proud of this material. We have Section 214 styled 
``The Prohibition on Taxpayer Funding,'' which reads, ``Section 
214(a) provides that no taxpayer funds may be used to prevent 
the liquidation of any financial company under this title. 
Section 214(b) requires that all funds expended in the 
liquidation of a covered financial company be recovered from 
the disposition of assets or through assessments on the 
financial sector. Section 214(c) provides that the taxpayer 
shall bear no losses from the exercise of any authority under 
Title II.''
    Now, that is pretty explicit in terms of taxpayers bailing 
out an institution. I would also add, and I am pleased that my 
friend Mr. Sherman is here, he was very vocal about Section 
13(3) and pursuant to his request, and I thank him for making 
these requests, we were able to prevent Section 13(3) funds 
from being utilized to bail out these institutions in the 
future. So we had this big debate about how we were going to 
bail out companies, and we decided we wouldn't, and then the 
debate became, how will the taxpayer dollars be used if they 
are used, and we thought that they shouldn't be used at all. 
That was the argument that was made in what is called an ex 
ante fashion, meaning that we would use funds from the industry 
to cover any losses the same way we use industry funds for 
premiums for FDIC. If you like the way FDIC functions, you 
should like the way Dodd-Frank and the Orderly Liquidation 
Authority function because FDIC funds are used, these are 
premiums, and these premiums are an ex ante premium. That means 
they are paid before an event occurs.
    Because we had a good many persons who--and by the way, 
these were not persons, for the most part, on my side of the 
aisle--felt that we ought to have an ex post process, meaning 
that the funds, if they are to be collected from the industry, 
would be collected after the event occurs, and that was made a 
part of the bill, the ex post process.
    Given that we now have this process of collecting after the 
fact, we also have this language that protects taxpayer funds. 
We can't use 13(3) funds. Taxpayers, while some of the funds 
may be used, they are not given to the FDIC. It is a loan, and 
the loan can carry with it an interest rate such that taxpayers 
will never be on the hook for a company going out of business.
    Finally, on this point, and I will make it quickly, in my 
opinion, too-big-to-fail is the right size to regulate. That is 
what Dodd-Frank does. It regulates too-big-to-fail, but it also 
provides a means by which too-big-to-fail can be eliminated. 
There is an Orderly Liquidation Authority, and this Orderly 
Liquidation Authority has the means by which large mega 
companies, the AIGs of the world, can be wound down and not 
have an impact on the broader economy. That is what Dodd-Frank 
is enshrined to do, that is what the law says, and in my 
opinion, we have an opportunity to regulate and manage these 
too-big-to-fail institutions.
    Thank you, Mr. Chairman. I yield back.
    Chairman McHenry. I thank the ranking member, and it is 
healthy to have a debate, and that is good. So, with that, we 
will now recognize Mrs. Wagner of Missouri for 2 minutes.
    Mrs. Wagner. Thank you very much, Mr. Chairman. After our 
country went through the financial crisis of 2008, there was 
broad agreement on two very important issues: first, that 
hardworking American taxpayers should never again be forced to 
foot the bill for the failure of a financial institution; and 
second, that government policy should not favor one particular 
institution or class of institutions at the expense of the rest 
of the market.
    Unfortunately, it appears that the so-called Orderly 
Liquidation Authority included in Dodd-Frank violates both of 
these principles. At best, the new resolution authority is, as 
former Democratic Senator Ted Kaufman recently put it, a 
``paper tiger that will fall apart the minute it is tested in a 
real life financial crisis.''
    And at worst, the OLA is a mechanism which makes taxpayer 
bailouts the official law of the land, and at the same time 
undermines basic principles of our free market economy. Either 
way, I hope today's hearing will make clear that Dodd-Frank and 
the OLA did not end too-big-to-fail and in many ways have 
actually made the problem worse.
    I look forward to hearing from our witnesses on this very 
important topic.
    Chairman McHenry. I thank the Members. With no other 
Members seeking recognition for opening statements, we will now 
move to the panel's oral presentation of their written 
testimony. Without objection, all of the witnesses' written 
statements will be made a part of the record.
    On your table, there is a light. All four of you are savvy 
to hearings on Capitol Hill, and you know the process: green 
means go; yellow means hurry up; and red means stop. So with 
that, let me introduce our distinguished panel today.
    We have Professor David A. Skeel, who is the Samuel Arsht 
Professor of Corporate Law at the University of Pennsylvania 
Law School. Among a number of his scholarly publications, he 
authored a book entitled, ``The New Financial Deal: 
Understanding the Dodd-Frank Act and Its Unintended 
Consequences.''
    Professor John B. Taylor is the Mary and Robert Raymond 
Professor of Economics at Stanford University. He has also 
authored a number of scholarly publications, including a well-
regarded book entitled, ``First Principles: Five Keys to 
Restoring America's Prosperity.'' For Fed watchers, he is the 
originator of the Taylor rule, inventively entitled the 
``Taylor Rule,'' which is important.
    We have Mr. Josh Rosner, the managing director at Graham 
Fischer & Company. He recently co-authored a book entitled, 
``Reckless Endangerment,'' which the Economist Magazine 
recognized as one of its 2011 books of the year and a ``must 
read.'' The ``must read'' part was my addition to the 
Economist's recommendations. I think others will note the 
Economist's recommendations more than mine.
    Mr. Michael Krimminger is a partner at the law firm of 
Cleary Gottlieb. He recently joined the firm in 2012 after a 
long and distinguished career serving government with the 
Federal Deposit Insurance Corporation, where he most recently 
was the General Counsel.
    Each of you will be recognized for 5 minutes, and as I 
mentioned, your written statements will be included in the 
record, so you can summarize. We will begin with Professor 
Skeel.

STATEMENT OF DAVID A. SKEEL, JR., S. SAMUEL ARSHT PROFESSOR OF 
      CORPORATE LAW, UNIVERSITY OF PENNSYLVANIA LAW SCHOOL

    Mr. Skeel. Thank you all for the opportunity to testify on 
this important issue. It is a great honor to appear before you 
all today. What I would like to do in my brief opening remarks 
is two things: first, I will describe several very problematic 
features of Title II as it is written, as it is on the statute 
books; and second, I will focus for a minute or two on the 
single point of entry strategy that the FDIC has developed over 
the past year or so for implementing Title II.
    I will argue that Title II needs serious amendments and 
also that the too-big-to-fail issue is not solved, not resolved 
by a long shot by Title II and should be addressed in other 
ways such as by changes to the bankruptcy laws.
    I should perhaps start by noting that it is quite possible 
that regulators would simply bail out another giant financial 
institution that threatened to fail rather than ever invoke the 
rules in Title II. Although the Dodd-Frank Act tries to make 
bailouts more difficult, as has already been alluded to several 
times, it certainly hasn't at all eliminated the possibility of 
a bailout. With the six biggest institutions in particular, 
there is a very good chance that regulators would never turn to 
Title II, particularly if more than one of them were in trouble 
at the same time.
    If regulators did invoke Title II, they would probably 
transfer some or all of the assets and liabilities of the 
holding company, the top corporation in the enterprise, to a 
newly created bridge financial institution. Title II authorizes 
the FDIC to create a bridge institution like this and permits 
the FDIC to keep it going for up to 5 years. For this 5-year or 
up to 5-year period, the bridge institution has major 
competitive advantages as compared to other financial 
institutions.
    One benefit is access to copious amounts of funding from 
the United States Treasury, potentially at below market rates. 
Bridge institutions also are given a sweeping exemption from 
taxes. While the bridge is in existence, it is not required to 
pay any taxes on the value of its franchise, property, or 
income. This tax-free status gives the bridge institution an 
enormous advantage over other financial institutions. In my 
view, there is simply no justification for this special 
treatment.
    For more than a year, the FDIC has been developing a 
strategy it refers to as a single point of entry strategy for 
invoking and using Title II. After establishing a new bridge 
institution, the FDIC would transfer all of the holding 
company's assets and all of its short-term liabilities to a new 
bridge institution, leaving its long-term debt, primarily its 
bonds, and its stock, behind in the old institution.
    Although I think this is a very clever strategy for 
resolving a large bank's financial distress, it seems to me to 
raise three very important concerns. First, the single point of 
entry strategy assumes that all the derivatives contracts and 
other short-term obligations of the troubled financial 
institution will be bailed out. This will encourage the big 
banks to use even more of the derivatives and other complex 
financial contracts that caused so much trouble 5 years ago.
    Second, although Title II explicitly requires that its 
provisions be used for liquidation, single point of entry is 
essentially a reorganization. It thus stands in tension with 
the explicit requirements of Title II.
    Finally, the single point of entry strategy won't end too-
big-to-fail at all. It will essentially rescue the troubled 
financial institution and is designed to ensure that the 
institution retains just as dominant a position after a 
financial crisis as before it.
    Let me suggest three implications of these comments about 
the likely effect of Dodd-Frank's resolution rules. First, I 
think it is very, very important to amend Title II to fix these 
problems, particularly the exemption from taxes that the bridge 
institution has.
    Second, Title II is not a solution to the too-big-to-fail 
problem. The largest financial institutions have, as they had, 
a dominant position in American finance in no small part due to 
the too-big-to-fail subsidy they enjoy when they borrow money. 
I think it is very important to do something directly about the 
too-big-to-fail problem.
    Finally, I believe it is important to recognize that 
bankruptcy is a very effective alternative to Title II for 
addressing the financial distress of large financial 
institutions. John Taylor and I are both involved in a project 
at the Hoover Institution that tries to suggest some ways to 
make bankruptcy even better.
    [The prepared statement of Professor Skeel can be found on 
page 66 of the appendix.]
    Chairman McHenry. Thank you for your testimony.
    We will now recognize Dr. Taylor.

STATEMENT OF JOHN B. TAYLOR, MARY AND ROBERT RAYMOND PROFESSOR, 
  STANFORD UNIVERSITY, AND GEORGE P. SCHULTZ SENIOR FELLOW IN 
            ECONOMICS, STANFORD'S HOOVER INSTITUTION

    Mr. Taylor. Thank you, Mr. Chairman, and Ranking Member 
Green for inviting me to testify on this important topic of 
bailouts, too-big-to-fail, and Title II of Dodd-Frank.
    In my view, too-big-to-fail, and the concern about bailouts 
is very much alive even with Title II of Dodd-Frank. I know 
there is disagreement about that. The Chairman of the Federal 
Reserve says that expectations of bailouts aren't there because 
of Title II. A couple of his colleagues take different 
viewpoints. Jeff Lacker of the Richmond Fed says we haven't 
dealt with the too-big-to-fail problem. Charlie Rosner at the 
Philadelphia Fed says in particular, Title II resolution is 
likely to be biased toward bailouts.
    When you look at OLA and how it might operate in practice, 
it seems to me there are serious reasons for concern. The FDIC 
will have an enormous amount of discretion about how to 
implement its difficult task of resolving a large financial 
institution. It is hard to specify what exactly they will do. 
There is a great deal of uncertainty about that, and a great 
deal of concern about transparency.
    My sense is given this, and given the heat of a crisis, it 
is quite likely the top policymakers will go right around Title 
II. They may have to change the law to do so. That is quite 
possible. So that will involve the same kind of bailouts we saw 
in 2008. It is not enough of an alternative to bailouts, if you 
like.
    But even if Title II is used, it seems to me the bailout 
problem is still there. There will be every incentive for the 
FDIC to provide additional funds to some creditors, additional 
funds over and above what they would get under a normal 
bankruptcy or in the marketplace. This is, by definition, to me 
a bailout. It really doesn't matter whether the funds come 
directly from the taxpayers or they come indirectly from the 
taxpayers through an assessment of financial institutions and 
higher prices to consumers of financial institutions, or for 
that matter, it doesn't matter if it comes from other creditors 
less favored. Money is taken away from the less favored to the 
more favored creditors. All the problems of lower interest 
rates that the large firms might get, the problem is the moral 
hazard exists with this form of a bailout. Yes, there is 
removal of the protection of the shareholders, but the 
protection of large important creditors is still there, and the 
determination of that will be through discretion, not through 
the law.
