    [House Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

                     FINANCIAL INSTITUTION BANKRUPTCY ACT
                                    OF 2015

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

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                               REGULATORY REFORM,
                          COMMERCIAL AND ANTITRUST LAW

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

                                   H.R. 2947

                                   __________

                                  JULY 9, 2015

                                   __________

                               Serial No. 114-35

                                   __________

             Printed for the use of the Committee on the Judiciary

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

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                           COMMITTEE ON THE JUDICIARY

                       BOB GOODLATTE, Virginia, Chairman
    F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
        Wisconsin                        JERROLD NADLER, New York
    LAMAR S. SMITH, Texas                ZOE LOFGREN, California
    STEVE CHABOT, Ohio                   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                 HAKEEM JEFFRIES, New York
    BLAKE FARENTHOLD, Texas              DAVID N. CICILLINE, Rhode Island
    DOUG COLLINS, Georgia                SCOTT PETERS, California
    RON DeSANTIS, Florida
    MIMI WALTERS, California
    KEN BUCK, Colorado
    JOHN RATCLIFFE, Texas
    DAVE TROTT, Michigan
    MIKE BISHOP, Michigan

               Shelley Husband, Chief of Staff & General Counsel
            Perry Apelbaum, Minority Staff Director & Chief Counsel
                                     ------

        Subcommittee on Regulatory Reform, Commercial and Antitrust Law

                       TOM MARINO, Pennsylvania, Chairman

                     BLAKE FARENTHOLD, Texas, Vice-Chairman

    DARRELL E. ISSA, California          HENRY C. ``HANK'' JOHNSON, Jr.,
    DOUG COLLINS, Georgia                  Georgia
    MIMI WALTERS, California             SUZAN DelBENE, Washington
    JOHN RATCLIFFE, Texas                HAKEEM JEFFRIES, New York
    DAVE TROTT, Michigan                 DAVID N. CICILLINE, Rhode Island
    MIKE BISHOP, Michigan                SCOTT PETERS, California

                          Daniel Flores, Chief Counsel

                                C O N T E N T S

                                  ----------

                                  JULY 9, 2015

                                                                       Page

                                    THE BILL

    H.R. 2947, the ``Financial Institution Bankruptcy Act of 2015''..     3

                               OPENING STATEMENTS

    The Honorable Tom Marino, a Representative in Congress from the
      State of Pennsylvania, 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    38
    The Honorable Bob Goodlatte, a Representative in Congress from
      the State of Virginia, and Chairman, Committee on the Judiciary    39
    The Honorable Dave Trott, a Representative in Congress from the
      State of Michigan, and Member, Subcommittee on Regulatory
      Reform, Commercial and Antitrust Law...........................    40
    The Honorable John Conyers, Jr., a Representative in Congress
      from the State of Michigan, and Ranking Member, Committee on
      the Judiciary..................................................    40

                                   WITNESSES

    Donald S. Bernstein, Esq., Partner, Davis Polk & Wardwell LLP
      Oral Testimony.................................................    43
      Prepared Statement.............................................    45
    Stephen E. Hessler, Esq., Partner, Kirkland & Ellis LLP
      Oral Testimony.................................................    59
      Prepared Statement.............................................    61
    Richard Levin, Esq., Partner, Jenner & Block LLP
      Oral Testimony.................................................    85
      Prepared Statement.............................................    87

                                    APPENDIX
                   Material Submitted for the Hearing Record

    Response to Questions for the Record from Donald S. Bernstein,
      Esq., Partner, Davis Polk & Wardwell LLP.......................   128
    Response to Questions for the Record from Stephen E. Hessler,
      Esq., Partner, Kirkland & Ellis LLP............................   132
    Response to Questions for the Record from Richard Levin, Esq.,
      Partner, Jenner & Block LLP....................................   134

                  FINANCIAL INSTITUTION BANKRUPTCY ACT OF 2015

                                  ----------

                             THURSDAY, JULY 9, 2015

                           House of Representatives,

                      Subcommittee on Regulatory Reform,
                          Commercial and Antitrust Law

                          Committee on the Judiciary,

                                Washington, DC.

        The Subcommittee met, pursuant to call, at 10:10 a.m., in
    room 2141, Rayburn House Office Building, the Honorable Tom
    Marino (Chairman of the Subcommittee) presiding.
        Present: Representatives Marino, Goodlatte, Farenthold,
    Collins, Walters, Ratcliffe, Trott, Bishop, Johnson, Conyers,
    and DelBene.
        Staff Present: (Majority) Anthony Grossi, Counsel; Andrea
    Lindsey, Clerk; and (Minority) Susan Jensen, Counsel.
        Mr. Marino. The Subcommittee on Regulatory Reform,
    Commercial and Antitrust Law will come to order.
        Good morning everyone. I apologize for the delay. We all
    have three or four things going on at once, starting at 7 in
    the morning. So without objection, the Chair is authorized to
    declare recesses of the Committee at any time. We welcome
    everyone to today's hearing on H.R. 2947, the ``Financial
    Institution Bankruptcy Act of 2015.'' I will now recognize
    myself for an opening statement.
        Last Congress, the Financial Institution Bankruptcy Act was
    reported favorably by this Committee and passed the House under
    suspension of the rules. This week, the legislation was
    reintroduced, and today, we build on last year's record by
    further examining the bill. In the wake of the financial crisis
    of 2008, Congress enacted the Dodd-Frank Wall Street Reform and
    Consumer Protection Act. That legislation was intended to
    address, among other things, the potential failure of large
    financial institutions.
        While the Dodd-Frank Act created a regulatory process for
    such an event, the Act states that the preferred method of
    resolution for a financial institution is through the
    bankruptcy process. However, the Dodd-Frank Act did not make
    any amendments to the bankruptcy code to account for the unique
    characteristics of a financial institution. The legislation
    before us today fills that void.
        The Financial Institution Bankruptcy Act is the product of
    years of study by industry, legal, and financial regulatory
    experts, as well as bipartisan review over the course of three
    separate Subcommittee hearings last Congress. The legislation
    includes several provisions that improve the ability of a
    financial institution to be resolved through the bankruptcy
    process. It allows for a speedy transfer of a financial firm's
    assets to a newly formed company. That company would continue
    the firm's operations for the benefit of its customers,
    employees, and creditors, and ensure the financial stability of
    the marketplace.
        This quick transfer is overseen by, and subject to the
    approval of an experienced bankruptcy judge, and includes due
    process protections for parties-in-interest. The bill also
    creates an explicit rule in the bankruptcy process for the key
    financial regulators. In addition, there are provisions that
    facilitate the transfer of derivative and similarly structured
    contracts to the newly formed company. This 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
    financial institutions. To that end, the bill provides that
    specialized bankruptcy and appellate judges will be designated
    in advance to preside over these cases.
        The bankruptcy process has long been favored as the primary
    mechanism for dealing with distressed and failing companies.
    This is due to its impartial nature, adherence to established
    precedent, judiciary oversight, and grounding in the principles
    of due process and the 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.
        As an original cosponsor of the bill, I look forward to
    hearing from today's expert panel of witnesses on the merits of
    the Financial Institution Bankruptcy Act and whether any
    further refinements to the bill are necessary. I now recognize
    the Ranking Member of the Subcommittee on Regulatory Reform,
    Commercial, and Antitrust Law, Mr. Hank Johnson, for his
    opening statement. Mr. Johnson.
        [The bill, H.R. 2947, follows:]

