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





    HEARING ON THE ``FINANCIAL INSTITUTION BANKRUPTCY ACT OF 2014''

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



                                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

                               __________

                             JULY 15, 2014

                               __________

                           Serial No. 113-112

                               __________

         Printed for the use of the Committee on the Judiciary


      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

                              ----------                              

                             JULY 15, 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 Georgia, and Ranking Member, 
  Subcommittee on Regulatory Reform, Commercial and Antitrust Law     3
The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia, and Chairman, Committee on the Judiciary     4
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Ranking Member, Committee on 
  the Judiciary..................................................     5

                               WITNESSES

Donald S. Bernstein, Partner, Davis Polk & Wardwell LLP
  Oral Testimony.................................................     8
  Prepared Statement.............................................    12
Thomas H. Jackson, Professor, William E. Simon School of 
  Business, University of Rochester
  Oral Testimony.................................................    36
  Prepared Statement.............................................    39
Stephen E. Hessler, Partner, Kirkland & Ellis LLP
  Oral Testimony.................................................    58
  Prepared Statement.............................................    60
Steven J. Lubben, Professor, Seton Hall University School of Law
  Oral Testimony.................................................    81
  Prepared Statement.............................................    83

                                APPENDIX
               Material Submitted for the Hearing Record

Discussion Draft of the ``Financial Institution Bankruptcy Act of 
  2014''.........................................................   100
Questions for the Record submitted to Donald S. Bernstein, 
  Partner, Davis Polk & Wardwell LLP.............................   129
Response to Questions for the Record from Thomas H. Jackson, 
  Professor, William E. Simon School of Business, University of 
  Rochester......................................................   131
Response to Questions for the Record from Stephen E. Hessler, 
  Partner, Kirkland & Ellis LLP..................................   135
Response to Questions for the Record from Steven J. Lubben, 
  Professor, Seton Hall University School of Law.................   138

 
    HEARING ON THE ``FINANCIAL INSTITUTION BANKRUPTCY ACT OF 2014''

