[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]









      H.R. 1667, THE FINANCIAL INSTITUTION BANKRUPTCY ACT OF 2017

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                           REGULATORY REFORM,
                      COMMERCIAL AND ANTITRUST LAW

                                 of the

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 23, 2017

                           Serial No. 115-12

                               __________

         Printed for the use of the Committee on the Judiciary




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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
STEVE KING, Iowa                     HENRY C. ``HANK'' JOHNSON, Jr., 
TRENT FRANKS, Arizona                    Georgia
LOUIE GOHMERT, Texas                 THEODORE E. DEUTCH, Florida
JIM JORDAN, Ohio                     LUIS V. GUTIERREZ, Illinois
TED POE, Texas                       KAREN BASS, California
JASON CHAFFETZ, Utah                 CEDRIC RICHMOND, Louisiana
TOM MARINO, Pennsylvania             HAKEEM S. JEFFRIES, New York
TREY GOWDY, South Carolina           DAVID N. CICILLINE, Rhode Island
RAUL LABRADOR, Idaho                 ERIC SWALWELL, California
BLAKE FARENTHOLD, Texas              TED LIEU, California
DOUG COLLINS, Georgia                JAMIE RASKIN, Maryland
RON DeSANTIS, Florida                PRAMILA JAYAPAL, Washington
KEN BUCK, Colorado                   BRAD SCHNEIDER, Illinois
JOHN RATCLIFFE, Texas
MARTHA ROBY, Alabama
MATT GAETZ, Florida
MIKE JOHNSON, Louisiana
ANDY BIGGS, Arizona
           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          DAVID N. CICILLINE, Rhode Island
DOUG COLLINS, Georgia                HENRY C. ``HANK'' JOHNSON, Jr., 
KEN BUCK, Colorado                       Georgia
JOHN RATCLIFFE, Texas                ERIC SWALWELL, California
MATT GAETZ, Florida                  PRAMILA JAYAPAL, Washington
                                     BRAD SCHNEIDER, Illinois
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                                     
                            C O N T E N T S

                              ----------                              

                             MARCH 23, 2017
                           OPENING STATEMENTS

                                                                   Page
The Honorable Bob Goodlatte, Virginia, Chairman, Committee on the 
  Judiciary......................................................     6
The Honorable Tom Marino, Pennsylvania, Chairman, Subcommittee on 
  Regulatory Reform, Commercial and Antitrust Law, Committee on 
  the Judiciary..................................................     1
The Honorable David Cicilline, Rhode Island, Ranking Member, 
  Subcommittee on Regulatory Reform, Commercial and Antitrust 
  Law, Committee on the Judiciary................................     4

                               WITNESSES

The Honorable Mary F. Walrath, Esq., U.S. Bankruptcy Judge 
  District of Delaware
    Oral Statement...............................................     7
Prof. John B. Taylor, Ph.D, George P. Shultz Senior Fellow in 
  Economics, Stanford University's Hoover Institution
    Oral Statement...............................................     9
Mr. Stephen E. Hessler, Esq., Partner, Kirkland & Ellis, LLP
    Oral Statement...............................................    10
Prof. Bruce Grohsgal, Esq., Helen S. Balick Visiting Professor in 
  Business Bankruptcy Law, Delaware Law School
    Oral Statement...............................................    12

                        OFFICIAL HEARING RECORD

Responses to Questions for the Record from Honorable Mary F. 
  Walrath, Esq., U.S. Bankruptcy Judge District of Delaware......    16
Responses to Questions for the Record from Prof. John B. Taylor, 
  Ph.D, George P. Shultz Senior Fellow in Economics, Stanford 
  University's Hoover Institution................................    15
Responses to Questions for the Record from Mr. Stephen E. 
  Hessler, Esq., Partner, Kirkland & Ellis, LLP..................    14
Responses to Questions for the Record from Prof. Bruce Grohsgal, 
  Esq., Helen S. Balick Visiting Professor in Business Bankruptcy 
  Law, Delaware Law School.......................................    16

