[House Hearing, 113 Congress] [From the U.S. Government Publishing Office] EXPLORING CHAPTER 11 REFORM: CORPORATE AND FINANCIAL INSTITUTION INSOLVENCIES; TREATMENT OF DERIVATIVES ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON REGULATORY REFORM, COMMERCIAL AND ANTITRUST LAW OF THE COMMITTEE ON THE JUDICIARY HOUSE OF REPRESENTATIVES ONE HUNDRED THIRTEENTH CONGRESS SECOND SESSION __________ MARCH 26, 2014 __________ Serial No. 113-90 __________ Printed for the use of the Committee on the Judiciary [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Available via the World Wide Web: http://judiciary.house.gov _____ U.S. GOVERNMENT PRINTING OFFICE 87-331 PDF WASHINGTON : 2014 ----------------------------------------------------------------------- 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 COMMITTEE ON THE JUDICIARY BOB GOODLATTE, Virginia, Chairman F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan Wisconsin JERROLD NADLER, New York HOWARD COBLE, North Carolina ROBERT C. ``BOBBY'' SCOTT, LAMAR SMITH, Texas Virginia STEVE CHABOT, Ohio ZOE LOFGREN, California SPENCER BACHUS, Alabama SHEILA JACKSON LEE, Texas DARRELL E. ISSA, California STEVE COHEN, Tennessee J. RANDY FORBES, Virginia HENRY C. ``HANK'' JOHNSON, Jr., STEVE KING, Iowa Georgia TRENT FRANKS, Arizona PEDRO R. PIERLUISI, Puerto Rico LOUIE GOHMERT, Texas JUDY CHU, California JIM JORDAN, Ohio TED DEUTCH, Florida TED POE, Texas LUIS V. GUTIERREZ, Illinois JASON CHAFFETZ, Utah KAREN BASS, California TOM MARINO, Pennsylvania CEDRIC RICHMOND, Louisiana TREY GOWDY, South Carolina SUZAN DelBENE, Washington RAUL LABRADOR, Idaho JOE GARCIA, Florida BLAKE FARENTHOLD, Texas HAKEEM JEFFRIES, New York GEORGE HOLDING, North Carolina DAVID N. CICILLINE, Rhode Island DOUG COLLINS, Georgia RON DeSANTIS, Florida JASON T. SMITH, Missouri [Vacant] Shelley Husband, Chief of Staff & General Counsel Perry Apelbaum, Minority Staff Director & Chief Counsel ------ Subcommittee on Regulatory Reform, Commercial and Antitrust Law SPENCER BACHUS, Alabama, Chairman BLAKE FARENTHOLD, Texas, Vice-Chairman DARRELL E. ISSA, California HENRY C. ``HANK'' JOHNSON, Jr., TOM MARINO, Pennsylvania Georgia GEORGE HOLDING, North Carolina SUZAN DelBENE, Washington DOUG COLLINS, Georgia JOE GARCIA, Florida JASON T. SMITH, Missouri HAKEEM JEFFRIES, New York DAVID N. CICILLINE, Rhode Island Daniel Flores, Chief Counsel C O N T E N T S ---------- March 26, 2014 Page OPENING STATEMENTS The Honorable Spencer Bachus, a Representative in Congress from the State of Alabama, and Chairman, Subcommittee on Regulatory Reform, Commercial and Antitrust Law........................... 1 The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in Congress from the State of Tennessee, and Ranking Member, Subcommittee on Regulatory Reform, Commercial and Antitrust Law 3 WITNESSES The Honorable Christopher S. Sontchi, United States Bankruptcy Judge for the District of Delaware, Wilmington, DE Oral Testimony................................................. 7 Prepared Statement............................................. 10 Seth Grosshandler, Partner, Cleary Gottlieb Steen & Hamilton LLP, New York, NY Oral Testimony................................................. 31 Prepared Statement............................................. 33 Jane Lee Vris, Partner and General Counsel, Millstein & Co., Washington, DC Oral Testimony................................................. 51 Prepared Statement............................................. 53 Thomas H. Jackson, Distinguished University Professor & President Emeritus, University of Rochester, Rochester, NY Oral Testimony................................................. 94 Prepared Statement............................................. 96 Michelle M. Harner, Professor of Law, Director, Business Law Program, University of Maryland Francis King Carey School of Law, Baltimore, MD Oral Testimony................................................. 129 Prepared Statement............................................. 131 APPENDIX Material Submitted for the Hearing Record Prepared Statement of the Honorable John Conyers, Jr., a Representative in Congress from the State of Michigan, and Ranking Member, Committee on the Judiciary..................... 161 Response to Questions for the Record from the Honorable Christopher S. Sontchi, United States Bankruptcy Judge for the District of Delaware, Wilmington, DE........................... 163 Questions for the Record submitted to Seth Grosshandler, Partner, Cleary Gottlieb Steen & Hamilton LLP, New York, NY............. 171 Response to Questions for the Record from Jane Lee Vris, Partner and General Counsel, Millstein & Co., Washington, DC........... 172 Response to Questions for the Record from Thomas H. Jackson, Distinguished University Professor & President Emeritus, University of Rochester, Rochester, NY......................... 176 Response to Questions for the Record from Michelle M. Harner, Professor of Law, Director, Business Law Program, University of Maryland Francis King Carey School of Law, Baltimore, MD....... 179 EXPLORING CHAPTER 11 REFORM: CORPORATE AND FINANCIAL INSTITUTION INSOLVENCIES; TREATMENT OF DERIVATIVES ---------- WEDNESDAY, MARCH 26, 2014 House of Representatives, Subcommittee on Regulatory Reform, Commercial and Antitrust Law Committee on the Judiciary, Washington, DC. The Subcommittee met, pursuant to call, at 4 p.m., in room 2141, Rayburn Office Building, the Honorable Spencer Bachus (Chairman of the Subcommittee) presiding. Present: Representatives Bachus, Marino, Holding, Collins, Johnson, and Jeffries. Staff present: (Majority) Daniel Flores, Subcommittee Chief Counsel; Anthony Grossi, Counsel; Jaclyn Louis, Legislative Director for Rep. Marino; Jon Nabavi, Legislative Director for Rep. Holding; Jennifer Lackey, Legislative Director for Rep. Collins; Ashley Lewis, Clerk; (Minority) Susan Jensen, Counsel; Norberto Salinas, Counsel; and Slade Bond, Counsel; and Rosalind Jackson, Professional Staff Member. Mr. Bachus. The Subcommittee on Regulatory Reform, Commercial and Antitrust Law hearing will come to order. Without objection, the Chair is authorized to declare recesses of the Committee at any time. I want to welcome our witnesses. This is a little unusual to have a 4 hearing, but we have had other scheduling difficulties, so we apologize. And there may be a vote on the floor starting fairly soon, so I am going to read my opening statement as quick as I can and then recognize the Ranking Member, and then we will go to the introduction of our panelists. And as Chairman of the Financial Services Committee, obviously I had a lot of exposure to these same issues back in 2008, 2009. And it is a very important issue, and I know there was a lot of good work done bringing us to this hearing by the panelists. And it is a real esteemed body of experts that we have here today. An integral component of the American economy is the ability of companies to turn to chapter 11 of the Bankruptcy Code to overcome unexpected financial troubles. These companies may use Chapter 11 to restructure their debt obligations while continuing their business operations, which preserves jobs and increases the value of return to the company's creditors, suppliers, customers, and the American economy. Meanwhile, creditors of companies rely on Chapter 11 to assess the risks associated with their investment and can depend on Chapter 11's transparent judicial process to gain a level of certainty regarding their potential recoveries from a bankrupt business. Chapter 11 has evolved since its inception and has adapted to changing to changing and emerging markets. It may be time for that again. Thirty years ago companies did not have complex capital structures with layers of intertwined debt, nor did a robust derivatives and repurchase agreement market exist. Similarly, the participants in the Chapter 11 process have become increasingly sophisticated. Given the constantly developing law and related practices, it is important that the Committee undertake a periodic review of the application of Chapter 11 and related issues. In part to assist Congress and this Committee's oversight of Chapter 11, the American Bankruptcy Institute has a similar collection of premiere bankruptcy judges, practitioners, professionals, and academics to discuss and debate wide-ranging issues related to Chapter 11. While their process is not complete, it will be helpful to hear from the ABI regarding their review of the issues that have played a central role in the process, and whether there is any emerging consensus on particular issues. We are grateful for the work that ABI has completed today. I look forward to their report at the end of this year. In connection with its ongoing oversight of bankruptcy issues, the Committee recently held a hearing on whether the Bankruptcy Code could be improved to better facilitate the resolution of a financial institution's insolvency. The witnesses at that hearing unanimously agreed that the Bankruptcy Code could be enhanced and reformed to achieve this goal. Today we will continue this discussion by further examining what types of amendments to the Bankruptcy Code and potentially Chapter 11 would assist with an efficient, successful resolution of a financial institution. The bankruptcy process has long been heralded as the primary means of resolving distress companies' insolvencies because of its established history of laws and impartial administration. It is our responsibility to ensure that the Bankruptcy Code has all the tools necessary to address the unique issues presented by financial institutions' insolvency. Today's hearing should assist the Committee in discharging this responsibility. An issue that could impact the ability of the Bankruptcy Code to effectively administer financial institutions' bankruptcy is the nature of existing safe harbors for certain financial contracts. These safe harbors have been expanded over time, and now apply to a wide variety of financial contracts. One of the primary rationales for creating the safe harbors was to prevent contagion of risk in the financial market. Given the recent financial crisis, it would be beneficial to review the existing safe harbors, their effectiveness, and the effect of their continued expansion. Safe harbors have a broad impact on liquidity in the short-term financial markets. And we will be mindful of this impact as we conduct our review. Today's witnesses collectively have decades of experience on these issues, and I look forward to hearing their testimony. At this time, I recognize the Ranking Member, Mr. Hank Johnson of Georgia, for his opening statement. Mr. Johnson. Thank you, Mr. Chairman. Before I begin, I would like to take a moment to acknowledge the tragic landslide that occurred this past weekend in Oslo, Washington--excuse me--Oso, Washington. Oso is the congressional district of Suzan DelBene, our colleague on this Subcommittee. I know that Susan cannot be with us today because she is doing everything back home to help those in need, and we empathize with her and her community. They are going through so much pain and loss. And our thoughts and prayers are with the community of Oso, the brave rescuers and search parties, and also our colleagues from the State of Washington. Now, turning to today's hearing, I would like to thank Chairman Bachus for convening this hearing on such an important topic. This July will mark the 4th year since President Obama signed the Dodd-Frank Act into law to address the financial crisis that nearly brought this country to its knees. Though imperfect, passing the Dodd-Frank Act was a crucial step in resetting our Nation's economic course. It addressed the root cause of the financial crisis by reigning in too big to fill financial institutions on Wall Street that caused immeasurable hardship to so many American families. It is my belief that we could have done more to create financial stability by limiting the size of the largest institutions and holding wrongdoers accountable, both civilly as we have done and also criminally as we have not done. But