                              ----------                              


                         TUESDAY, JULY 15, 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 3:57 p.m., in 
room 2141, Rayburn House Office Building, the Honorable Spencer 
Bachus (Chairman of the Subcommittee) presiding.
    Present: Representatives Bachus, Goodlatte, Marino, 
Holding, Johnson, and Conyers.
    Staff Present: (Majority) Anthony Grossi, Counsel; Ashley 
Lewis, Clerk; and (Minority) Susan Jensen, Counsel.
    Mr. Bachus. Good afternoon. The Subcommittee on Regulatory 
Reform, Commercial and Antitrust Law hearing will come to 
order.
    And, without objection, the Chair is authorized to declare 
a recess of the Committee at any time.
    And we have had kind of a helter-skelter day. And that may 
be a little severe, that word. But we expect to have votes 
probably in a little over 30 or 40 minutes. So we are going to 
still have opening statements, and then we will hear your 
statements, and we will have time for both of those, if that is 
okay. And I will start with my opening statement.
    Having lived through it legislatively, first during the 
financial crisis of the fall of 2008 and then the deliberations 
that resulted in Dodd-Frank, I know that a question people 
often ask is why distressed financial firms were not resolved 
through the bankruptcy process instead of drawing on emergency 
government support, or what many people characterize as 
bailouts, government bailouts.
    Over the last few years, industry legal and financial 
regulatory experts have examined this question in detail. This 
Committee, through its ongoing oversight of the Bankruptcy 
Code, has closely reviewed the question in addition to 
consulting experts in the field, and we have actually heard 
from several of you before. We have held a number of hearings 
on the issue, including two hearings in the past year on this 
precise matter.
    Two points of general agreement appear to have emerged. The 
first is that the single-point-of-entry approach seems to be 
the most feasible and efficient method to resolve a financial 
institution that is organized with a holding company atop its 
corporate structure. The second point of agreement is that the 
Bankruptcy Code as currently drafted containsimpediments to 
using the single-point-of-entry approach.
    The bankruptcy process has long been favored as the primary 
mechanism for dealing with distressed and failing companies 
because of its impartiality, adherence to established 
precedent, judicial oversight, and grounding in the principles 
of due process and rule of law.
    We are here today as part of an effort to structure a 
bankruptcy process that is better equipped to deal with the 
specific issues raised by failing financial firms. By doing so, 
we can also address what some have described as bailout fatigue 
on the part of the American taxpayer.
    The subject of today's hearing, draft legislation titled 
the ``Financial Institution Bankruptcy Act,'' includes several 
provisions that could improve the ability of financial 
institutions to be resolved through the bankruptcy process.
    It allows for a speedy transfer of a financial firm's 
assets to a newly formed company. It would continue the firm's 
operations for the benefit of its customers, employees, 
creditors, and the financial stability of the marketplace. This 
quick transfer is overseen by and subject to approval of an 
experienced bankruptcy judge and includes due-process 
protection for parties in interest.
    Second, the draft bill provides the financial institutions' 
regulators with standing to be heard on issues impacting the 
general financial marketplace. Under a narrow set of 
circumstances, the Federal Reserve would be allowed to initiate 
a bankruptcy case over the objection of a financial 
institution. Specifically, the Federal Reserve must demonstrate 
to a judge by a preponderance of evidence that the financial 
institution is at or near insolvency and commencing a case is 
necessary to prevent substantial harm to financial stability.
    In addition, there are provisions that facilitate the 
transfer of derivative and similarly structured contracts to 
the newly formed company which will improve the ability of the 
company to continue the financial institution's operations.
    Finally, the legislation recognizes the factually and 
legally complicated questions presented by the resolution of a 
financial institution. To that end, the bill provides that 
specialized bankruptcy and appellate judges will be designated 
in advance to preside over these cases.
    We have an esteemed panel of witnesses with expertise on 
bankruptcy and financial implications of the draft legislation. 
I will look forward to their testimony and the ensuing 
discussion as the Committee continues its consideration of this 
important issue.
    And let me say before I turn to the Ranking Member, under 
Dodd-Frank, a study was commissioned, which actually the 
Federal Reserve and the Bank of England both said that 
bankruptcy, a single point of entry--they endorsed that 
approach.
    And we have worked very closely with Members of the 
Democratic minority on this, and I think this is one of those 
issues where there is some bipartisan agreement that we can 
work together. And I think we have; our staffs have worked 
closely together on this.
    And so, with that, I would recognize my Ranking Member, Mr. 
Johnson, for his opening statement.
    Mr. Johnson. Thank you, Mr. Chairman.
    And I, too, am heartened by the manner in which our staffs 
have been able to coordinate and cooperate and get to this 
point with a product that can be said to be bipartisan.
    And I also want to acknowledge the brilliance of the people 
on this panel today. It doesn't get much better, from an 
intellectual point of view, than the gentlemen that we have 
seated before us today.
    Thank you for your work, all of you.
    And today's hearing concerns legislation that would attempt 
to accommodate the efficient winding down of a systemically 
important financial institution while promoting stability in 
the financial marketplace, rather than forcing a resolution 
under Title 2 of the Dodd-Frank Act. In other words, this 
legislation concerns how the Bankruptcy Code should treat the 
failure of the next Lehman Brothers, whose collapse caused 
untold insecurity in our Nation's financial system and wreaked 
havoc across the globe.
    Four years ago, Congress enacted the Dodd-Frank Act in 
response to the greatest financial crisis since the Great 
Depression. I support this landmark legislation because it was 
a crucial step in reining in financial institutions that caused 
immeasurable hardship to so many American families. Built on 
the back of predatory lending of subprime mortgages to the most 
vulnerable members of society, including low-income, 
minorities, and the elderly, the great recession was indeed a 
study in corporate greed.
    But despite stemming the hemorrhaging of our Nation's 
financial system, it is clear that Dodd-Frank left too many 
issues unaddressed. Banks are still too big for regulation, too 
big for trial, too big to fail, and too big to jail. I would 
also note that under the Roberts Court's interpretation of 
corporate speech, banks are also too big to respect the 
reproductive rights of women and too big to be bound by 
campaign finance law.
    Later this week, this Subcommittee will conduct an 
oversight hearing on the Department of Justice's attempt to 
rein in fraud against the elderly and consumers. Imagine that. 
Banks are also too big to investigate for fraud and money 
laundering and too big to be held accountable for defrauding 
Americans.
    With these observations in mind, it is my strong belief 
that any legislation to accommodate the winding down of a 
systemically important fiscal institution must promote the 
public interest through a transparent process.
    Although I commend the Chair for the staff-level process 
for the discussion draft we are considering today, we have not 
heard from the bank regulators and many other important 
stakeholders on the draft bill. The purpose of this legislation 
should be the protection of the public interest. The input from 
bank regulators and other interested parties, specifically on 
the question of whether this legislation truly protects 
consumers, is vital to my support for the underlying bill.
    We are all in the same boat when it comes to our Nation's 
financial system. I therefore urge the Chair to allow ample 
time to hear from all parties and stakeholders for their 
comment on this legislation and to not impose an arbitrary 
deadline on legislation that affects one of the most important 
aspects of the financial system.
    Lastly, as I mentioned in this Subcommittee's hearing on 
Title 2 of Dodd-Frank in March, it is imperative that this 
Subcommittee consider the strengths and weaknesses of the 
Bankruptcy Code in not just business bankruptcy but in consumer 
bankruptcy, as well.
    Few other areas are as important to most Americans as the 
crippling effects of student-loan debt, which has reportedly 
ballooned into the largest source of debt for American 
consumers. This debt is practically nondischargeable, growing 
exponentially, and has far-reaching consequences. I have little 
doubt that, if we put our minds to it, we could reach a 
bipartisan solution to alleviate the suffering of many of those 
consumers who are affected and afflicted by crushing student-
loan debt.
    Furthermore, I would remind the Chair that it is very 
difficult for the minority to routinely support the majority's 
priority legislation without reciprocity in consideration of 
issues. There are a number of outstanding bipartisan issues, 
like consumer bankruptcy, that merit discussion. I urge the 
Chair to consider these requests.
    And I look forward to our witnesses' testimony on the 
discussion draft of the Financial Institutions Bankruptcy Act 
of 2014.
    And, with that, I yield back.
    Mr. Bachus. Thank you, Mr. Johnson.
    I would now like to recognize the full Committee Chair, Mr. 
Bob Goodlatte of Virginia, who later tonight will be playing 
tennis for charity against an opponent from the Administration.
    Mr. Goodlatte. On the other hand, I might be here working 
on immigration reform.
    Mr. Bachus. The great tennis match might be postponed, huh?
    Mr. Goodlatte. I thank the Chairman and welcome our 
panelists today.
    This is an important hearing. Our Nation's financial system 
provides the lifeblood for industry to develop, grow, and 
prosper. Ensuring that this system functions efficiently in 
both good times and bad is critical to the ongoing vitality of 
our economy.
    The recent financial crisis illustrated that the financial 
system and existing laws were not adequately prepared for the 
insolvency of certain institutions which threaten the very 
stability of the global economy and our financial industry. 
There has been considerable debate over whether Congress' main 
response the financial crisis, the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, is adequate to respond to a 
future crisis.
    Today's hearing, however, is not focused on that debate. 
Instead, we turn our attention to the private and public 
efforts to strengthen the Bankruptcy Code so that it may better 
facilitate the resolution of an insolvent financial firm while 
preserving the stability of the financial markets.