              Additional Material Submitted for the Record

Statement submitted by the Honorable John Conyers, Jr., Michigan, 
  Committee on the Judiciary.....................................    28

 
      H.R. 1667, THE FINANCIAL INSTITUTION BANKRUPTCY ACT OF 2017

                              ----------                              


                        THURSDAY, MARCH 23, 2017

              House of Representatives,    
         Subcommittee on Regulatory Reform,
                      Commercial and Antitrust Law,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 9:00 a.m., in 
Room 2141, Rayburn House Office Building, Hon. Tom Marino 
(Chairman of the Subcommittee) presiding.
    Present: Representatives Marino, Goodlatte, Gaetz, 
Cicilline, Conyers, and Schneider.
    Staff Present: Ryan Dattilo, Counsel; Andrea Woodard, 
Clerk; and Susan Jensen, Minority Counsel.
    Mr. Marino. Good morning. And in the interest of saving 
some time here, we're going to get started immediately, because 
we do have some from each side here.
    The Subcommittee on Regulatory Reform, Commercial and 
Antitrust Law will come to order. Good morning, everyone. 
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. 1667, the 
Financial Institution Bankruptcy Act of 2017.
    Mr. Marino. And I now recognize myself for an opening 
statement.
    Before I do that, again, I want to let you know that we're 
going to--I'm going to do my best to stick to the 5-minute 
rule, because we may be running in and out of here today, and I 
really do not want you kind people who took your time to come 
here to be sitting around waiting for us to come back. And I'll 
keep my colleagues and myself in line to the 5-minute rule.
    Last Congress, the ``Financial Institution Bankruptcy Act'' 
was reported favorably by this Committee and passed the House 
under suspension of the rules. This week, I reintroduced this 
important piece of legislation with Chairman Goodlatte, and 
Ranking Members Conyers and Cicilline as cosponsors. Today, we 
build on last year's record by taking one more opportunity to 
further examine it.
    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 only called for 
study of, and 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 four 
separate hearings before the Committee. 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 operation 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 experienced bankruptcy judges and includes due 
process protection for parties-in-interest. The bill also 
creates an explicit role 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 
operation.
    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.
    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, judicial 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.
    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.
    Mr. Marino. Now, since Mr. Cicilline is on his way, what 
I'm going to do is introduce our witnesses. And then, when 
David comes, he will make his opening statement.
    So, again, good morning and thank you all for being here.
    Judge Mary F. Walrath is a United States bankruptcy judge 
for the District of Delaware. She was appointed in 1998 and 
served as chief bankruptcy judge from 2003 to 2008. Prior to 
her appointment, Judge Walrath worked at the Philadelphia law 
firm of Clark Ladner Fortenbaugh & Young, concentrating in the 
areas of debtor/creditor rights and commercial litigation.
    Judge Walrath is a founding member and co-president of the 
Delaware Bankruptcy American Inn of Court, a member of the 
Delaware Chapter of the International Women's Insolvency and 
Restructuring Confederation, a member of the American 
Bankruptcy Institute, and a fellow of the American College of 
Bankruptcy. She is also an editor of the Rutter Group 
Bankruptcy Practice Guide and an adjunct professor at St. 