    I think there are some other problems with Title II. David 
Skeel mentioned some of these. But more basically, under a 
bankruptcy, the new firm would be motivated by profit and loss 
considerations, the decisions to be made as we are familiar in 
our economy. Under Title II, the new firm, for as long as 5 
years, is going to be run by the government, so all the 
concerns that this committee, in particular, would have about 
the pressures put on government agencies for favors, for 
example, for different kinds of treatment, will most likely 
exist for this kind of a firm.
    In addition, as David said, there are very particular 
advantages. The lower borrowing cost because of the access to 
the Treasury, the exemption from taxes, and the lower capital 
requirements are enormous advantages this firm will have, and 
you can understand why the FDIC would like to nurse this firm 
for a while with those special advantages. But the truth is, 
they are so huge, and for a 5-year period, the firm will most 
likely have those unfair advantages, and I could see very well 
the government agencies would want to take account of that.
    So I think a better approach is to reform the Bankruptcy 
Code. There is a lot of work done on that. David Skeel 
mentioned that. The idea is to have even a large financial firm 
go through an orderly bankruptcy without spillovers, according 
to the rule of law, without all the discretion that the current 
Title II entails. I think it is possible. I write about this in 
detail in my testimony. I will be happy to answer any questions 
you may have about it.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Taylor may be found on page 
70 of the appendix.]
    Chairman McHenry. Thank you, Dr. Taylor.
    I now recognize Mr. Rosner.

STATEMENT OF JOSHUA ROSNER, MANAGING DIRECTOR, GRAHAM FISHER & 
                              CO.

    Mr. Rosner. Chairman McHenry, Ranking Member Green, and 
members of the subcommittee, thank you for inviting me to 
testify on this important subject.
    I should express my concern that the criticisms of Title II 
will be used as an argument for repeal of a flawed rule before 
a workable replacement or fix is created. That is not my 
intent. Before addressing Title II, I want to highlight the key 
problem with Title I. Congressional intent was to ensure all 
too-big-to-fail firms would be unwound through bankruptcy. If 
the Fed adhered to the intent of Title I, then Title II would 
be unnecessary.
    Instead, Title I and Title II create a special class of 
GSE-like companies that benefit from implied government 
guarantee. Title II's liquidation authority was designed to 
protect from the disorderly failure of firms that cannot be 
resolved under bankruptcy. Because of the explicit and implicit 
subsidies it offers, the industry prefers it to bankruptcy. 
While a traditional liquidation would result in replacement of 
management, under the FDIC's proposed regime, key management of 
failed operating subsidiaries could continue to manage the 
newly recapitalized firm. It remains unclear what if any 
benefit will accrue to the public from OLA. By contrast, the 
measurable benefits will flow to those creditors that benefit 
from disparate treatment and bonuses will be paid to retain 
highly paid employees deemed essential to keeping the 
enterprise functioning.
    The FDIC's approach requires an enormous amount of taxpayer 
subsidized debtor-in-possession financing from Treasury. It 
supports an ``all animals are created equal but some animals 
are more equal than others'' banking system. These companies 
are far too large. Markets simply can't fund them in 
bankruptcy.
    Under Section 210(n)(5), bridge funding from Treasury is 
priced at Treasury rates plus the spread for average corporate 
bond yields, but Dodd-Frank does not state which corporate 
index should be used. If the FDIC indexes to a Triple A 
corporate average, funding may by at rates the market confers 
on only the healthiest institution. That subsidy has value not 
just in failure.
    Additionally, the government has the authority to leave 
behind as much debt as it wants, another subsidy. Potential 
needs of the largest companies could reach to close to $100 
billion, straining even Treasury's ability to access funds. 
This is the easiest way to understand that these companies are 
far too large. Markets simply can't fund them in bankruptcy.
    Under the FDIC's approach, a failing firm's operating 
subsidiaries remain open and operating while the holding 
company would be subject to OLA. Thus, subsidiary creditors 
face greatly diminished chances of loss. After all, the FDIC 
has declared that these subsidiary banks and broker dealers 
will probably never face insolvency. Counterparties will be 
less prudent if they think creditors of the holding company are 
on the hook.
    If the government stands behind the holding company, market 
monitoring will go down, leading to further problems. Why would 
creditors choose to do business with companies that face normal 
market discipline in bankruptcy when they could deal with the 
company that offers subsidized pricing and assurances from the 
FDIC that it would never fail? The FDIC's approach also create 
incentives for management and creditors to starve the holding 
company of funding and to instead raise capital at the 
operating company, weakening the holding company's ability to 
act as a source of strength.
    It is very problematic if the same institution has the 
possibility of going through two different insolvency regimes, 
depending on the whim of regulators. Returns to creditors are 
different under each regime and are somewhat unknowable in the 
Title II regime, making it difficult for creditors to make 
investment decisions. More disturbing is the FDIC's decision to 
justify dissimilar treatment of similarly situated creditors 
under the guise of protecting critical functions. As market 
participants become concerned about the potential failure of a 
too-big-to-fail firm, they will exacerbate problems and 
increase systemic risk by selling their holdings into an 
increasingly illiquid market. It paradoxically provides 
benefits to any claimant that can convince regulators of its 
systemic importance.
    As a restructure regime, Title II levies no cost of failure 
and provides no clear process to move assets from weak hands to 
strong hands. The proper approach to ending the too-big-to-fail 
problem would be to consider fairness, which is at the core of 
the too-big-to-fail problem. It is essential that large firms 
be subject to the same insolvency regime that smaller firms 
are: the Bankruptcy Code. Making these firms small and simple 
enough to fail through standard bankruptcy is clearly the best 
path forward. It would eliminate the Orwellian approach to 
equality, reduce risk of capital market flight, and support the 
FDIC's mission as deposit insurer to the narrow banking system.
    There is obviously far more detail in my written testimony, 
and I would hope that you would take the time to read that. 
Thank you.
    [The prepared statement of Mr. Rosner can be found on page 
57 of the appendix.]
    Chairman McHenry. Thank you, Mr. Rosner.
    And finally, I recognize Mr. Krimminger.

  STATEMENT OF MICHAEL H. KRIMMINGER, PARTNER, CLEARY GOTTLIEB

    Mr. Krimminger. Chairman McHenry, Ranking Member Green, and 
members of the subcommittee, thank you for the opportunity to 
testify today.
    Too-big-to-fail did not begin with the recent financial 
crisis or with Dodd-Frank. It has been the long-term 
expectation by the market that some institutions are so 
critical to the functioning of the financial system that the 
government will act to prevent their insolvency. Over many 
years, this has distorted market pricing for debt and equity 
and limited the incentives that should be provided by market 
discipline. Unfortunately, the recent financial crisis proved 
the expectation of too-big-to-fail to be true.
    Why? Because faced with the massive disruptions in the 
market in the fall of 2008, regulators had no other option than 
the Bankruptcy Code to resolve the largest non-bank financial 
companies. After the turmoil following the Lehman bankruptcy, 
this was not viewed as a reasonable choice, and as a result, 
the regulators had to take several difficult steps to prevent 
greater chaos.
    To be succinct in response to the question posed for 
today's hearing, Title II of Dodd-Frank does not enshrine too-
big-to-fail. Title II simply provides an alternative to the 
Bankruptcy Code to ensure that the tools are available in a 
crisis to close the largest financial companies and to impose 
the losses on their shareholders and creditors while mitigating 
the potential for more widespread dislocations in the financial 
system and economy.
    Any consideration of Title II has to examine why it was 
created. In a properly functioning market economy, there will 
be winners and losers, and some firms will become insolvent and 
should fail. Actions that prevent them from failing ultimately 
distort market mechanisms, including the market incentive to 
monitor the actions of similarly situated firms.
    Title II is a reaction to the fact that in 2008, the 
regulators did not have an adequate legal framework to close 
and resolve the largest companies. This was the reason that 
Title II was created, to address limitations of the then-
current Bankruptcy Code. Title II is simply an adaptation of 
the rules the FDIC has long used to resolve banks. It is 
important to note also that the authorities in Title II are now 
the international standard because regulators everywhere 
recognize the need for tools adapted from those previously used 
by the FDIC. The G20 heads of state and the Financial Stability 
Board have endorsed them, and countries are putting those tools 
into place.
    Let me be clear, however, that bankruptcy has a long and 
honored history under U.S. law. For the vast majority of the 
business bankruptcies in the United States, the current system 
has worked very well. In extraordinary circumstances, the 
limitations of normal bankruptcy can impair its ability to 
resolve the most complex financial companies. Improvements can 
and should be made to the bankruptcy process to make it more 
effective for such insolvency.
    I have long recommended several improvements such as better 
capabilities to continue businesses under first day orders, 
changes to address financial contracts, and the ability to act 
immediately under broader mandates for designated trustees or 
debtors in possession. The recommendations made yesterday by 
the Bipartisan Policy Center and others offer valuable 
additional suggestions.
    However, Title II does provide a critical backup resolution 
structure for extraordinary cases, and I think we need both. 
While Title II is a vital foundation, it is not sufficient to 
end too-big-to-fail. The expectation of a government bailout 
will end only when the market fully incorporates into its 
pricing and other interactions an expectation that in the next 
crisis, the largest institutions will be closed and resolved. 
While Title II provides the legal framework, more must be done. 
We must continue ongoing efforts to achieve even a greater 
international coordination and we must continue the ongoing 
resolution planning.
    The FDIC has done an admirable job of explaining its plans, 
but the job is not complete, because questions and doubts 
remain. To complete the job, the FDIC must be much more 
explicit about how it will conduct any Title II process. I 
understand it will shortly be issuing a policy statement about 
that process. I will say that this statement needs to lay out 
very clearly the expected process under Title II and the 
limitations of its discretion.
    Too-big-to-fail should be eliminated because of its 
distortion of market discipline and market practices and 
ultimately its negative consequences for the real economy. 
However, too-big-to-fail is not created or enshrined by the 
Dodd-Frank Act. We need to support market discipline by 
ensuring that we have insolvency procedures that are effective 
for all scenarios. Market discipline, if allowed to act, can 
prevent failures by incentivizing action by management and 
creditors alike.
    Thank you, and I would be pleased to answer any questions.
    [The prepared statement of Mr. Krimminger can be found on 
page 43 of the appendix.]
    Chairman McHenry. I thank the witnesses.
    Under Section 210 of the Dodd-Frank Act, the FDIC is 
authorized to borrow from the Treasury, ``all purchases and 
sales by the Secretary of such obligations under this paragraph 
shall be treated as public debt transactions of the United 
States.''
    It is clear that the Orderly Liquidation Authority 
authorizes the FDIC to tap the Treasury, the Treasury to tap 
the public markets, and the taxpayers are on the hook for that 
debt that the Treasury lets, just as they are today for 
Treasury auctions in our current market.
    Now, I bring this up, Professor Skeel, to understand this 
process, what dollar percentage cap within the Act is provided 
as a limitation on what the FDIC can loan a bridge corporation?
    Mr. Skeel. The Act has two different dollar limitations, 
and limitations almost isn't the right word because they are 
not very limiting. At the time a Title II resolution starts, 
the FDIC can borrow up to 10 percent of the consolidated asset 
value of the institution, which if you take JPMorgan Chase as 
your example, that is 10 percent of $2 trillion in consolidated 
assets, more or less. That is $200 billion at the start of the 
case.
    Chairman McHenry. And then, thereafter?
    Mr. Skeel. And then, thereafter, after 30 days the FDIC can 
borrow up to 90 percent of the fair value of the assets. So if 
the asset--
    Chairman McHenry. So 90 percent.
    Mr. Skeel. --is in that same range, we would be talking 
about $1.8 trillion.
    Chairman McHenry. Okay. So Dr. Taylor, Mr. Rosner, can you 
put that in context for this last crisis? Perhaps, let's walk 
through the scenario. If you had multiple firms going through 
the Orderly Liquidation Authority, had it been in place in 
2008, what would that look like?
    Mr. Rosner. I think it is fair to say that Title I and 
Title II were created under the premise of single institutions 
failing. I think if we ended up with the contagion and multiple 
large institutions failing at the same time, unfortunately we 
would likely see the Treasury, the Fed back up here before all 
of you arguing as to the reasons that we are going down the 
same path and need to do another TARP-like bailout.
    Chairman McHenry. That is not a great answer. Dr. Taylor?