    The subject of today's hearing, the Financial Institution 
Bankruptcy Act of 2014, is a reflection of these efforts. The 
bill is calibrated carefully to provide transparency, 
predictability, and judicial oversight to a process that must 
be executed quickly and in a manner that is responsive to 
potential systemic risks.
    Additionally, it incorporates the single-point-of-entry 
approach, which a growing consensus of experts in public and 
private industry believe is the most effective and feasible 
method to resolve a financial institution that has a bank 
holding company.
    The Judiciary Committee has a long history of improving the 
Bankruptcy Code to ensure that it is equipped properly to 
administer all failing companies. The Financial Institution 
Bankruptcy Act adds to this history by enhancing the ability of 
financial firms to be resolved through the bankruptcy process.
    The development of the discussion draft before us today has 
been a collaborative effort that included the financial and 
legal community as well as the Democratic staff. This 
collaboration has continued through a broader circulation of 
the bill, including to, among others, the Federal Reserve, the 
FDIC, the courts, and Treasury. We look forward to feedback 
from all parties regarding the proposed text of the bill.
    Over the course of the past year, during two separate 
hearings, this Committee has heard testimony that the 
Bankruptcy Code could be improved and that a measure that 
creates a new Subchapter V within Title 11 of the Bankruptcy 
Code should be enacted.
    Today, we will hear from a panel of experts whether the 
draft before us meets these goals and whether the text could be 
further refined. I look forward to hearing from today's 
witnesses on this important measure.
    Thank you, Mr. Chairman, for holding this hearing, and I 
yield back to you.
    Mr. Bachus. Thank you, Chairman Goodlatte.
    I would now like to recognize the full Committee Ranking 
Member, Mr. John Conyers, Jr., of Michigan, for his opening 
statement.
    Mr. Conyers. Thank you, Chairman Bachus.
    Welcome, witnesses.
    I am the last presenter on this side of the table. And we 
are trying to ensure that the resolution of complex bank 
holding companies on the verge of insolvency can be better 
facilitated under the Bankruptcy Code, and I would appreciate 
your views on that.
    Any legislative fix should be premised on the critical 
lessons learned from the near collapse of our Nation's economy 
just 5 years ago. Without doubt, the great recession was a 
direct result of the regulatory equivalent of the wild west. 
And in the absence of any meaningful regulation of the mortgage 
industry, lenders developed high-risk subprime mortgages and, 
frankly, used predatory marketing tactics, targeting the most 
vulnerable.
    These doomed-to-fail mortgages were then securitized and 
sold 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 
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. Neighborhoods across 
the Nation are still blighted by vast swaths of abandoned 
homes. Many municipalities, big and small, continue to struggle 
with the attendant costs resulting from mortgage-foreclosure-
induced blight as well as reduced revenues.
    Thus, lesson number one is the legislation should make it 
easier, not harder, for regulators to respond to an imminent 
threat to the Nation's financial marketplace.
    Then, as demonstrated by the failure of Lehman Brothers and 
the resultant near collapse of Wall Street, it is critical that 
liquidity and trust in the financial marketplace be restored as 
soon as possible after the collapse of a major financial 
institution. Fortunately, Dodd-Frank goes a long way toward 
reinvigorating a regulatory system that makes the financial 
marketplace more accountable and, hopefully, more resilient.
    The act also institutes long-needed consumer protections. 
While Dodd-Frank establishes a mandatory resolution mechanism 
to wind down a systemically significant financial institution, 
the act implicitly prioritizes using a bankruptcy solution 
before invoking Dodd-Frank's orderly liquidation process. This 
is because the Bankruptcy Code has, for more than 100 years, 
enabled some of the Nation's largest companies to regain their 
financial footing, including, more recently, General Motors and 
Chrysler.
    But for bankruptcy to be truly viable as an alternative to 
a Title 2 resolution process, the bank holding company must 
have access to lenders of last resort, even if it is the 
Federal Government. Unfortunately, the draft bill is utterly 
silent on that critical component. In fact, the Senate 
counterpart to this measure strictly forbids government 
assistance. So I need you to think with me of whether we are 
engaged, at least to some degree, in a futile effort.
    And, in concluding, this legislation must be carefully 
analyzed to ensure that the constitutional due-process and 
property rights are not violated. Although there appears to be 
a consensus that the bankruptcy law must be amended to better 
accommodate the resolution of large bank holding companies, we 
must ensure that fundamental rights and protections are not 
adversely affected, even unintentionally.
    In the rush to expedite the transfer of a troubled 
company's assets, does the bill ensure that the interests of 
all affected parties are adequately protected? And I hope you 
will respond to that. Does the legislation strike the right 
balance between stemming panic contagion and transparency? Are 
the legislation's time limits for judicial determinations and 
appeals workable?
    And so here we are today trying to struggle through these 
and other considerations, and we have to continue to realize 
that the regulators and the Federal courts play a critical role 
in these determinations. And so I invite you to join us in what 
is a very, very important hearing.
    And Mr. Chairman, I yield back the balance of my time.
    Mr. Bachus. Thank you, Ranking Member Conyers.
    Without objection, all Members' written statements will be 
made a part of the record.
    As Ranking Member Johnson said, we have a very 
distinguished panel before us, and I will first start by 
introducing our witnesses.
    Mr. Don Bernstein is partner of Davis Polk, where he heads 
the firm's insolvency and restructuring practice. During his 
distinguished 35-year career, he has represented nearly every 
major financial institution in numerous restructurings, as well 
as leading a number of operating firms through bankruptcy, 
including Ford, LTV, and Johns Manville.
    Mr. Bernstein has spent the last several years working on 
resolution plans, commonly referred to as living wills, for 
large financial firms, as well as representing financial 
institutions on resolution-related issues.
    Mr. Bernstein has earned multiple honors for his practice, 
including being elected by his peers as chairman of the 
National Bankruptcy Conference, the most prestigious 
professional organization in the field. Mr. Bernstein received 
his A.B. Cum laude from Princeton University and his J.D. From 
the University of Chicago Law School.
    We welcome you.
    Professor Tom Jackson holds faculty positions in the 
William E. Simon School of Business Administration and the 
Department of Political Science at the University of Rochester, 
where he also served as president from 1994 to 2005.
    Before he became Rochester's ninth president, Mr. Jackson 
was vice president and provost for the University of Virginia, 
where he first joined as the 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 Court Judge Marvin Frankel in 
New York from 1975 through 1976 and then for Supreme Court 
Justice and later Chief Justice William H. Rehnquist from 1976 
to 1977.
    Professor Jackson is the author of bankruptcy and 
commercial law texts used in law schools across the country. 
Recently, he has spent considerable time on the issue of 
improving the Bankruptcy Code to facilitate the resolution of 
financial institutions, including working with the Hoover 
Institute, the Bipartisan Policy Center, and the FDIC on this 
issue.
    And he received his B.A. From Williams College and his J.D. 
From Yale Law School.
    So, welcome.
    Mr. Stephen Hessler is a partner of the restructuring group 
of Kirkland & Ellis. His practice involves representing 
debtors, creditors, and investors in complex corporate Chapter 
11 cases, out-of-court restructurings, acquisitions, and 
related trial and appellate litigation.
    He has counseled clients across a broad range of 
industries, including energy, gaming, hospitality, and real 
estate, telecommunications, financial institutions, and 
manufacturing.
    Prior to joining Kirkland & Ellis, Mr. Hessler was a law 
clerk for Judge Ambro at the United States Court of Appeals for 
the Third Circuit, as well as Justice Hepburn at the United 
States District Court for the Western District of Kentucky. He 
also served on the staff of Senator Spencer Abraham.
    In addition to practicing law, Mr. Hessler is a frequent 
lecturer and author on a variety of restructuring-related 
topics. He currently serves as the chairman of one of the 
advisory boards to the American Bankruptcy Institute's 
Commission to Study the Reform of Chapter 11. He also teaches a 
restructuring class each fall at the University of Pennsylvania 
to both law school and Wharton students.
    Mr. Hessler recently was selected by Turnarounds and 
Workouts as one of their 2013 outstanding young restructuring 
lawyers. He received his B.A. And J.D. From the University of 
Michigan, where he served as a managing editor of Michigan's 
Law Review.
    Again, quite impressive.
    And particularly for you who teach classes at law schools, 
or Wharton students in your case, you better know your subject 
if you teach at that level.
    Professor Steven Lubben is the holder of the Harvey 
Washington Wiley Chair in corporate governance and business 
ethics at Seton Hall and is a recognized expert in the field of 
corporate finance and governance, corporate restructuring, 
financial distress, and debt.
    He is the author of a leading corporate finance text and a 
contributing author to the Bloomberg Law on Bankruptcy 
treatise. He is also a columnist for the New York Times Deal 
Book page.
    And I read that. I will have to pay more attention to your 
articles.
    Following graduation from law school, Professor Lubben 
clerked for Justice Broderick in the New Hampshire Supreme 
Court. He then practiced bankruptcy law in the New York and Los 
Angeles offices of Skadden & Arps, where he represented parties 
in Chapter 11 cases throughout the country.
    Since joining Seton Hall, Professor Lubben has presented 
his papers at academic conferences around the world and 
frequently provides commentary on Chapter 11 and related issues 
for national and international media outlets, including the 
Wall Street Journal, the New York Times, the Financial Times, 
Reuters, the Associated Press, Bloomberg, and BBC.
    Professor Lubben received his B.A. From the University of 
California Irvine and his J.D. From Boston University, his LLM 
from Harvard Law School and his Ph.D. From the University of 
Groningen--is that right?
    Mr. Lubben. Yes, close.
    Mr. Bachus. He tried to teach me, but I couldn't get it--in 
the Netherlands.
    Mr. Lubben. My wife can't get it either, so don't worry 
about it.
    Mr. Bachus. Thank you.
    All right. We will start with Mr. Bernstein.