John's Law School in Queens, New York.
    Judge Walrath is also active in the National Conference of 
Bankruptcy Judges and is currently the president-elect of the 
National Conference of Bankruptcy Judges. Judge Walrath 
graduated from Princeton University and earned her J.D. cum 
laude from Villanova University. Judge Walrath clerked for the 
Honorable Emil F. Goldhaber, the chief judge of the U.S. 
Bankruptcy Court for the Eastern District of Pennsylvania.
    Judge, welcome.
    Judge Walrath. Thank you.
    Mr. Marino. Dr. John B. Taylor is the Mary and Robert 
Raymond Professor of Economics at Stanford University, a George 
P. Schultz Senior Fellow in Economics at the Hoover 
Institution, and is the director of the Stanford Introductory 
Economics Center. Dr. Taylor also held positions of professor 
of economics at Princeton University and Columbia University.
    Dr. Taylor served as senior economist on the President's 
Council of Economic Advisers, a member of the President's 
Council of Economic Advisers, and was also a member of the 
Congressional Budget Office's Panel of Economic Advisers.
    Dr. Taylor also served as Under Secretary of treasury for 
international affairs, where he was responsible for currency 
markets, trade in financial services, foreign investments, 
international debt and development, and oversight of the 
International Monetary Fund and the World Bank.
    Dr. Taylor received the 2015 Truman Medal for Economic 
Policy, for extraordinary contributions to the formation and 
conduct of economic policy; the Alexander Hamilton Award for 
his overall leadership at the U.S. Treasury; the Treasury 
Distinguished Service Award for designing and implementing the 
currency reforms in Iraq--I would love to have a discussion 
with you about that over lunch, because it would take us a 
couple of hours; and the Medal of the Republic of Uruguay for 
his work in resolving the 2002 financial crisis. He received 
his B.A. in economics summa cum laude from Princeton 
University, and a Ph.D. in economics from Stanford University.
    Doctor, welcome.
    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 
restructuring, 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 B.A. and J.D. from the University of 
Michigan, where he served as the managing editor of Michigan's 
Law Review.
    And just in case he needs any assistance, he has two 
handsome young gentlemen behind him, his sons, here visiting us 
today.
    And welcome. And, Mr. Hessler, thank you for being here.
    Mr. Hessler. Thank you, Mr. Marino.
    Mr. Marino. Mr. Bruce Grohsgal is the Helen S. Balick 
Visiting Professor in Business Bankruptcy Law. Prior to joining 
Widener University, Mr. Grohsgal was a partner in the 
Wilmington, Delaware, office of Pachulski--you're throwing some 
good stuff here at me--Stang Ziehl & Jones LLP.
    He has represented debtors, creditors, committees, and 
trustees in Chapter 11 bankruptcy cases and litigation, 
including the debtors in Solyndra, Global Home Products/Anchor, 
Chi Chi's, and Trans World Airlines, the creditors' committee 
in Freedom Communications, Orange County Register, and Jevic 
Transportation, and the Chapter 11 trustee in Le-Nature's. He 
previously was a partner in Wolf Block Schorr and Solis-Cohen 
LLP in Wilmington and Philadelphia.
    Professor Grohsgal was a senior fellow at Americans for 
Financial Reform, Washington, D.C., and was the Chair of the 
Bankruptcy Section of Delaware State Bar Association. He 
received his B.A. from Brandeis University and his J.D. from 
Columbia Law School, where he was a Stone Scholar.
    Professor, welcome.
    And I do have to add that the judge and Professor Grohsgal 
are in my district, so to speak, in Pennsylvania's 10th 
District. And you maybe need to do a throw out for----
    Judge Walrath. Yes. I was born and raised in Wellsboro, 