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                                   __________
        Mr. Johnson. Thank you, Mr. Chairman. H.R. 2947, the
    ``Financial Institution Bankruptcy Act of 2015,'' amends the
    bankruptcy code to establish a process for the expedited
    judicial resolution of large financial institutions to soften
    the disruptive effects of their collapse.
        I trust the courts and am sympathetic to the notion that a
    judicial process may be preferable to an administrative process
    for resolving systemically important financial institutions
    that present a risk to the economic stability of our Nation,
    but I'm concerned that the lack of a funding mechanism for H.R.
    2947 may make the bill unworkable.
        A key difference between an orderly resolution under Dodd-
    Frank and the resolution contemplated by this bill concerns the
    proper mechanism for funding the reorganization of the debtor.
    In a typical bankruptcy case, the debtor's reorganization may
    be funded by private parties or by the Federal Government as
    illustrated by the General Motors bankruptcy.
        In many instances, liquidity provided by the U.S.
    Government to prevent the collapse of financial institutions
    has either returned a profit to the government or is likely to
    be repaid. The National Bankruptcy Conference (NBC), which
    includes the Nation's leading bankruptcy scholars and
    practitioners, explained in a letter to the Committee in June
    that, ``meeting the liquidity needs of a distressed financial
    institution is essential to successfully resolving the firm
    without creating undue systemic risk.''
        This critical mechanism has prevented the collapse of
    several major financial institutions without cost to the
    taxpayer. It is my understanding that this element does not
    currently exist in the bill for jurisdictional reasons.
    Nevertheless, I remain optimistic that the Chair will continue
    to work across party lines to accommodate these concerns prior
    to the bill's consideration on the floor.
        In addition to these concerns, I would caution the Chair
    against efforts to combine this bill with legislation that
    would strike Title II of the Dodd-Frank Act. Such efforts would
    be unacceptable and would meet strong opposition. As the
    National Bankruptcy Conference further noted, laws currently in
    place such as Title II of the Dodd-Frank Act should ``continue
    to be available even if the bankruptcy code is amended to
    better address the resolution of systemically important
    financial institutions'' because ``the ability of U.S.
    regulators to assume full control of the resolution process to
    elicit the cooperation from non-U.S. regulators is an essential
    insurance policy against systemic risk and potential conflict
    and dysfunction among the multinational components of these
    institutions.''
        Title II of the Dodd-Frank Act also serves as a valuable
    backstop to the bankruptcy process should this bill become law.
    Additionally, as the conference has also noted, it is important
    that financial regulators have a very significant role in the
    timely resolution of a financial institution regardless of
    whether by bankruptcy or orderly liquidation.
        As the Conference noted, the ``heavy involvement of U.S.
    regulators would be critical if adverse systemic effects from
    the failure of the systemically important financial institution
    are to be prevented or minimized.''
        It would be unwise to overlook the expertise of financial
    regulators who are charged with considering the impact of a
    resolution on the economy and financial markets in favor of a
    process that is intended to produce maximum returns to
    creditors while facilitating the debtor's reorganization.
        Thank you, Mr. Chairman, and I yield back.
        Mr. Marino. Thank you, Mr. Johnson.
        The Chair now recognizes the Chairman of the full Judiciary
    Committee, Congressman Goodlatte of Virginia for his opening
    statement.
        Mr. Goodlatte. Thank you, Mr. Chairman. I appreciate your
    holding this hearing.
        Our Nation's financial system provides the life blood for
    industry, small businesses, and our communities 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 threatened the very stability of the global
    economy and our financial industry.
        There has been considerable debate over whether Congress'
    main response to 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 2015,'' 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 risk.
        Additionally, it incorporates the ``single point of entry''
    approach, which a growing consensus of experts in public and
    private industry believes 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
    legislation before us today has been a collaborative effort
    that included the financial and legal community, Members of
    Congress on both sides of the aisle, the Federal Reserve, the
    FDIC, the courts, and Treasury.
        I applaud Congressman Trott for continuing the efforts of
    last Congress to strengthen the bankruptcy code and Chairman
    Marino for holding today's hearing on this important reform. I
    look forward to hearing from today's witnesses on the Financial
    Institution Bankruptcy Act and whether the passage of time has
    resulted in the need for any further revisions to the bill.
        And at this time it is my pleasure to yield the balance of
    my time to the gentleman from Michigan, Mr. Trott, the chief
    sponsor of the legislation for any opening remarks that he
    might have.
        Mr. Trott. Thank you, Chairman. I also want to thank
    Chairman Marino and Ranking Member Johnson for holding this
    hearing, and also thank our witnesses for again providing their
    insight on this bill.
        The health of our financial institutions, particularly
    large multinational players, is critical to not only our
    economy but also our citizens. Consequently, how we react when
    a systemically important financial institution fails is of
    particular concern.
        The Financial Institution Bankruptcy Act of 2015 seeks to
    address those concerns and put in place a better process. The
    bill amends the bankruptcy code so as to allow the insolvency
    of a financial institution to be resolved through the Chapter
    11 process. The Chapter 11 process provides rules that are
    designed to accomplish an equitable and predictable resolution
    of competing claims.
        Chapter 11 is a relatively efficient process, and the
    integrity and transparency ensured by due process protections
    will reduce the risk to our overall economy and reduce the
    potential of a taxpayer funded bailout.
        As an aside, my hometown is Detroit, Michigan, and I am
    here to tell you that the bankruptcy process can add great
    value to difficult financial situations that undermine our
    economy and our communities.
        Thank you again, Chairman. I yield back my time.
        Mr. Goodlatte. And I yield back. Thank you, Mr. Chairman.
        Mr. Marino. Thank you, Chairman.
        The Chair recognizes the full Judiciary Committee Ranking
    Member, Congressman Conyers from the State of Michigan for his
    opening statement.
        Mr. Conyers. Thank you, Mr. Chairman and Members of the
    Committee. I join in congratulating my colleague from Michigan,
    Mr. Trott, for his authorship of the measure that is before us.
    I support it, and I am a cosponsor of it. As a matter of fact,
    there are a number of reasons for my support.
        Number one, the bill addresses a real need, recognized by
    regulatory agencies, bankruptcy experts, and the private sector
    that the bankruptcy law must be amended so that it can
    expeditiously restore trust in the financial marketplace as
    soon as possible after the collapse of a major financial
    institution.
        Many of us recall the failure of Lehman Brothers in 2008
    which caused a worldwide freeze on the availability of credit,
    which not only affected Wall Street but Main Street as well.
        The near collapse of our Nation's economy because of
    Lehman's failure revealed that current bankruptcy law is ill
    equipped to deal with complex financial institutions in
    economic distress. H.R. 2947 would establish a specialized form
    of bankruptcy relief under Chapter 11 of the Bankruptcy Code by
    which the holding company of a large financial institution
    could voluntarily use or be forced to use by the Federal
    Reserve Board, under certain conditions.
        The debtor's operating subsidiaries would continue to
    operate outside of bankruptcy while the debtor's principal
    assets--such as secured property, financial contracts, and the
    stock of its subsidiaries--would be transferred to a temporary
    bridge company. The bridge company, under the guidance of a
    trustee, in turn, would liquidate these assets to pay the
    claims of the debtor's creditors.
        The legislation would also impose a temporary stay to
    prevent parties from exercising their rights in certain
    qualified financial contracts. Each critical step of this
    process would be under the supervision of a bankruptcy judge
    and subject to the right of appeal.
        Another reason for my support is that it appropriately
    recognizes the important role of the Dodd-Frank Act in the
    regulation of large financial institutions. Without doubt, the
    Great Recession was a direct result of the regulatory
    equivalent of the Wild West. In the absence of any meaningful
    regulation of the mortgage industry, lenders developed high
    risk subprime mortgages and 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. The ensuing 2008 crash froze credit and
    trapped millions of Americans in mortgages they could no longer
    afford, causing waves of foreclosures, massive unemployment,
    and international economic upheaval.
        The Dodd-Frank Act goes a long way toward reinvigorating a
    regulatory system that makes the financial marketplace more
    accountable and hopefully more resilient. In particular, Title
    II of Dodd-Frank establishes a mandatory resolution process to
    wind down large financial institutions, which is a critical
    enforcement tool for bank regulators to ensure compliance with
    the Act's heightened regulatory requirements.
        Nevertheless, Dodd-Frank clearly recognizes that bankruptcy
    should be a first resort and that Title II's orderly resolution
    process should be a last resort. In fact, Title I of the Act
    explicitly requires these companies to write so-called living
    wills that must explain how they will resolve their financial
    difficulties in a hypothetical bankruptcy scenario. This is
    because bankruptcy law has, for more than 100 years, enabled
    some of the Nation's largest companies to regain their
    financial footing, including General Motors and Chrysler
    Corporations.
        But to be a truly viable alternative to Dodd-Frank's
    resolution process, the bankruptcy law must be amended to
    facilitate the rapid administration of a debtor's assets in an
    orderly fashion that maximizes value and minimizes disruption
    to the financial marketplace.
        And finally, I am pleased to note that this bill is the
    product of a very collaborative, inclusive, and deliberative
    process, which I hope would be more regularly employed in this
    Congress and not the exception when it comes to drafting
    legislation.
        While an excellent measure, H.R. 2947 unfortunately does
    not include any provision allowing the Federal Government to be
    a lender of last resort, which nearly every expert recognizes
    is a necessary element to ensure financial stability. I
    recognize, however, that this is an issue not within the
    Committee's jurisdiction but more within the area of the
    jurisdiction of the Financial Services Committee.
        I welcome the witnesses, particularly Mr. Levin, and I
    thank the witnesses for their participation here today, and I
    yield back the balance of my time.
        Mr. Marino. Thank you, Congressman Conyers.
        Without objection, other Members' opening statements will
    be made part of the record. The Chair will begin by swearing in
    our witnesses before introducing them. Would you please rise
    and raise your right hand.
        Do you swear that the testimony you're about to give before
    this Committee is the truth, the whole truth, and nothing but
    the truth, so help you God?
        Let the record reflect that the witnesses have answered in
    the affirmative. Thank you. Please be seated.
        I will now introduce each of the witnesses before anyone
    gives their opening statement. Mr. Don Bernstein is a partner
    at 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 Steel, and Johns Manville. Mr. Bernstein has earned
    multiple honors for his practice, including being elected by
    his peers as the chair 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 JD from the University of Chicago Law
    School. Thank you, Mr. Bernstein, for being here
        Mr. Stephen Hessler is a partner in 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. In addition to
    practicing law, Mr. Hessler is an author and frequent lecturer
    on a variety of restructuring related topics, including, as a
    professor at the University of Pennsylvania, where he teaches a
    restructuring class to both law school and Wharton students.
    Mr. Hessler has been recognized by both Chambers and
    Turnarounds & Workouts as an outstanding restructuring lawyer.
    Mr. Hessler received his BA and JD from the University of
    Michigan, where he served as the managing editor of Michigan's
    Law Review. Welcome.
        Mr. Richard Levin is a partner in the Bankruptcy, Workout
    and Corporate Reorganization Practice of Jenner & Block. Mr.
    Levin is the current chair of the National Bankruptcy
    Conference, a fellow of the American College of Bankruptcy, and
    a lecturer of bankruptcy law at the Harvard Law School. In
    almost 40 years of practice, Mr. Levin has gained a reputation
    as one of the foremost restructuring, bankruptcy and creditor/
    debtor rights lawyers. Notably, Mr. Levin served as a
    bankruptcy counsel to the House Judiciary Committee and was one
    of the principal authors of the 1978 U.S. Bankruptcy Code. Mr.
    Levin received his undergraduate degree from MIT and his JD
    from Yale Law School where he served as editor of Yale Law
    Review. Welcome, Mr. Levin.
        Mr. Levin. Thank you, Mr. Chairman.
        Mr. Marino. Each of the witnesses' written statements will
    be entered into the record in its entirety, and I ask each of
    the witnesses to summarize their statements, you've been
    through this before, in 5 minutes or less. To help you stay
    within your time, you see the lights in front of you, but as I
    do, when I'm sitting at that table making a statement, I'm
    concentrating on making my statement and not watching the
    lights.
        So what I will politely and diplomatically do if it gets
    too far over the 5 minutes, is I will reach for the gavel and
    just sort of raise it to get your attention, and ask you to
    succinctly come to a close in your statement.
        I'm going to recognize our witnesses for their opening
    statement. Mr. Bernstein.