          TESTIMONY OF DONALD S. BERNSTEIN, PARTNER, 
                   DAVIS POLK & WARDWELL LLP

    Mr. Bernstein. Thank you, Chairman Bachus and Ranking 
Member Johnson, as well as Chairman Goodlatte, Ranking Member 
Conyers, and the other Members of the Subcommittee. I want to 
thank you for inviting me to testify before this Subcommittee 
once again about the resolution of systemically important 
financial institutions under the Bankruptcy Code.
    I am especially pleased to be commenting on the draft, 
which I commend the staff on, of the Financial Institution 
Bankruptcy Act of 2014 that would add a new Subchapter V to 
Chapter 11 of the Bankruptcy Code dealing with insolvencies of 
large financial firms.
    In light of time constraints, I am going to focus on a few 
key issues in my testimony; I am not going to focus on 
everything. But I commend the testimony to you.
    The first issue is bankruptcy as the first method of 
resolution but retaining Title 2 of Dodd-Frank, as well. As 
others have mentioned, Title 2 can only be invoked if 
resolution in bankruptcy can't be effectively accomplished. And 
I think this is as it should be.
    Bankruptcy is a transparent process. It is driven by the 
rule of law. But Title 2 should remain as a backup resolution 
tool. It is important to have that available. And we don't know 
whether we will ever need to use it, and, hopefully, if this 
bill is passed, it will make it far less likely that we will 
need to use Title 2.
    When I was before the Subcommittee in December, I did 
recommend that the Bankruptcy Code be amended to add tools to 
facilitate what I called at the time whole-firm 
recapitalizations, similar to the single-point-of-entry 
resolution strategy advocated by the FDIC.
    I think it is increasingly recognized, not only in the 
United States but in other parts of the world, that whole-firm 
recapitalization is the best way of resolving large financial 
institutions in a manner that minimizes losses, minimizes 
systemic disruption, and prevents taxpayer bailouts.
    This is because recapitalization preserves the going-
concern value of a financial firm by avoiding what I will call 
a short-stop liquidation of the kind that we had in Lehman 
Brothers. It maintains the continuity of the firm's operations 
that may be critical to the financial system. Examples are 
custody, clearance, settlement of transactions. All of these 
things run through our financial institutions, and if they get 
disrupted or stopped, it could be very systemically damaging.
    And, most importantly, the recapitalization imposes the 
firm's losses on private-sector creditors rather than on 
taxpayers. This is a highly important point because, by 
removing an implicit government backstop of financial firms, it 
incentivizes private-sector creditors to appropriately price 
risks and, most importantly, to engage in more effective 
monitoring of these firms.
    And I would point out--and Representative Conyers made the 
point about making sure that financial firms are not taking 
undue risks--the creditors should actually be monitoring that. 
And having an incentive for them to do it, by making it clear 
that they are going to absorb the losses, is extremely 
important.
    Professor Jackson and I describe in our testimony that 
single-point-of-entry recapitalization is facilitated by the 
bank holding company structure that we have in the United 
States. In other countries, they don't necessarily have holding 
companies.
    What a holding company does is it creates a class of 
structurally subordinated debt at the holding company which can 
be used to be bailed in, or recapitalized, by being left behind 
in our system in a bankruptcy or a receivership. And the 
process is described in all of the witness statements, so I am 
not going to belabor it, but it facilitates a recapitalization 
solution to have this holding-company structure.
    The bill we are looking at today embraces the idea of 
whole-firm recapitalization. It includes many of the tools that 
I discussed in December, and I think the bill's overall 
approach is the right one. And its passage, with some minor 
modifications, would be a substantial step forward in helping 
to assure that taxpayer-funded bailouts never happen again.
    I want to focus on three particular points in the 
legislation, and you will see why I think they are important. 
The first one is the definition of ``capital structure debt.'' 
That is the debt that gets left behind when you recapitalize 
the firm. I noted in my written testimony that the bill's 
expansion of the definition of ``capital structure debt'' to 
include all unsecured debts of the holding company and to omit 
the words ``debts for borrowed money'' reduces the clarity that 
the market has over how the recapitalization is going to occur.
    The Federal Reserve has announced that they plan to require 
companies to have substantial amounts of capital structure 
debt, and the discussion has been about long-term debt, which 
is not, for example, held by mutual funds or money market 
funds. And I actually favor the definition that is in the 
Senate version of the bill because it focuses on long-term 
debts with maturities of longer than a year and debt for 
borrowed money, and there are two reasons for this. First of 
all, I think it really corresponds to the expectation of what 
the Federal Reserve is likely to put out, and it is going to 
make it clear to creditors which class of debt is going to be 
the debt that ends up being used to recapitalize the firm.
    One of the criticisms that has been leveled against Title 
II is that the statute doesn't make it sufficiently clear which 
category of debt is going to be the debt that is going to be 
bailed in and how that decision is going to be made.
    Second, as I mentioned, those debts with maturities of less 
than a year are held in various places where they could become 
systemically significant. And if capital structure debt is 
defined to include those potentially systemically significant 
debts, it could require that a provision be included in the 
bill to give regulators the discretion to exclude certain 
capital structure obligations for favored treatment so that if 
there is a systemic risk associated with some of the capital 
structure debt, it would be assumed by the bridge company 
rather than left behind.
    The National Bankruptcy Conference recommended this 
particular solution in its letter to the Subcommittee of 
January 29. The NBC was concerned that a bright-line test might 
create activities to avoid the test. But as noted in the 
written testimony, with the Federal Reserve actually 
promulgating a requirement that this debt be in place, I think 
the risk of avoidance goes away because the financial 
institutions will actually have to maintain the debt on their 
balance sheets. So this debt will be there if it is needed.
    The second topic I want to discuss is the topic of the 
special trustee. The special trustee provision in this bill, in 
my view, is important and should be retained. Its use is not 
mandatory, but it does have an important purpose. From the 
point of view of the market, and from the point of view of 
foreign regulators, it is highly important that the new bridge 
company be returned to a state of normalcy as soon as possible. 
This will enhance the likelihood of quickly regaining access to 
private-sector liquidity and reduce the risk of ring fencing by 
local regulators.
    To accomplish these goals, it may be highly desirable that 
the recapitalized firm be perceived as healthy enough to longer 
be subject to the bankruptcy process. The provisions of section 
1186 of the bill permit the court to transfer the bridge 
company to a special hand-picked trustee, and it gives the 
court the necessary authority to accomplish this if it is in 
the best interests of the estate and is going to preserve the 
value of the asset.
    The last point I want to mention is the question of how the 
proceedings get commenced. I think it is very appropriate for 
the Federal Reserve to be given the right to file an 
involuntary case against a SIFI if a board of directors has not 
voluntarily done so in the appropriate circumstances; however, 
I think it is a failure if the Federal Reserve actually has do 
that. A dispute over commencement of the case could seriously 
impair the effectiveness of resolution proceedings.
    With this in mind, I think the bill should do what it can 
to encourage voluntary petitions in Subchapter V cases where 
the firm is in financial distress. And I have suggested that 
the bill adopt an approach similar to the one taken in Title II 
of Dodd-Frank, where the simple act of filing or consenting to 
a case under Subchapter V should not cause liability for the 
board. Boards will remain accountable for their prebankruptcy 
actions, but they shouldn't feel at risk for the simple act of 
invoking Subchapter V.
    In my written testimony I have made a number of other 
technical comments both about the safe harbor provisions as 
well as the provisions relating to avoidance actions. I 
generally support these provisions. I think they are critical 
to accomplishing the goal of Subchapter V. However, I think 
some of the technical tweaks I suggest are merely cross-
reference errors in some cases, but they should be fixed so 
that the provisions work as intended. I welcome the opportunity 
to discuss these technical points directly with the staff, and 
would also like the opportunity to study the bill further and 
provide additional technical comments if I have any.
    Once again, I am extremely grateful for the opportunity to 
present my views. I believe this bill is a very important step 
forward, and I thank the Committee for considering this 
legislation. I would, of course, be pleased to answer any 
questions about my written statement or my oral testimony. 
Thank you.
    [The prepared statement of Mr. Bernstein follows:]
    