opportunities remain to safeguard the public through congressional and regulatory oversight. Today, the Subcommittee is exercising its important responsibility of oversight by asking how best to perfect and strengthen the Bankruptcy Code to create soft landings instead of financial crashes. While we may not always agree on matters before this Subcommittee, today's hearing presents an opportunity to forge a bipartisan consensus and cooperation. I hope that this cooperation will guide us to explore the strengths and weaknesses of the Bankruptcy Code in other areas, particularly consumer bankruptcy. Perhaps no other area is as important to most Americans as the exponential growth and crippling effects of the student loan debt that many face. According to the most recent quarterly report by the Federal Reserve Bank of New York, student loan debt has tripled in the last decade, rising to over $1 trillion. In my home State of Georgia, students graduate with an average of $23,089 according to the Institute of College Access and Success. And while more people are defaulting on student loans than any other form of debt, these loans are practically non- dischargeable. Why? Although unsecured debt is typically dischargeable in bankruptcy, the Bankruptcy Code has a specific carve-out that does not exempt student loans unless the debtor is able to demonstrate that continued repayment of the debt would pose an undue hardship on the debtor. This standard is nearly impossible for distressed borrowers to establish. In fact, earlier this month, Reuters reported that in 2007, courts granted some form of relief to only 81 debtors out of the 170,000 student loan debtors who filed for bankruptcy protection in 1 year alone. This ballooning problem is already affecting the housing market. David Stevens, the chief executive of the Mortgage Bankers Association echoed this concern, noting that ``student debt'' trumps all other consumer debt. It is going to have an extraordinarily dampening effect on young people's ability to borrow for a home, and that is going to impact the housing market and the economy at large. The goal of bankruptcy long has been to provide debtors a financial fresh start from burdensome debt. The Supreme Court recognized this principle in the 1934 decisions Local Loan v. Hunt, noting that bankruptcy gives the honest, but unfortunate, debtor a new opportunity in life, and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. This principle applies to businesses and consumers alike. As we work together to improve the Bankruptcy Code, it is imperative that we also look at consumer bankruptcy. I again thank the Chairman for holding this hearing, and I look forward to the testimony from this distinguished panel of witnesses. And I thank you all for coming. Mr. Bachus. Thank you. We have 4 minutes, 54 seconds left on a floor vote. And I am thinking just to keep it in an orderly way, instead of introducing maybe two of our witnesses, I will come back, introduce the entire panel, and then we will have your opening statements, and go from there. So I understand none of you have a time constraint as such, right? So thank you. One interesting thing, and I appreciate the Ranking Member's statement, he mentioned criminalizing some of these things or criminal cases. This Committee has formed a bipartisan group of five Republicans and five Democrats to talk about over-criminalization because we continue to add to the long list of Federal crimes. And many of them are by regulation. We pass something not intending it to be a criminal act, and yet the different departments of the government are interpreting it and turning into criminal acts. And so, we have literally filled our prisons with hundreds of thousands of inmates, and some of them for actually violations of regulations as opposed to laws because of the interpretation, which is something we are going to be looking at in a bipartisan way. And, of course, mandatory sentencing has added to that, so we have to be kind of careful about defining something as a crime if there is no mens rea. And you and I agree on that. Mr. Johnson. We do, and I think we have a discussion coming up about two types of crime. One is legal and the other illegal crime. And the legal crime tends to wear a white collar, and the illegal crime, they tend to wear blue collars. And so, when we can get to the point of rectifying the disparity in the two crimes, then we can start consolidating offenses and working on other problems in our criminal justice system. Particularly, I am interested in the effect that the private prison industry has on our public policy. Mr. Bachus. I did not mean to start this. [Laughter.] Thank you. We will recess this Committee and probably be back in about 35 or 40 minutes. Thank you. [Recess.] Mr. Bachus. The hearing is reconvened, and we appreciate your patience. Our first witness is Judge Sontchi. Judge Sontchi, actually Christopher Sontchi, is a United States bankruptcy judge from the District of Delaware and a frequent speaker in the United States and Canada on issues relating to corporate reorganizations. He was recently appointed to the Committee on Financial Contracts Derivatives and Safe Harbors of the American Bankruptcy Institution's Commission to Study the Reform of Chapter 11. In addition, he is a member of the American Bankruptcy Institute and the National Conference of Bankruptcy Judges. In 2010 and '12, he was selected as outstanding bankruptcy judge by the magazine Turnarounds and Workouts. He recently published Valuation: A Judge's Perspective in the American Bankruptcy Institution's Law Review. Judge Sontchi received a B.A. with distinction in political science from the University of North Carolina at Chapel Hill where he was elected to Phi Beta Kappa. He received his J.D. from the University of Chicago Law School. And I guess you have quit watching the NCAA tournaments, right? Mr. Sontchi. At least we won one more game than Duke. Mr. Bachus. That is right. Duke was out in the very first round. Seth Grosshandler is a partner of Cleary Gottlieb Steen--is it Stein or Steen? Mr. Grosshandler. Steen. Mr. Bachus. Steen, and Hamilton where he has been practicing law for over 30 years. His practice focuses on financial institutions, derivative products, securities transactions, secured transactions, and structured finance. As an instrumental player in the development of the safe harbor provisions of the Bankruptcy Code, the Federal Deposit Insurance Act, and orderly liquidation authority, Mr. Grosshandler is regarded as a preeminent expert on derivatives and security transactions, and as well on the risk to counterparties of regulated financial institutions in the event of their insolvency. During and after the financial crisis, he advised major Wall Street firms, including Bear Stearns, and Lehman Brothers, and various government agencies on market stabilization efforts. Boy, you must have been paid well. Bear Stearns and Lehman Brothers. You had your hands full. Mr. Grosshandler. They are counterparties to Bear Stearns. Mr. Bachus. Oh, they are counterparties. Well, they did pretty well. Mr. Grosshandler. Probably better than representing the debtors. Mr. Bachus. That is right. Thank you. He received his undergraduate degree from Reed College and his J.D. cum laude from Northwestern University. Ms. Jane Vris is general counsel and partner at Millstein & Company. And I did do that right. During her legal career, including as a partner at Wachtell--is that right, Wachtell-- she has advised board special committees, creditors, potential purchasers of assets from distressed companies, and equity investors and companies emerging from Chapter 11. She most recently served as a partner at Vincent & Elkins and was a founding partner of Cronin and Vris. And she is a member of the National Bankruptcy Conference. She has been designated by Chambers USA as one of America's leading lawyers for business, named a New York Super Lawyer by New York Super Lawyers, and is included in the Guide to the World's Leading Insolvency and Restructuring Lawyers by Legal Media Group, and the International Who's Who of Insolvency and Restructuring Lawyers. It is kind of a who's who of insolvency. I am sorry. I am just joking. [Laughter.] She received her B.A. magna cum laude from the University of Pennsylvania and her J.D. from New York University School of Law, where she served as the managing editor of the Law Review. Quite impressive. Professor Thomas H. Jackson is with the William H. Simon School of Business at the University of Rochester. Professor Jackson holds faculty positions in the Simon School of Business and the Department of Political Science at the University of Rochester, where he also served as president from 1994 to 2005. You know, Steve Covey in his book, I do not know if you are aware, he says the job of a college president is the most difficult job in America. Mr. Jackson. [Off audio.] Mr. Bachus. Thank you. Before he became Rochester's ninth president, Mr. Jackson was vice president and provost at the University of Virginia, where he first joined as dean of Virginia's School of Law. Previously he was professor of law at Harvard and served on the faculty at Stanford University. He clerked for U.S. District Judge Marvin Frankel in New York from 1975 to '76, and then for Supreme Court Justice and later Chief Justice William Rehnquist from 1976 to 1977. Professor Jackson is the author of bankruptcy and commercial law texts used in law schools across the country, and served as special master for the U.S. Supreme Court in a dispute involving every State in the country over the disposition of unclaimed dividends held by brokerage houses. He received his B.A. from Williams College and his J.D. from Yale Law School. Welcome to you. Professor Michelle Harner is a professor at University of Maryland Francis King Carey School of Law. She teaches courses in bankruptcy and creditors' rights, business associations, business planning, and professional responsibility at the University of Maryland School of Law. Prior to joining the University of Maryland, Professor Harner served as Assistant Professor of Law at the University of Nebraska, and was voted professor of the year by her students during the 2006 and 2008 academic years. That is quite an honor. Professor Harner is widely published and lectures frequently on corporate governance, financially distressed entities, and related legal issues. Professor currently is serving as the reporter to the ABI Commission to study the reform of Chapter 11. She previously was in private practice in the business restructuring insolvency bankruptcy and related transactional fields. Most recently as a partner of the Chicago office of the International Law Firm Jones Day. Professor Harner is a member of a number of professional organizations, including the American Law Institute, American Bankruptcy Institute, the American Bar Association, and the International Association of Restructuring, Insolvency, and Bankruptcy Professors. Professor Harner received her B.A. from Boston College and her J.D. from Moritz College of Law at Ohio State University. All right. That is a very impressive group of witnesses. Did you want to ask them whether they had ever represented the Koch brothers? Mr. Johnson. The Koch Brothers? Mr. Bachus. Koch Brothers, that is right. Mr. Johnson. Have any of you ever represented the Koch Brothers before? Voice. No, sir. Mr. Johnson. All right. Mr. Bachus. We are in good shape. Mr. Johnson. How about Sheldon Adelman? Mr. Bachus. No, we will get that out of the way. You only have one. [Laughter.] I do not know about that. The Koch Brothers, his opening statement normally contains some reference to them, and you did not work that into the statement. Mr. Johnson. Well, I did not want any of that Koch Brothers money coming into my reelection campaign. That is the situation. Mr. Bachus. But you got legal crimes in there, which is kind of an oxymoron, so that is a new one. Pretty good. Each of our witnesses' written statements will be entered into the record in its entirety. I ask each of the witnesses