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

        Mr. Bernstein. Thank you, Chairman Marino, and thank you,
    Chairman Goodlatte, and also Congressman Trott for introducing
    and being a sponsor of the bill, as well as Congressman
    Conyers. I want to say that you have made my job easy in terms
    of meeting the 5-minute requirement because the statements were
    so good in terms of summarizing the bill. I'm just going to
    skip to my major points
        So, just as a little bit of background, this idea of single
    point of entry resolution of a financial firm is a result of a
    lot of work that's been done at the FDIC and in other contexts,
    including under Title II of Dodd-Frank, with the idea that if
    you set up financial institutions correctly in the United
    States with bank holding companies, you should be able to
    recapitalize their operations if the operations have losses
    because there is loss absorbency at the holding company level.
        And in fact, there are a number of features that are being
    added to the way bank holding companies are structured in order
    to facilitate resolution under the Bankruptcy Code, which has
    been an outgrowth of the resolution planning process under the
    Dodd-Frank Act. One of these is a concept that is being adopted
    globally, which is called, ``Total Loss Absorbing Capacity.''
        That consists of two things. It consists of the capital of
    the bank and also a layer of debt that can effectively be
    bailed in or converted, in effect, to equity so that no capital
    needs to be infused from sources outside the firm, including no
    taxpayer funds would have to be infused to create the capital
    necessary.
        The capital levels of financial institutions since 2008,
    especially the largest ones, have essentially doubled from
    where they were in 2008, and then if you add a requirement that
    is in the process of being developed and is likely to be
    imposed by regulators for total loss absorbing capacity, it
    will double again in effect and permit the use of bankruptcy
    and single point of entry resolution to use that loss absorbing
    capacity in order to resolve firms.
        Most of the largest financial institutions actually have
    that layer of indebtedness already, so we are actually at a
    point where the resources are available to recapitalize these
    firms.
        Secondly, there has been a massive increase in the amount
    of liquidity that's being maintained by all the firms.
    Congressman Conyers made the point about a liquidity source. I
    know the NBC makes that point in their letter and I make it as
    well in my testimony, my written testimony, but today, with the
    levels of liquidity that the banks are maintaining, they can
    resolve themselves in a severely adverse economic scenario
    based on the balance sheet liquidity that they are currently
    maintaining. So that is--and it's a huge increase from the way
    it was in 2008.
        The third area that single point of entry requires is a
    clean holding company, a holding company that can be left
    behind in a bankruptcy proceeding when the operating
    subsidiaries have been recapitalized and then get transferred
    to a bridge company. And pursuant to regulatory requirements
    and also pursuant to the resolution planning process, the firms
    are also putting themselves in a place where they are not
    having material operations occurring in the holding company
    where there is little or no short-term debt in the holding
    company, and subsidiaries are not guaranteeing holding company
    debts. So that is another aspect of how the companies are
    putting themselves in a position to actually utilize the single
    point of entry process.
        And finally, because the amendments that are in section
    1188 of the proposed bill have not been enacted, there has been
    a very strong effort by both regulators and by the firms to
    amend financial contracts to remove cross defaults to a holding
    company bankruptcy so that the financial contracts cannot be
    terminated the way they were in Lehman Brothers and can
    continue in effect, of course with appropriate protections for
    counterparties, because the guarantees would be moved to the
    new bridge company and would therefore not be subject to the
    debt that's been left behind in the old bankrupt company.
        So all of those features, and there were some others that I
    mention in my written testimony, are putting things in a
    position to actually accomplish single point of entry.
        Now, there were two provisions in the bill that I wanted to
    mention that I think are worth just highlighting. The first one
    is the ability of the Federal Reserve to commence an
    involuntary case. One of the difficulties that's been raised
    with that provision is involuntary cases normally come with the
    right to oppose them and other parties need to be heard by the
    court, there might be appeals, and in my view, if the due
    process issues are so overwhelming with respect to that issue,
    it's not critically necessary to include that provision.
        And I see you raising your gavel, so what I will do is wait
    for questions if there are questions on that issue or on the
    other provision that I wanted to address. Thank you.
        Mr. Marino. Thank you, Attorney Bernstein. See it works
    very subtilely.
        [The prepared statement of Mr. Bernstein follows:]

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                                   __________
        Mr. Marino. Attorney Hessler, please.