    
    
                               __________
    Mr. Bachus. Thank you.
    What we are going to do at this point, we have 2 minutes, 
50 seconds plus whatever time they give us to get to the floor. 
The opening statements, you know, instead of 5-minute opening 
statements on this, I would prefer to have, if you need 10 or 
12 minutes, you have it, and that way we will--because we very 
much want your comments, and we are not just simply going 
through the motions.
    So we will recess until the votes are through on the floor. 
The Committee staff can keep you appraised of that and give you 
a pretty good idea about when we will be returning. How many 
votes on the floor? Just two votes. So we should be back 
probably in 15, 20 minutes. We will resume. And then I think 
taking your testimony as opposed to asking questions is 
probably going to be the best way to do this.
    We are in recess at this time. Thank you.
    [Recess.]
    Mr. Farenthold [presiding]. The Committee will come to 
order. Chairman Bachus asked me to get started in his absence. 
He is on the floor with an amendment to the appropriations 
bill. He will return shortly, and I will return the gavel to 
him. But in the interests of getting everybody home in time to 
see their families tonight, we will recognize Mr. Jackson for 
the customary 5 minutes.

  TESTIMONY OF THOMAS H. JACKSON, PROFESSOR, WILLIAM E. SIMON 
          SCHOOL OF BUSINESS, UNIVERSITY OF ROCHESTER

    Mr. Jackson. Thank you.
    Chairman Bachus, Ranking Member Johnson, Representative 
Farenthold, also Chairman Goodlatte and Ranking Member Conyers, 
this is my second time testifying before you this year on a 
subject near and dear to my heart, which is bankruptcy law, 
specifically the role bankruptcy law can and should play in the 
best possible resolution of a troubled financial institution, 
and how the bill under consideration, the Financial Institution 
Bankruptcy Act of 2014, is a solid starting point permitting 
that to happen, thus fulfilling the vision of the Dodd-Frank 
Act and the FDIC that bankruptcy should be the primary 
resolution mechanism, which it cannot be, I believe, in its 
current form.
    It is clear from this bill that much has occurred since my 
March testimony, and I am grateful particularly to the staff 
for that.
    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. And I 
might add, for me, a fourth: One that is predictable in the 
sense of conforming to the rule of law in its myriad decisions.
    At the time of the 2008 financial crisis, everyone seemed 
to acknowledge that bankruptcy law should play a major role, 
but there were also a general lack of confidence that it was up 
to the task. The resulting Dodd-Frank Act, while placing 
bankruptcy at the core of a resolution regime, also found it 
necessary to create an administrative backstop to it. And let 
me spend a minute on that, because it demonstrates, I think, 
the clear need for amendments to the Bankruptcy Code along the 
lines of the Financial Institution Bankruptcy Act of 2014.
    The primary role bankruptcy law is expected to play, even 
under the Dodd-Frank Act, is reflected first in the requirement 
of resolution plans, the so-called living wills, under Title I 
of that act. These plans are specifically to be focused on and 
tested against bankruptcy. Thus, a resolution plan must be 
resubmitted if it, quote, ``is not credible or would not 
facilitate an orderly resolution of the company under the 
Bankruptcy Code.'' And the firm must ultimately be reshaped so 
that its resolution plan will, quote, ``facilitate an orderly 
resolution of such company under the Bankruptcy Code.''
    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 determination that the 
use of bankruptcy law would have a serious adverse effect on 
U.S. financial stability. It is widely acknowledged, I think, 
that bankruptcy law is or should be the preferred resolution 
mechanism. To quote from the FDIC when it released its single 
point of entry strategy paper in December, quote, ``The statute 
makes clear that bankruptcy is the preferred resolution 
framework in the event of the failure of a SIFI.''
    But there is a disconnect between those premises and 
today's Bankruptcy Code. There is an emerging consensus that 
the best resolution system, one that meets the standards I 
indicated above, involves, A, loss-bearing capacity known in 
advance that, B, can be jettisoned in a rapid recapitalization 
of a financial institution. In the U.S., 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 of the Dodd-Frank Act. Compared to this 
administrative resolution proposal, the current Bankruptcy Code 
is clearly found wanting.
    The essence of this kind of recapitalization is, first, 
leaving behind equity and the loss-bearing debt--presumably 
long-term unsecured debt that has been required by the 
regulators, the Federal Reserve Board, to bear the loss; and, 
second, transferring everything else--assets, liabilities, 
rights and subsidiaries--to a bridge company that, because of 
the stripping off of the loss-bearing 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 of 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-default 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 the 
orderly liquidation authority under Title II will, contrary to 
the starting premises, become the default resolution mechanism.
    The bill you are considering, the Financial Institution 
Bankruptcy Act of 2014, by adding a new Subchapter V to Chapter 
11 of the Bankruptcy Code, and by paying attention to these 
concepts, neatly provides the necessary amendments to permit a 
rapid recapitalization that will, first, leave losses on 
previously identified parties, equity and long-term debt 
holders; and second, rapidly recapitalize the parent 
institution in a way that will make clear that it is solvent, 
its business has been kept together, and it is able to deal 
with the subsidiaries so as to restore market confidence and 
reduce contagion.
    What is required? In addition to the specific loss-
absorbency capacity known in advance that, as Don Bernstein 
indicated, the Federal Reserve Board is working on and is 
really a necessary ingredient in all of this, 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 that it would have stays and overrides 
of certain provisions to enable that to happen.
    The bill you are considering does all of this and as well 
provides an important role in the process for the Federal 
Reserve Board and the FDIC in a proceeding run before 
preidentified bankruptcy judges, with appeals going to a 
predesignated appellate panel consisting of court of appeals 
judges.
    While the details are many--and I am happy to get into them 
with staff in further discussions, and my written statement to 
some extent does this--and, yes, I think the Financial 
Institution Bankruptcy Act of 2014 is, as a result, necessarily 
somewhat complex at points, the concept is simple. Through what 
ends up being modest amendments to the Bankruptcy Code which 
would be effectuated by this bill, it indeed can be considered 
the primary resolution vehicle for SIFIs as envisioned by the 
Dodd-Frank Act. And because it is a judicial proceeding, it 
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 the living wills, the 
resolution plans that now can legitimately focus on a viable 
bankruptcy solution.
    In your deliberations on the Financial Institution 
Bankruptcy Act of 2014, I believe some technical changes need 
to be made, and there is some other relatively small issues 
that I think warrant further consideration. Don Bernstein's 
written and oral statements, and I have had time to read his 
written statement, contains several, and I concur with them.
    I have glanced at the suggestions of the other two 
witnesses that you will be hearing from today, and I believe a 
number of them probably warrant consideration as well. But 
importantly, none of them undermine the basic structure and 
importance of the bill before you.
    So with that modest caveat that there are things I think 
need consideration and work, I want to emphasize what I think 
is an incredibly important step by your consideration of the 
Financial Institution Bankruptcy Act of 2014.
    Again, I want to thank the Subcommittee for allowing me 
this opportunity to present my views, and even moreso for its 
wisdom and its consideration of the Financial Institution 
Bankruptcy Act of 2014. I would, of course, be delighted to 
answer any questions you may have about my testimony.
    [The prepared statement of Mr. Jackson follows:]
    
    
    