Pennsylvania, and I have a lot of family up there. So thank you 
for representing their interests.
    Mr. Marino. As the crow flies, that's about 30 minutes from 
my place. And now it is my honor to look to my good friend, 
Congressman Cicilline, the former mayor of Providence, Rhode 
Island, and we're paisans.
    So, Mr. Cicilline.
    Mr. Cicilline. Thank you, Mr. Chairman. I wanted to stop 
the shameless pandering of the panel to the Chairman at all 
costs.
    Thank you, Mr. Chairman.
    In 2008, the United States economy nearly collapsed as a 
direct result of lending practices in the housing market that 
were predatory, unsafe, and in many cases fraudulent. 
Investments in toxic securities created a cycle of failure in 
the housing market. The declining health of the market 
undermined the value of these securities, which, in turn, 
devastated the housing market and caused the failure of several 
of the Nation's largest financial institutions.
    With the financial system in near collapse, large financial 
institutions were essentially able to blackmail the government, 
because these banks were so large that there was no way to 
break them apart, as then FDIC Chair Sheila Bair testified in 
2009.
    Although the true hardship caused by this widespread fraud 
is incalculable, we do know that it erased $10 trillion of 
household wealth and caused eight million Americans to lose 
their jobs and five million Americans to lose their homes. 
Rhode Island, my home State, was hit particularly hard by this 
recession. When I took office, the unemployment rate in Rhode 
Island hovered at 11.2 percent, the fifth-highest in the 
country.
    In the wake of this economic disaster, the Dodd-Frank Act 
was enacted to comprehensively reform the financial system. 
Because of this law, which includes some of the strongest 
consumer protections passed since the Great Depression, the 
banking system is stronger, there is more transparency in 
consumer lending, and the Consumer Financial Protection Bureau 
continues to serve as an important watchdog to protect 
Americans against predatory lending and fraud in the financial 
system.
    Title I of Dodd-Frank provides stability in markets by 
requiring large financial institutions to have a living will, 
to serve as a plan for the rapid and orderly resolution in the 
event of material financial distress or failure.
    Title II ends taxpayer bailouts of banks that are too big 
to fail by providing financial regulators with orderly 
liquidation authority where a bank's collapse would have 
serious adverse effects on financial stability in the United 
States and no viable private sector alternative is available. 
This process expressly requires a finding by the Secretary of 
Treasury that the bankruptcy process would not be appropriate 
to resolve a distressed firm.
    Leading commentators agree, however, that the U.S. 
bankruptcy process is not designed to accommodate the orderly 
resolution of a large financial institution that poses systemic 
risk to the entire economy. H.R. 1667, the Financial 
Institution Bankruptcy Act, addresses this concern by 
establishing a single point of entry for the resolution of an 
insolvent financial institution with assets exceeding $50 
billion. The goal of this bill is to establish a process where 
a distressed financial institution could voluntarily seek 
bankruptcy relief while its subsidiaries continue to operate.
    While I support H.R. 1667, make no mistake, I will strongly 
oppose any effort to combine this measure with repeal of the 
Dodd-Frank Act or any of its provisions.
    Since this law was enacted, the economic recovery has led 
to the creation of more than 15 million private sector jobs, a 
60 percent increase in business lending, and record performance 
by the Dow Jones Industrial Average. It is critical that we 