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

        Mr. Hessler. Thank you. Chairman Marino, Chairman
    Goodlatte, Ranking Member Johnson, Ranking Member Conyers,
    other Members, thank you for inviting me to testify at today's
    hearing.
        As noted in your very kind introduction, I'm a partner in
    the restructuring group of Kirkland & Ellis, LLP. Although my
    practice includes representing creditors, equity holders, and
    other constituencies in complex distressed matters, I mostly
    represented major corporations as company counsel in some of
    the largest and most challenging bankruptcies in history. I am
    speaking especially from that perspective this morning.
        I am distinctly pleased to appear before this Subcommittee
    again regarding the Financial Institution Bankruptcy Act of
    2015, also known as Subchapter V. It was my privilege to
    testify in July 2014 in support of the prior version. Given the
    comprehensive record scrutinizing Subchapter V, I will not
    repeat my prior testimony and will instead this morning focus
    on two issues.
        First, the comparative benefits of a judicial process such
    as Chapter 11 versus a regulatory process such as Title II of
    the Dodd-Frank Act for addressing a major bank's failure, and
    second, how the 48-hour delay of the qualified financial
    contract safe harbors from the automatic stay is critical to
    the effectiveness of Subchapter V.
        Turning to the first issue. The touchstone analytical
    framework for evaluating Subchapter V should not be as a stand-
    alone proposal, but rather, as compared to Chapter 11 in its
    current form, Chapter 11 as amended by Subchapter V and Title
    II. Among these alternatives, Subchapter V is the best designed
    option both structurally and philosophically to advance the
    private and public policies that animate the reorganization of
    a financial corporation.
        The hallmarks of an optimal resolution regime for failing
    SIFIs must be clear and established rules administered by an
    impartial tribunal. Subchapter V is a financial corporation
    specific supplement to the existing reorganization provisions
    of Chapter 11 of the Bankruptcy Code. And thus, it builds upon
    decades of practice and precedent that have refined the code
    and that otherwise provide a well tested and proven successful
    reorganization framework for major corporations, including
    SIFIs and their stakeholders.
        Importantly, Subchapter V does not directly preclude or
    supplant the potential applicability of Title II. Critically,
    however, by design and operation, the availability of
    Subchapter V will make it far less likely that Title II will
    ever be invoked.
        Turning to my second point. As a general rule, upon a
    debtor commencing a Chapter 11 case, contract counterparties
    are automatically stayed from terminating their agreements and
    engaging in self-help remedies against estate assets, but the
    Bankruptcy Code currently provides that counterparties to so-
    called qualified financial contracts, such as derivatives,
    repurchase, and swap agreements enjoy a so-called safe harbor
    from the automatic stay.
        Consequently, a Chapter 11 filing by a financial
    corporation with significant qualified financial contracts
    could be chaotic at the outset as counterparties that are not
    subject to the automatic stay proceed to terminate and enforce
    their rights in the debtor's assets. Subchapter V addresses
    this potential problem by precluding access to these safe
    harbors for 48 hours after the commencement of the case, which
    is consistent with the time period under Section 1185 for
    effecting the transfer of the subsidiary operating assets which
    include qualified financial contracts to the bridge company
    under the single point of entry approach highlighted by Mr.
    Bernstein.
        I have previously criticized Title II for imposing too
    brief a stay on this front until only 5 p.m. Eastern on the
    business day following the FDIC's appointment as receiver, and
    as a general matter, my default position remains that safe
    harbors should not exist at all. That said, for the following
    four reasons, I am persuaded that Subchapter V proposes a
    workable construct in this context.
        One, since passage of the Dodd-Frank Act in 2010, financial
    corporations have had 5 years to draft and refine their living
    wills. Ideally, the enactment of Subchapter V will reinforce
    the need to be prepared to make expedited qualified financial
    contract transfer and assignment decisions.
        Two, Subchapter V requires that decisions on whether to
    transfer and assign all of the debtor financial corporation's
    assets, expressly including qualified financial contracts, must
    be made within 48 hours. It logically follows that 48 hours is
    a sufficient period to stay qualified financial contract
    counterparties from taking remedial actions that would
    interfere with these determinations.
        Three, the implicit expectation of Subchapter V is that
    essentially all qualified financial contracts will be
    transferred to the bridge company. Because Subchapter V
    precludes cherry-picking only certain qualified financial
    contracts for assignment, this should reduce the burden of
    having to make transfer determinations for every individual
    agreement.
        Lastly, the most likely alternative to a Subchapter V case,
    which is Title II, proposes a shorter stay than 48 hours, and
    Chapter 11 without Subchapter V provides for no stay at all on
    qualified financial contract counterparty termination. This
    means Subchapter V's 48-hour stay is actually the most robust
    option under the current and potential SIFI insolvency regimes
    at issue.
        I look forward to further careful consideration of the
    important issues addressed by Subchapter V. I thank the
    Subcommittee for allowing me to share my views on this
    legislation, and I welcome the opportunity to answer any
    questions about my testimony.
        Mr. Marino. Thank you, Attorney Hessler.
        [The prepared statement of Mr. Hessler follows:]

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                                   __________
        Mr. Marino. Attorney Levin, did I--am I pronouncing it
    correctly? Levin or Levin?
        Mr. Levin. It is Levin, Mr. Chairman
        Mr. Marino. Levin. I apologize for the mispronunciation.
        Mr. Levin. Not a problem.
        Mr. Marino. Please, your opening statement.

                   TESTIMONY OF RICHARD LEVIN, ESQ.,
                      PARTNER, JENNER & BLOCK LLP

        Mr. Levin. Thank you. Thank you, Mr. Chairman. Thank you
    for your kind introduction. I thank the Members of the
    Subcommittee for their attention here today.
        I want to reiterate that as chair of the National
    Bankruptcy Conference, I am speaking here today only on behalf
    of the Conference, not on behalf of my own views or the views
    of my law firm, Jenner & Block, or the views of any clients of
    Jenner & Block.
        You have our written statement, Mr. Chairman, which I
    understand will be included in the record. It covers many more
    things than I will address today orally, but I want to
    highlight a few points.
        First, I would like to describe that the National
    Bankruptcy Conference is in general agreement with what Mr.
    Bernstein and Mr. Hessler have already said. There is a lot
    of--as there is within the Subcommittee--there is a lot of
    agreement within the financial and bankruptcy community about
    many terms of this bill. It was very carefully crafted and
    constructed to address many of the concerns that had been
    addressed, especially with respect to financial contracts.
        That said, the National Bankruptcy Conference, which
    generally supports bankruptcy legislation, has concerns about
    the workability of this legislation considered in an isolated
    form. But what has happened over the last several years since
    the financial crisis is that many other structures have arisen
    that make this bill much more workable than it would have been
    had it been enacted say in 2009 or 2010, the single point of
    entry concept development, the provisions in financial
    contracts that provide for nontermination upon the guarantor's
    or the parent guarantor's bankruptcy and many other things that
    Mr. Bernstein and Mr. Hessler have addressed, but the
    Conference nevertheless is concerned about the workability of
    this legislation.
        We do not oppose it. We are not, I will say, vigorous
    supporters of it. We are, I think, mild supporters of the
    legislation as a good alternative for the reasons that Mr.
    Hessler just described. But let me describe the few concerns
    that we have.
        One is that the, the regulators in every other financial
    area of stockbrokers, insurance companies, usually have the
    speed and the agility and the expertise to take over and
    resolve a distressed financial institution. Here we are talking
    about the holding companies where the regulators, in normal
    times, have a lot of expertise. Bankruptcy courts do not have
    that expertise. They are going to be asked to move very quickly
    over what we call a resolution weekend. We all recognize that
    things have to move that fast. And we think that therefore the
    regulators should continue to play a major role in this
    process.
        The judicial supervision is useful for transparency and due
    process, we agree with that, but we do not believe that given
    the speed that is required and the time it takes to get
    educated about the intricacies and complexities of these
    institutions that all of this can be put upon even a well
    trained bankruptcy judge and that the regulatory role is still
    very important in the process.
        We believe it's also important because of cross border
    issues. Regulators in other countries are much more comfortable
    dealing with the regulators that they have worked with for
    years in supervising these institutions rather than with an
    unknown bankruptcy judge who might be every bit as qualified
    and capable as the regulators but is not a known quantity and
    therefore would create uncertainty and therefore risk.
        So the next point is that--the point on involuntary
    petitions. We are concerned about due process with the amount
    of time that is available to deal with involuntary petitions,
    and we favor the voluntary route. I think we can witness the
    Lehman experience, which in a voluntary petition works, that we
    don't need a regulator in a voluntary because the regulators
    have enough tools to persuade management and a board of
    directors that a voluntary petition is necessary. So we support
    the idea of voluntary use of Subchapter V.
        We are concerned about the lender of last resort issue. We
    know that's outside this Committee's jurisdiction, so I won't
    spend much time on it other than to say we think its
    availability will obviate the need for its use, and that's an
    important point.
        And finally, we do support the provision in this bill,
    which was not--which has not been in some other proposals, that
    this proceeding take place before bankruptcy judges who are
    expert in financial reorganization rather than before the
    district court who does not have the same expertise as the
    bankruptcy court.
        With that, Mr. Chairman, I'm happy to address any questions
    the Committee might have.
        Mr. Marino. Thank you, Attorney Levin.
        [The prepared statement of Mr. Levin follows:]