to summarize his or her testimony. Actually, we are not going to hold you to 5 minutes. If you go 6 or 7 minutes, that is fine. This is something they tell me to read every time about quitting and everything, but we are just going to go with that. Now, I will recognize the witnesses to their testimony. And, Judge, we will start with you. TESTIMONY OF THE HONORABLE CHRISTOPHER S. SONTCHI, UNITED STATES BANKRUPTCY JUDGE FOR THE DISTRICT OF DELAWARE, WILMINGTON, DE Judge Sontchi. Thank you. Chairman Bachus, Ranking Member Johnson, and Members of the Committee, thank you for inviting me to testify today. My name is Christopher Sontchi. I am a bankruptcy judge in the District of Delaware, and I have presided over a number of cases and issued numerous opinions involving the safe harbors for financial contracts, derivatives, and repurchase agreements. Most notably, I presided over the American Home Mortgage case. At the time of its filing in 2007, American Home Mortgage was the 10th largest home mortgage originator in the country, and as part of its origination and securitization business, the company was a party to numerous repurchase agreements involving billions of dollars. As you also stated, I have had the honor of serving as a Member of the Committee on Financial Contracts, Derivatives, and Safe Harbors of the American Bankruptcy Institute's Commission to Study the Reform of Chapter 11. Today I would like to discuss two important issues related to the safe harbors. First, I believe Congress should amend Section 546(e) of the Bankruptcy Code to significantly narrow its scope. Section 546(e) exempts from avoidance as preferences or fraudulent conveyance settlement payments. I believe Congress' intent was to insulate the securities transfer system. Security industry transferees are generally not the beneficial owners of the subject transactions, but rather are the conduits. Subjecting the conduits to avoidance actions could trigger a series of unintended and disastrous defaults in the interconnected securities markets. As written and applied, however, the Section 546(e) safe harbor has insulated settlement payments to the ultimate beneficiaries of leveraged buyouts and other transactions, even if the securities were privately issued. Absent the safe harbors, these payments often made to directors, officers, and other insiders that led the company into bankruptcy in the first place would be potentially voidable as fraudulent or preferential transfers. The safe harbor of Section 546(e) should protect the securities transfer system, but not settlement payments or other transfers with respect to the beneficial owners of privately placed debtor equity securities. And with regard to publicly-traded securities, Section 546(e) should only protect transfers to the beneficial owners of public securities that have acted in good faith. I have and continue to be faced with a flurry of motions to dismiss and for summary judgment filed by insiders of bankrupt companies seeking shelter from liability through the 546(e) safe harbor. The secret is out, and defense attorneys are seeking to take advantage of the almost too good to be true safe harbor to the fullest extent possible. And I respectfully urge Congress to act quickly to close this unintended loophole in the safe harbor for the securities transfer system. The second subject I would like to discuss is more controversial. What is the proper scope of the safe harbor's governing mortgage repurchase agreements? I respectfully urge Congress to remove mortgages and interests in mortgages from the safe harbors relating to repurchase agreements and securities contracts. The genesis of my request is my experience in the American Home Mortgage bankruptcy case. One of the primary arguments offered in favor of the safe harbors is that it is important for assets subject to the safe harbors to remain liquid. The argument is that without the liquidity supplied by the safe harbors, the cost of lending would increase, and in the event of default, there could be a cascading series of defaults that might spread to the repo counterparty lender and parties to other agreements with the repo counterparty. It became quickly apparent to me during American Home that mortgages and interests in mortgages are not liquid assets. In fact, it can take several months to complete the sale of one bundle of mortgages. The reality is that the counterparties to repurchase agreements, i.e., the lenders, are not interested as much in preserving the liquidity of their investment in the mortgages originated by a debtor as they are in owning what would otherwise be property of the estate and the lender's collateral. The business of originating mortgages requires access to a large amount of capital. Traditionally, a mortgage lender would borrow the money necessary to originate mortgage loans through a warehouse secured line of credit or loan. In the event of a bankruptcy by the mortgage lender, the mortgage loans would become property of the bankruptcy estate. The automatic stay would prevent the warehouse lender from taking control of the mortgage loans. And the warehouse lender would both have a secured claim against the estate, collateralized by those loans, and be entitled, for example, to adequate protection. But as part of BAPCPA, Congress expanded the definition of ``repurchase agreement'' to include mortgages. And since then, the bulk of lending to mortgage originators has been through repurchase agreements. The repurchase agreements and warehouse secured loans are really identical in all aspects for the most part, other than in a repo the mortgage belongs to the repo counterparty lender rather than to the mortgage lender. In the event of a default or a bankruptcy by a mortgage lender, the repo counterparty has a right to declare a default and require the mortgage lender to immediately repurchase the mortgage. And in the event the mortgage lender cannot do so, which is normal, the repo counterparty would obtain permanent ownership of the loan and be able to sell it directly to investors, a securitization trust, or keep the repo. In my experience, that is what the repo counterparty is interested in doing. Rather than preserving liquidity by selling the mortgage, it is likely to hold the loans for later disposition, especially in a crisis such as 2007 through 2009 where the value of the mortgage was low. The safe harbors allow the repo counterparty, rather than the debtor, to hold the mortgage and obtain the upside of any increase in value. As applied to mortgages, the safe harbors allow for the repo counterparty to grab what otherwise would be its collateral, and prevent the mortgage lender debtor from maximizing the value of those loans for the benefit of the estate. This is contrary to the treatment of secured loans in bankruptcy and turns the Code on its head. The economic reality is that a mortgage lender, such as American Home Mortgage, can be stripped of its assets in days or even hours, leaving no ongoing business, and denying its creditors in general of the value of its assets, i.e., its mortgage loans. And while these safe harbors may make sense in the context of assets that are actually liquid, such as U.S. treasuries, they do not in the context of an illiquid assets, such as mortgages. Based on my experience, I respectfully urge Congress to consider removing mortgages and interests in mortgages from the definition of repurchase agreement, as well as the definition of securities contract. And thank you again very much for asking me to testify on these important issues. I am more than happy to answer any questions you might have. [The prepared statement of Judge Sontchi follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] __________ Mr. Bachus. Thank you. Mr. Grosshandler? TESTIMONY OF SETH GROSSHANDLER, PARTNER, CLEARY GOTTLIEB STEEN & HAMILTON LLP, NEW YORK, NY Mr. Grosshandler. Thank you, Chairman Bachus. Thank you for having me here. You have my written testimony. I am not going to repeat what is in there. The only reference to the written testimony I want to make is to thank my colleagues Knox McIlwain and Timmy Coldorovo who put it together in such short order. I was the co-chair with Judge Peck of the Lehman bankruptcy of the ABI Safe Harbors Committee that Judge Sontchi was on as well. And we started that a few years ago, and we were given by the ABI commissioners several pages of topics to cover. We could not get to them all. This is a very, very complicated topic, the safe harbors, the treatment of financial contracts in bankruptcy. Part of that has to do with there are lots of different players involved, and you may have different answers depending on who the players are, so you have systemically important financial institutions. You have hedge funds. You have industrial companies. You have individuals on the debtor side. It may depend on who the creditor is. Is the creditor a securities clearing agency, like DTC, or is it a non-dealer party? And there are different policy considerations depending on who you are talking about on the debtor and on the creditor side. Although we had many disagreements among the committee members, there were several things we agreed on. First of all, really complicated. Could not get it all done in the time we had. And then, the safe harbors do derogate from the general principles of the Bankruptcy Code, and that needs to be justified, right? And the justification, and different people on the committee disagreed as to what was and was not justified under these standards. But I think that the basic standards were agreed to, which is the safe harbors, if they promote stability and liquidity, that those are things that might justify derogating from the usual rules of the Bankruptcy Code. I think people generally agreed that the derivatives, creditors, and repo creditors, at least some of them, maybe not the whole loan repo creditors. I disagree with Judge Sontchi on that, but we can talk about that if you would like. But that some of the risks they face are different from other creditors under the Bankruptcy Code, and, therefore, at least some of the safe harbors were justified under those standards. The safe harbors also underpin very important markets. The derivatives market, the repo market, they might not cease to exist if you got rid of the safe harbors, but they would certainly shrink a lot. And is that good or bad depends on a lot of things. And one of the problems with just getting rid of the safe harbors is it is a very blunt instrument because it would basically mean everybody is not safe harbored as opposed to, for instance, regulatory change. So if you look at short-term funding transactions, like repos, the Federal Reserve Board is all over it, in terms of greater liquidity requirements, capital requirements, that sort of thing, to give a disincentive to over reliance on those kinds of transactions, whereas just getting rid of a safe harbor under the Bankruptcy Code, again, would be a very blunt instrument. I think an interesting example is insurance insolvency, not the subject of this Committee. It is State law. Insurance insolvency is governed by State law. Little known to most people because why would they be focusing on this, but in the past 5 years, at least 10 States have enacted new safe harbors for insurance company insolvency for derivatives and repos. We are up to about 20, 22 now. But the bulk of that has happened since the financial crisis. Why? It is the insurance companies, the users of those products that wanted the safe harbors to have access to those markets because Wall Street was unwilling to give them access or limited access because of the risk. So this is not only about protecting Wall Street. It is also end users like insurance companies who want the safe harbors. All that being said, there are clearly issues with everybody liquidating all at once. You want to avoid that if you can. In Lehman, I think that that actually helped prevent more contagion. If all the creditors had been stayed from exercising their rights, there would have been a lot of problems. But the liquidations