    Mr. Taylor. I think your question really was addressing 
within Title II. There is the concern about going around it as 
well, but even within it, of course, that is a huge subsidy. 
The access to the Treasury borrowing is lower interest rates; 
also, the rate at which the FDIC would be able to translate 
that into its own loans is pretty much discretionary at this 
point as well.
    Chairman McHenry. You have a bridge company, it is funded, 
getting liquidity support from the Treasury, lending enormous 
sums to this company. You have the FDIC that is in charge of 
managing this government bank, let's call it, so you have 
ongoing operations managed by the FDIC, while at the same time 
the FDIC and the Treasury are making decisions on how to value 
the assets, and is there enormous discretion there, Professor 
Skeel?
    Mr. Skeel. Absolutely.
    Chairman McHenry. So you have enormous discretion on 
valuing those assets. Describe this conflict within the FDIC 
and Treasury on making a wise decision for taxpayer dollars 
while at the same time making wise decisions to get a firm back 
on a healthy basis making a nice profit.
    Mr. Skeel. Obviously, the FDIC has an incentive to make 
valuation decisions that support its goal of preserving this 
giant financial institution, so there is a direct conflict of 
interest, and the FDIC has almost complete discretion. It is 
very, very difficult to challenge its decisions
    Chairman McHenry. So that discretion, Mr. Rosner, in terms 
of valuation, is there any check within the Act on that?
    Mr. Rosner. No, there isn't a check. First of all, I think 
it is also worth pointing out that there is no obligation or 
mechanism within Title II to price the credit risk that is 
being taken on, and I think that is an important part of a 
subsidy as well, but beyond that, I think the point that was 
made is really important to emphasize, which is the conflict, 
the internal and inherent conflict between the role as 
balancing the public interest with the interest of creditors--
let's not think about it as the institution--as creditors of 
that institution, are really unbridgeable
    Chairman McHenry. So unbridgeable, why?
    Mr. Rosner. Because at the end of the day, there is a 
political reality where they are going to have to show, just as 
we have seen claimed over and over since the crisis, that they 
have made all of the taxpayers' money back, and if that comes 
at the cost of unfair disadvantaging of certain creditors, that 
is an internal conflict which really needs to be addressed.
    Chairman McHenry. I thank the witnesses. We will now 
recognize the ranking member for 5 minutes. I am sorry. The 
ranking member is asking me to recognize Mr. Cleaver. Mr. 
Cleaver is recognized for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Dr. Taylor, would you agree that unless it is curtailed, 
too-big-to-fail will continue to place the taxpayers in a 
position of blackmail? You might want to substitute a word for 
``blackmail,'' it probably won't rhyme, but you get the premise 
of my question?
    Mr. Taylor. I am not sure I do. I think the concern of too-
big-to-fail and the bailout tendency is multifold. Part of it 
is the distortions it creates in the market and it encourages 
risk-taking. It leads to the crisis we are trying to avoid. 
That is probably the biggest concern I would have.
    In terms of the taxpayers, absolutely. Using taxpayers' 
money like this is inexcusable, but I think the too-big-to-fail 
problem goes beyond that, because if, for example, through an 
assessment, you charge a broad group of financial institutions, 
they are going to charge higher prices on their customer, so it 
is going to be paid elsewhere. Or if the bailout of certain 
creditors occurs at the expense of other creditors, that is 
also a problem because it is going against the direction of the 
rule of law which we have in the country. So there is a whole 
set of ramifications that I am concerned about here.
    Mr. Cleaver. You mention rule of law. I was sitting right 
here when Secretary Paulson was sitting right there telling us 
that we have to take some action, that President Bush had sent 
him over to tell us the situation that we were in, and then I 
was really unhappy later when I read his comment that he did 
not have the authority to do what he did, and so my question 
is, in an economic crisis, do you think that we will discard 
again the rule of law? Mr. Rosner?
    Mr. Rosner. The answer, unfortunately, I think is yes, if 
we continue down the path that we are heading down. The thing 
that I found interesting is there does seem to be unanimity of 
view among the Members that too-big-to-fail is an intolerable 
situation for us to accept, which really says two things: one, 
we either have to make these companies small enough and 
manageable enough that they can be treated like every other 
corporation; or two, they have to have sufficient amounts of 
capital, real capital to be able to avoid that crisis. Those 
are the outcomes. Those are the opportunities. And I don't 
think Title I or Title II address those, and I think that 
really is the task before you.
    Mr. Cleaver. Yes, Mr. Krimminger?
    Mr. Krimminger. I thought I would note one thing. One of 
the things I would note about the criticisms of Title II as 
well, as I think as I noted in my testimony, is you have to 
look at the realistic alternatives we have had in the past. I 
don't think it is realistic to go back and discard Title II and 
have the Bankruptcy Code that was in existence in the past and 
expect to the situation to be different than it was in the 
past.
    We certainly need to make improvements to the Bankruptcy 
Code. I think everyone, and I believe even including the FDIC, 
certainly when I was there, would have been wholeheartedly in 
support of making Title II a less-likely-to-be-used 
alternative, but to eliminate the alternative, even with an 
improved Bankruptcy Code, I think is in some ways potentially 
sending the message that in the next crisis, they are much more 
likely to come back and sit at these desks and ask for more 
money in the future.
    Mr. Cleaver. Do you believe that the economies of scale in 
banks and other certain businesses are worth preserving as long 
as they are regulated in proportion to their impact on the 
economy?
    Mr. Krimminger. I think it is always very difficult to come 
up with a metric, if you will, or an analysis that it concludes 
at what size institutions should be. So, certainly there are 
economies of scale. Certainly, there is a need for a global 
financial system and financial institutions that can provide 
credit for that financial system. Certainly, there is 
regulation, additional regulation in Title I, and I think you 
have to look at Title I, Title II, and other parts of the Dodd-
Frank Act as a combined whole and what effect they will have. 
Are there changes that may be necessary at times? Yes. But 
Title I and Title II, I think, are designed to kind of work in 
tandem, and that is part of the issue.
    Mr. Cleaver. We still have banks behaving badly, and I 
think something needs to be done about it. I appreciate the 
hearing, but I think we need to tweak Title II if it is not 
strong enough and tough enough. I think the American people 
would support that.
    I think that my time has run out, Mr. Chairman.
    Chairman McHenry. I thank the gentleman, and I would 
certainly like to work with him on a process that will actually 
work, and I think this hearing is bringing to light that the 
current process doesn't. So I am encouraged by your comments, 
and I appreciate that.
    We will now recognize Mr. Ross of Florida for 5 minutes.
    Mr. Ross. Thank you, Mr. Chairman. It is interesting that 
three of our witnesses talked about an amendment to the 
Bankruptcy Code, and one says that the Bankruptcy Code would 
not have helped.
    In my experience in my practice, which has been very 
limited in bankruptcy, at least allowed for due process, notice 
to creditors, notice to debtors, and in fact put them on notice 
that they may only receive pennies on the dollar of what may be 
owed them, and yet underneath Title II it appears as though we 
are creating a situation where those creditors, even those 
shareholders have no risk if a bridge holding company takes 
over.
    Is that your understanding, Mr. Skeel?
    Mr. Skeel. That is absolutely my understanding. And as I 
said earlier, the creditors that are most guaranteed to be 
protected are the fancy financial contracts, the derivatives 
that caused problems in 2008.
    Mr. Ross. With the obvious competitive advantage that a 
bridge holding company has, you also have a situation that is 
so contrary to market forces that says where you have increased 
risk, you may have increased return, and so if I am a 
shareholder in a company that is now part of a bridge holding 
company, my risk is almost eliminated; is that not true?
    Mr. Skeel. Absolutely, for up to 5 years. As long as that 
bridge company is going, it is a protected entity.
    Mr. Ross. And Mr. Krimminger, let me ask you this: Under 
Title II, is there any due process for these companies?
    Mr. Krimminger. Absolutely, there is due process.
    Mr. Ross. And what would that be? Obviously, it is not a 
full due process as the law allowed under the Bankruptcy Code.
    Mr. Krimminger. There is due process. In fact, the 
Bankruptcy Code provides for ex ante due process and a hearing 
before a judge. Part of the reason Title II has an ex post, in 
other words, you have a right to file suit against the FDIC for 
making errors or doing something to with your credit that is 
inappropriate after the fact, is because of the need for speed 
and financial insolvency.
    And let me, if I may, just clarify one thing. I may have 
been misinterpreted. I absolutely believe that improvements to 
the Bankruptcy Code should be done and will be very helpful.
    Mr. Ross. And I think they should be, too, because not only 
are we talking about financial institutions. There are some 
financial institutions that are too-big-to-fail under some 
people's interpretation, but what about non-financial 
institutions? If we are allowing now for this process to go 
through that totally ignores our bankruptcy, what about Wal-
Mart? What is to prevent them from having some regulatory 
reform system in place to keep them from going for bankruptcy? 
My point is that we are taking traditional due process methods 
and not allowing companies that have created a high risk, poor 
performance and allowing them to succeed to a market 
disadvantage.
    Dr. Taylor, you talked about three of the disadvantages, 
one of which is the lack of having to be liable for taxes at 
every level. Do we know what the cost of that is?
    Mr. Taylor. I don't think it has been estimated, 
unfortunately. Maybe that is something you could request.
    Mr. Ross. I think I will. Quite frankly, I think that the 
cost of tax exemption will probably outweigh the benefits, if 
any at all, in saving these companies.
    Now, let me ask you this: The risk-based assessment, the 
last step in the event that we have to now repay FDIC, and we 
go to the good players, and we assess them their share, if you 
will, what happens if you have a mutual company, a savings and 
loan insurance company, that now has to be assessed. It has 
done everything right. Are they able to recapture the cost of 
this assessment in their rate-making process with their 
consumers? Does anybody have a comment on that?
    Mr. Taylor. Most likely, absolutely. They will be able to 
capture it partly by passing it on to their customers, whether 
they are regulated or not, quite frankly. Economics says that 
kind of--
    Mr. Ross. So if I am a consumer who has a AAA rated, mutual 
insurance company that is now being assessed, I am going to 
have to pay for somebody who has been a bad actor. This reminds 
me of a situation where we have created the ultimate hangover 
cure in Title II, and every morning, these SIFIs, these 
Systemically Important Financial Institutions that are 
performing badly can take this hangover cure and go on and 
continue to perform, and yet they do so at the risk and at the 
cost of those who are not the drinkers in this situation.
    Lastly, one of the three, and I am going to--give me a 
second, here, Dr. Taylor. You talked about the competitive 
advantages, including capital requirements. So if my State of 
Florida has certain capital requirements for an insurance 
company, those would be totally disregarded by the bridge 
holding company under Title II, is that correct?
    Mr. Taylor. No.
    Mr. Krimminger. I would just say it would not because 
certainly under Title II, the insurance company--frankly, 
insurance companies are not really eligible for Title II until 
it has already gone through a--
    Mr. Ross. But the process is there, and I only have a 
second. The process is there that if they have been deemed 
Systemically Important Financial Institutions as an insurance 
company, they can have lesser capital requirements in conflict 
with State regulation.
    Mr. Krimminger. No, that is not true, but we can talk 
later, sir.
    Mr. Taylor. The example of the insurance companies, there 
are many other examples you could use for which the capital 
requirements could be lower, as in Title II at this point.
    Mr. Ross. And I will follow up. Thank you, Mr. Chairman. I 
yield back.
    Chairman McHenry. The gentlelady from Ohio, Mrs. Beatty, is 
recognized for 5 minutes.
    Mrs. Beatty. Thank you so much, Chairman McHenry, and 
Ranking Member Green. And to our guests here testifying today, 
as you know, this is one of three hearings that we have had, 
and I am certainly looking forward to hearing your comment. 
This has been an ongoing discussion that we have been having in 
learning a lot of new terminology, hangover, from what I am 
drinking, to SIFI and all of the other things we are talking 
today. So I certainly welcome this healthy debate on the issue.
    But first, I think it is clear that size and scope and 
scale and interconnectedness of the largest financial 
institutions prevent the elimination of all possible fallout 
resulting from a failure. But in Dodd-Frank Title II, it 
provides a new mechanism, I think, and I am interested later to 
hear your comments on that for government to resolve the most 
complex forms without creating new systemic failures associated 
with bank loans or across default provisions or acute asset 
value decline.