    
                               __________
    Mr. Farenthold. Thank you very much, Professor Jackson.
    Mr. Hessler, you are up.

           TESTIMONY OF STEPHEN E. HESSLER, PARTNER, 
                      KIRKLAND & ELLIS LLP

    Mr. Hessler. Good afternoon, Chairman Bachus, Chairman 
Goodlatte, Ranking Member Johnson, Ranking Member Conyers, and 
Representative Farenthold. Thank you for inviting me to testify 
at today's hearing. My name is Steve Hessler, and I am a 
partner in the Restructuring Group of Kirkland and Ellis LLP. 
My practice primarily involves representing debtors, and my 
recent engagements include some of the largest and most complex 
corporate reorganizations in history.
    I have also written at length about Title II of the Dodd-
Frank Act, and I have specifically advocated that adopting 
relatively discrete amendments to Chapter 11 would better 
facilitate the orderly reorganization of systemically important 
financial institutions. To that end, I am pleased that 
Subchapter V incorporates many of the prescriptive alternatives 
that I have long favored.
    The written materials that I have submitted include a 
lengthy comparative analysis of the various insolvency 
resolution frameworks at issue, but in my testimony this 
afternoon, I will focus on the most significant reasons that I 
believe, as a debtor practitioner, Subchapter V is the best-
designed option so far, both structurally and philosophically, 
to maximize estate value for the benefit of stakeholders, while 
also protecting against the broader economic contagion that 
could result from the unmitigated failure of a financial 
corporation.
    First, perhaps the signal benefit of Subchapter V is that a 
financial corporation case will be administered by a 
predetermined panel of experienced bankruptcy court judges 
within the established practice and precedent of the Bankruptcy 
Code instead of politically sensitive regulators within an 
untested nonjudicial process.
    Second, Subchapter V amends the Bankruptcy Code to allow 
the Federal Government to file an involuntary petition and to 
commence a Chapter 11 case without the debtor financial 
corporation's consent. To echo the remarks of Mr. Bernstein, 
given that regulators already have various methods of 
essentially forcing a financial company to commence a voluntary 
case under the Code, making this ability explicit and subject 
to bankruptcy court approval hopefully will help further 
incentivize financial corporations to confront their problems 
early on and to diligently pursue responsible restructuring 
options.
    Third, the Bankruptcy Code does presently provide that 
counterparties to qualified financial contracts are not subject 
to section 362's automatic stay against termination. This means 
a Chapter 11 filing by a financial corporation could be marked 
by chaos at the outset as counterparties proceed to terminate 
and enforce their rights in the debtor's assets. Subchapter V 
addresses this issue by subjecting qualified financial 
contracts to the automatic stay, but only for 48 hours. 
Although I have concerns that this time period may be too short 
to be viable, Subchapter V, unlike Title II, at least provides 
for debtor involvement and bankruptcy court approval of the 
contract assumption determinations.
    Fourth, beyond Subchapter V's key amendments, I also want 
to focus on what I think is quite notable, which is the core 
provisions of Chapter 11 that Subchapter V does not modify, and 
I want to cite three key examples. The first is that the 
Bankruptcy Code requires debtors to adhere to the so-called 
absolute priority rule, which generally provides that creditors 
with similar legal rights must receive the same treatment, and 
that junior creditors may not receive any recovery until senior 
creditors are paid in full. Unlike Title II, which provides 
that similarly situated creditors may receive dissimilar 
treatment, Subchapter V does not disturb the primacy of the 
absolute priority rule, which is one of the most fundamental 
principles of Chapter 11, and is critical to ensuring the fair 
and equitable treatment of creditors of financial corporations.
    Next, Subchapter V also does not amend a debtor's exclusive 
right to file a reorganization plan under section 1121. This 
means that the Federal Reserve and the FDIC, like all other 
parties in interest, would have standing to file a motion to 
terminate exclusivity for cause, but the government 
appropriately must first obtain bankruptcy court permission 
before abrogating a debtor's prerogatives on these fundamental 
restructuring decisions.
    Thirdly, regarding directors and officers, in my experience 
their knowledge, expertise, and commitment is indispensable to 
effectuating a debtor's soft landing into and orderly passage 
through Chapter 11. In this regard, Subchapter V exercises, I 
believe, admirable restraint in not vilifying, much less 
disqualifying, a financial corporation's existing leadership 
from continuing to serve the debtor in possession postpetition, 
subject, of course, to already applicable Bankruptcy Code 
grounds for removal as justified.
    Lastly, while I am very supportive of Subchapter V, I do 
want to note for the record there are certain provisions about 
which I have reservations, most significantly regarding the 
single point of entry approach that is central to Subchapter V. 
While the immediate separation and transfer of good bank assets 
in certain respects does mirror the so-called melting ice cube 
very fast section 363 asset sales that already are occurring 
under Chapter 11, Subchapter V codifies and accelerates these 
practices. That said, Subchapter V does also employ a number of 
safeguards on this front, including, critically, bankruptcy 
court approval under existing section 363 of the debtor's 
proposed transfer and plan distribution of trust assets.
    I also believe there are certain issues around the 
procedures for commencing a Subchapter V case, especially in 
the highly compressed initial ruling deadlines, the record-
sealing requirements, and limited judicial review. These 
provisions depart from standard bankruptcy principles of due 
process and transparency. So my preliminary reaction is to 
favor greater flexibility and openness. Here as well, however, 
I am very aware that the drafters of Subchapter V are striving 
very hard to balance those imperatives against the widely held 
views that the good assets of a financial corporation cannot 
withstand the prolonged public scrutiny of a typical Chapter 11 
filing. To that end, I look forward to further careful 
consideration and further discussions with the Subcommittee 
staff on these key issues.
    I thank the Subcommittee for allowing me to share my views 
on this important legislation, and I welcome the opportunity to 
answer any questions about my testimony.
    [The prepared statement of Mr. Hessler follows:]
    
    
    
                               __________
    Mr. Farenthold. Thank you very much.
    We will now go to Professor Lubben.

          TESTIMONY OF STEPHEN J. LUBBEN, PROFESSOR, 
              SETON HALL UNIVERSITY SCHOOL OF LAW

    Mr. Lubben. Thank you very much.
    Mr. Farenthold. Could you make sure your microphone is on 
and close to your mouth, please, sir?
    Mr. Lubben. Thank you very much, Chair Bachus, 
distinguished Members of the Subcommittee. My name is Steven J. 
Lubben. I hold the Harvey Washington Wiley Chair in Corporate 
Governance and Business Ethics at Seton Hall University School 
of Law in Newark, New Jersey.
    When considering financial institution failure, to my mind 
context is key. The context in which the failure happens is 
key. You need a range of options to address the failure of a 
financial institution, ranging from current Chapter 11 
practices to the orderly liquidation authority. And I commend 
the proposed Subchapter V as a new addition to the regulatory 
toolbox. And accordingly, it applies the approach that was 
successfully used in the automotive bankruptcy cases to the 
case of financial institutions, and thus gives the regulators 
and financial institutions another approach to deal with 
possible failure.
    I also commend the bill for utilizing the experienced 
bankruptcy judges to conduct the proceedings. One of the key 
benefits of the American approach to corporate reorganization 
is the use of specialized knowledgeable bankruptcy judges, and 
I do, again, commend the bill for utilizing those judges for 
resolving financial institutions.
    I do believe that the bill could be improved in a few ways, 
however, and I will focus on three of those in my comments 
today. First of all, unlike some prior witnesses, I have some 
doubts about the utility of the special trustee concept. At 
heart, I think the special trustee concept confuses the 
debtor's ownership of the shares of the bridge company with the 
ongoing operations of the bridge company. It is an issue that 
could be addressed more straightforwardly and less confusingly. 
In particular, I think that the special trustee provisions add 
unneeded complexity and uncertainty to Subchapter V, and I 
would urge a rethink of those.
    Next, I would urge the Subcommittee to give further thought 
to the fate of the debtor after the sale of the assets to the 
bridge company. Understandably, the bill focuses primarily on 
the successful movement of the debtor's assets, which is 
primarily going to be the equity and the operating subs, to the 
bridge company, but it doesn't really address the question of 
what happens next. This may seem a bit overly technical, but 
the debtor's creditors may rightly argue that leaving them to 
recover claims in an unfunded liquidation proceeding of the 
remaining debtor amounts to appropriation of their claims. 
Presumably that makes the investment decision to invest in bank 
holding company debt somewhat difficult, which we probably 
don't want to do.
    At the very least, I think we need a mechanism to convert 
the case from Subchapter V to a liquidation under Chapter 7, 
but, as my comments suggest, the Subcommittee may want to 
consider, if conversion is not the likely outcome in many 
cases, if there is no mechanism for reorganizing the debtor or 
even coming to a liquidation plan.
    Specifically, we need to think about ways to fund the case 
after the transfer of the asset has happened, and precisely 
what is going to happen, and what role regulators will play in 
that new case.
    Third, I suggest the Subcommittee should consider what will 
happen if a Subchapter V proceeding fails. In other words, if 
you do transfer the assets to the new bridge institution, and 
the institution continues to experience a run, what is going to 
happen at that point? Can the bridge company itself be put into 
a Dodd-Frank orderly liquidation authority proceeding? At the 
very least, you may want to make it explicit that the bridge 
company succeeds to whatever eligibility its former self had.
    In addition, does the bankruptcy court have an ability to 
convert a Subchapter V proceeding to some other sort of 
insolvency proceeding? And does the court have an ability to 
coordinate with regulators?
    Likewise, does the bankruptcy court have an ability to 
block regulatory actions that might undermine a Subchapter V 
proceeding. For example, what if a State insurance regulator or 
a State banking regulator decides to take action against an 
operating subsidiary that undermines the viability of the 
Subchapter V process? Does the bankruptcy court have an actual 
ability to stay them?
    Presumably, if they have such a power, it is not going to 
extend to foreign regulators, which I think then highlights the 
reality that solving the ``too big to fail'' problem is as much 
about the structure of financial institutions as it is about 
the specifics of any insolvency process. Insolvency, in other 
words, is a very small piece of a much larger regulatory 
structure.
    Thank you very much.
    [The prepared statement of Mr. Lubben follows:]
    