caused their own problems, of course. So I think mechanisms that achieve continuity--Chapter 14, the Federal Deposit Insurance Act, single point of entry--all of these designed to avoid close out and are very, very good things. The key to them working from a creditor perspective is that there is somebody who is creditworthy who is able to continue the performance, and that is not only balance sheet creditworthiness. It is liquidity, liquidity to be able to perform. And then the final thing I would say is to the extent that Congress believes that changes to the fundamental safe harbor provisions are necessary, we need to be very careful. It is really complicated. There are a lot of international aspects to this. There are safe harbors around the world, capital implications for financial institutions. And the final thing is on the committee we dealt with a number of issues, the really hard issues like the scope of the repo exemption. There was a lot of division. There were several other issues that we picked first because it was so-called low hanging fruit where there was actually a lot of agreement about changes that would make the safe harbors better for America. Thank you. [The prepared statement of Mr. Grosshandler follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] __________ Mr. Bachus. Thank you. Ms. Vris? TESTIMONY OF JANE LEE VRIS, PARTNER AND GENERAL COUNSEL, MILLSTEIN & CO., WASHINGTON, DC Ms. Vris. Thank you. Thank you, Chairman Bachus---- Mr. Bachus. Maybe pull that mike a little closer. It will actually put less of a strain on---- Ms. Vris. There we go. Is that better? Mr. Bachus. Yes, there you go. Ms. Vris. Okay, great. Thank you, and thank you, Ranking Member Johnson, as well for this opportunity to speak on behalf of the National Bankruptcy Conference. I am the chair of the Capital Markets Committee there, and I am submitting for our testimony today position papers and proposed changes to the Bankruptcy Code that the conference has previously prepared. And these topics cover both safe harbors for, let us call them, the qualified financial contracts. By that I mean the derivatives, the swaps, the repos that you have been hearing about, as well as some form of bankruptcy proposal for treatment of SIFIs, the systemically important financial institutions. So in a sense, I sort of appropriately sit in the middle here because I am dealing both with the QFCs and safe harbors, as well as the Chapter 14 topic that I think you are going to be hearing more about. I will start with the SIFIs. We recognize in the conference that SIFIs face extraordinary challenges in bankruptcy. Ordinarily the mission in bankruptcy, and I think the Bankruptcy Code does a good job of this, is to preserve asset value for the benefit of all of the constituents. The automatic stay is a key component of that protection. It protects the debtor's assets from actions of creditors that would otherwise allow them to get at the assets, favor the first to act creditors, and leave less value behind for the other creditors. When a SIFI files, we are concerned that to some extent the reverse happens, that the filing itself can trigger a loss of asset value to the detriment of all parties concerned. I think it is important to think for a moment what we mean when we say ``when a SIFI files.'' By that I mean a parent holding company whose assets are the equity in operating subsidiaries, institutions like banks, insurance companies, broker dealers. So it is the parent that we are focusing on when we talk about bankruptcy solutions, including, I think you will hear, for Chapter 14 type solutions. The parent when it files has its assets protected by the automatic stay, but the operating subsidiaries do not have the benefit of the same protection. First, many of them are not eligible to file. Insurance companies, banks, they cannot file for bankruptcy under any chapter. Some subsidiaries can file, but only liquidation, and one conducted by a trustee, which is not really conducive to maximizing asset value for anybody. So for these reasons when the parent files, the regulated subsidiaries may be seized by their regulators, both here in the U.S. and abroad. Even if they are not seized, parties who have deposits with the banks are likely to demand their deposits back, a lack of confidence in the SIFI. And parties who may previously have been extending short-term financing are likely to stop extending that financing to those enterprises. All of this increases the need for liquidity at the subsidiaries at the same time that liquidity is no longer available to those subsidiaries. In these circumstances, value dissipates quickly. We think that the safe harbors for QFCs to some degree contributes to this dynamic. Even at the parent level the counterparties are not bound by the automatic stay. They may seize collateral, as you heard from the judge. They may sell the collateral, and they may terminate contracts. Not only at the parent level, but because the parent often guarantees these qualified financial contracts on behalf of its subsidiaries, when the parent files, because it is a guarantor, that can trigger the rights of the counterparties down at the subsidiaries to also terminate contracts, grab collateral. So as a consequence, when the parent files, there is a ripple effect throughout the entire enterprise that can cause assets to dissipate and also increase the need for the liquidity. We have thought about the ways in which the Bankruptcy Code could be modified to help a SIFI when it files. We support some limited modifications to the safe harbors. We think that would be beneficial. But we do not support the wholesale revocation of those safe harbors. We do recognize the single point of entry, and I think you will hear more about this, framework for a bankruptcy solution for SIFIs. Its chief component is allowing assets to be moved rapidly away from the parent, and to allow new management, and with the help and the input of regulators, to make fundamental decisions about how best to stabilize those subsidiaries away from the battleground that bankruptcy can sometimes be and that the parent will be under. However, even for the single point of entry solution to work, we think there must be a temporary stay of the safe harbors for the qualified financial contracts. And we also believe that the entire enterprise will need access to liquidity of some sort. And so, we think while the Chapter 14 single point of entry is a very positive development in the thinking about how to resolve SIFIs in bankruptcy and the Bankruptcy Code can be amended to incorporate that, we think it also requires some changes to the safe harbors and requires some access to liquidity. On behalf of the National Bankruptcy Conference, again I want to thank you for allowing us to present this testimony today. [The prepared statement of Ms. Vris follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] __________ Mr. Bachus. Professor Jackson? And thank you. TESTIMONY OF THOMAS H. JACKSON, DISTINGUISHED UNIVERSITY PROFESSOR & PRESIDENT EMERITUS, UNIVERSITY OF ROCHESTER, ROCHESTER, NY Mr. Jackson. Chairman Bachus, and Ranking Member Johnson, and other Members of the Subcommittee, thank you for inviting me here this afternoon. And it is an honor to have an opportunity to testify before you on a subject near and dear to my heart, which is bankruptcy law, and specifically the role bankruptcy law can and should play in the best possible resolution of a troubled large financial institution, and how modest, but important, amendments to the Bankruptcy Code can facilitate that outcome. First, what do I mean by the best possible resolution of a troubled financial institution? I mean a resolution process that meets three important tests: first, one that both minimizes losses and places them on appropriate pre-identified parties; second, one that minimizes systemic consequences; third, one that does not result in a government bailout. In reflecting on the 2008-'09 financial crisis, everyone seemed to acknowledge that bankruptcy law should play a major role, but few had confidence that it was up to the task. The Dodd-Frank Act, while placing bankruptcy at the core of a resolution regime, nonetheless created an administrative backstop to it. Bankruptcy's core role in Dodd-Frank is reflected in two places, first in the requirement of resolution plans--living wills--under Title I, which are focused on and tested against a bankruptcy resolution process. It is also reflected in the statutory requirements for implementing an administrative resolution proceeding, the orderly liquidation authority under Title II. Such a resolution proceeding cannot be commenced without a finding that use of bankruptcy law would have serious adverse effects on U.S. financial stability. It is widely acknowledged that bankruptcy is the preferred resolution mechanism. But there is a disconnect between those premises in today's Bankruptcy Code. There is an emerging consensus that the best resolution system, one that meets the three standards I noted above, involves, first, loss bearing capacity known in advance that can be jettisoned in a rapid recapitalization of a financial institution. In the United States, this system is represented by the FDIC's single point of entry proposal for the recapitalization via a bridge company of a SIFI holding company under Title II. Compared to this administrative resolution proposal, the current Bankruptcy Code is, in my view, kind of ``close but no cigar.'' Yes, Chapter 11 of the Bankruptcy Code is increasingly used to effectuate a going concern sale of a business, sometimes rapidly through a pre-packaged plan. But it will struggle to do this in the case of a large financial corporation. The essence of the recapitalization is, first, leaving behind equity and the loss-absorbing debt, presumably long-term, unsecured debt, to bear the losses. And second, the transfer of everything else--assets, liabilities, rights, and subsidiaries--to a bridge company that because of the stripping off the loss-absorbing debt is presumably both solvent and in a position to deal with the needs of its subsidiaries. And this must be done with great speed so as to restore market confidence without a contagion-producing run. Yet because of the exemption of qualified financial contracts from most bankruptcy's provisions, including the automatic stay, and because of the lack of clear statutory language permitting the assignment of liabilities or the override of cross defaults or change of control provisions, the current Bankruptcy Code cannot provide the necessary assurance of a rapid recapitalization. This will lead, in my view, either to ineffective resolution plans and/or the reality that Title II will, contrary to desires, become the default resolution mechanism. In my view, amending bankruptcy law is the solution. Doing so can harmonize resolution plans with what currently is perceived to be the best way to deal with a troubled large financial institution, and those fixes can assure that Title II of Dodd-Frank becomes, in fact, a process of last resort to deal with emergencies that we are simply not able to foretell. What is required? In addition to specified loss absorbency capacity known in advance, and that I understand the Federal Reserve Board is working on, it requires explicit statutory authorization for a rapid transfer of the holding company's assets, liabilities, rights, and subsidiaries, minus the loss absorbing debt and equity to a bridge institution, and stays and overrides of certain provisions to enable that to happen. In my written statement, in a proposed Subchapter 5 to Chapter 11, and there are other proposals that are called Chapter 14 that are referenced in it as well, goes into detail as to how to accomplish this. And while the details are many, the concept is simple. Through modest amendments to the Bankruptcy Code it indeed can become the primary resolution vehicle for large financial institutions as envisioned by the Dodd-Frank Act. And because it is a judicial proceeding, bankruptcy places primacy on the rule of law, on