    But as I look through your testimony, I guess one of the 
questions I would like to ask that we haven't quite touched on 
this morning is what is happening at an international level. 
And I think I want to address this question to you, Mr. 
Krimminger.
    Can you tell us if what we are doing here today, if they 
have had any better results, for example, in China, with using 
Title II in their complex and in their monetary system?
    Mr. Krimminger. Certainly. I think Title II, as I said 
before, provides a statutory framework that I think has 
facilitated a lot more cooperation. One of the steps that has 
been undertaken over the last few years as a result of the 
crisis was that many other countries recognize that the old, if 
you will, liquidation process for banks as well as other types 
of financial companies was not very effective. Part of the 
problem, particularly in Europe, is that effectively they have 
always bailed out all of their banks because their only option 
was essentially a liquidation rather than the continuity that 
you even get under the Federal Deposit Insurance Act with the 
insured banks in the United States.
    So one of the things that has gone on internationally is 
there has been a great expansion of cooperation, a great 
expansion of moving towards more similar types of legal 
infrastructures, as I noted in my testimony, and the heads of 
the state of the G-20, the Financial Stability Board and 
others, the types of authority that Dodd-Frank gives has really 
effectively become the international standard for the most 
complex financial companies.
    One of the things we have to make sure we push against is 
the continuing desire in some countries to go to a bailout-type 
process. The problem is if you have nothing but a bankruptcy, 
or an old-fashioned bankruptcy liquidation process, or a 
bailout, these countries have always opted for a bailout. So 
the FDIC and other U.S. regulators are doing a lot to work more 
cooperatively with other international regulators to make sure 
that a plan is put in place, because planning and the ability 
to plan in advance is, I think, a major advantage provided by 
having this type of insolvency framework.
    Mrs. Beatty. Okay, thank you. Others, please?
    Mr. Rosner. Dodd-Frank provides no mechanism to deal with 
the international resolution process, and the Fed has 
recognized that and has made proposals on that basis for an 
intermediate holding structure for foreign banks operating in 
the United States. I think it is a little bit disturbing for us 
to fail to accept the reality that different countries have 
different legal regimes, and those cannot be handled through 
cooperation among regulators, or bridged I should say, by 
cooperation among regulators. That is something that is left 
and intended to be left to law, and each jurisdiction has its 
own.
    We currently have memoranda of understanding between 
various jurisdictions. Those are largely unworkable when push 
comes to shove, especially because of the legal barriers 
imposed upon regulators. So I think this is an issue that needs 
to be addressed affirmatively by legislators, not outsourced to 
policymakers. It needs to be done before, not during or after a 
crisis.
    Mr. Krimminger. If I might comment on that, it is somewhat 
odd to assert as a defect of Title II that it doesn't deal with 
all of the international law issues when other countries have 
the ability to adopt their own laws. But what it does do, and 
what has occurred is a great deal more pre-planning. You have 
to have planning if you are going to have an effective 
resolution. And yes, I agree that paper documents don't do it. 
But you have to have planning if you are going to have any 
progress in the future. And to ignore the planning is to 
basically set yourself up for failure the next time.
    Chairman McHenry. The gentlelady's time has expired. I am 
going to yield myself 5 minutes. Professor Skeel, I just want 
to follow up on a comment, a suggestion I made in my opening 
statement, which is since the FDIC can loan up to 90 percent of 
total consolidated assets to a bridge holding company, 
presumably it could loan 0 percent. Is that correct?
    Mr. Skeel. It can loan as little or as much as it wants up 
to that 90 percent, which is as much as $1.8 trillion.
    Chairman McHenry. What are the ramifications or problems 
with that scenario?
    Mr. Skeel. It reinforces the things that we have been 
talking about. It creates an enormous amount of uncertainty. It 
gives the FDIC complete discretion as to what it does with 
Title II, and there really is no check on that.
    Chairman McHenry. Dr. Taylor, given this wide latitude in 
funding authority, could the FDIC use it to change the degree 
to which they require creditors to suffer losses due to write-
downs of their debts?
    Mr. Taylor. Absolutely. It has the power to do what it 
needs to do, or what it wants to do to favor certain creditors 
maybe because there are concerns about systemic issues with 
those creditors, or there may be other reasons we don't know, 
but it has the power to do it. And it could do that even 
without this by hurting, if you like, other creditors who are 
not so favored compared to the bankrupt rules. So it definitely 
has that power. It is one of the uncertain things here you 
can't plan for. It is really not a rule of law as would exist 
under the Bankruptcy Code where you have priorities or specific 
ways you handle various kinds of creditors.
    Chairman McHenry. Mr. Rosner?
    Mr. Rosner. Yes. I think that problem is probably the 
biggest issue to contend with, the ability to hand the FDIC the 
authority to treat similarly situated creditors differently at 
their whim under the guise of protecting the ability of 
potential counterparties to continue to serve in supporting 
essential functions of the institution. And so, they do have 
far too much discretion. It is absolute discretion, and by the 
way, the ability to fund can conceivably take what is a failed 
firm into being the most profitable firm overnight if we pump 
in enough taxpayer dollars.
    Chairman McHenry. Mr. Rosner, if a bridge holding company 
borrowed at lower interest rates than its competitors while 
also avoiding all taxes, how significant would those combined 
advantages be?
    Mr. Rosner. Starve competition, increase the scope and 
scale and size of that utility, provide opportunities for that 
utility to justify to neighboring jurisdictions its ability and 
capability to operate in those markets. And it would ultimately 
just reinforce the oligopolistic market power of that 
institution and the small group of institutions that are 
similar.
    Chairman McHenry. Professor Skeel?
    Mr. Skeel. I just want to follow on to that. I agree 
completely, and I would like to make a comment about the 
comparisons that have been made to the way financial 
institutions are regulated in Europe. I think it is important 
to keep in mind that the approach to financial institutions in 
Europe is completely different than the U.S. approach. Too-big-
to-fail is a long-standing tradition in European regulation, 
and so the idea that we would be replicating what they are 
doing is not an idea that I think we should be sympathetic to. 
We have a very different perspective on the importance of 
competition in this country.
    Chairman McHenry. I yield back the balance of my time.
    I recognize the gentleman from California, Mr. Sherman, for 
5 minutes.
    Mr. Sherman. Let me start by asking Mr. Krimminger to also 
respond to the latest, the last question.
    Mr. Krimminger. I don't think anyone is suggesting we 
should adopt the European model for our financial regulation. 
This point was simply being made, was that the authorities to 
dissolve companies in Title II are being adopted in Europe, not 
the other way around. So I think that everyone has recognized 
that you simply can't have only a liquidation under bankruptcy 
as the only alternative under the existing Bankruptcy Code. We 
agree that we need to make improvements to it, but we need to 
look at the alternatives to make sure that you can deal with 
the potential systemic unwinding of the financial institution. 
That is why, frankly, under Title II there is some discretion, 
just as there has been for many, many years under the Federal 
Deposit Insurance Act, to provide for some additional payments 
to creditors that are essential to keep the company operating.
    Bankruptcy also has first-day orders. In fact, one of the 
recommendations by many with regard to bankruptcy improvement 
has been to expand the ability to make sure that you can keep 
the essential functions operating beyond the traditional way of 
looking at first-day orders. So this is not a huge departure in 
terms of the tools that are available from the Bankruptcy Code. 
I think the departure that people are concerned about 
apparently is that there is the ability to act quickly with ex 
post judicial review instead of an ex ante judicial oversight.
    Mr. Sherman. Thank you. We sometimes speak a different 
language than those who favor bailouts, should deal with 
translation. They believe that you have checks and balances if 
several different executive department officers have to sign 
off on the same thing, that you don't need Congress to have 
checks and balances on enormous power. And they also believe 
that it is not a bailout if the shareholders lose their money, 
even if the creditors are fully bailed out. And I disagree with 
that simply because the key in financial services is your cost 
of capital. And if you can assure creditors that they will be 
bailed out, you will have a lower cost of capital.
    Mr. Taylor, for the record, if you could expand on in a 
written response how Title II provides for an almost crony 
capitalism as to which creditors get paid and which don't, 
because I am familiar with regular bankruptcy; you are either a 
secured creditor or you are an unsecured creditor. All of the 
unsecured creditors are equal. Apparently in this world, some 
animals are more equal than others. So if you could provide us 
with a written response there, certainly what worries me is 
that the key to being a successful business ought to be a 
successful business, not covering yourself by being well-
connected and well-respected in Washington, D.C.
    We have been focusing on what happens if there is a great 
catastrophe, a great storm, but the effect of this too-big-to-
fail affects us even now on a relatively calm day, because the 
giant banks are getting bigger, and my concern is not so much 
for the banks. It is for the borrowers. We had Jamie Dimon 
sitting there saying he couldn't find small businesses in 
America to loan to, so he sent his money to London, where it 
got eaten by the whale. And the really big banks would rather 
make a billion dollar bet than a million dollar loan.
    One controversy that has swirled is how much do the big 
banks benefit from this belief that when you lend the money, 
you are not just relying on their balance sheet; you have Uncle 
Sam's safety net? I have heard estimates of 80 basis points, 60 
basis points. I would like to go down the list. Take the second 
or third largest banking institution in America, how many basis 
points do they save on their borrowed capital?
    Mr. Skeel. As John Taylor has noted, there is a lot of 
controversy about this, but I have heard anywhere from 70 or 80 
basis points to higher. I have heard up to 2 percent in some of 
the estimates. There are a lot of numbers that are swirling 
around, but it is clear that the benefit is very, very large.
    Mr. Sherman. Mr. Taylor, do you have an opinion?
    Mr. Taylor. I think there are 80 basis points, that is what 
translates into $83 billion, is based on a study which I have 
looked at. I think it makes sense. They are looking at how 
different types of government policies affect credit ratings, 
which in turn, affect interest rates. I think that is a good 
number.
    Mr. Sherman. Mr. Rosner?
    Mr. Rosner. Yes, I would agree. The NY study is actually 
fairly robust. I would also point out that any subsidy that 
advantages these institutions relative to the seven other firms 
in our country is anticompetitive and too much, and I would 
request or suggest that you turn to page 8 of my testimony, in 
which I refute many of the claims made about scale and benefit 
that we receive as a result of large global financial 
institutions.
    Mr. Sherman. Mr. Krimminger?
    Mr. Krimminger. I am not sure that I have a number I would 
give. I think the key thing is to make sure that these large 
institutions are all subject to insolvency processes that will 
have the market discipline act and operate.
    Mr. Sherman. My time has expired. I yield back.
    Chairman McHenry. The gentlelady from Missouri, Mrs. 
Wagner, is recognized for 5 minutes.
    Mrs. Wagner. Thank you, Mr. Chairman. Professor Skeel, in 
your opinion, does Title II of Dodd-Frank do anything to limit 
the maturities of loans that the FDIC provides to the bridge 
company? In other words, could the FDIC just continuously 
provide short-term loans at favorable rates to the bridge 
company?
    Mr. Skeel. Sure. The FDIC can essentially cherry pick the 
rate it wants by picking obligations of the maturity that has 
an attractive interest rate. So, there is very, very little 
limitation on them.
    Mrs. Wagner. So while a private corporation would have to 
worry about renegotiating its credit line every 6 months or so, 
a company under OLA would have guaranteed access to favorable 
loans backed by the taxpayer?
    Mr. Skeel. Absolutely.
    Mrs. Wagner. I direct this both to Professor Skeel and Dr. 
Taylor. Would you say that one of the biggest risks financial 
institutions face, which is liquidity risk, would be largely 
eliminated for a financial institution that enters OLA?
    Mr. Taylor. Once it is in the bridge form, yes, basically 
it can provide as much credit as it needs. That was put in the 
Act on purpose, I am sure, but it creates, if you take care of 
the liquidity problem, then you can do a lot of other things at 
the same time. So, it is a huge advantage.
    Mrs. Wagner. Professor Skeel?
    Mr. Skeel. Yes, all of those numbers we have been talking 
about are available to eliminate any hint of a liquidity 
problem.