    
    
    
                               __________
    Mr. Farenthold. Thank you very much.
    I appreciate all of your testimonies. And we will begin 
with some questions.
    I will be the first to admit that I am not the expert in 
bankruptcy. I practiced law for a while, took one bankruptcy 
class. So just really getting up to speed on this Committee, 
and I appreciate you-all's help with that.
    With that in mind, I want to step back and start with a 
30,000-foot view for those who will be reading this record who 
are not as expert as you guys are. I just want to get 
everybody's 30,000-foot opinion. Do you agree that the 
Bankruptcy Code could be improved to facilitate the resolution 
of financial institutions? I think that I got a yes from 
everybody's testimony. Does anybody disagree with that 
statement?
    All right. I think we are good. All our panelists seem to 
be nodding their head in the affirmative.
    Can you all also generally agree, subject to some of the 
revisions that is in your written testimony, that you could 
support the Financial Institution Bankruptcy Act? Anybody have 
any reservations beyond what is in their testimony?
    I think we got all affirmative nods there, too. I like it 
when we can get everybody to agree here.
    All right. Professor Jackson, let me ask you, do you 
believe the enactment of Subchapter V would reduce the 
necessity for regulators to initiate Title II resolution 
proceedings?
    Mr. Jackson. I do. I believe, as Don Bernstein indicated, 
Title II should be there as a backstop. The world is an 
uncertain place. But I believe that enactment of a bill along 
these lines, with some of the amendments people have talked 
about, will significantly reduce the need for invocation of 
Title II of Dodd-Frank, because, again, in order to invoke it, 
you have to find a bankruptcy is wanting. I think this largely 
fixes the problems that currently exist that would make 
bankruptcy wanting. So the short answer to your question is 
yes.
    Mr. Farenthold. Anybody else want to weigh in on that? Mr. 
Hessler, or Professor Lubben, Mr. Bernstein?
    All right. Mr. Hessler, I will ask you, why do you believe 
the Federal Reserve should be provided with the authority to 
commence involuntary Subchapter V proceedings?
    Mr. Hessler. There is two reasons. One is practical; one is 
a little more theoretical. First, the practical reason is there 
are various regulatory maneuvers that regulators, including the 
Fed, could take that would otherwise effectively make it 
inevitable that a financial corporation had to file for 
bankruptcy in any event.
    But from a more important, I think, theoretical 
perspective, and it was echoing some remarks of Mr. Bernstein 
as well, the fact that there is the explicit ability for an 
involuntary to be commenced against a financial corporation 
hopefully will incentivize them to, as early as possible, as 
they approach the zone of insolvency, to begin to responsibly 
explore what would be alternative or viable restructuring 
alternatives instead of otherwise turning a blind eye to the 
problem for as long as possible, safe in the awareness that 
nobody can force them into bankruptcy until things are truly 
dire.
    Mr. Farenthold. Mr. Bernstein?
    Mr. Bernstein. I think there is one additional reason, 
which is if the Fed believes that the company, if the firm 
needs to be in a resolution procedure, if we didn't have this 
provision, its only recourse would be to consult with the FDIC 
and Treasury and do a Title II procedure. So this gives them 
another option.
    Mr. Farenthold. All right. Mr. Hessler, let's talk a little 
bit about the importance of retaining existing management for 
like newly formed bridge companies or holding companies. The 
concern is that if the financial institution got in trouble to 
begin with, and we are hanging onto some of the same 
management, you know, there is a potential problem. Does the 
Bankruptcy Code provide sufficient methods to remove these bad 
managers?
    Mr. Hessler. It does. It does. First of all, just some 
background context from that. As I said, in my experience the 
overwhelming majority of cases, the overwhelming number of 
Chapter 11 cases, were not caused by bad actions by management. 
They tend to be balance sheet restructurings either having to 
do with macroeconomic effects that were unanticipated, or 
potentially entirely justifiable business decisions that turned 
out to be wrong, but not the type of malfeasance or other type 
of actions that would otherwise warrant, as Title II would upon 
the invocation of proceedings, simply cleaning the slate and 
removing all of the top directors and officers.
    So like I said, in my experience that would actually be 
disastrous if you did that, because you would have a rudderless 
ship going into bankruptcy. And what Title II anticipated was 
not just regulatory help, but the employment of various 
consultants and third parties to otherwise assist in what is 
going to be a very rapid transfer of assets and then 
liquidation. It is extremely impractical, in my opinion, that 
that could be effected that quickly in a way that doesn't 
otherwise cause massive chaos and confusion.
    And the last thing I would add to your direct question is 
the Bankruptcy Code already provides that creditors or other 
parties in interest can seek the appointment of a trustee. And 
the trustee has the powers to otherwise relieve the debtors of 
directors and officers if, in fact, that is warranted by the 
circumstances.
    Mr. Farenthold. I see, Professor Jackson, you have got your 
hand up. You want to weigh in here?
    Mr. Jackson. One other concurring comment with respect to 
that. The system assumes that there may be utility to 
continuing the management. The management may or may not have 
been responsible. In the case of the 2008, it was sort of a 
systemic-wide use of the mortgages that everybody did. But the 
Bankruptcy Code, whether through the trust or through the 
ownership--remember, the ownership of the--the beneficial 
owners of this new entity, this bridge company, are the people 
left behind, the old long-term debt and equity interests that 
are left behind, and the debtor, and like any corporation that 
is functioning, they ultimately have the control and ability to 
replace both the board and management, and I think that is as 
it should be. They may decide to, and they may decide not to, 
but they are the right people to be making that decision.
    Mr. Farenthold. All right. I see my time is up.
    We will now recognize the Ranking Member of the 
Subcommittee, the gentleman from Georgia.
    Mr. Johnson. Thank you.
    Well, let's suppose that a Federal Government backstop as a 
creditor of last resort is a mechanism in place should this 
legislation be signed into law, passed and signed into law. And 
let's assume that the Federal Government then uses taxpayer 
money to assist or bridge the chasm between when the bankruptcy 
is filed to a more stable period, thus avoiding a catastrophic 
meltdown. Let's say that that is in place.
    Does this legislation insulate the bad actors, namely those 
who control a large unaccountable business, that brought the 
business to that point? Does this legislation insulate that 
kind of malfeasance, which could border upon willful behavior 
that could even implicate some criminal law violations? But 
does this legislation insulate those types of bad actors and 
shield them from accountability?
    Mr. Bernstein. Representative Johnson, I don't think it 
shields anyone from liability. And, in fact, remember that if 
this bank is going to be continuing in business, it still is a 
regulated entity. So whatever actions need to be taken with 
respect to any sort of malfeasance of the kind that you are 
talking about are still available.
    Mr. Hessler. Just to add to that, to echo Mr. Bernstein, 
the legislation in no way places any limitations on the ability 
to otherwise address those issues.
    The other thing I would just note, the Federal Government, 
both the legislators as well as regulators, are entirely 
understandably and entirely justifiably focused on remedial 
actions for fraud, mismanagement, and things like that that 
would occur.
    The one thing I would just, you know, highlight or 
reiterate is nobody is more motivated to address those issues 
than creditors, because they are the ones who are even more 
directly impacted. So there is already an enormous amount of 
incentivization and investigatory powers that creditors have to 
make sure that, to the extent those circumstances exist, that 
they are remedied. And creditors do not hesitate to go and seek 
the appointment of a trustee and the removal of management and 
directors and officers if, in fact, there is any credible 
evidence of the type of malfeasance or even criminal actions 
that you just mentioned.
    Mr. Lubben. If I could add, Representative Johnson, I did 
want to say----
    Mr. Farenthold. Get a little closer to the microphone.
    Mr. Lubben. Okay. I did want to say that I do think that if 
the circumstances arise that you indicate, where the Federal 
Government is providing funding to a failed financial 
institution, the Federal Government should have the rights of 
any other--that any other DIP lender would have in that 
circumstance. And therefore, I do have some concerns with the 
special trustee provisions in this bill, that they complicate 
the ability for the Federal Government, for example, to demand 
an equity stake in the bridge entity. If taxpayer money is at 
risk in the reorganization of a financial institution, the 
taxpayers, to my mind, should have some stake in the upside of 
that financial institution, too.
    Mr. Johnson. Professor Jackson?
    Mr. Jackson. I basically concur with the statements that 
have already been made. The only place there would be any 
insulation at all, as Don Bernstein suggested, you might 
insulate the trustee, the directors of the company for the 
filing of the bankruptcy case itself, which I think is a wise 
thing. But other than that, they are subject to regulatory 
authority, they are subject to rule of law, they are subject to 
criminal prosecution. And I think importantly to note, they are 
subject to the debtor, which is going to have the long-term 
debt holders, and they would have an incentive not only to 
remove the management that they think may have done something, 
but actually seek funds from them, because that may be some of 
the funding that they could get in terms of their own 
reorganization of the debtor or whatever, liquidation of the 
debtor. So I think there is lots of incentives here not to let 
bad actors get away with it.
    Mr. Johnson. To date are any of you aware of anyone who has 
been prosecuted for their role in causing the great recession? 
It looks like there is no--none of our witnesses can speak on 
that, so I assume that that means nobody knows of anyone who 
has been prosecuted. I will refrain from asking whether or not 
you think that there is anyone who should be prosecuted, but I 
will ask this question: Will this legislation work without a 
Federal Government----
    Mr. Bachus [presiding]. Would they be under immunity if 
they did offer that somebody ought to be prosecuted?
    Mr. Johnson. They probably have some legislative immunity 
since they are testifying, but we won't put them in that spot.
    But would this legislation work without a Federal 
Government backstop as a creditor of last resort?
    Mr. Lubben. The legislation will work. It would obviously 
work, I think, much better with the Federal Government 
providing liquidity, because in the context of a financial 
crisis, you probably cannot depend on the free market, the 
private market providing the degree of liquidity a large 
financial institution is going to require.
    Mr. Johnson. Mr. Hessler, would you disagree with that?
    Mr. Hessler. I would not disagree with that.
    Mr. Johnson. Professor Jackson?
    Mr. Jackson. No. And I actually have a pragmatic concern 
that since the orderly liquidation fund is available under 
Title II of Dodd-Frank, if something comparable to that is not 
available to the bridge company in a bankruptcy proceeding, 
there may still be powerful reasons to use Title II of Dodd-
Frank to access the orderly liquidation fund, where I would 
rather have the bankruptcy proceeding take precedence.
    Mr. Johnson. Thank you.
    Mr. Bernstein. I agree with everything the others have 
said.
    Mr. Johnson. All right. Thank you. With that, I will yield 
back.
    Mr. Bachus. Thank you.
    Let me start off saying lender of last resort, or whether 
that is the government or someone else, we think that is maybe 
something for the Financial Services Committee to address, and 
we have tried to structure this text to avoid going there. But 
it is something that is worthy of consideration. I do 
understand that.
    And I will start with Mr. Bernstein. The Financial 
Institution Bankruptcy Act deploys a very quick process where 
assets are transferred in a time frame that can be as short as 
24 hours. Do you believe this expediency is necessary, or can a 
financial institution endure a longer bankruptcy process?
    Mr. Bernstein. Mr. Chairman, I do believe it is necessary. 
I will make a reference to the movie ``It's a Wonderful Life'' 
with Jimmy Stewart. You remember what happened at the building 
and loan when there was a run on the bank, and he was able to 
get everybody in the room and say, you are a depositor, but 
don't take your money out because your money is in your 
neighbor's house.
    Well, that is what banks do. They are in the business of 
maturity transformation, and they can't liquify their assets in 
the face of a run. And if you end up having a prolonged 
bankruptcy proceeding, and they aren't fixed very quickly, 
which this bill permits you to do because of the 
recapitalization it allows, you end up having a run that 
becomes unmanageable; whereas if you fix it, and you are able 
to go back into the market and get credit, the bank will 
stabilize. And that is really the objective here, and you can 
only do that if it is fast.
    Mr. Bachus. Thank you.
    And, Professor Jackson, I might ask you the same question. 
Do you have any input on that response?
    Mr. Jackson. No. I agree with the response. The comment I 
would make is that you need the rapidity for two reasons. One, 
you need to restore market credibility, otherwise I think it 
will spread to other institutions.
    The second reason is you are staying a lot of players in 
order to have this happen. You are staying all the qualified 
financial contracts. You are staying a lot of things because 
you want to keep everything in place for the transfer. And it 
seems to me that that itself is a powerful reason to call for 
rapid, essentially 48-hour, resolution of this. It would be 
nice if it could be longer, but I just don't think it is 
practical.
    Mr. Bachus. Yeah. I think the text we are using is 48 
hours, or 2 days. If the Financial Institution Bankruptcy Act 
were enacted today, or in law today, and you had a Lehman-style 
insolvency a year from now, say, would the bill improve the 
resolution process for that firm, and would the result be 
better than the result we had in the Lehman bankruptcy?
    Mr. Bernstein. Mr. Chairman, I think the bill, plus some of 
the other things that have been going on, would make it a lot 
better. First of all, financial firms are a lot better 
capitalized today than they were when Lehman Brothers failed. 
In addition, the Federal Reserve is going to impose a long-term 
debt requirement, which is going to create loss-absorbing debt 
at the holding company level. And once you have got those two 
things, you then have a situation where this legislation could 
really make a difference and permit a company to actually be 
resolved very efficiently.
    Mr. Bachus. Professor Jackson?
    Mr. Jackson. One other thing to add to that. And I actually 
think Lehman Brothers was--Harvey Miller's work for them was 
magical under the circumstances. Remember, they had done no 