market-based solutions rather than agency control, and on a process that is fair and known in advance, indeed planned for via resolution plans. I urge that you consider amending the Bankruptcy Code along these lines. Again, I want to thank the Subcommittee for allowing me this opportunity to present my views. I would, of course, be delighted to answer any questions you may have. [The prepared statement of Mr. Jackson follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] __________ Mr. Bachus. Thank you very much, Professor Jackson. Professor Harner? TESTIMONY OF MICHELLE M. HARNER, PROFESSOR OF LAW, DIRECTOR, BUSINESS LAW PROGRAM, UNIVERSITY OF MARYLAND FRANCIS KING CAREY SCHOOL OF LAW, BALTIMORE, MD Ms. Harner. Thank you. Chairman Bachus, Ranking Member Johnson, and Members of the Subcommittee, thank you for the opportunity to testify today. I am honored to appear before you. My research at the University of Maryland Francis King Carey School of Law focuses on corporate governance and financial distress, so I am very familiar with the topic of today's hearing. I want to note, however, that I am testifying in my capacity as reporter to the ABI Commission to Study the Reform of Chapter 11. My comments are on behalf of the commission and not my personal capacity. The commission was formed in 2012 to study the utility of the Bankruptcy Code. The commission comprises 20 of the Nation's leading practitioners, judges, and academics, and it was constituted by the American Bankruptcy Institute, the largest multidisciplinary, non-partisan organization dedicated to research and education on matters related to insolvency. My testimony will summarize the potential need for Chapter 11 reform, the commission study process, and certain testimony and research received by the commission. The Bankruptcy Code has served us well for many years. Nevertheless, today's financial markets, credit and derivative products, and corporate structures are very different than what existed in 1978 when the Bankruptcy Code was enacted. Companies' capital structures are more complex and rely more heavily on leverage. Their asset values are driven less by hard assets and more by services, contracts, and intangibles. And both their internal business structures and their external business models are more global. In addition, claims trading and derivative products have changed the composition of creditor classes. These developments are not necessarily unwelcome or unhealthy, but the Bankruptcy Code was not designed to rehabilitate companies in this environment. Moreover, anecdotal evidence suggests that Chapter 11 has become too expensive, particularly for small and middle market companies, and is no longer achieving certain policy objectives, such as stimulating economic growth, preserving jobs and tax bases, and helping to rehabilitate viable companies. The commission study process was designed to explore the new environment in which financially distressed companies operate, and to determine what is and is not working as effectively as possible. Notably, the commission study process has involved over 250 individuals who work in or are affected by business insolvency. These individuals are serving as commissioners or advisory committee members or have testified as hearing witnesses. The commission has been actively engaged in the study process since January of 2012. It has received detailed research reports from its advisory committees on 12 broadly defined areas of Chapter 11 practice, such as governance, finance, financial contracts and derivatives, sales, and plans. It also has received a comparative analysis of many of these issues from an international working group representing over 12 different countries. The commission is currently reviewing this impressive body of work. In addition, the commission has held 16 public field hearings in 11 different cities. The testimony at each of these hearings has been substantively rich and diverse and has covered a variety of topics. Several common themes have emerged from the field hearings, including an acknowledgment that Chapter 11 cases have changed over time, that Chapter 11 may no longer work effectively for small and middle market companies, that the safe harbors for financial contracts and derivatives have in some respects been extended beyond the original intent of that legislation, and that despite some issues, Chapter 11 continues to be an important restructuring tool for U.S. companies. The commission's study process is winding down, and the commission is beginning its deliberations. It currently anticipates producing a preliminary report in December of this year. Although the commission does not yet know what it ultimately will recommend, it is guided by its mission statement to study and propose reforms to Chapter 11 and related statutory provisions that will better balance the goals of effectuating the effective reorganization of business debtors with the attendant preservation and expansion of jobs, and the maximization and realization of asset values for all creditors and stakeholders. Again, I want to thank the Subcommittee for this opportunity to testify, and I, of course, am happy to answer any questions. [The prepared statement of Ms. Harner follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] __________ Mr. Bachus. Thank you very much. At this time, with consent of Mr. Marino, we are going to Congressman Collins first. Is that right? Mr. Collins. Thank you, Mr. Chairman. I do appreciate my dear friend, Congressman Marino, for allowing me to go here. Professor Jackson, in looking---- Mr. Bachus. He has been in the back listening on TV, so he is---- Mr. Collins. You all make great television stars. You all ought to think about this. You look good back there. Mr. Bachus. And they are wondering, this guy shows up and he starts asking questions, and he has not heard a thing. Mr. Collins. Yes, I have heard every bit of it back there. It is great. But again, Professor Jackson, your testimony indicates, and also your written statement, that transparency, certainty, judicial oversight of the bankruptcy process make it the preferred method for resolution of a financial firm. I just have a question. Could those same attributes make bankruptcy the ideal process for the resolution of Fannie and Freddie? Mr. Jackson. I am not an expert on the details of Fannie and Freddie, but in general it seems to me the structure of bankruptcy law, with well-defined rules about how you deal with assets and liabilities and priorities, a huge body of judicial law and judicial review of the processes, in my view, generally makes it the preferred resolution mechanism for almost any institution. That does not mean that there will not be perturbations to a system if a Fannie or Freddie went into a bankruptcy proceeding, but bankruptcy is pretty good at knowing how to deal with this. Trust assets will be set aside, priorities will be determined by the kind of priorities that they should have had. So as I said at the start, I am a big fan of bankruptcy law because I think it, in general, we have decades of decision making under it. We have strict priority rules. We have a judicial process that I think is pretty free from political pressure most of the time, that does a wonderful job of adhering to the rule of law. Mr. Collins. Okay. And I think that is the interesting, you know, process here of amending the Bankruptcy Code because it does have the history, for not only Fannie and Freddie, but also large and middle-sized banks as well. Would that follow along that same pattern of your answer? Mr. Jackson. Yes. When you are talking about depository banks, they are historically done under the Federal Deposit Insurance Corporation, but there is an actual feature of depository banks that makes them distinguishable from other kinds of even financial institutions. The Federal Government is, in fact, the residual owner of these institutions almost anyway because of the deposit insurance guarantees. So it is really their own institution that they are resolving at the end of the day, and that is very different from all other financial institutions. Mr. Collins. I am very glad you all are here. Just on the question line now, Professor Jackson, doing that, especially with Fannie and Freddie, I am looking at derivatives, the bigger issues that we have here, whether stockholder equity and enterprise is meeting its financial obligations to creditors, but it needs to be restructured or, you know, put into a run- off. This is where the bankruptcy if we amend it would probably work in situations like that given its history, given its structure. Would that be a fair statement? Mr. Jackson. That would be a fair statement. Again, what bankruptcy would do is impose losses first on the shareholders, on the equity. And then if any company was, in fact, insolvent, it would impose those losses on the lower tiered debt in the first instance. For example, in the SIFI process, the stripped off long-term debt that is left behind will be the group that bears losses in case the entity is insolvent so that you have to go deeper than wiping the equity out. But all of that is firmly established by priority rules in the Bankruptcy Code, which is one of the reasons I am such a fan of it. Mr. Collins. Okay. And a final part here just is looking at this and continuing on this sort of theme that we have developed here. And after this, if anybody else would like to jump in on this question. I see that bobble head going. Financial obligations. Are Fannie and Freddie right now meeting the financial obligations to creditors? If we did have a process like this, you know, should a bankruptcy filing leaves derivatives contracts and other financing arrangements in place? Would that be something that could be done through this? Mr. Jackson. Well, again, leaving them in place requires something like what I have been talking about with the single point of entry. It requires you to transfer everything to a new entity. Mr. Collins. Right. Mr. Jackson. Currently under the Bankruptcy Code if you did not have a stay to allow that continuation process to occur, and the others who were talking about the qualified financial contracts, under the Bankruptcy Code, those people can run. So you do need amendments to the Bankruptcy Code to at least allow you to transfer these to an entity where everything could stay in place. Mr. Collins. Go ahead. Mr. Grosshandler. Yes. I agree with everything Professor Jackson said, but I wanted to put one important point, extra point, which is Fannie and Freddie, of course, issue guaranteed securities, right? Mr. Collins. Right. Mr. Grosshandler. And those securities consist of the holder has a right to the payments on the mortgage loans that they are holding in trust, plus the Fannie and Freddie guarantee. What is going to happen to that guarantee in the bankruptcy? And the usual Bankruptcy Code rule is there is a long time to determine what happens to that guarantee in bankruptcy. It is a contingent claim. You do not know whether those mortgages are going to default or not, whether you need to draw on it. And it is very complicated. I think that kind of extended uncertainty in a regular bankruptcy proceeding would make the value of those securities tank. Mr. Collins. Well, even though this is the late hour and all, this is something that needs to be looked at, I think, as we look at the vast derivatives and other things that need to be looked at possibly in the structure bankruptcy. And I thank you, and I do thank my colleagues for allowing to question. And I hope you all have a wonderful evening. Thank you. Mr. Bachus. I thank the gentleman. Now, Ranking Member Johnson is recognized. Mr. Johnson. Thank you, Mr. Chairman. To be clear, Title II of Dodd-Frank is only triggered by the determination of the Treasury Secretary that a non-bank financial institution is systemically important. Could an entity like Lehman Brothers, whose impending failure puts the financial marketplace into a free fall and freezes the lending market? Is that enough to trigger a Title II orderly