build on this progress through education, training, and other 
initiatives to promote economic opportunity. Too many Americans 
are still unemployed or working two or even three jobs just to 
get by, while Wall Street has never been better.
    We must also preserve and advance the protections 
established by the Dodd-Frank Act, to ensure transparency and 
stability in the financial system, while protecting consumers.
    The National Bankruptcy Conference agrees with this 
assessment and has previously instructed that the Dodd-Frank 
Act should, quote, ``continue to be available even if the 
Bankruptcy Code is amended to better address the resolution of 
SIFIs, 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 SIFIs.''.
    Moreover, should this legislation become law, Dodd-Frank 
provides a valuable backstop to bankruptcy through its orderly 
liquidation authority, which empowers the Federal Deposit 
Insurance Corporation to act as the receiver for large 
financial institutions that are too big to fail.
    I thank the witnesses for appearing before us today and 
very much look forward to hearing your testimony.
    And with that, I yield back the balance of my time.
    Mr. Marino. Thank you.
    The Chair now recognizes the Chairman of the full Judiciary 
Committee, Mr. Goodlatte of Virginia, for his opening 
statement.
    Chairman.
    Chairman Goodlatte. Thank you, Mr. Chairman, and I 
appreciate your holding this hearing.
    Our Nation's financial system provides the lifeblood 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 2008 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 2017'', is a reflection of these efforts. The 
bill is calibrated carefully to provide transparency, 
predictability, and judicial oversight in a process that must 
be executed quickly and in a manner that is responsive to 
potential systemic risk.
    Additionally, the bill incorporates the ``single point of 
entry'' approach, which facilitates a quick transfer of assets 
and some of the liabilities of the financial institution's 
holding company to a newly formed bridge company. The consensus 
of experts in public and private industry believes this 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 properly equipped to 
handle 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 and included the financial and legal 
communities, Members of Congress on both sides of the aisle, 
the Federal Reserve, the FDIC, the courts, and the Department 
of Treasury.
    I applaud Chairman Marino for continuing this important 
effort to strengthen the Bankruptcy Code and for holding 
today's hearing.
    I look forward to hearing from today's witnesses on the 
Financial Institution Bankruptcy Act and whether there is a 
need for any further revisions to the bill.
    Thank you, Mr. Chairman. I yield back.
    Mr. Marino. Thank you.
    Each of the witnesses' written statements will be entered 
into the record in its entirety. I ask that each witness 
summarize his or her testimony in 5 minutes or less. To help 
you stay within that timing, there are lights in front of you. 
The lights will switch from green to yellow, indicating that 
you have a minute left; and when it turns red, your time has 
run out. I will politely raise the end of the gavel just to 
give you a little indication, because I know you are 
concentrating on your statement, and that's so we can get 
through this so we don't have to keep you here today.
    But first of all, I need to swear you in. And would you 
please stand and raise your right hand?
    Do each of you solemnly swear to tell the truth, the whole 
truth, and nothing but the truth in your testimony before this 
Committee today, so help you God?
    Let the record reflect that the witnesses have answered in 
the affirmative.
    Judge, would you like to begin with your opening statement?