prebankruptcy planning whatsoever. The board had not even 
considered it. One of the great features of Title I of Dodd-
Frank is the resolution plan living wills that are focused on 
bankruptcy so that you are not going to have a situation again 
in which a company like Lehman Brothers needs to enter 
bankruptcy, not having a clue what it is going to do once it is 
in bankruptcy. So I think the living wills are also an 
important part of the background here.
    Mr. Bachus. Right. And at this time I am going to interrupt 
my questioning and let the former Chairman of the full 
Committee Mr. Conyers start his questions.
    Mr. Conyers. Thank you for your generosity, Chairman 
Bachus.
    I merely wanted to raise this aspect in the granting of 
Subchapter V relief in terms of the very short windows of time 
for these decisions to be made. On page 6 it is 12 hours; on 
page 7 it is 14 hours; page 8 it is 14 hours. And I am just 
wondering can we be assured that the judicial role is 
meaningful when you have to be looking at your watch at the 
same time that you are making humongous kinds of 
decisionmaking? Could you talk with me about that for a little 
while, gentlemen?
    Mr. Jackson. I will take a stab at it. It is a difficult 
question. Obviously, all of us would like a judicial process to 
have more time, but it is offset by some need for speed.
    A couple of just sort of background comments. Yes, I don't 
think there is time for a whole lot of consideration, but it 
does bring in the important regulators, the Federal Reserve 
Board and the FDIC, whose perspective--if their perspective is 
contrary to that of the debtor, for example, who files, I think 
that will be a very interesting hearing before the bankruptcy 
judge. The bankruptcy judge does not have to approve the 
transfer.
    But the second point I would make is once you have filed, 
it is almost a self-fulfilling prophecy that you need to 
resolve this firm. This firm is not going to easily get out of 
bankruptcy on its own because of the market signal it sent by 
being in bankruptcy. So once the case is commenced, I am not 
sure there is a whole lot of people who are harmed by the speed 
in which this happens as long as you have well-established, 
preidentified parties who get left behind. Everybody else goes 
with the company and presumably will not be harmed. And the 
equity and the whatever the debt, the long-term debt, whatever, 
the capital structure debt, are people who know ahead of time 
that they are going to be left behind, they know their 
priority, and it seems to me under those circumstances their 
ex-post remedies are probably the best we can do under these 
circumstances.
    Mr. Conyers. Any other comments on this?
    Mr. Hessler. I would tend to agree with that. And I 
addressed in both my written testimony, as well as I spoke of 
today, that it is highly unusual. And as a debtor practitioner, 
I can imagine how chaotic that would be to be dealing with 
those time periods.
    I would note as a practical matter that I think there is a 
high likelihood that if a debtor is on the brink of being told 
that an involuntary is going to be commenced against it, that 
there is a high likelihood--it would probably go ahead and 
commence its own voluntary proceeding so as to continue to 
maintain control of its case. And if a debtor itself opted to 
commence that voluntary proceeding, these very compressed time 
periods for the appeal, they are irrelevant at that point in 
time because no one is going to be challenging the debtor's 
determination that, given its insolvency, a bankruptcy 
proceeding is appropriate under the law.
    Mr. Conyers. Yes, sir.
    Mr. Bernstein. I agree with what has been said. I also want 
to make one other point. We have to look at what the outcome of 
the proceeding is. Unlike other cases where you are doing a 
section 363 transfer very quickly, this asset is not being 
transferred away to a third party, so there is no question of 
whether there is an adequate price or not. It makes the 
decision much easier for the court because the asset is being 
preserved for the benefit of the estate.
    So not only with respect to the time periods for an 
involuntary filing, and I agree with everything that has been 
said about how likely it is, once there is an involuntary 
filing, people are not going to be prejudiced because you 
really need to be in the proceeding. But more importantly, the 
consequence of that is going to be the asset is going to be 
protected through the process of moving it to a place where it 
is safe and can continue to maintain its value rather than 
being transferred away.
    Mr. Conyers. My second question was dealing with the 
requirement that the pleadings be filed under seal. And I take 
it that this would also prevent runs and panic and so forth 
from happening.
    So I am going to go to my last question, which is by 
allowing a failed bank holding company to spin off its 
subsidiaries so they can continue to function, does this 
present a possible issue of moral hazard? Because they are 
going on unimpeded, and they are really in big trouble, but 
maybe nobody knows it.
    Mr. Bernstein. May I answer that, Representative Conyers? 
It is Don Bernstein.
    There are two things that are going on here. One is, yes, 
the company is continuing in business, but there is a group of 
creditors and shareholders who are going to be left behind and 
are going to be suffering the losses. And the question of moral 
hazard is going to surround making sure that they understand 
that prior to any failures so that they do proper monitoring 
and risk management, and they know that they are going to 
suffer the losses if this happens. So I think there is, you 
know, actually some positive impact of this in terms of the 
ability of the market to regulate these companies.
    Mr. Conyers. Professor?
    Mr. Lubben. I might be somewhat more skeptical about the 
moral-hazard issue. I think the moral-hazard issue might still 
well prevail. But I think that goes back to my comment in my 
opening remarks, that the insolvency process has to be a small 
piece of a much larger regulatory approach. And probably moral 
hazard is not best addressed through the insolvency process; it 
is best addressed through the financial institution regulators 
more directly.
    Mr. Conyers. Mr. Chairman, that concludes my questions, and 
I thank you for your generosity.
    And I thank the witnesses. This has been a very, very 
special panel, as far as I am concerned.
    Mr. Bachus. Thank you, Mr. Conyers. As you know, I have the 
greatest respect for you over the last 22 years, and you served 
as my Chairman when I first arrived here on the Hill. So thank 
you.
    Mr. Conyers. Thank you.
    Mr. Bachus. I am going to ask some questions.
    We were talking about Lehman Brothers, and, of course, 
Lehman Brothers, because of Bear Stearns, I think most people 
expected Lehman to receive a government assistance. And I think 
there was a reliance by Lehman, to a certain extent, that that 
was coming, and it never came.
    But it did serve a benefit, in that I think it highlighted 
some needed changes in the Bankruptcy Code if you were going to 
choose that as opposed to a government-assisted resolution. So 
I think we may have benefited from that. Certainly, the Lehman 
shareholders did.
    I am going to ask Professor Jackson, can Subchapter V be 
used to resolve financial institutions that have international 
operations and subsidiaries? And I think Mr. Conyers sort of 
mentioned that.
    Mr. Jackson. Yes, it can, but, obviously, a limitation of 
any U.S. Law, whether it be bankruptcy law or whether it be 
Title 2 of Dodd-Frank, is that it cannot directly impact 
foreign operations that are incorporated in other countries. It 
can set out a template, and it can give confidence to the 
foreign regulators that the rule of law will be followed, but I 
think that what you need in addition--and I think it is taking 
place--is international conversations and coordinations around 
this issue.
    I think it is hugely helpful that the European Union and 
the FDIC have agreed that single-point-of-entry-like 
proceedings are the appropriate way to go. I have a lot of 
confidence that they will work on these issues of cross-country 
collaborations, which I don't think we can solve on our own.
    I would just make the point that whatever the problems 
exist for bankruptcy law, they are going to exist for Title 2 
of Dodd-Frank, as well. The one difference is maybe foreign 
regulators would prefer seeing a regulator do this than a 
bankruptcy judge do this, but I think a lot of that depends on 
the FDIC's confidence in the bankruptcy process. And if they 
give their imprimatur to the process, then I think there will 
be very little distinction between whether it is Title 2 of 
Dodd-Frank or section 5 of Chapter 11 under this proposed bill.
    Mr. Bachus. Right.
    And I guess the fact that it is only the top holding 
company that files the bankruptcy, it does maybe lessen some of 
those complications.
    Mr. Jackson. Somewhat.
    Mr. Bachus. But not----
    Mr. Jackson. The problem is--and the bill effectively 
addresses this, but of course it cannot address it effectively 
extraterritorially--is a lot of the contracts that you want to 
keep in place at the operating subsidiary levels, like the 
qualified financial contracts and others, may have cross-
default provisions, may have change-of-control provisions that 
you don't want them to be able to enforce, and so we are still 
going to need help from the foreign regulators in keeping those 
things in place.
    Mr. Bachus. All right.
    Mr. Bernstein, do you----
    Mr. Bernstein. No, I don't have really anything to add. 
There is also work under way to develop contractual solutions 
so that if you do go through an appropriate proceeding and, for 
example, a bridge company were created that assumed the 
guarantee and what have you, that the contracts would remain in 
place even in foreign countries.
    Mr. Bachus. All right.
    And any suggestions you all have on whether there ought to 
be any statutory language in this bill or in a financial 
services bill or companion bill, perhaps?
    Professor Jackson, do you believe that enactment of 
Subchapter V into law would reduce the necessity for regulators 
to initiate a Title 2 resolution proceeding?
    Mr. Jackson. Quite clearly, yes.
    Mr. Bachus. And, Mr. Hessler, do you agree?
    Mr. Hessler. I do agree, as well.
    Mr. Bachus. Okay.
    I have been told that Mr. Farenthold asked you questions 
concerning the Federal Reserve and some other questions, so I 
am not going to repeat those.
    My final question, for Professor Lubben: In your written 
testimony, you indicated that it may be better to keep the 
equity of the newly formed bridge company in the possession of 
the debtor. Are there any risks associated with this proposed 
approach, particularly with the perception of the bridge 
company existing in, rather than out of, the bankruptcy 
process?
    Mr. Lubben. This goes to the question of separating the 
management of the bridge company from the ownership of the 
equity of the bridge company.
    I think there would be ways to make it clear that 
management is distinct from share ownership and that it would 
still allow the debtor, the old debtor, to access the value of 
those shares if they needed to fund their bankruptcy case. And 
I think, as I suggested in my written testimony, these may be a 
little bit more clear-cut.
    So the risk is just not making that distinction clear, but 
I think it could be made clear. So I think it is a solvable 
problem.
    Mr. Bachus. Well, I think there was some mention earlier by 
Mr. Bernstein or Professor Jackson, I think, that if you 
allowed, you know--that particularly the filing of a bankruptcy 
would not lead to any liability on the part of the board of 
directors.
    Mr. Bernstein. Yeah, we both mentioned that. We think that 
is an important feature so that you encourage voluntary, as 
opposed to the involuntary, proceedings.
    And if I might just comment on the question that Professor 
Lubben just discussed, one of the difficulties, which was 
mentioned by Professor Jackson, is the lack of understanding by 
foreign regulators of the bankruptcy process and moving the 
bridge company back into private ownership, albeit a trustee, 
but not ownership by the bankrupt holding company, and having 
it back in an environment where it is dealing directly with its 
primary regulators and the primary regulators are in control, 
and those are the people who are talking to the foreign 
regulators, may go a long way to stabilizing the new company's 
relationship with the regulators so they don't take precipitous 
action.
    Mr. Bachus. All right.
    Mr. Hessler. If I could just add one quick thought on that, 
what happens at present under just a conventional Section 363 
sale, even one that happens quickly where most of the debtor's 
assets are sold, you know, to somebody entirely outside of 
bankruptcy, in those circumstances what typically happens is 
nearly all of the management and certainly all of the 
management that is tied to the operations of the assets that 
are being transferred go with the assets. And I expect that 
that would happen here once the transfer happens under the 
single-point-of-entry approach.
    To Professor Lubben's point, also, about potential 
disjunction between, you know, sort of, creditor access to the 
assets, you know, where the management otherwise lines up, my 
instinct is that creditors would be very supportive of 
management going over into the bridge company along with the 
assets, given that it is their economic interest in the equity 
being held in the trust that is ultimately going to come to 
them through the plan distribution. So, you know, my instinct 
is that creditors actually would be heartened that this 
approach contemplates that.
    Mr. Bachus. All right. Thank you.
    I might ask this. You know, the Senate bill has been 
mentioned. They actually have Chapter 14 as opposed to a 
Subchapter 11, but is there any--is that a matter of substance, 
or is that just----
    Mr. Jackson. Not really a matter of substance. I actually 
think Subchapter V of Chapter--my Hoover counterparts may not 
like me to say this, but I think Subchapter V of Chapter 11 is 
the cleaner way to go.
    Mr. Bachus. Uh-huh. Thank you.
    Mr. Lubben. And I would actually concur on that. And I 
think there actually may be a subtle substantive reason to do 
it this way--namely, it makes clear that the other parts of 
Chapter 11 still apply to----
    Mr. Bachus. Yeah. And I think that was our reasoning, that 
it is a part of--it is not a separate----
    Mr. Bernstein. I agree with that.
    Mr. Bachus. Thank you.
    Mr. Hessler. As do I.
    Mr. Bachus. I was afraid to ask that, but I am glad I did. 
But, you know, it obviously is something you want to know. And 
I don't think they have any objection to that either.
    This concludes today's hearing, and thanks to all our 
witnesses for attending. It is always good for you to hear 
compliments about your abilities. Witnesses don't always get 
that from the panel, but there was unanimous recognition of all 
of your qualifications, experience, and abilities. And we 
appreciate you giving your valuable time to us. I am glad you 
are not billing at your normal hourly rate, for the attorneys.
    But, without objection, all Members will have 5 legislative 
days to submit additional written questions for witnesses or 
additional materials for the record.
    This hearing is adjourned. And I thank you for your 
patience.

    [Whereupon, at 6:06 p.m., the Subcommittee was adjourned.]
    
                            A P P E N D I X

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               Material Submitted for the Hearing Record
               



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    Note: The Subcommittee did not receive a response to these 
questions at the time of the printing of this hearing record.