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                                   __________
        Mr. Marino. The Chair will now start by asking questions of
    the panel, and I ask my colleagues to keep their questions at 5
    minutes or less and give you ample time to answer
        Mr. Bernstein, I would like to start with you for a moment.
    We know that banks have increased their liquidity reserves, but
    if a bank were to fail and the bridge company--would the bridge
    company still have to receive some type of loan to cover the
    issue concerned, or do banks have enough liquidity to keep
    those loans at a minimum?
        Mr. Bernstein. Thank you. At current liquidity levels,
    which have been enhanced since 2008, the banks have used severe
    stress testing of those liquidity models in a resolution
    context, and they show that they do have enough liquidity. I
    agree with Mr. Levin's point that if there were a liquidity
    backstop, it wouldn't be used, but having it there would help
    to stabilize the firm more quickly simply because it exists.
        So I think the need for--there is no need for liquidity
    because of the current balance sheet levels, but having a
    liquidity backstop would serve the purpose of helping to
    facilitate the resolution and getting the company to be
    stabilized more quickly to give the market confidence.
        Mr. Marino. Thank you. Attorney Hessler, you stated in your
    last, I think, testimony about your reservations concerning the
    single point of entry approach, and have you come up with an
    alternative to that? Would you please explain that in a little
    more detail? I did it get it in your opening statement, but
    could you elaborate on it, please?
        Mr. Hessler. Sure. I have not come up with an alternative
    way, but I would say--and this was emphasized in my testimony
    submitted for today. Over the last year since my testimony last
    summer, I spent significant additional time contemplating the
    bill, and I am at this point comfortable with the single point
    of entry approach, and I guess very quickly I'll tick off four
    reasons why I think it is----
        Mr. Marino. Please.
        Mr. Hessler [continuing]. A viable construct.
        First of all, a point that was highlighted by Mr. Bernstein
    in his opening statement. SIFIs have corporate structures that
    don't comport with conventional bankruptcy practice. Many of
    the operating subsidiaries either cannot be filed for
    bankruptcy or need to be liquidated in a regulatory proceeding.
        So Subchapter V, the single point of entry approach
    actually facilitates and accommodates the unique corporate
    structure of systemically important financial institutions.
        The second point is while the discreet steps of single
    point of entry may be a unique addition to Chapter 11, the
    transfer determination, that in and of itself is subject to
    Bankruptcy Code and bankruptcy court approval within well
    established and applicable law under the legal principles of
    sections 363 and 365 of the Bankruptcy Code.
        The third point is more of a practical matter, which is,
    again, although single point of entry would be a novel addition
    to the Bankruptcy Code, as already noted, versions of this very
    rapid sale have been happening already. Lehman is the most
    extreme example, which was the sale of all the operating assets
    within, you know, four to 5 days of the petition, but there
    have been other sort of lightning fast with the ``melting ice
    cube sales'' that are already happening under the Bankruptcy
    Code, and so understood, the single point of entry approach
    actually just formalizes and codifies something that's already
    going on.
        And then lastly, and I talk about this at great length in
    my testimony, if you actually walk through the expectations of
    various creditors, secured creditors, unsecured creditors, and
    equity interest holders, the distributional scheme that is
    effected by single point of entry is consistent with typical
    Chapter 11 principles.
        Mr. Marino. Thank you. Attorney Levin, you talk about the
    regulators having a role in this, and I do agree that they
    should have a role in this, but their decisions, in part, are
    subjective. How can we assure that at least their subjective
    findings are going to be consistent? I have a concern when so
    many subjectivity is involved in this situation by someone who
    is not a judge or an experienced bankruptcy judge, please.
        Mr. Levin. Fair point, Mr. Chairman. I'd note, however,
    that in a lot of these areas, even in the bankruptcy courts,
    the decisions are discretionary, and therefore, to a large
    degree, subjective. The courts set out broad rules for what
    kinds of transactions are permitted, but within those broad
    rules, there is tremendous subjectivity in their application.
    And I would note that the regulators themselves have begun
    adopting regulations on how this process would work, so it is
    controlled as well. If you have the combination of the
    regulators and the bankruptcy court supervising this process, I
    think you get the best of both worlds in that area.
        If I might follow up on Mr. Hessler's last----
        Mr. Marino. Quickly, please
        Mr. Levin [continuing]. Remark. There is a real--there is a
    dividing line that's very important in the single point of
    entry concept. The dividing line is the transfer of the
    operating assets to the bridge company.
        From that point, what goes on in the bankruptcy case is
    purely bankruptcy. It's not regulatory. It's not financial
    institution. The financial institution has been moved to the
    bridge company, and the bridge--what's going on in the bridge
    company is totally outside of the bankruptcy realm. It should
    be a healthy operating financial institution that will be
    subject to regulatory control.
        I think Subchapter V, meaning no pun, bridges that nicely
    and separates them and therefore works to facilitate both
    systems in due process and transparency and protection of
    creditors and protection of systemically important--protection
    of the system with a systemically important financial
    institution, and that, I think, addresses the fourth of Mr.
    Hessler's points that he made.
        Mr. Marino. Thank you. My time is expired. The Chair
    recognizes the Ranking Member, the gentleman from Georgia,
    Congressman Johnson.
        Mr. Johnson. Thank you. Mr. Levin, in a letter that the NBC
    sent to our Subcommittee last month, the conference stated that
    any amendments to the Bankruptcy Code relating to the
    resolution of SIFIs should make it clear that regulators retain
    Title II's orderly liquidation authority despite the pendency
    of bankruptcy.
        Does H.R. 2947 sufficiently ensure that regulators retain
    their Title II authority, notwithstanding the pendency of the
    bankruptcy?
        Mr. Levin. Yes. I haven't--the bill was introduced this
    week, and I haven't had a chance to review it, but my
    understanding was that it does not affect the regulators' other
    authorities for liquidation.
        Mr. Johnson. All right. Thank you. Can a Subchapter V
    operate as intended if there is no secured lender of last
    resort such as the Federal Government?
        Mr. Levin. Possibly. It's a far riskier proposition. Mr.
    Bernstein notes that the banks are far better capitalized now
    than they were 6 or 7 years ago, very true. I would expect that
    a SIFI that winds up in Subchapter V probably would not be as
    well capitalized as most banks are today, and therefore, there
    would be a need for liquidity. That liquidity might be supplied
    by the recapitalization of the subsidiaries when they are
    transferred over to the bridge company and they're
    recapitalized by contribution of the parent from the assets,
    but at the same time it might not be adequate and therefore
    liquidity could be important.
        To the extent it's a bank subsidiary, the Federal Reserve
    discount window provides that. To the extent it's a broker/
    dealer or an insurance company or another kind of financial
    institution such as a derivatives trading institution, there is
    no apparent source of liquidity, and that could create risk in
    the bridge company.
        As I said earlier, and this is the important point to
    stress, the market is less likely to run if it knows the
    liquidity facility is there than if there isn't one. If the
    market knows that the liquidity facility is there, people will
    feel protected, and therefore, there will be less need for a
    liquidity facility. I sometimes characterize it as akin to our
    nuclear arsenal. The fact that we have it means that we don't
    have to use it.
        Mr. Johnson. Thank you. Mr. Hessler, your response to that
    same question?
        Mr. Hessler. I agree with the general thrust of Mr. Levin's
    response. I think it's possible that the absence of the Federal
    funding mechanism would not impair the ability of the bridge
    company to operate effectively because of the recapitalization
    that occurs upon the transfer of the assets. To the extent that
    is otherwise available, though, that could be reassuring to the
    market.
        Mr. Johnson. Thank you. Mr. Levin, in a letter that the NBC
    sent to our Subcommittee last month, the conference described
    several significant concerns. Among them, the NBC stated that
    under certain circumstances the bankruptcy process might not be
    best equipped to offer the expertise, speed, and decisiveness