    TESTIMONY OF THE HONORABLE MARY F. WALRATH, ESQ., U.S. 
   BANKRUPTCY JUDGE, DISTRICT OF DELAWARE; PROFESSOR JOHN B. 
 TAYLOR, PH.D., MARY AND ROBERT RAYMOND PROFESSOR OF ECONOMICS 
   AT STANFORD UNIVERSITY, GEORGE P. SHULTZ SENIOR FELLOW IN 
  ECONOMICS AT STANFORD UNIVERSITY'S HOOVER INSTITUTION; MR. 
 STEPHEN E. HESSLER, ESQ., PARTNER, KIRKLAND & ELLIS, LLP; AND 
   PROFESSOR BRUCE GROHSGAL, ESQ., HELEN S. BALICK VISITING 
   PROFESSOR IN BUSINESS BANKRUPTCY LAW, WIDENER UNIVERSITY, 
                      DELAWARE LAW SCHOOL

                  TESTIMONY OF MARY F. WALRATH

    Judge Walrath. Yes. Thank you, Mr. Chairman and members of 
the House Judiciary Committee.
    My name is Mary Walrath. I have been sitting as a 
bankruptcy judge in the District of Delaware since 1998. I am 
currently the president of the National Conference of 
Bankruptcy Judges, which represents all 350 bankruptcy judges.
    However, I am here in my personal capacity, and I can take 
no position for or against any specific legislation pending 
before Congress. But as a bankruptcy judge, I have had 
experience dealing with large corporate bankruptcies and 
presided over the case filed by the holding company of 
Washington Mutual Bank.
    A bill that allows for voluntary bankruptcy proceedings 
involving holding companies of financial institutions, even 
systemically important ones, before the financial institution 
is seized and sold is a laudable goal. There are several 
reasons why I believe this is good.
    First, bankruptcy laws are familiar to the public. More 
than any other part of the Federal judicial system, the general 
public comes into contact most often with bankruptcy courts. In 
this instance, there are between 800,000 and 1.6 million 
bankruptcy cases filed annually, including more than 7,000 
business bankruptcy cases.
    In addition to the number of debtors who file bankruptcy, 
however, hundreds of thousands of people come in contact with 
the bankruptcy system, as creditors, employees, retirees, 
landlords, customers, and vendors of debtors in bankruptcy.
    The process has become so familiar to the public that a 
large percentage of individuals who file bankruptcy do so 
without the benefit of counsel. In addition, even in the 
largest corporate bankruptcy cases, individuals with claims 
against the debtor feel comfortable enough about the process to 
proceed without counsel.
    In contrast, few people and attorneys have ever been 
involved in proceedings dealing with the Federal Deposit 
Insurance Corporation. People just do not know what it is and 
have never had any experience with it.
    If Congress wants to instill confidence in the public about 
the resolution of a systemically important financial 
institution, it is wise to use a process with which the public 
is familiar.
    Second, in contrast to FDIC proceedings, bankruptcy cases 
are largely transparent. Today, all bankruptcy pleadings are 
filed electronically and are readily accessible to the public. 
Bankruptcy hearings are open to the public and most courts 
allow parties in interest, including small creditors and 
shareholders, to appear and to listen telephonically, even to 
appear and make their case without the benefit of counsel, and 
many have done so successfully.
    It is also important that the Bankruptcy Court provides a 
forum for negotiation and consensual resolution without the 
need for a contested hearing or trial, but with the assurance 
that a court is available if there is not consensus. In fact, 
plans of reorganization in Chapter 11 are premised largely on 
consensus and agreement.
    Third, bankruptcy courts are used to holding hearings on 
short notice and making expeditious rulings. In large corporate 
bankruptcy cases, even where assets exceed $100 million, first-
day hearings are held within a day or two of a Chapter 11 
filing, to address emergency matters that will keep the 
business operating.
    The legislation before you has similar expedited notice 
provisions. The Bankruptcy Court should be able to handle such 
an expedited schedule with only minor adjustments. I would, 
however, strongly urge Congress to consider requiring more 
judges be designated to handle these matters, just to be sure 
there is one available when the need arises.
    The legislation also asks that the Bankruptcy Court should 
consider the systemic risk to the markets in making its 
rulings. While that is not always done, the courts are fully 
capable of considering that factor and, if evidence is 
presented, making a ruling appropriately.
    In addition to the advantages of a voluntary bankruptcy 
option, I understand the legislation seeks to avoid the 
necessity to borrow funds from the Treasury, even on a 
temporary basis. The holding company would be expected, 
consistent with its living will, to have sufficient funds to 
fund the operating entities, to assure they are viable in the 
event of a bankruptcy filing.
    In sum, I think that the legislation properly provides an 
option for a holding company to either file a Chapter 11 
petition, to file a Subchapter V petition, or to allow for 
resolution under the FDIC regime.
    So thank you very much for allowing me to express my views.
    Judge Walrath's written statement is available at the 
Committee or on the Committee Repository at: http://
docs.house.gov/meetings/JU/JU05/20170323/105758/HHRG-115-JU05-
Wstate-WalrathM-20170323.pdf.
    Mr. Marino. Thank you, Judge.
    Dr. Taylor, please.