    Mrs. Wagner. Dr. Taylor, what kind of advantages would this 
confer upon the company under OLA versus private financial 
institutions that don't have access to cheap, taxpayer-backed 
loans?
    Mr. Taylor. One thing it could do which is actually kind of 
perverse is since it doesn't have to worry about liquidity, it 
doesn't have to worry about accessing the private market 
liquidity, you can take actions actually which are more risky 
than otherwise and be covered by that, and therefore that gives 
us a direct advantage. That would be one example.
    Mrs. Wagner. Professor Skeel, a little over a year ago, 
Martin Gruenberg as the Acting Chairman of the FDIC, gave a 
speech regarding OLA and talked about the need to, as you put 
it, craft a resolution, undergo a market test of viability, and 
appoint a temporary new board of directors, and a CEO from the 
private sector. When you were talking about an institution with 
potentially trillions of dollars in assets, wouldn't these 
steps to running a bridge holding company potentially take 
years?
    Mr. Skeel. Potentially, they could. And I worry more about 
this, about how we are going to decide who is going to be 
managing these giant bridge institutions the further we get 
away from 2008. If it happened right now, everybody has been 
focusing on it for 2 years. It is possible you could come up 
with some folks to run these companies. The further away we 
get, the more worried I am, and it is a huge question mark even 
now.
    Mrs. Wagner. The FDIC really has no experience winding down 
a large, internationally connected complex institution?
    Mr. Skeel. No. That is a very important point, and if I 
may, let me throw in an additional cause for concern. We have 
been talking about what the FDIC does with its bank 
resolutions, what it has done for a long time. It is very 
important to keep in mind the normal FDIC bank resolution looks 
nothing like the institutions we are talking about.
    Mrs. Wagner. Right.
    Mr. Skeel. The small mom-and-pop institution, all of its 
liabilities are deposits. This is a completely different 
creature and this is uncharted territory.
    Mrs. Wagner. Absolutely. Mr. Rosner, if OLA were 
implemented prior to 2008, is it reasonable to assume that 
multiple firms would have undergone the OLA process as a result 
of the financial crisis?
    Mr. Rosner. It is reasonable to expect that they would try 
because of congressional legislative mandate. Is it reasonable 
that it would succeed? No.
    Mrs. Wagner. So, if multiple institutions are undergoing 
the OLA process at the same time, is it reasonable to assume 
that the FDIC would find itself, as we have just discussed with 
Professor Skeel, quickly overwhelmed?
    Mr. Rosner. I think the answer is, absolutely. And in fact, 
during the crisis we had managements that needed to be replaced 
and there was not an available pool of talent within the 
industry to bring enough management in, so we often found 
management left in place under greater supervision, which is 
neither an equitable outcome, nor is that the proper resolution 
to have the people who created failure continue to run an 
institution in failure.
    Mrs. Wagner. My time is short here, but if the FDIC proves 
itself--as we just discussed--incapable of running a bridge 
holding company into the ground after exercising discretion 
over its assets, could this potentially, I assume, cause 
irreversible harm to the broader economy?
    Mr. Rosner. I don't think there is any question, and I 
think you raise an important point, which is if in failure, or 
if we find OLA results in failure, what are the remedies at 
that point?
    Mrs. Wagner. Right. Thank you, I appreciate it. I believe I 
have run out of time.
    Chairman McHenry. We will now recognize the gentleman from 
Maryland, Mr. Delaney.
    Mr. Delaney. Before I ask my questions, I want to say that 
I actually think the FDIC did a very nice job through the 
financial crisis. We had a situation where 19 of the 20 largest 
financial institutions in the United States, 19 of 20, either 
failed or required massive investment by the U.S. Government. 
The only one that didn't was Berkshire Hathaway, and we, within 
a relatively short period of time, completely recapitalized the 
banking system and the financial system continued to function. 
So it is not clear to me why there is a sense that the FDIC 
would not manage this process well. Does anyone have data that 
suggests that the FDIC did a bad job managing this process?
    Mr. Rosner. I don't think the question is, did the FDIC do 
a bad job. As you said, 19 of 20 either failed or required 
capital investments.
    Mr. Delaney. Yes.
    Mr. Rosner. And that in itself, is inequitable, that we 
ended up backstopping, supporting, saving, keeping in place 
management of companies that otherwise would neither have been 
able to fund or exist to the disadvantage of the other banks 
within our banking system.
    Mr. Krimminger. If I may just respond, of course, one of 
the reasons we now have have Title II is to have an alternative 
to a bailout that occurred in TARP, and I think that we also--
again, I have a theme here, what are our alternatives to having 
a process where the FDIC can help take over these institutions 
and make the shareholders and creditors bear the losses. In 
bankruptcy, in Chapter 11 we often ignore the fact that the 
debtor in possession, which is typically the old management, is 
operating the company in reorganization. So there is always 
going to be a challenge with getting the right-skilled people 
to take over these companies.
    Mr. Delaney. Exactly, and that is why I wanted to just put 
this in context because I think it is a great discussion, and 
an appropriate discussion of that inequality that occurred as 
it relates to the response to the financial crisis, because I 
certainly believe there was significant inequality. But perfect 
is the enemy of the good, and we had to save the financial 
system because the consequences, in my judgment, would have 
been worse.
    And my point was, as it relates to the FDIC, I don't see 
anything in their behavior that would indicate that they are 
not in a position to manage this process well, because in fact, 
when tested, their deposit insurance fund did not in fact, need 
a significant--I am going to move on to my next question--
bailout, and I think again, in the context of things, they 
operated prudently. And this is a roadmap for handling it, one 
which did not exist before. So if you look at their past 
behavior, when they didn't actually have a roadmap, and assume 
that with a roadmap I would actually judge that they would do 
better, but what I do worry about, which is what my question 
is, that the ability to provide funding to these financial 
institutions fails for one of three reasons: fraud; credit 
risks; or liquidity risk. And these large institutions have an 
advantage as it relates to liquidity, because they have 
liquidity built in to the extent they were to fail. And while 
it is very clear that equity and management and those kind of 
things get wiped out, stabilizing the institutions does help 
its creditors, and the equity of these institutions is 10 
percent of the balance sheet; 90 percent of the balance sheet 
is creditors, so having in place a mechanism to stabilize the 
institution with liquidity, while the liquidation occurs, one 
would argue is good for its creditors because it allows an 
institution to actually liquidate its assets in an orderly way 
where you typically get better prices than if you have to 
liquidate assets in a non-orderly way where you get worse 
prices. So the question is, do you think this mechanism will in 
fact over time--and I apologize if you testified on this 
before--provide an advantage to how these institutions borrow 
in the unsecured debt markets?
    I will open that up to Mr. Skeel and Dr. Taylor.
    Mr. Skeel. I certainly do think it will provide an 
advantage, particularly with short-term debt. The proposal that 
the FDIC is putting forward, the single point of entry 
proposal, would, if it were ever used, write down bond debt, so 
I think there may be some negative effect on the price with 
respect to bond debt. But with short-term unsecured debt in 
particular, I think there is going to be a significant increase 
in the attractiveness of this debt. The cost is going to go 
down a lot, and there is still a general too-big-to-fail 
subsidy that is going to reduce credit costs as well.
    Mr. Taylor. I think a lot of the things you would like to 
have orderly, et cetera, could be achieved with the Bankruptcy 
Code in the right format. And don't forget that the Bankruptcy 
Code avoids all of this rule of law violation, all of these 
special things we are doing for favored creditors here. It has 
a procedure to handle that and it can be modified so that you 
do have the orderly kind of process if you want to.
    Mr. Delaney. Thank you. Mr. Krimminger?
    Mr. Krimminger. I will just note that I think the idea 
that, yes, there could maybe be a subsidy to creditors in some 
ways if they are carried over to the bridge bank, we have to 
put that, again, in consideration of the alternatives.
    Mr. Delaney. Right.
    Mr. Krimminger. Right now, everybody has been saying that 
the banks have uplift based upon the expectation of too-big-to-
fail. If you remove an alternative way of resolving these 
institutions, whether in the extraordinary case where the 
Bankruptcy Code won't work, and again, I think we need to make 
it where the Bankruptcy Code can be more successful, removing 
that alternative way is simply going to emphasize that too-big-
to-fail may still be the case in a crisis.
    Mr. Delaney. I agree with you; it is better than the 
alternative. I just think we should be observing how much these 
spread differentials in fact occur.
    Mr. Rosner. Can I just make one point?
    Mr. Delaney. Please.
    Mr. Rosner. We are also forgetting a key issue here, which 
is we are creating incentive through this structure for the 
institution to issue debt at the OPCO level, rather than at the 
HOLDCO level, and creditors who prefer to invest in the 
operating company level, rather than the holding company level 
because of the difference in treatment.
    Mr. Delaney. I am not sure that is a problem. I am going to 
take back my time, because the problem was HOLDCO debt, not 
OPCO debt, generally speaking.
    Chairman McHenry. The gentleman's time has expired. I would 
love to engage more deeply on this question, because where 
those unsecured creditors are going into a crisis may be 
significantly different under the Orderly Liquidation Authority 
and their rights are very unclear, and that is--I have a 
question about that when we get to the second round, which I am 
hopeful we can, and I would love to engage with you about that.
    With that, I will recognize Mr. Hultgren for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman. And thank you all 
for being here. I want to follow up briefly on Representative 
Sherman, who was questioning a couple of minutes ago. I think 
he had to step out maybe to another meeting, but to follow up a 
little bit on some of his points that he had started 
discussing, I was looking at a speech that Richard Foster, 
President and CEO of the Federal Reserve Bank of Dallas, had 
made back in January where he referenced some numbers given by 
Andrew Haldane and gave estimates of the current implicit too-
big-to-fail global subsidy to roughly $300 billion per year for 
the 29 global institutions identified by the Financial 
Stability Board as systemically important. To put that $300 
billion estimate annual subsidy in perspective, all of the U.S. 
BCs summed together reported 2011 earnings of $108 billion.
    I wondered if I could ask Professor Skeel, and also 
Professor Taylor, to the extent Dodd-Frank and Title II truly 
eliminate bailouts, shouldn't this be reflected in increased 
borrowing costs to the institutions covered by the title?
    Mr. Skeel. It should, and the Haldane speech--which I would 
commend anybody to read; it is a terrific paper--very, very 
strongly suggests to the contrary that we are going in the 
opposite direction, that the too-big-to-fail subsidy has gotten 
bigger since the crisis, not smaller.
    Mr. Taylor. And the IMF study we discussed a few minutes 
ago finds that the basis points have increased since the 
crisis.
    Mr. Hultgren. I wonder if you could just elaborate a little 
bit more. To the extent the borrowing cost advantage persists, 
does this imply that the expectation for bailouts persist as 
well?
    Mr. Skeel. Absolutely, and the trend line is not good. To 
refer to something else that is in that Haldane talk, the top 
three U.S. banks in 1990 had 10 percent of industry assets. 
They now have 40 percent of industry assets. So we are very 
much going in the wrong direction.
    Mr. Rosner. I think it is also demonstrable. If you look at 
the rating agencies' response to the Brown-Vitter bill as 
introduced, it was that if it were enacted, it would eliminate 
the upsweep support of the government that they include in 
their ratings of these companies.
    Mr. Hultgren. Following a little bit further on that with 
Professor Skeel and Professor Taylor, what other factors do you 
see that contribute to the borrowing cost advantage enjoyed by 
bigger institutions, and any other factors besides an implicit 
guarantee that affect the creditworthiness and borrowing costs 
of banking institutions?
    Mr. Skeel. We have talked about a lot of the factors, the 
likelihood that creditors will be bailed out, the likelihood 
that the institution wouldn't be allowed to fail. Also in that 
is an assumption that the capital requirements that everybody 
is talking about as the solution to too-big-to-fail won't work. 
Historically, capital requirements have not worked. They 
haven't predicted crises. They haven't avoided crises, and I 
think the market is pretty confident they are not going to work 
this time either.
    Mr. Taylor. I think it is hard to control for all of the 
different factors that affect the spreads, and these studies 
tried to do that. But there could be other differences with 
large banks. Mr. Rosner says he doesn't find particular 
advantages of larger banks, but there may be some advantages 
besides the Federal support which provides a different rate. So 
it is important to take that into account and if you are going 
to have a good debate about these issues, consider the other 
sides. But when you look carefully, it seems to me that the 
expected Federal Government support, if you like, the 
expectations of bailouts, is a big factor in this favorable 
rate.