    needed to balance systemic risks against other competing goals
    in connection with resolution of systemically important
    financial institutions and thus Title II of Dodd-Frank should
    be retained even if H.R. 2947 becomes law.
        And as you've stated, it appears that this legislation does
    retain--or I mean, it doesn't repeal it, so I mean, legislation
    is retained, but there is an ability of the regulators to
    assert authority during the pendency of the Subchapter V
    action. Please describe what types of companies or
    circumstances might warrant the application of Title II's
    orderly liquidation authority in lieu of a resolution in
    bankruptcy?
        Mr. Levin. Subchapter V would address most of the problems
    that Title II would address. The fact that it was there and
    Dodd-Frank says that bankruptcy is the preferred alternative
    might make bankruptcy workable and probably will make
    bankruptcy workable in that circumstance. But none of us is
    prescient enough to know all of the bad things that could
    happen in a rapidly evolving crisis. And I don't have a
    specific answer for the particular circumstances that might
    require a different regulatory regime than Subchapter V, but
    what is called the triple key entry for Title II as well as the
    statutory preference for bankruptcy, we think it's useful to
    have that backup which would only be used in the most extreme
    circumstances, which are difficult to imagine and lay out at
    this point.
        The fact is, the banks are well capitalized now. Things are
    going pretty well. This is not likely to be used for many
    years. We don't know what the system will look like several
    years from now if and when it ever becomes necessary for a SIFI
    to be resolved in a crisis situation. So that--I think that is
    what lies behind our position more than any specific
    circumstances.
        Mr. Johnson. All right. Thank you, and I yield back.
        Mr. Marino. Thank you. The Chair now recognizes the Vice-
    Chairman of the Subcommittee on Regulatory Reform, the
    gentleman from Texas, Mr. Farenthold.
        Mr. Farenthold. Thank you very much, Mr. Chairman.
        And actually Mr. Levin has a great lead in to my question.
    We are a bunch of lawyers up here that spend a lot of time
    looking at this and getting into the weeds. I want to take a
    step back and look at the big picture of this.
        We recently enacted Dodd-Frank, which is a very burdensome
    regulatory scheme, which went--from what I hear from a lot of
    banks and from a lot of people, seeking to borrow from banks.
    We got a situation where just recently we had the increased
    liquidity rules that we've been talking about. We really are
    looking at a very worse case scenario, something that none of
    us can imagine at this point.
        Can--maybe Mr. Bernstein, can you give me an idea? What
    kind of bankruptcy events are we talking about here?
        Mr. Bernstein. Yes. So I actually think this is less
    related to the facts on the ground at the time of any
    particular resolution than it is to--it's, frankly, almost a
    foreign policy issue. In the context of my practice, I've been
    dealing a great deal with foreign regulators.
        Foreign regulators do not understand bankruptcy. The main
    benefit and the primary benefit, I think, of retaining Title II
    is to give confidence to foreign regulators that if something
    is going wrong in the bankruptcy process, the regulators do
    have the ability to step in. Simply because they deal with the
    U.S. regulators every day, there is active dialogue with them,
    they think they understand where the U.S. regulators are coming
    from, so it's not necessarily something that will need to be
    used because this bill actually has the appropriate process.
        But in terms of preventing a foreign regulator from seizing
    a foreign subsidiary when we're trying to keep them out of
    bankruptcy, it may go a long way in giving the regulator
    confidence that they don't have to do that because they know
    that the U.S. regulators can step in.
        Mr. Farenthold. All right. Now, again, I think we're kind
    of get into the weeds now. And then again, this may be a little
    bit off topic of the bill, but would all of you agree that we
    really are dealing with a worse-case scenario situation here,
    something that is very--is not foreseeable at this point, would
    anybody disagree with that on the panel? I see no one does, so
    let me go on to my second question and----
        Mr. Levin. I don't disagree with that, but as I said a
    moment ago, Mr. Farenthold, had anybody asked us this question
    in the 1990's, we would have given the same answer.
        Mr. Farenthold. Okay. Let me go on to my second question.
    Mr. Hessler--or did you want to weigh in on this first?
        Mr. Hessler. There is one thing that I think would be
    hopefully clarifying about the interrelationship between Title
    II and Subchapter V. So nothing in Subchapter V diminishes
    Title II.
        Mr. Farenthold. Right.
        Mr. Hessler. It doesn't touch it. However, I think it's
    important that Subchapter V also be examined on its own merits
    because there's a critical provision, which is Section 1184,
    which provides standing to Federal Government regulators to be
    involved in a bankruptcy case. That presently does not exist
    within Chapter 11.
        Mr. Farenthold. And obviously the taxpayers could
    potentially be left holding the bag if the Federal regulators
    aren't----
        Mr. Hessler. Well, the decision on that, the Federal
    Government at present can only participate in a bankruptcy case
    to the extent it is a creditor----
        Mr. Farenthold. Right.
        Mr. Hessler [continuing]. Not the debtor. So the point I
    want to make is sort of irrespective of Title II and what it
    does and doesn't provide or the future of Title II, whether it
    has one or not, just within Subchapter V, it specifically and
    on its own provides that critical grant of standing for Federal
    regulators to advance their public interest mandates in a
    Chapter 11 case.
        Mr. Farenthold. Got you. All right. My other question is,
    one of the objections we're hearing to Subchapter V is it
    actually increases the incentive for private regulation, which
    I would guess is say the creditors putting more creditor
    favorable terms, you know, regulations are by the creditors
    rather than by the government.
        Do you believe the bill increases the incentive for the
    creditors of banks to put in these more burdensome requirements
    for the banks or no?
        Mr. Hessler. Subchapter V? No, I think--I actually believe
    that it puts a disincentivization for risky creditor behaviors.
    Creditors understand Chapter 11. It's well established and the
    governing principles are highly effective and highly proven. I
    actually think it's Title II, which is much more of an unknown
    quantity and an unknown entity that actually increases creditor
    uncertainty as to how a Title II untested proceeding would go,
    so I actually think Subchapter V, which really just adds
    additional clarifying facets to Chapter 11, I actually believe
    that's helpful for maximizing responsible creditor behavior.
        Mr. Farenthold. And Actually Mr. Bernstein wants the weigh
    in on this as well.
        Mr. Bernstein. Yes. I think the one thing about whether
    it's the provisions of this bill or the fact that the FDIC has
    made it clear that holding company creditors rather than
    taxpayers will absorb losses, that will increase the level of
    monitoring by creditors, and they will be making decisions
    about whether to invest based on how they see the institution
    operating rather than based on the feeling that they are going
    to be bailed out.
        And I think that is a very important aspect of this bill.
    It is probably a good thing.
        Mr. Farenthold. Thank you very much. I see my time has
    expired, Mr. Chairman.
        Mr. Levin. If I may add, Mr. Chairman, the fact that the
    ISDA has adopted this protocol that provides a stay in the
    financial contract itself of 48 hours shows exactly the
    opposite kind of creditor behavior. The creditors are helping
    to facilitate the process.
        Mr. Farenthold. Thank you.
        Mr. Marino. Thank the Chair recognizes the Ranking Member
    of the full Judiciary Committee, Congressman Conyers.
        Mr. Conyers. Thank you, sir. Mr. Levin, the National
    Bankruptcy Conference states regulators should not have the
    power to commence an involuntary Subchapter V. Do you have any
    reasons to let us know why the Conference takes this position?
        Mr. Levin. Yes, Mr. Conyers.
        Mr. Conyers. Please.
        Mr. Levin. An involuntary petition is like any lawsuit. It
    entitles the defendant, here the alleged debtor, to a defense.
    The amount of time necessary available for a resolution, we
    call it the resolution weekend, is so short that there really
    can be no meaningful defense. And there can be no meaningful
    appeal if the transfer process to the bridge company is to
    occur over a resolution weekend in response to an involuntary
    petition. So we think it undercuts due process to allow an
    involuntary bankruptcy petition.
        As I said earlier in my openings statement, we believe the
    regulators have enough tools at their hands to persuade a board
    of directors why it is important to file a voluntary petition
    at the beginning of a resolution weekend, rather than go
    through the contested in voluntary process. And we think that