liquidation? Mr. Jackson. Everybody can jump in on this. I think actually Title II designed precisely for an entity such as Lehman. I mean, if you look at when Dodd-Frank was being enacted, Lehman was the elephant in the room because of the Lehman bankruptcy, and a sense that Lehman had done zero pre- bankruptcy planning. And so, I think a lot of effort that went into Dodd-Frank and Title II was trying to design a process that could, in fact, happen for Lehman. So, yes, I would assume that the Treasury and the Fed and the FDIC would conclude that Lehman was a systemically important financial institution for purposes of triggering Title II. Mr. Grosshandler. I think that is right certainly if Title II was in effect in 2008. Today the question would be, because the standard is would there be severe and adverse effects on the economy if there were not a Bankruptcy Code proceeding. If, in fact, the Bankruptcy Code were changed along the lines of Chapter 14, et cetera, in fact, and given the resolution planning that is happening, it might be that Lehman today or tomorrow, assuming changes to the Bankruptcy Code, would not require the Title II intervention. Mr. Jackson. I think that is completely correct. I was playing with the world that exists today where I think you have a disconnect between the desire of the Dodd-Frank Act, which is bankruptcy takes primacy. You cannot trigger a Title II proceeding until you have found the bankruptcy is not up to the task. And the reality is, which is because have not changed bankruptcy law, I think today if a Lehman Brothers was to fail, it is almost inevitable that the trigger would be pulled on Title II The proposals I have talked about today, it seems to me, are explicitly designed to reduce almost to the vanishing point the need to implement Title II, and instead use a judicially- based proceeding in bankruptcy. So that I believe if you went in the direction I talked about today with a Chapter 14 or Chapter 5 of Chapter 11, you today would use bankruptcy and not Title II for Lehman Brothers. Mr. Johnson. Well, Professor Jackson, it is clear that you believe that the judicial system would be better equipped to deal with the resolution of a SIFI as opposed to a regulatory body. Can I ask each of you what you think---- Mr. Bachus. But he is saying with the changes that he has proposed. Mr. Johnson. Yes. Yes. But what Professor Jackson is saying is that we need to do this judicially as opposed to administratively. And I would like to get the other witnesses' opinions on that. Judge Sontchi. Well, I think that---- Mr. Johnson. And I would also point out the case of GM bankruptcy and the government money that went into that. And, of course, Professor Jackson, you do not want any bailouts, any government bailouts. And so, how can you restructure a company like GM in a bankruptcy proceeding without public dollars? So in light of that, what is the best way to deal with this? Mr. Jackson. Do you want me to take that one on, and I think the other question went to the other people at the table. The difference between General Motors, I think, and what we are talking about here is I am explicitly talking about a system in which there is loss absorbency built into the financial structure so that what you do in the financial institution case, it is like a bail-in. You strip the debt out, leave it behind in the bad company, and you start out with a new company that is solvent again. That option was not really available at the time of General Motors, nor was it available at the time of the 2008-2009 financial crisis for other institutions. The beauty of this, and it does require regulatory requirements that there is loss absorbency capacity built into the system, is that by doing that, you get away from what I think is the Hobson's choice that they faced in 2008-2009, which is either allow the financial system to crater or to bail them out. And what this does is I think it allows you to get away from that Hobson's choice. It is a very different thing because the financial institutions have a different sort of structure and importance than a General Motors so that I am not really talking now about what you do with corporate reorganization. Mr. Johnson. I understand. I understand. Could I, Mr. Chairman? Mr. Bachus. You want to---- Mr. Johnson. Yes, if the others could respond. Mr. Bachus. That is all right. Mr. Johnson. Thank you. Ms. Harner. Certainly. Thank you, Ranking Member Johnson, for that question. So first, I will say in my personal capacity, I, like Professor Jackson, am a true believer in the bankruptcy system. I think the transparency, the due process, the certainty and the judicial oversight hold tremendous value when you are trying to restructure any company, including SIFIs and companies like GM. Do we need to change the Bankruptcy Code to accommodate those types of companies? Yes, I think we do. Now, from the commission's perspective, we have not made any determinations about the type of issues Professor Jackson or you, sir, have raised, but we are looking at them. In fact, we have asked the Subcommittee that Judge Sontchi and Mr. Grosshandler are on to help us consider ways to handle issues that come up in a Chapter 14 and SIFI type situation. I also will just point out that one of the themes we are hearing continuously is that a one-size-fits-all approach in bankruptcy may not be the most effective or best approach. So we may be considering ways to think differently about very large corporations, very small corporations, and then what constitutes the majority of U.S. companies and U.S. debtors, the small middle market companies. Judge Sontchi. If I may very quickly. First of all, it is nice to hear everybody trusts the bankruptcy system. [Laughter.] I do not know if we deserve it, but I will take it. Mr. Grosshandler. You may hear a little dissent. Judge Sontchi. I think one of the primary problems is time is your enemy. Time is your enemy in almost every Chapter 11. But when you are talking about these SIFIs, you are talking about trying to close out billions dollars in very short order, time becomes a very difficult thing to deal with. And what the bankruptcy court gives you is transparency. It gives you due process, but it takes time. So the difficult balance in trying to figure out how you can handle a SIFI in a bankruptcy process I think has a lot to do with the balance of due process, which takes time, and the need, the real economic need, to move very, very quickly. We actually do this every day. Every Chapter 11 case I have, when you have an operating business under court supervision, time is critical. And we are required to, and I think we do a pretty good job, of balancing the issue about due process with the emergent nature of the case. And why I say that is because you will hear that a regulatory position or a regulatory answer might be better for it because things can happen more quickly because we cannot wait around for a court to get around to doing things. And I would counter that, yes, there is a tension there. There is no question. But I think the bankruptcy system does a pretty good job of handling that on a day-to-day basis in all our cases. And I think it would be a challenge, but I think we would be more likely than not to handle it in a SIFI type situation that we are talking about. Ms. Vris. I think that the bankruptcy judges are very good at some tasks and some missions, and that the regulators are better for other tasks and other missions. I think if we are talking about a claims dispute process resolving disputes, I think the bankruptcy judges are better for that. I think if we are talking about a planned process or valuation, I think the bankruptcy judges are better suited for that. I think if we say for resolution of SIFIs we are broadening the mission and we want to also try and safeguard the disruptive effect on our entire financial system and the economy of the country, I think that is a lot to put on the shoulders of our bankruptcy judges, as wonderful as they are. In Lehman, Judge Peck had an extraordinarily short period of time to decide whether or not to approve the sale of the broker dealer to Barclays. He did an admirable job. Everybody and their brother objected. He had, as I said, very little time. And ultimately he made a decision, which I think most people would say was the right decision, notwithstanding that people later tried to upset that decision. But I do not think that is really what we should ask of the bankruptcy courts if, as I say, our mission with the SIFIs is to look at the broader effect on the economy as a whole, and to do so quickly. But I would also note that I think with any of the sort of Chapter 14 or bridgeco solutions that we are thinking of, those require extraordinarily fast action at the beginning of the case. Twenty-four hours, 48 hours. If you are anywhere in that kind of timeframe, it is very hard, as the judge has said, for the judges to really provide due process and make all the decisions they will be asked to make in that process. So I think that it is hard to ask the judges to make too many concrete decisions for approving the transfer of assets and certain liabilities to bridgeco. I do want to address your GM question, but if you will allow me, I will speak instead to Chrysler since I was involved in that. I represented the equity there, so I can speak more from personal knowledge. I think it was the same situation in the sense that there was no one else who would have provided the liquidity that was needed. There was testimony presented that Chrysler needed $100 million a month just to keep the lights on, and there was no one who was willing to do that. If the government had not stepped in, I think everyone there who had heard that testimony would agree the company would have to have been shut down, including the people who were objecting to the whole process in Chrysler. They acknowledged that there was no one else there to step in and provide that liquidity. And perhaps a little less optimistically than Professor Jackson, I think we at the conference believe that with a SIFI, they are going to need liquidity, too. I do not think that the single point of entry structure removes the need for liquidity. And so, the question is who provides that liquidity. And, you know, I cannot speak to that today, and I do not know how much would be needed and what the private markets would or would not be willing to do at that point. But some liquidity and access to it will be needed we think. Mr. Johnson. Thank you. Mr. Grosshandler. I agree very much with Judge Sontchi and Ms. Vris. Time is the enemy, and also the bankruptcy courts, I think, are very well situated for sort of the after the fact adjudication of things. But approving that transfer is a lot to put on a bankruptcy judge. And I am just not so wary of the Federal regulators' ability to make those decisions. Mr. Bachus. Thank you. Ms. Vris. I am sorry. Could I just interject briefly? Mr. Bachus. Sure. Ms. Vris. I would just also point out that with the living will process, hopefully regulators will have had access to more information. They will know more about the assets and the liabilities. And even if the living wills are not a perfect blueprint to solve the problem, it is at least a huge head start. Mr. Bachus. Thank you. And what we did, and I think it is good. I mean, instead of just shoehorning everything into 5 minutes, we actually went 15 minutes with this, but I think that is good because we can get into the substance. And so, you can have as long as you want. I mean, 15 minutes. Mr. Marino. I have one issue that I want to zero in on. I was a prosecutor for 18 years, and I was a U.S. attorney, so I am used to the Federal court system. And I actually shared an office with one of the bankruptcy judges because we needed room, and we split things. [Laughter.] So I have heard a lot of war stories. And I am going to ask each of you to respond to this. I am going to ask Professor Harner, would you respond first, and I am going to set up the scenario. Whatever position you take, whether we need to change the Bankruptcy