    Mr. Hultgren. But any specifics? Besides the backstop, what 
other implicit benefits?
    Mr. Rosner. I should make sure it is understood that I 
wasn't saying there were no benefits. I was suggesting that the 
social benefits, the systemic benefits of these global 
institutions are overstated and not substantial.
    Mr. Skeel. Just to throw one more benefit in, the big 
institutions were given enormous tax breaks during the period 
of the crisis, as well. And these were ad hoc tax breaks, where 
the IRS changed its rule on things like net operating losses 
for the benefit of the institutions. So there is an assumption 
that the government is going to be behind them helping them out 
in the event of a crisis.
    Mr. Hultgren. My time is winding down, so I am not going to 
really have a chance to ask another question, but I would love 
to follow up. There has been some allusion to needed changes in 
the Bankruptcy Code, dealing specifically with this, so I would 
love to hear any suggestions you might have on that, of what we 
should be looking at or working on with other committees, 
Judiciary and other committees, to be able to address that, and 
to also make sure that this never happens again.
    Thank you so much. I yield back.
    Chairman McHenry. Mr. Heck is recognized for 5 minutes.
    Mr. Heck. Thank you, Mr. Chairman. For those of you who 
said that having access to the Orderly Liquidation Fund yields 
some kind of funding or competitive advantage, that is clearly 
implying that there is an incentive to do so. So my question 
is, is there evidence to suggest that banks have engaged in 
merger talk to reach that magic $50 billion threshold to take 
advantage of this? Is there evidence that banks are lobbying 
any of us to lower the $50 billion threshold so that they could 
achieve this status? Is there any evidence that non-banks are 
lobbying FSOC to be designated as SIFIs so they could take 
advantage of what you are suggesting is competitive and funding 
advantage?
    Mr. Rosner. Can I turn the question around a little bit?
    Mr. Heck. No.
    Mr. Krimminger. I would be happy to answer it, briefly. I 
think it is very clear--
    Mr. Heck. I was teasing him. He is welcome to turn it 
around.
    Mr. Krimminger. I would be happy to say that I think by and 
large, companies have not been willing to be over that $50 
billion threshold. Certainly, Title II of Dodd-Frank does not 
apply to any company over the $50 billion threshold. Of course, 
it applies to the very largest where bankruptcy would 
potentially create systemic risk, and it is trying to address 
that systemic risk. So companies certainly would not want it to 
be over $50 billion because they would not want to undergo the 
additional supervisory oversight by the Federal Reserve and 
other preparation of living wills and things like that.
    Mr. Heck. So are the funding advantages and the competitive 
advantages neutralized or negated by this additional 
requirement?
    Mr. Krimminger. I certainly don't think that the 
institutions perceived there being a funding advantage, 
particularly at that $50 billion threshold cutoff.
    Mr. Skeel. It seems to me that the issue isn't the $50 
billion threshold. It is the $800 billion, $1 trillion 
threshold. So in my view, the reason why people don't want to 
be over the $50 billion is because they are not the 
beneficiaries. The beneficiaries are JPMorgan and Citigroup and 
Goldman and Morgan Stanley, and those banks, and so if you get 
just over the $50 billion threshold, you get the disadvantages 
of being singled out without the advantages of being singled 
out.
    Mr. Heck. So at what dollar level does the advantage kick 
in?
    Mr. Skeel. I couldn't put a precise dollar level, but when 
you get into the top 10 banks or so in the country--
    Mr. Heck. It is not clear to me how that changes the spirit 
of my question, though. Then why aren't multiple regional banks 
talking with one another to achieve this holy grail of the 
funding advantage and competitive advantage of--
    Mr. Rosner. I do think that we have institutions that have 
sought to be what I call aspirational too-big-to-fail 
institutions that have grown in precisely that manner with--
    Mr. Heck. Can you name names?
    Mr. Rosner. I think that is one of the drivers we have seen 
with PNC over the years, and previously with SunTrust and with 
regions at times. So I think there is this class of 
aspirational too-big-to-fails, but where I was going before was 
if we do not see the Orderly Liquidation Authority as a 
benefit, or the DIF funding as a subsidy, then why don't we 
just open that DIF funding to every single institution in this 
country in case of trouble? Allow everyone to access low-cost 
Treasury capital when they are in trouble. It is absurd. It is 
an absurd suggestion, and the fact that we all recognize it is 
an absurd suggestion demonstrates or points to the inequity of 
that financing in the first place.
    Mr. Heck. I am glad you made a reference to DIF. I would 
like to move on if I may, sir. As you define bailouts, would 
the traditional FDIC resolution process to wind down a 
depository institution qualify as a bailout?
    Mr. Rosner. No, because it is actually a liquidation rather 
than a restructuring. And in fact, it seems that the 
institutions have sought to make themselves intentionally more 
complex even within the banks by moving their derivative books 
which had historically in many cases been outside the banks 
into the banks to increase the complexity and the difficulty of 
resolving a bank.
    Mr. Krimminger. Having a little bit of experience with the 
FDIC, I think it is--you can't make that distinction, frankly, 
between the FDIC process and banks being a liquidation and this 
being a reorganization. What happens in a bank is that you sell 
it to another bank. You put it into a bridge and then sell it 
to another bank. Here, you don't want to put it into a bridge 
and sell it to another large institution because then you just 
treble the size of the large institution, potentially. So you 
really can't draw that distinction. I think the FDIC certainly 
has a lot of experience in dealing with those bank resolutions, 
but certainly I think under the Dodd-Frank Title II provision, 
we want to make sure that the Bankruptcy Code can be effective 
up to the largest possible size. I don't think, frankly, banks 
have been moving their derivatives portfolios into the bank to 
increase their magic complexity, but there is funding because 
you have a deposit base that is insured. That is why people 
like to have that solidity of the deposit base. You can debate 
whether that is the appropriate step or not, but that is the 
reason, not--
    Mr. Rosner. I think there are multiple reasons. I don't 
think they are mutually exclusive.
    Chairman McHenry. The gentleman's time has expired. I will 
now recognize Mr. Barr of Kentucky for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman, and thanks to the 
witnesses for your testimony this morning. Professor Skeel, I 
was particularly impressed with the arguments that you made 
that OLA does, in fact, afford a competitive advantage to 
failed financial firms that access the Title II provisions. I 
would like all of the witnesses to maybe comment and amplify on 
those thoughts, and in particular, how the tax exemption, the 
funding advantage, the capital advantage, for a bridge company, 
how would that contribute to the perception or reality of an 
implicit government guarantee contribute to moral hazard, and 
in your comments in answering that question, I would like for 
you to address the arguments made by those who defend Title II, 
that Title II doesn't somehow enshrine too-big-to-fail because 
it imposes losses on shareholders, because it imposes losses to 
creditors, because management has changed; in other words, that 
Title II does impose consequences on failed institutions.
    Mr. Skeel. Okay, a couple of quick comments on that. I do 
think that the bridge institution would be a specially 
protected non-market driven institution. It has all of these 
benefits we have been talking about, the tax benefits. It is 
also the case that the FDIC would not let it back out into the 
world until it was healthy and there was no way it was going to 
fail. So I think there is this limbo state in which it would 
have enormous advantages.
    With respect to the claim that taxpayers will never pay 
anything, I don't think that is accurate for two reasons. One 
is, we have talked about a number of ways in which taxpayers 
will pay, even though in theory they are not paying. Taxpayers 
are paying if the interest rate on loans that the bridge 
institution has is a below-market interest rate. Taxpayers are 
paying because of the tax exemption that the bridge institution 
has. So there is that set of issues. The other set of issues is 
that even if some of the costs of resolution were ultimately 
recovered from the industry down the road after 5 years or 
whatever, that is a tax of sorts, as John Taylor has said. 
Effectively what we are doing is taxing a particular industry 
to support the resolution of the failed institution.
    Mr. Taylor. I would just agree with that, but it is a 
different--under a bankruptcy, the shareholders get wiped out, 
so there is not an issue there. The issue is about other 
creditors. And in Title II, it is hard to see how it wouldn't 
happen. You would be giving special favors to certain creditors 
and charging the assessment fund for that, if not the Treasury 
directly, or also just charging other creditors for that, and 
that has all of the elements of a bailout, all of the dangers 
that we are worried about of a bailout, too much risk-taking, 
the moral hazard, the uncertainty, the lack of rule of law, and 
those are the concerns. That is why we keep coming back to some 
notion of a Bankruptcy Code trying to do this, but also, it is 
fair. It deals with Wal-Mart, and other firms as well.
    Mr. Barr. I am mindful of my time, so if I could just move 
on to a second question. Many of you testified that an enhanced 
bankruptcy procedure perhaps amending Chapter 14 is preferable 
to a Title II OLA. What about the criticism of those who say 
that a bankruptcy process is too slow, particularly in a 2008 
financial meltdown scenario? What is the response to those 
criticisms, and also speak to access to debtor and possession 
financing in a liquidity crisis?
    Mr. Skeel. Just a couple of things very quickly on that. 
Bankruptcy can be used very, very quickly. One of the 
interesting things that a group of us are working on now is the 
idea of using bankruptcy to do a resolution somewhat similar to 
the one that the FDIC has in mind, where you sell the assets of 
the holding company immediately, and then you have a new 
institution that is subject to market forces out there. So it 
seems to me the idea that bankruptcy can't be used quickly is a 
misperception, and that you can do all of the things we have 
been talking about with Title II with a couple of tweaks to the 
Bankruptcy Code in bankruptcy, and if you did it in bankruptcy, 
you would have a new institution that would be fully subject to 
market pressures.
    Chairman McHenry. I thank the gentleman.
    Professor Skeel, as previously announced, your departure 
time has arrived, and we thank you for your testimony, and you 
are dismissed. We will continue with the remainder of the 
panel.
    We will now recognize the ranking member, Mr. Green, for 5 
minutes.
    Mr. Green. Thank you, Mr. Chairman. We have now concluded 
that Dodd-Frank is not perfect. The current Bankruptcy Code is 
not perfect. But we can, it seems, make the Bankruptcy Code 
perfect, whereas we cannot make Dodd-Frank perfect.
    So let me start by asking who among you would eliminate 
Dodd-Frank completely? If you would do so, would you kindly 
raise your hand? This way, I will be able to move quickly. Who 
would eliminate Dodd-Frank completely? Mr. Taylor, would you 
eliminate it completely?
    Mr. Taylor, I hate to do this because time of the essence.
    Mr. Taylor. There are some things in there I would not 
eliminate.
    Mr. Green. Okay, so you would keep some portions of Dodd-
Frank.
    Mr. Rosner?
    Mr. Rosner. I would keep some portions of Dodd-Frank.
    Mr. Krimminger. I would keep some portions of it. We 
clearly need an alternative. Just very quickly, I know you have 
very little time, is that mainly the tweaks we need to do with 
the Bankruptcy Code, they are in all of the recommendations, 
actually make it more like Dodd-Frank in many ways to 
accomplish some of the goals. Bankruptcy needs cash because in 
a huge crisis, debtor-in-possession financing is not always 
available.
    Mr. Green. You are going to segue into my next question, so 
let me just toss it to you. Dodd-Frank mimics the Bankruptcy 
Code as much as possible, but it has some additional things 
that the Bankruptcy Code doesn't have. Can you take just a 
quick moment and give us some thoughts on those different 
things, please?
    Mr. Krimminger. A couple of things. First of all, it does 
have liquidation funds we have talked about a lot. The 
Bankruptcy Code would need cash in order to be able to do a 
resolution. If you are trying to deal with systemic risk, you 
need to have some ability to deal with systemic risk and to say 
you want to eliminate any ability to make sure you can maintain 
operations which does involve preferencing some creditors, I 
think is not consistent with trying to deal with systemic risk. 
The Bankruptcy Code, itself, has some mechanisms to continue 
those things. They might need to be expanded. The ex ante, or 
the before decisions are made, a decision by a judge on each of 
the questions, is something that Dodd-Frank puts after the fact 
for lawsuits to challenge what the receiver has done, and the 
receiver would need to be able to act quickly. That is one of 
the things that Title II does, and it also provides for 
borrowing authority to transfer things to that bridge financial 
company.