    will suffice to protect the system.
        Mr. Conyers. Thanks. Now Subchapter V, could it operate as
    intended if there is no secured lender of last resort, Mr.
    Levin, such as the Federal Government. How would you respond to
    those who would say that this could amount to a taxpayer funded
    bailout of Wall Street people.
        Mr. Levin. We don't think it is a bailout because of the
    nature of lender-of-last-resort funding. Lender-of-last-resort
    funding has three requirements; one, that there be good
    collateral so that the lender, whether it is the Federal
    Reserve, or the Federal Government, or whether it is some other
    Federal corporation or agency is fully protected by the
    collateral it receives.
        The second is that the interest rate be what is referred to
    in literature as a punitive interest rate so that it is higher
    than--so there is no desire to access it for convenience. And
    for a moment I'm drawing a blank on the third and I'm going to
    ask Mr. Bernstein to help me on the third requirement.
        Mr. Bernstein. Above market interest rate.
        Mr. Levin. That was----
        Mr. Bernstein. You already said that? Then I don't remember
    the third one.
        Mr. Conyers. All right, two then.
        Mr. Levin. In any event, the point is this is not a bail
    out in the sense that the Federal Government or any agency is
    contributing money, taking an equity position, taking an equity
    risk. This is helping the financial institution take valuable
    assets that it has and make them liquid until those assets can
    be sold in a orderly market, rather than be dumped at fire sale
    prices and depress the market for everybody.
        Mr. Conyers. Well, do you think that by allowing it--if
    there is no secured lender of last resort--that we may be in
    some ways rewarding irresponsible behavior?
        Mr. Levin. I don't think a bankruptcy is a reward for
    irresponsible behavior whether or not there is a lender of last
    resort.
        Mr. Conyers. Now, going to Mr. Bernstein for his response
    to this question. If Subchapter V was in existence when Lehman
    failed, would it have achieved a better result with respect to
    the case's impact on the Nation's financial marketplace?
        Mr. Bernstein. It is a complicated question because many
    other things that are in place today weren't in place at that
    time. I think one of the things that it would have helped is
    this bill would have potentially permitted Lehman to adopt a
    different strategy. It could have used a single point of entry
    strategy and could have preserved its derivative contracts.
        The problem with Lehman at the time, though, is it didn't
    have the total loss absorbing capacity and might not have been
    able to recapitalize the subsidiaries. So that piece of it,
    which is now being required, not only in the U.S. but by global
    regulators, is very important. And if you have both of those
    pieces, the provisions in this bill or in the contractual ISDA
    to protocol, plus the total loss absorbing capacity, you would
    have had a totally different result in Lehman Brothers, I
    think.
        Mr. Conyers. So your answer is a substantially yes.
        Mr. Bernstein. That's correct, your Honor. Your Honor--
    Congressman.
        Mr. Conyers. Thank you. Thank you, Mr. Chairman.
        Mr. Marino. Thank you. The Chair recognizes the gentleman
    from Michigan, Congressman Trott.
        Mr. Trott. Thank you, Chairman.
        Mr. Levin, so you raised a few concerns, one concern was
    the lack of experience potentially in a bankruptcy judge and
    the need for regulators to be involved. Didn't like the
    involuntary provision, which I agree with your comments in that
    regard. The lender of last resort concerns and then I think
    also then the need for experienced judges, not district judges.
        So the first concern is what surprised me a little bit. You
    know, Dodd-Frank came upon us in 2010, the FDIC has been
    working on rules for single point of entry since then. So you
    have, you know, you believe regulators are going to be able to
    act more efficiently and quickly because of their experience
    than a bankruptcy judge?
        Particularly under section 298 we have one of the 10
    experienced bankruptcy judges has been appointed for this
    purpose to deal with complex insolvency. I don't know if I
    understand why you have more confidence in the ability of
    regulators to move quickly and react than a bankruptcy judge
    who essentially does it every day?
        Mr. Levin. I'll tell you that the Conference had the view
    back in 2009 and 2010 of great concern about the regulators
    being able to do what you just described. But I think we've all
    learned a lot in 5 years, and the regulators have learned a
    lot. And we've watched them evolve in their thinking and learn
    and write regulations so they are in a much better position now
    to deal with this kind of circumstance than they would have
    been 5 or 6 years ago. But with that said, I want to go back to
    what I said in my opening statement. I think Subchapter V gives
    us the best of both worlds.
        The bankruptcy judge does not have enough knowledge about
    the company to be able to do it alone--the regulator--and does
    not have enough knowledge about the systemic affects of
    whatever is done. The regulators do not have the same process
    and remove that a bankruptcy judge has. And by combining the
    efforts of the two of them, I think you get a much better
    result than one alone. And this applies only to the resolution
    weekend and the transfer to the bridge. That's where the
    important difficult decisions have to be made. After that
    happens, the bankruptcy judge is fully well qualified to handle
    all of the rest of the case.
        Mr. Trott. Okay. Appreciate that clarification. Mr. Hessler
    made a comment about uncertainty as it relates to Title II. Mr.
    Levin, you made a comment, it will be many years before this
    perhaps even comes into play and we don't know, you know, how
    things will play out and how soon the provisions will be
    interpreted.
        Would you agree with Mr. Hessler's comments that the same
    can be said of Title II.
        Mr. Levin. Oh, yes, definitely. I mean there are parts of
    the Bankruptcy Code, Subchapter IV of Chapter 11 railroad
    reorganization is very rarely used, one case recently, nobody
    could have envisioned in 1978 what a Chapter 9 of Detroit might
    have looked like in 2013. So we have to think way into the
    future, and there's going to be uncertainty whichever way we
    go.
        Mr. Trott. Mr. Bernstein, so let's say H.R. 2947 was in
    place and we have a Lehman type insolvency. Can you just
    discuss for a moment how that would have played out
    differently?
        Mr. Bernstein. Yes. And this relates to Congressman
    Conyers' question. I think if we had this bill, plus all the
    other changes that are being made in the resolution planning
    process, I think we would have had an extremely different
    outcome in Lehman Brothers. Lehman Brothers holding company
    would have filed, the subsidiaries would have been
    recapitalized so that they would have sufficient capital not to
    go into bankruptcy.
        The subsidiaries would have been transferred to a new
    bridge holding company. And the derivatives contracts
    importantly would not have terminated, which would avoid
    enormous losses that would threaten the viability of those
    subsidiaries. So there wouldn't have been the systemic
    disruption that occurred at the time of Lehman Brothers, which
    is very important.
        Mr. Trott. So to that point I got delivered yesterday a
    copy of Hoover institute's book on making failure feasible. I
    read their mission statement in terms of the resolution
    project. And it said if a clear and credible measure can be put
    in place that convinces everyone that failure will be allowed,
    then expectations of bailouts will disappear. If we get rid of
    the risk reducing behavior that are fostered by guarantees,
    then that would be a good thing. And then also a clear process
    to reduce panic, H.R. 2947 would have accomplished that in
    Lehman?
        Mr. Bernstein. Yes, it would have. In fact, as you'll see
    in that Hoover book, there are several chapters devoted to this
    type of single point of entry resolution and their conclusion
    is it would be very effective in that way.
        Mr. Trott. It is a fascinating book, I'm not too far into
    it yet.
        But Mr. Hessler, one quick question, I am out of time.
    Ranking Member Johnson raised a concern about the funding. So
    back to Lehman, you know, the professional fees in Lehman were
    $2 billion, I believe. Can you just speak for a moment on
    funding concerns specifically as it relates to Ranking Member
    Johnson and this bill?
        Mr. Hessler. Yeah, I think it is what Mr. Levin is
    hopefully clarifying for me. There are two funding questions at
    issue in Subchapter V proceeding. Upon the transfer of the
    assets to the bride company, it is the access to liquidity of
    the bridge company.
        Mr. Trott. We've talked about that plenty.
        Mr. Hessler. That's not governed by Subchapter V because
    that is not in the jurisdiction of the bankruptcy. There is
    potentially the issue of for the purposes of finding the wind
    down----
        Mr. Trott. Do you have any concerns in that regard?
        Mr. Hessler. No. There is regular DIP lending capacity and
    there that will be a significantly more limited funding need