Code particularly concerning safe harbors or not, what impact would the change or not having the change have on our international financial system, particularly dealing with the EU at this point, because my area of expertise-ish concerning finance is international finance. So could you please address that? Ms. Harner. Certainly. Thank you, Congressman, for the question. So I think you raise a key point. Markets are no longer domestic. They certainly are global in nature. And that was one reason the commission felt so strongly about constituting an international working group. And so, we are working with academics and practitioners in the following countries, Austria, Australia, Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, People's Republic of China, South Africa, Spain, and the United Kingdom, to help consider possible reform if the commission would determine it is necessary. And they have been giving us very thoughtful research reports on issues that would integrate and impact the financial markets just as you mentioned. So I think like any change to the Bankruptcy Code, it is a matter of finding that sweet spot, finding the balance where we are not disrupting the financial markets either domestically or globally significantly. But we are actually giving companies an opportunity to rehabilitate. Mr. Marino. Okay. Thank you. Professor Jackson, please? Thank you, Professor Harner. Mr. Jackson. Not particularly my expertise area, but I have a couple of comments on it. Mr. Marino. Please. Mr. Jackson. I think we need to think about doing what we think is right with respect to qualified financial contracts. I think even if you wanted to modify, the world is not going to look like they have been repealed. I think you want to look at what the rest of the world does particularly with, I will go to the large financial institutions, these holding companies and subsidiaries. Lehman had over a thousand different subsidiaries. That is probably too complicated. But the reality is these are global companies, and anything we try to do that is going to work for these, even at the holding company level, is going to require the cooperation of the subsidiaries and the regulators of the subsidiaries to go along. We can solve that domestically, but when we are dealing with foreign subsidies, and if our rules look weird to the foreign regulators, we are going to have a hard time getting them to play by our rules. And so, I think those cross-border issues, particularly at the large financial institutions, is something we need to be very sensitive to. Mr. Marino. Thank you, sir. Ms. Vris? Ms. Vris. I agree with what Professor Jackson said. And the conference believes that any kind of resolution will require discussion between the U.S. and the foreign regulators. They have to have confidence in whatever we are proposing to do. If they do not, then they are going to circle the fences around the assets in their country. This happened in Lehman. It has happened in other cases. And so, cash that is overseas is going to stay there. Those creditors are going to get favored. Mr. Marino. Yes. Ms. Vris. And you have to put it in context. Even with the best of coordination, you may still encounter that in countries. It is a natural instinct of the regulators to want to hold the cash in their own country. But if you do not at least work with them up front, you are going to have no chance at cooperation. Some of our big SIFIs, I think, Lehman did have subsidiaries around the world. I had the pleasure of representing the Central Bank of Germany in that case. But you have to look a little more carefully. Not all foreign subsidiaries are necessarily critical to the long-term survival of some of our SIFIs. So it is a case by case situation. Mr. Marino. Sir. Thank you. Mr. Grosshandler. Yes. I have two basic points to make. The first is, as I had indicated earlier, the safe harbors are an international phenomenon in Europe as well as Asia. Most of the developed countries have safe harbors for financial contracts. And so if one were to get rid of them here or substantially narrow them, that would have competitive issues, all of those sorts of things. Also the single point of entry mechanism, one of the reasons for it is because of the very difficult cross-border issues. So the idea is the holding company goes under, but the operating bank, broker dealer does not, and, therefore, the operating banks and broker dealers overseas do not go under. Great thing if it works. It requires cooperation. At a very technical level, I think it is very important to think about cross-border recognition. So Europe, the European Union, is considering the BRRD, the Banking Recovery and Resolution Directive, which in Article 85 gives local regulators in Europe the ability to recognize U.S. law. So, for instance, if U.S. law, like under Title II overrides defaults and cross-defaults in financial contracts, Article 85 allows recognition of that. There is no comparable vice versa. So if the U.S. wants to recognize a European law, which the BRRD also has that overrides defaults and cross-defaults, it is just basic comity law, which in many courts very, very difficult. It would be wonderful if there were a centralized bankruptcy court kind of mechanism like Chapter 15, which does not apply to many of these contexts because it does not apply to financial institutions, but a Chapter 15 expansion to recognize European law. Mr. Marino. Thank you. Judge? Judge Sontchi. First of all, I think you just found out how incredibly knowledgeable Mr. Grosshandler is about these issues. His encyclopedic knowledge is amazing, and I have a lot of respect for him. I think about it just maybe a little differently. I was at a conference in Vancouver last month, and one of the main issues was corporate groups. What do we do about cases like this where we have holding companies, we have subsidiaries, they may be in different countries? How do we deal with that on a cross-border basis? And the Chapter 15 we have today that covers cross-border cases does not deal with that. So UNCITRAL, which is the UN organization that came up with Chapter 15 in the first place, and the European Union, and people in those entities, are today exploring, and there is a lot of talk about how do we deal with corporate groups on an international level. And I do not know frankly whether anyone in the United States is sort of on board with that discussion. But the discussion is going forward, and I would hope and I think that as that moves forward, I think you are going to start to see an international consensus growing, at least on a procedural way, to deal with some of these issues from a cross-border perspective. Mr. Marino. Thank you all very much. I could talk with you for hours, but I am sure that you folks have important things to do as well. But thank you very much, and I yield back. Mr. Bachus. Thank you. Listening to the testimony, I had written several things down. And the second thing I wrote down was international institutions during the testimony, and then Mr. Marino went into that. I was actually thinking I might want to move that up to number one, and I think this discussion has gotten around it. When we talk about SIFIs, we are talking about international institutions. I am not sure we knew that before 2007, 2008, Members of Congress, but we sure did after that because with AIG, you had a British subsidiary that caused all the problems. The insurance business was fully reserved, so bailout was not of AIG. It was the counterparties, and they were paid 100 cents on the dollar. And that money went through AIG within a matter of hours. It went to the counterparties. Most of those were in Europe. And then many of them then had agreements back with Goldman, had agreed to ensure that. So you had the credit default swaps. So you had money coming in here, going out there, coming back to the United States. And it took literally a year before the public and many Members of Congress knew where the money went. If you are talking SIFI, you could not possibly have a chapter that you used on middle and small or even large companies, and these too big to fail. That is another word for that. And, you know, there is a big debate here whether or not we are going to allow too big to fail or SIFIs significantly. There is tremendous debate on does that give them a preference. Does that give them an advantage? And of course the regulatory agencies are saying, well, we are going to protect them by requiring more capital of them. And then they are saying, well, you know, that makes us less efficient. So there are all these subplots. But sitting here, I believe when it comes to the SIFIs, maybe not the only, but the most rational approach would be a Chapter 16 or whatever, you know, a chapter for this because Chapter 15 is not designed for that. And it is going to be an international agreement because there are some that I have disagreed with that say we do not need financial institutions that big. Well, they are going to exist. They will exist in other countries if they do not exist here. And those are maybe the first choices, but I think they are going to exist. When it comes to them getting in trouble, there is going to have to be an international resolution because if you try to change Title 11 to fit that, then you are going to have smaller companies. You are going to have them structuring different things to fall under safe harbor. And you are going to have all kinds of abuses because, according to the judge, we are already having some market distortions or people designing things to take advantage or to get a preference when that was not what was intended. The second thing I wrote down, and this is sort of reminiscing, but the American Securitization Forum, I asked one of the staffers, I said, that was about 10 years ago. Find out when their first annual conference of the American Securitization Forum was because I spoke at their first conference, and it was 2004. And the reason I went is because Chairman Oxley said, we were sitting around, and the Subcommittee Chair of securities, Chairman Oxley, said, do you want to go and speak. And he said, well, what would I speak about? And he said, CDOs, and CDSs, and mortgage-backed securities. And he said, you know, I do not think I want to go. [Laughter.] And I had read sort of a book like derivatives for idiots. And so, I was able to--what is a credit default swap? I said, well, it is a form of insurance. So that one question got me a trip to Arizona because we were dealing with things that we really did not know what they were. I mean, Members of Congress did not know the difference in a CDS and a CDO and a mortgage- backed. And if you think about it, the Budget Control Act, 1978, a lot of things we now have instruments we did not have then. And 2005 we may have had them, but I am not sure we knew we had them, and we certainly did not know how prevalence they were. And the OTS who regulated Thrift regulating, they were the regulator for the AIG. And they may have been the least qualified, and I do not mean that in a bad sort of way. I will say this. Dodd-Frank, half of it was written in a 2- week period in the Senate. But one thing that we actually in a bipartisan way discussed--Chairman Frank, myself, others--we worked on a living will, Title I. Does everybody agree that is a good thing? And I think that you again, we have talked. I have very little debate since then, and everybody agrees that is a good thing. But we also, and you have talked about this, another thing I wrote down is ``panic/stable economic environment.'' You know, a lot of what works in a stable economic environment in a panic, you know, it is a different environment, much of what was done then. And I, for instance, received a call from Speaker Boehner, who may have been minority leader--no, he was Speaker then--that had I lost my mind because I had said we needed to get warrants from these institutions. And the his staffer called and said he is saying we need to get arrest warrants for these people. [Laughter.] And I was talking about warrants, you know, the