[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




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      Available via the World Wide Web: http://judiciary.house.gov

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                       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:]



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                               __________
    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:]



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                               __________
    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:]



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                               __________

    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:]



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                               __________

    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:]



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                               __________

    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.





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   Questions for the Record submitted to Seth Grosshandler, Partner, 
          Cleary Gottlieb Steen & Hamilton LLP, New York, NY*
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    *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.





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