    because what at issue the wind down of undesirable assets.
    That's what's happening in the Chapter 11 case upon single
    point of entry transfer.
        Mr. Trott. Thank you, sir.
        Mr. Hessler. Thank you.
        Mr. Marino. The Chair now recognizes the Congresswoman from
    the State of Washington, Ms. DelBene.
        Ms. DelBene. Thank you Mr. Chairman. Thanks to all of you
    for being here with us today. Some of my questions were asked
    already, but I just had a quick question for you Mr. Hessler on
    living will requirements and I just wondered what your thoughts
    were on this legislation in terms of whether or not it would
    help facilitate the Dodd-Frank living will requirements?
        Mr. Hessler. I believe it will. I think the living will
    practices today have already begun to put in place the road map
    for what a Subchapter V proceeding would look like. And I think
    this is a point I want to augment that we've been talking how
    would Lehman have looked under a Subchapter V proceeding, and
    thus far really all that we have focused on is what would the
    cause have looked have looked like once it's filed.
        The one thing I'd want to mention to the Committee is from
    what we do in the vast majority of our work is spent preparing
    debtors for a soft landing into bankruptcy. So perhaps the most
    important consideration that I would urge lawmakers to keep in
    mind is with legislation what sort of incentives and
    disincentives does it put in place for directors and officers
    to confront restructuring challenges and begin to prepare and
    address those issues as early as possible.
        And this is something I talked about in my testimony. Title
    II has the provision that directors and officers are
    effectively all wiped out, the are all going to get fired and
    compensation is going to get clawed back and it's sort of all
    types of punitive measures. I actually think that creates a
    disincentive for directors and officers to begin taking
    responsible actions that are otherwise necessary to maximize
    stakeholder recoveries in a bankruptcy.
        And so I think that's a very important part in Subchapter V
    I think it very, very hopefully incentivizes management to
    begin to prepare for bankruptcy because it sees an orderly path
    forward to otherwise affect a resolution of a failing bank.
        Mr. Levin. We sometimes refer to what Title II does as
    requiring management to sign its own death warrant.
        Ms. DelBene. Any other feedback on that one?
        Mr. Bernstein. I think this bill would definitely
    facilitate structures already being used in the living wills of
    the largest financial institutions and I think that that is a
    very positive development.
        Ms. DelBene. Thank you. Thank you Mr. Chair. I yield back.
        Mr. Marino. Thank you, the Chair recognizes the gentleman
    from Texas, Congressman Radcliffe.
        Mr. Radcliffe. Thank you, Chairman. I would also like to
    thank my friend and colleague, the gentleman from Michigan,
    Congressman Trott for his work on this issue.
        The 2008 financial crisis hurt a lot of folks in Northeast
    Texas. And some of the families in my district are frankly
    still working to get back on solid financial footing. And I'll
    be the first to admit that I'm not an expert on bankruptcy
    issues. But following that crisis I think it became obvious to
    all of us that these technical, complicated bankruptcy issues
    are having a huge impact on everyday Americans. And issues that
    impact everyday Americans are the ones that we as policymakers
    certainly want to make sure that we're addressing.
        There were a lot of questions and frustrations that have
    come out of the financial crisis. For example, why did
    distressed financial firms receive government bailouts, instead
    of being forced to seek resolution through the bankruptcy
    process? Now I know in the years since this crisis this
    Committee has worked very hard to improve the Bankruptcy Code
    and make sure that it is equipped to handle all failing
    companies. I appreciate all of you witnesses being here today
    to provide your expertise on the proposed legislation. I want
    to find out whether it is in fact going to achieve its intended
    goal.
        So I want to kick things off by asking about a provision in
    the bill that would allow the Federal Reserve to initiate a
    bankruptcy case over the objection of a financial institution.
        Now, a lot of folks in my district have a real distrust of
    the Federal Reserve. They see it as a dangerously powerful
    body, one with little oversights and little transparency. So if
    you gentleman were chatting with my constituents about possibly
    giving the Federal Reserve this new authority, how would you
    allay their concerns? And what would you tell them about how
    this new authority would help them?
        Mr. Bernstein. Yes, there is a lot of uncertainty as a
    financial crisis develops and boards of directors may hesitate
    to act. I do not believe that the Federal Reserve will end up
    ever using the power if they are granted the power to file
    involuntary petitions, because the fact that the Federal
    Reserve can do it if it's necessary will cause corporate
    managements to be very focused on when the right time to go
    into Chapter 11 is. And that, taken together with the living
    will process, I think the two together make it very unlikely it
    will ever be used. And it is really only a failsafe for a
    situation where the company management may be paralyzed at that
    time.
        That being said, I don't think it is an essential part of
    this bill for the reasons that Mr. Levin stated, which is there
    are other supervisory powers that the Federal Reserve has. And
    the Federal Reserve is going to be intimately involved in the
    living will process, and they have been, so I think there is
    going to be a constant dialogue with the regulators and the
    financial institutions that make this provision almost
    unnecessary.
        Mr. Radcliffe. Mr. Hessler.
        Mr. Hessler. Yeah, no, I would add to that. I think the
    involuntary provision is an unhelpful distraction to what is
    otherwise a very good bill. Already there are provisions in the
    Bankruptcy Code that provide creditors the express right to
    file an involuntary case against a debtor to commence an
    involuntary Chapter 15. Those are exceedingly rare and the
    reason they are is debtors are very aware of those creditor
    powers and they are usually already very engaged in dialogue
    with the creditors, debtors do not like to get tossed into
    bankruptcies on a timeline and terms that are not of their own
    making. So they will file voluntarily before involuntary can be
    initiated. I fully expect that's what would happen here in the
    context of SIFIs, that they would be well aware of what Feds
    otherwise can do and even without the express involuntary
    rates, the Feds could probably force a bankruptcy anyway, and
    the company is going to file in advance of that so that it can
    maintain control of its own case.
        Mr. Radcliffe. Mr. Levin, anything you'd like to add? I
    will give you a chance.
        Mr. Levin. Nothing to add. The Conference agrees with both
    of those.
        Mr. Radcliffe. Terrific. Mr. Hessler, I spend a
    considerable amount of my time these days listening to
    constituents who have to deal with the immense burdens and
    expense of complying with Dodd-Frank. Personally I'd like to
    get rid of Dodd-Frank all together, but at the very least I
    would like to see us moving forward with respect to solving
    some of its challenges.
        So let me ask you this, in your opinion, would the bill
    before the Committee today reduce the necessity for regulators
    to initiate a Title II resolution proceeding under Dodd-Frank?
        Mr. Hessler. Yes, it would. I addressed it in my testimony
    and in my opening statement. I think the availability of
    Subchapter V will effectively render the need for a Title II
    unnecessary.
        Mr. Radcliffe. Mr. Bernstein, will you comment on that?
        Mr. Bernstein. I agree, I agree with Mr. Hessler.
        Mr. Radcliffe. Thank you. I see that I'm out of time and I
    yield back.
        Mr. Marino. Seeing no other Congressmen or women, this
    concludes today's hearing. I want to thank the witnesses for
    attending, I want to thank our guests for attending. And each
    time I have an opportunity to listen to you gentlemen I learn
    something so thank you very much for today's testimony.
        Without objection, all Members will have 5 legislative days
    to submit additional written questions for the witnesses or
    additional materials for the record.
        This hearing is adjourned.
        [Whereupon, at 11:30 a.m., the Subcommittee was adjourned.]
                                A P P E N D I X

                                  ----------

                   Material Submitted for the Hearing Record

     Response to Questions for the Record from Donald S. Bernstein, Esq.,
                       Partner, Davis Polk & Wardwell LLP

     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

      Response to Questions for the Record from Stephen E. Hessler, Esq.,
                         Partner, Kirkland & Ellis LLP

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Response to Questions for the Record from Richard Levin, Esq.,
                          Partner, Jenner & Block LLP

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                     [all]