money that we loaned them, which was not an arrest warrant. So, you are dealing with Members of Congress who simply on an ordinary day are overwhelmed. But on a day like this, we do not understand. We were listening, and, you know, to varying degrees we understand what we are talking about. But something this complex has got to have your institutions and your groups to tell us what to do. Safe harbor to most of us that have a legal background means shielding from liability. That is usually how we consider it. It shields us, not that it gives a preference to one asset or one creditor or one over another. So we are going to need an awful lot of guidance on these things. And that is what we are going to depend heavily on you for. And I think part of it we may could do this year, but when it comes to the SIFI part, it is going to have to be some international agreement because, you know, a lot of the things that were put in as a safe harbor, the original intent was not to allow some of the things that happened. But I found everything else said has been very helpful to us. And what I think this Congress does best is not when it makes sweeping changes in a crisis, but if you can come to agreement on a few things, it can be done now. Not a reform bill to reform a whole thing, but something to address a few specifics. And we might could actually accomplish that this year. So I am not going to ask any questions. You have answered the question that needed to be asked without anybody asking it. But if any of you want to make final comments, we would love to hear those. Judge Sontchi. Well, Chairman Bachus, what you said at the very end about being able to deal with perhaps discrete items, I would take you back to what I talked about, which is amending Section 546(e) of the Bankruptcy Code. I think that is not a very controversial topic. There are some, you know, bumps about how exactly you treat public shareholders, for example. But I think for the most part it is not controversial. And I think frankly there is an immediate need to deal with that safe harbor because as it is being applied now, and we have really no choice given how it is drafted, there are people who are directors, officers, insiders who are using 546(e) to shield themselves from potential fraudulent conveyance liability in private transactions. Mr. Bachus. And that undermines the people's trust---- Judge Sontchi. I think so. Mr. Bachus [continuing]. When they hear things of that nature. And obviously it is not fair to shareholders. It is not fair to creditors, you know. Anybody else? Ms. Vris. Yes. The conference agrees with that, and, in fact, we did propose some specific statutory changes to, I think, pretty much, in fact, what you are discussing, Judge. And, you know, we would be more than pleased to dust that off and work with your staff on that. Mr. Grosshandler. And the Committee on Safe Harbors, in addition to mostly agreeing on changes to 546(e), and the differences are in some of the details that are very detailed. There were a number of other items where we agreed on things. But when you get to issues of the scope of the repo safe harbor, there was a lot of disagreement, but there was a lot of agreement on a number of things. And I think the process is that the full commission is going to take the committee's recommendations and come out with something. But I would be surprised if they did not take the recommendations that were pretty much unanimous. Ms. Harner. And, Chairman Bachus, I will just add onto that the commission would be more than happy to work with the Subcommittee in any way that would be helpful. And to the extent that there are issues that you would like us to prioritize, certainly let us know. And the safe harbor issues may be a starting point. Mr. Bachus. Well, obviously, Judge, what you said in your testimony was disturbing that that is going on, that there are people that are sort of insulating or looking out for themselves as opposed to the corporation. I personally would rather you make the determination of what is a priority because you know much more than I do on this subject. Now, if it is railroad law, come to me and I will give you some advice, but most of it will be 22 years old. Mr. Johnson. Well, Mr. Chairman, you told me about that railroad case, and I find those country experiences to be inconsistent with your knowledge in this particular area. [Laughter.] And so I am perplexed, but I am also intrigued. And I look forward to our Committee doing some good work in this area. This has been a great panel, and I have learned a lot myself. And I realize that our process often impedes our ability to learn from the private sector, the academic sector, the commercial sectors. And when we can take a few minutes to let ourselves question and try to understand outside of the 5- minute period that many so rigorously adhere to, it gives us a better chance of coming to some sound decision making. So I definitely appreciate you. Mr. Bachus. Let me say this. In a bipartisan way, the Congress was concerned over not following rule of law, you know, not going by an established Bankruptcy Code. What Professor Jackson--I am not saying yes, yes, yes. You know, this is the preferred method. This is rule of law. This is precedent. This is people. There is predictability. There are all these things, the transparency. It is not politics or somewhat insulated, I mean, I think, to a great extent. And you would really be doing, I think, a great service to the American people because if this issue is not resolved, I mean, then there is going to be an outcry from the American people to do things that I think would damage our free market system and our capitalism, and would be damaging to our financial system. What you are saying is people are beginning to think, well, the government owns the banks anyway, which I hope that is not the case. But I can understand exactly what you meant. And so, you would be doing a great service, even if we were able to make a few changes to the things that most all of you agree with. And we would have a much greater likelihood of enacting some law this year. So I think this hearing is adjourned. But I think your testimony has been excellent. The interchange between the panel I think has been most helpful. And where you can reach a reasonable consensus, if you can do that, I think we can do our part. So thank you very much, and this concludes today's hearing. I thank all the witnesses for attending. Without objection, Members will have 5 legislative days to submit additional written questions for the witnesses or additional materials for the record. This hearing is adjourned. Mr. Johnson. Thank you, Mr. Chairman. Voices. Thank you. [Whereupon, at 6:28 p.m., the Subcommittee was adjourned.] A P P E N D I X ---------- Material Submitted for the Hearing Record Prepared Statement of the Honorable John Conyers, Jr., a Representative in Congress from the State of Michigan, and Ranking Member, Committee on the Judiciary This is the second hearing examining whether current law would adequately address the insolvency of a significant financial institution given what we learned from the near collapse of our Nation's economy just five years ago. As we consider this issue, it is critical that we keep in mind exactly what precipitated the Great Recession. Basically, it was the regulatory equivalent of the Wild West. In the absence of any meaningful regulation in the mortgage industry, lenders developed high risk subprime mortgages and used predatory marketing tactics that targeted the most vulnerable by promising them that they could finally share in the Great American Dream of homeownership. This proliferation of irresponsible lending caused home prices to soar even higher, ultimately resulting in a housing bubble. In the absence of any meaningful regulation in the financial marketplace, these risky mortgages were then bundled and sold as investment grade securities to unsuspecting investors, including pension funds and school districts. Once the housing bubble burst, the ensuing 2008 crash stopped the flow of credit and trapped millions of Americans in mortgages they could no longer afford, causing vast waves of foreclosures across the United States, massive unemployment, and international economic upheaval. And, to this day, we are still dealing with the lingering effects of the Great Recession of 2008 in the form of a sluggish national economy, neighborhoods blighted by vast swaths of abandoned homes, and municipalities struggling with reduced revenues. As I noted, this is the second hearing at which this Subcommittee is exploring how the Bankruptcy Code could be improved to deal with systemically significant financial institutions. Indeed, the Committee and Subcommittee combined have held 23 hearings since the last Congress on various anti-regulatory matters and measures that have absolutely no hope of becoming law. But when it comes to examining how the bankruptcy law can better accommodate the needs of consumers and municipalities struggling with financial distress, the Subcommittee has not held a single hearing on any of these critical issues: not during the last Congress and not during the current Congress as of this date. And, these are not frivolous issues. They include, for example:exploring ways to give homeowners who are victims of predatory lending relief from excessive mortgage interest rates and hidden ``gotcha'' penalties; determining how to provide relief to well-meaning students ensnared by profit-driven schools and private educational loan lenders into obligations they will never be able to repay; and conducting a long-overdue examination of the various ways how Chapter 9 of the Bankruptcy Code, which deals with municipal bankruptcies, could be improved. Accordingly, I implore the esteemed Chairman of Subcommittee to focus on these other issues that are more than equally deserving of being considered before the end of the current Congress. Finally, as one who was here during the consideration of the 2005 amendments to the Bankruptcy Code, I can attest that measure illustrates just what happens when special interests control the legislative process. One of the issues that will be addressed at this hearing is whether the expansion in 2005 of the Bankruptcy Code's safe harbors for derivatives--in the aftermath of the Great Recession--may have, in fact, contributed to the Nation's near economic collapse. Over the course of prior hearings, we have learned how these derivative safe harbors not only destroyed billions of dollars of value in the Lehman Brothers bankruptcy case, but how the precipitous collapse of that entity nearly froze the Nation's financial marketplace. As I recall, these safe harbors were included in the 2005 law at the special insistence of the industry, which later was very much traumatized by them. I would hope that this could be at least one area where there may be the potential for bipartisan resolution. In particular, the National Bankruptcy Conference has a number of thoughtful suggestions about how we can restore the original intent of these safe harbors, namely, to protect the stability of the financial marketplace not the bottom lines of private parties. For example, the Conference recommends: closing the financial contract loophole that allows creditors to foreclose collateral consisting of the debtor's operating assets; and limiting recourse for settlement payments that otherwise constitute constructive fraudulent transfers. Accordingly, I look forward to hearing the testimony from our witnesses about these and other recommendations to improve the bankruptcy process. [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Questions for the Record submitted to Seth Grosshandler, Partner, Cleary Gottlieb Steen & Hamilton LLP, New York, NY* --------------------------------------------------------------------------- *The Subcommittee had not received a response to these questions at the time this hearing record was finalized and submitted for printing on September 25, 2014. [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] [all]