    Mr. Green. Thank you. I asked the question about Dodd-
Frank, and mending it, because there are some people who want 
to end it. And there are some people who want to use your 
testimony to end Dodd-Frank and bring in a regime under 
bankruptcy.
    Let's point to something else. There was talk about the 
industry being taxed after the fact once the liquidation has 
taken place. That taxing, as you have called it, isn't that 
similar to the premium paid by banks with the FDIC? Mr. 
Krimminger?
    Mr. Krimminger. It is. The difference, of course, is that 
the Deposit Insurance Fund is funded up front by risk-based 
premiums.
    Mr. Green. Right.
    Mr. Krimminger. The Orderly Liquidation Fund is repaid. If 
all the cash that is paid, that is received through the bridge 
company could not be paid to Treasury, which I think is very 
unlikely, you would have to almost have the value of that 
company being zeroed out because Treasury takes off the top. 
The cash is risk-based, and it is paid ex ante, very much like 
the Deposit Insurance Fund.
    Mr. Green. So it is similar, just that one is paid up 
front, and the other is paid after the fact, correct?
    Mr. Krimminger. That is correct, and the important 
difference, to respond to one of the questions earlier, this is 
only paid by those institutions that are over that $50 billion 
threshold or have been designated as 50 that is not paid by the 
thrift and savings and loans that are smaller.
    Mr. Green. Mr. Krimminger, in your paper--by the way, I 
thought it was excellent, and I plan to post it on my Web 
site--you indicate that there is an additional thing that Dodd-
Frank does that bankruptcy doesn't do. Bankruptcy deals with 
creditor claims, whereas Dodd-Frank also deals with protection 
of the public, and it looks at the impact on the economy. Can 
you please give me your thoughts on this, because it is 
important for us to note that in 2008, the crisis was so large 
that banks were not lending to each other, that a prepackaged 
bankruptcy was not possible because you didn't have the 
liquidity to take into that process. So with that in mind, 
would you kindly explain how this notion in Dodd-Frank of 
protecting the public becomes exceedingly important?
    Mr. Krimminger. The reason that Title II was created in the 
first place was because of making sure that in that rare 
extraordinary circumstance where you had a systemic crisis, you 
had an additional option that could impose losses upon the 
shareholders and the creditors as much as possible while making 
sure you could continue this operation of the institution that 
would deal with systemic risk. That is why you needed funding 
and that is why inevitably, just as you do in bank failures 
because of maximizing value, you do have some creditors who get 
more than others. To say that all creditors should get only the 
amount provided for under the priority system, in some ways is 
not even true under bankruptcy at times because you need to 
continue operations.
    Mr. Green. One final quick question. How many of you would 
make the big banks smaller? There has been talk about doing it. 
Let's see now if you would do it. Would you raise, would you 
make the big banks, would you downsize them, break them up? If 
so, kindly raise your hand. Okay, we have one person, Mr. 
Rosner would. Mr. Taylor?
    Mr. Taylor. You asked, would I like to get rid of this too-
big-to-fail? I would like to deal with it that way.
    Mr. Green. I understand, but the question I am asking is, 
would you break up the big banks?
    Mr. Taylor. It would have those effects. That would have 
those incentives. When you ask the question that way, you 
missed, I think, the point that we have a problem that is--
    Mr. Green. I understand the point, but when you make 
statements about breaking up the banks, I would like to know if 
this is what you would do.
    Mr. Rosner. When I say break up the banks--
    Mr. Green. My time has expired, and I have gone over. So I 
have to yield back, Mr. Chairman.
    Mr. Rosner. Can I just respond?
    Chairman McHenry. The gentleman is trying to answer the 
question.
    Mr. Rosner. So to clarify, if the Fed took seriously its 
obligations under Title I, which would be to use the living 
will process to figure out how institutions can fit through the 
Bankruptcy Code, Title II becomes unnecessary. Would I use that 
process to achieve those ends? Yes. Is that forcibly breaking 
them up? No. It is creating incentives to make sure that they 
are manageable through the bankruptcy process.
    Mr. Green. And in effect, what you are doing, what you are 
acknowledging, is that Dodd-Frank provides a means by which 
this may be done.
    Mr. Rosner. No, what I am acknowledging is that there is a 
tool that creates a living will, which is a blueprint for how 
things could work, not how they will work.
    Mr. Green. I didn't say how they will, but I do contend and 
I believe you agree that Dodd-Frank provides the means by which 
it may be done.
    Chairman McHenry. I appreciate the dialogue and debate. We 
will now recognize Mr. Duffy for 5 minutes.
    Mr. Duffy. Thank you, Mr. Chairman. Mr. Taylor, I don't 
know if you wanted to further answer that question that was 
asked about your thoughts on breaking up big banks.
    Mr. Taylor. I think I would like to. A lot of the concerns 
about too-big-to-fail and the anticipation of bailouts is that 
it does give advantages to certain institutions. And so that 
could make that larger. There is also the question about what 
capital should be. There is a real concern about capital, in my 
view, and so that would also have an impact on the size of the 
institutions. I think that is what you want to do. You want to 
level the playing field.
    And also with respect to repealing or eliminating Dodd-
Frank, the question really--there is the Office of Thrift 
Supervision which is eliminated, you have the central 
clearinghouses. So those are good reforms, but Title II itself, 
it seems to me, has real problems. And if you could replace it 
with modification of the Bankruptcy Code, I think that would be 
far preferable. If for political reasons, you have to keep it, 
and put in the Bankruptcy Code reforms, then I would be all for 
that. But Title II itself is problematic.
    Mr. Duffy. I think we have engaged in a really nice 
conversation today to try to find some solutions on how we can 
move forward to truly end too-big-to-fail, and I think you see 
a bipartisan approach to that effort. And I think we can all 
work together to improve the current legislation, and I think 
there is a willingness today, more so than there has been in 
the past, to try to find a system that is workable, and 
breathes certainty into the marketplace. But one of my concerns 
in regard to too-big-to-fail and SIFI is looking at Title I, 
and Title II, is the implicit Federal backstop for the 
operating subsidiaries. And my concern is that if you have this 
Federal backstop and you are designated an SIFI, what does that 
do to the borrowing costs of those various institutions? Does 
it create an actual benefit before they are thrown into Title 
II? If they are just operating as an SIFI, doesn't that 
automatically give them a borrowing advantage?
    Mr. Taylor. Data certainly suggest that large institutions 
get this advantage and that it has increased since the 
financial crisis. So that is what the data show, and then when 
you go through and look at the details, you could see why that 
might be the case.
    Mr. Krimminger. If I could just say, I think that, clearly, 
it has been a long-term issue about too-big-to-fail and the 
uplift, if you would, provided for the largest institutions. I 
think in some ways it would be difficult to, but we need to 
separate out the uplift that might have increased the Federal 
filing requirements because we took what was an expectation of 
too-big-to-fail and made it reality. So the markets 
incorporated that concept as well.
    As far as the operating subsidiaries, certainly it is 
important to make sure that Title II, whether it is used at the 
single point of entry at the holding company, or at different 
levels, is kept in mind. I try to remind people--and I reminded 
people when I was at the FDIC as well--that single point of 
entry could not be the way it would work out because you might 
have multiple entities within that holding company that simply 
can't go on. Multiple point of entry so that you close the 
subsidiaries has to be looked at as being a viable option as 
well so that you reduce that filling of the subsidy for the 
subsidiaries.
    Mr. Duffy. But wasn't it in your testimony that you 
admitted that there is a subsidy there to the operating 
subsidiaries?
    Mr. Krimminger. In the case of a subsidiary that doesn't 
fail, you don't close a company just because they happen to be 
a subsidiary of a failed company. If the subsidiary is 
operating in the best value for that subsidiary, and it is 
making money, to continue for it to make money, then that would 
be the rational thing to do in any type of insolvency process.
    Mr. Duffy. But if you are a creditor to that subsidiary, 
you are not going to be allowed to have that debt not met, 
right? The holding company is going to go to Treasury. They are 
going to access dollars from Treasury, and they are going to be 
able to meet--go find the creditor, and I am going to lend to a 
subsidiary. I have a Federal backstop. So I am going to be able 
to, if I am one of those subsidiaries, I don't have a benefit 
in borrowing.
    Mr. Krimminger. If that subsidiary is insolvent, it should 
be closed. That is why I am talking about the multiple--
    Mr. Duffy. What happens to the creditor if it is insolvent?
    Mr. Krimminger. If it is closed, then it goes through an 
insolvency process, and it would either go in through an 
insolvency process in bankruptcy, or it would go through an 
insolvency process under Title II, and the creditors--
    Mr. Duffy. I am saying if we are in Title II.
    Mr. Krimminger. Okay, but the holding company could be in a 
Title II resolution, a single point of entry, but there also 
could be a failure of a subsidiary. So that subsidiary under 
the statute could go right into bankruptcy or under Title II if 
it were systemic itself, and if it is systemic and it goes 
under Title II, the creditor is still going to take losses 
because you don't have the kind of single point of entry 
approach at that level of the entity.
    Mr. Duffy. Do you agree with that, Dr. Taylor?
    Mr. Taylor. This is the question about whether there is the 
Federal backstop and how that is affecting rates?
    Mr. Duffy. Right. Yes.
    Mr. Taylor. I will stand with what I said before. It is 
there and it is affecting rates and it has increased since 
Dodd-Frank was passed.
    Mr. Duffy. Mr. Rosner?
    Mr. Rosner. I agree. And again, it creates an incentive for 
creditors to choose to invest in the OPCO rather than the 
HOLDCO, further distorting the ability of the HOLDCO to be a 
source of strength to its operating subsidiaries.
    Mr. Duffy. I yield back.
    Chairman McHenry. All right. The first round of questioning 
is now done.
    I expressed at the beginning of the hearing that our 
intention was to adjourn by noon, but we have additional 
Members with a few extra questions, so I ask unanimous consent 
that we have 7 additional minutes per side, with 5 minutes 
going to Mr. Barr, and 2 minutes to me on our side. I will now 
recognize the ranking member for 7 minutes.
    Mr. Green. Thank you, Mr. Chairman. And if there are other 
Members who would like to speak, if you will kindly let someone 
know, I will adjust my time.
    Let's come back to Dodd-Frank versus bankruptcy, because 
this is what this has become about today. Let's ask this 
question. What is it that you find that you can do with 
bankruptcy that you cannot do with Dodd-Frank?
    Mr. Taylor. The advantage of bankruptcy is it is part of 
our system for creditors. It has been around as part of the 
rule of law. It can work for all kinds of--
    Mr. Green. I understand.
    Mr. Taylor. And that is what you want to--
    Mr. Green. Time is of the essence, and we have to move on.
    Mr. Taylor. --make it available--
    Mr. Green. Can you give me something that you can do under 
bankruptcy that you can't do under Dodd-Frank?
    Mr. Taylor. Yes. That is the main thing. You have the rule 
of law applies and Dodd-Frank you don't.
    Mr. Green. Dodd-Frank is not the rule of law?
    Mr. Taylor. Dodd-Frank has tremendous discretion authority 
given to--
    Mr. Green. I understand.
    Mr. Taylor. --to the FDIC.
    Mr. Green. But that is under the rule of law.
    Mr. Taylor. And how they treat creditors--
    Mr. Green. Let me go on to Mr. Krimminger.
    Mr. Krimminger, can you tell me something about Dodd-Frank 
that allows it to do what we generally speak and want to do 
with bankruptcy, please?
    Mr. Krimminger. Essentially what Dodd-Frank does, as I 
said, it is really supposed to be an alternative, and I worked 
a long time, I worked with a number of people when I was at the 
FDIC, to try to make sure that Title II would not be viewed as 
being substantially or substantively different in the way it 
would treat creditors. Yes, there was more discretion, but the 
discretion is inherent to the ability to address a systemic 
risk.
    I think if we go and say we have to eliminate the 
discretion, you are eliminating the ability to deal with a 
systemic risk in a crisis. So, clearly, Title II will allow you 
to do that. It is also simply not true to say that Title II 
does not or ignores the rule of law. Title II just has the rule 
of law after the decision is made initially and you can file 
suit for damages.
    Under U.S. law, it has always been viewed as being an 
appropriate remedy to be able to file a suit for damages rather 
than having a judge make every decision in advance. That is the 
bankruptcy way, and bankruptcy should apply wherever possible.
    Mr. Green. Let's talk for just a moment about bridge 
institutions. There seems to be this notion that a bridge 
institution is somehow going to come into existence, reap a lot 
of benefits, and a lot of money is going to be made. What is 
the purpose of the bridge institution, and talk about its 
longevity, please, Mr. Krimminger?
    Mr. Krimminger. The bridge institution is designed to be a 
very short-term entity. I think that much of the discussion 
today about the length of a bridge company being up to 5 years, 
that is also true under the Federal Deposit Insurance (FDI) 
Act, and the average length of time for a bridge institution 
under the FDI Act has been less than 6 months.
    Now, it might be longer under a Title II situation, but 
remember, under the single point of entry approach the FDIC is 
talking about, you would be taking over the holding company, 
which is a very simple organization. There, the way they plan 
to do that would be to do a--that debt for equity swap, if you 
will, a creditor claim for equity swap for the debt within 6 to 
9 months, because I will assure you, the FDIC does not want to 
run a mega institution for any extended period of time.
    Mr. Green. Mr. Krimminger, in your paper you also talk 
about time being the enemy in a time of crisis. In 2008, it was 
a time of crisis and time was the enemy. Would you please 
elaborate on time being the enemy and juxtapose this to 
bankruptcy as an option?
    Mr. Krimminger. I think time is an enemy because you need 
to act very quickly. In 2008, on the weekends when things 
needed to be done, and it seemed to happen on far too frequent 
a basis, you had to make the decisions and come to a conclusion 
about how to deal with an institution by the Sunday night 
before the business opened in Asia, because once the market was 
open, it would be too late, and the illiquid institution would 
fall.
    If you look at the Lehman bankruptcy, and again, I would 
like to see bankruptcy improve where it could deal with the 
situation much better, but if you look at the Lehman bankruptcy 
itself, it effectively allowed for a transfer of the broker-
dealer, in that case by keeping the broker-dealer open with 
large funding from the Federal Reserve Bank of New York. We 
want to get to a situation where an institution can be closed, 
it can be resolved while losses are imposed rather than having 
funding for an extended period of time so that some creditors 
get out and complete their transactions.
    I think the Lehman bankruptcy illustrated some of the 
issues of bankruptcy and illustrated some of the ways forward 
in how we can make improvements.
    Mr. Green. We understand that banks don't go through 
bankruptcy, generally speaking. They go through a process with 
the FDIC. Is what we are attempting to do with Dodd-Frank, 
which by the way is in its infancy, it is still being 
developed, rules are still being promulgated. Is what we are 
trying to do with Dodd-Frank similar to what is being done with 
the FDIC and banks, generally speaking?
    Mr. Krimminger. It is based upon essentially the similar 
powers of the FDIC. I think, as I was saying here in my 
testimony earlier, that it has been internationally recognized 
that you need to have certain powers in extremis, if you will, 
to be able to take those actions, so it is really based upon 
the same models of authority to take action and then have a 
determination.
    Mr. Green. Now, there were some points that you wanted to 
make earlier, and I remember you didn't get an opportunity to. 
If you made note of them, I would like for you to use some of 
this time to make those points.
    Mr. Krimminger. I would just note, as I was trying to make 
a lot--I just note in response to some of the questions earlier 
that clearly some of the improvements we are trying to make in 
the Bankruptcy Code, in order for the ability to act more 
quickly, the first day order issue, the ability to find an 
identifiable area of cash or debtor possession financing and 
others, the ability to deal with systemic risk; in fact, the 
creation through potentially a Section 343 sale under the 
Bankruptcy Code of a sale to an entity that would be similar to 
a bridge company is very much modeled upon what we are talking 
about in Title II.
    So I think we just have to keep in mind that the changes we 
want to make should be appropriate for the types of entities we 
are talking about, and I don't think we want to have all those 
changes in the normal bankruptcy process anyway, so we need to 
make sure that the changes in the Bankruptcy Code make it more 
effective, but do not dramatically change the normal bankruptcy 
process.
    Mr. Green. Is it possible for bankruptcy itself to have an 
adverse impact upon the economy in a time of crisis? For 
example, if AIG had gone through bankruptcy in a time of 
crisis, how would that have impacted the economy?
    Mr. Krimminger. I don't want to really speak to AIG 
particularly, being as it is an open company at this point, but 
certainly I think that if you had the rapid deleveraging of a 
company that is involved very much in the derivatives markets, 
that could be very destabilizing in the marketplace. And one of 
the great things about the ability to terminate net contracts 
in bankruptcy or under the FDI Act after a one-day stay is that 
it allows people to have liquidity in their market contracts. 
One of the bad things is that if you have that ability to 
immediately terminate those contracts and dump them on an 
already illiquid market, you run the risk of having much more 
illiquidity in the market and it freezes up the markets.
    Mr. Green. Thank you. My time has expired.
    Thank you, Mr. Chairman.
    Chairman McHenry. With that, we will now recognize Mr. Barr 
for 7 minutes, with my colleague understanding that I would 
certainly appreciate a few minutes at the end. Two minutes at 
the end would be great.
    Mr. Barr. Absolutely, Mr. Chairman. Thank you.
    Chairman McHenry. Thank you.
    Mr. Barr. I would be interested in Dr. Taylor's and Mr. 
Rosner's responses to the comments, the testimony that Mr. 
Krimminger just made with respect to the perceived or real 
deficiencies of bankruptcy, and please speak to the liquidity 
issue and the timing questions?
    Mr. Taylor. I will just make a couple of points. There is 
no reason, and I document it in my written testimony, that you 
couldn't be just as quick with a bankruptcy as what is being 
contemplated with the FDIC's new single point of entry. In 
fact, I describe how that could work with an example. It could 
be done over the weekend, if you like. The process could be 
very quickly.
    We also have ways that we can have experts more involved 
with the bankruptcy judges than they are now. There is a wide 
range of things in terms of the reform side that could make 
this very smooth.
    And I would say even now when we think about what the FDIC 
might do, we don't know. They are talking about issuing a 
paper. They are talking about issuing some procedures. That is 
very important to do, but that will still just be their 
procedures. That is not part of the rule of law. That could be 
changed on a dime. So it is quite different. All that 
discretion is still there.
    So I think those two things are the most important, I would 
say, in response to what Dr. Krimminger said.
    Mr. Barr. Mr. Rosner?
    Mr. Rosner. I would agree. I would add, which is also in 
response to Mr. Green's question, the same thing. The question 
is almost more importantly asked, what does the Bankruptcy Code 
offer that Dodd-Frank doesn't, and to that end, the answer is 
clarity, certainty, due process. Those are the key features 
that you want codified in law and in judicial process and 
review rather than leaving it in the arbitrary hands of even 
the most well-intentioned and well-meaning regulators.
    Mr. Barr. A question for all of the witnesses generally on 
the issue of too-big-to-fail systemic risk, I have heard the 
argument made that size or largeness is not in and of itself 
systemic risk, that the real question, the real problem is 
overleverage, the real problem is liquidity risk, that is the 
more fundamental problem in a crisis situation. And in fact, I 
have also heard the argument--and I think there is a persuasive 
element to it--that large institutions that are highly 
diversified have the capacity, unlike non-diversified smaller 
institutions, to absorb losses. As we kind of grapple with 
policymakers with the issue of too-big-to-fail, could you all 
kind of comment on that, and as we approach the problem, how 
should we take that into account when we hear proposals to 
break up banks?
    Mr. Rosner. Look, I am sympathetic to the view that if we 
are sitting here having discussions over a Title II authority 
as treating institutions differently because they pose systemic 
risk, we do have to stop, step back, and ask why we have all 
chosen to live with a gun at our head rather than figure out 
how to manage that so it doesn't pose a threat, and I think 
that is really the starting point. And I think leverage is a 
key issue there. I think capital is a key issue there. I think 
clarity of structure, the ability to put through bankruptcy and 
an international structure that would allow for management of 
those operating subs in insolvency or some sort of a ring 
fencing of those makes sense. I would start there rather than 
by codifying too-big-to-fail through Title II.
    Mr. Barr. I want to yield time back to my chairman, but if 
Mr. Krimminger would like to follow up on that, and then I will 
yield back to the chairman.
    Mr. Krimminger. Just briefly, I think that the 
diversification of assets and operations can certainly do a 
lot. I think fundamentally, if you are looking to make sure an 
institution of whatever size doesn't fail, it is a question of 
risk management. I think the largest institutions as well as 
the smaller institutions today have made a lot of strides in 
the last few years in actually looking at ways to better manage 
their risk, and I think the living will process has actually 
paid some dividends because there has been some significant 
changes in the way the operation has been done in reaction to 
those efforts.
    Mr. Rosner. Non-public, non-transparent, and frankly not 
visible to the market outcome supposedly of Title I.
    Chairman McHenry. Will my colleague yield?
    Mr. Barr. I will. Thank you, Mr. Chairman.
    Chairman McHenry. Thank you, Mr. Barr.
    My question, Mr. Krimminger is, within the Act, within the 
Dodd-Frank Act, Title II authority, liquidation authority as we 
are discussing today, does the FDIC have discretion about the 
order of creditors?
    Mr. Krimminger. The FDIC has authority under the Act 
subject to its own regulations to provide additional funding or 
additional payments to some creditors if they are essential to 
the operation of the receivership of the bridge.
    Chairman McHenry. Okay. But there is discretion for the 
FDIC in that process?
    Mr. Krimminger. There is a statutory requirement, and the 
FDIC put in place a regulation that said that their board of 
directors had to approve any particular payments to a 
particular creditor, but again, that is to deal with systemic 
risk.
    Chairman McHenry. How many members are on the FDIC board?
    Mr. Krimminger. Five.
    Chairman McHenry. And how many votes does it take in order 
to make that determination?
    Mr. Krimminger. It requires, under that regulation, a 
supermajority, so I think it would end up being four.
    Chairman McHenry. Four. So four individuals are given 
discretion, just like in the crisis, they took the discretion 
to reach out and insure a set of assets that they had never 
previously, in the FDIC's history, insured.
    Mr. Rosner, to this point, this question of discretion, 
does that increase uncertainty or decrease uncertainty?
    Mr. Rosner. In absolute terms and relative terms, it 
increases uncertainty. It will have impact not only as an 
institution approaches failure, but definitionally has impact 
as we see in the cost of funds advantage long before we get 
there.
    Chairman McHenry. Dr. Taylor, you talk about discretion 
with monetary policy and the challenges there. So, if you are 
an unsecured creditor, unsecured debt within an institution, 
does this process give you greater certainty than where you 
would be in a bankruptcy process?
    Mr. Taylor. The bankruptcy will be much clearer. Here, the 
discretion creates uncertainty. There is no question about it.
    Again, we don't know, even now, what the FDIC's policy is. 
A paper may help, but it will still have the discretion to 
change it when they want to.
    Chairman McHenry. Okay.
    Mr. Taylor. I think it is tremendous uncertainty, which is 
one of my biggest concerns about that whole too-big-to-fail 
process.
    Chairman McHenry. Thank you, and thank you for your 
testimony. I appreciate your answers to the variety of 
questions posed today. We have a few takeaways accordingly: 
that the Orderly Liquidation Authority leads to greater 
uncertainty; that greater uncertainty is not helpful to the 
marketplace, not helpful to our nature of the rule of law and a 
regulatory policy that is clear to the marketplace.
    Likewise, the functioning of this would--if an institution 
went into an orderly liquidation, it could result in an 
enormous bank tax, which would be put on other institutions, 
surviving institutions, and thereby their consumers. And 
finally, the overall question about taxpayers being on the 
hook. I think that is pretty well resolved now that we better 
understand what the Orderly Liquidation Authority actually 
means.
    Thank you so much for your testimony, and thank you for 
being so forthcoming.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is now adjourned.
    [Whereupon, at 12:15 p.m., the hearing was adjourned.]


                            A P P E N D I X



                              May 15, 2013




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