                  TESTIMONY OF JOHN B. TAYLOR

    Mr. Taylor. Thank you, Mr. Chairman, other Members of the 
Committee, for inviting me to testify on the Financial 
Institution Bankruptcy Act, which in my view is an essential 
element of a good pro-growth economic program.
    The act would make failure feasible under clear rules 
without disruptive spillovers. It would help prevent bailouts. 
It would diminish excessive risk-taking. It would remove 
uncertainty about an inherently ad hoc bailout process. It 
would also reduce the likelihood and severity of a financial 
crisis going forward, and I think thereby would lead to 
stronger economic growth.
    As Judge Walrath has stated, Chapter 11 has many benefits, 
including its basic reliance on the rule of law. But for large 
complex financial institutions, it has some shortcomings. It is 
too slow and cumbersome to deal with the possibility of runs on 
failing financial institutions.
    The Financial Institution Bankruptcy Act would also rely on 
the rule of law and strip priority rules of bankruptcy, but it 
would operate faster, over a weekend, and it will leave 
operating subsidiaries outside of bankruptcy entirely. It would 
do this by moving the original firm's financial operations to a 
new bridge company that is not in bankruptcy. It would, thus, 
let a failing financial firm go into bankruptcy in a 
predictable, rules-based manner without spillovers.
    To understand how a reformed Bankruptcy Code would resolve 
a large financial institution, I think there is no substitute 
for thinking about how it would have worked in past cases, 
including the Lehman Brothers case. Emily Kapur of Stanford 
University has provided this analysis for us, and I have 
summarized it through her writings in my testimony that I've 
attached.
    The Financial Institution Bankruptcy Act would work better, 
in my view, as a resolution device than Title II of Dodd-Frank. 
In that case, the FDIC would exercise considerable discretion. 
Even if the Title II process were used, bailouts would be 
likely, in the sense that the FDIC might wish to hold some 
creditors harmless in order to prevent spillovers. The perverse 
incentive effects of bailouts occur whether or not the extra 
payment comes from the Treasury, financed by taxpayers; from a 
fund financed by financial institutions; or from smaller 
payments for other creditors.
    Moreover, under Title II, a government agency, such as the 
FDIC and its bridge bank, would make the decisions. In 
contrast, under bankruptcy reorganization, private parties, 
motivated and incentivized by profit-and-loss considerations, 
make key decisions about the direction of the new firm.
    Another advantage of the Financial Institution Bankruptcy 
Act is that it would facilitate resolution planning under Dodd-
Frank. Some of the resolution plans submitted by the large 
financial firms have been rejected by the Fed and the FDIC. 
With the Financial Institution Bankruptcy Act, the plans would 
be more feasible.
    The issue of liquidity should be considered if the 
Financial Institution Bankruptcy Act were to replace Title II. 
The new firm might need lender of last resort support. I 
believe section 13(3) of the Federal Reserve Act would be 
available in such circumstances. And I think, when combined 
with the expectation of having to suffer losses imposed by a 
bankruptcy, the additional expectations of possible new loans 
afterwards would cause little moral hazard.
    I think international arrangements should also be 
considered if the Financial Institution Bankruptcy Act were to 
replace Title II. For example, current European resolution 
authorities contemplate a parallel authority abroad in the 
United States. If Title II were repealed and there was no 
parallel authority in the U.S., then some way to cooperate 
internationally would have to be created.
    In sum, in my view, reform of the bankruptcy law, such as 
with the Financial Institution Bankruptcy Act, is essential for 
ending government bailouts and for creating a robust financial 
system, and it would also create economic stability and growth. 
I think the Financial Institution Bankruptcy Act has clear 
advantages over Title II of the Dodd-Frank Act and, in fact, it 
would be a preferable resolution process even if Title II 
remained.
    Thank you very much. I'd be happy to answer your questions.
    Prof. Taylor's written statement is available at the 
Committee or on the Committee Repository at: http://
docs.house.gov/meetings/JU/JU05/20170323/105758/HHRG-115-JU05-
Wstate-TaylorJ-20170323.pdf.
    Mr. Marino. Thank you, Doctor.
    Mr. Hessler.

                TESTIMONY OF STEPHEN E. HESSLER

    Mr. Hessler. Thank you, Chairman Marino, Chairman 
Goodlatte, Ranking Member Cicilline, Members of the Committee. 
Thank you for inviting me to testify at today's hearing.
    I am pleased to appear before this Subcommittee again 
regarding the Financial Institution Bankruptcy Act of 2017, 
also known as FIBA. It was my privilege to testify in both July 
2014 and July 2015 in support of the prior iterations of FIBA, 
which were passed by the Judiciary Committee in September 2014 
and March 2016 and by the full House in December 2014 and April 
2016.
    Given the comprehensive record addressing FIBA, I will not 
repeat my prior written and oral testimonies and will instead 
focus in my opening remarks on a couple of the key issues that 
I understand are presently the subject of particular scrutiny. 
First, whether FIBA should shield a covered financial 
corporation's board of directors from potential liability for 
acting in good faith to authorize a filing and asset transfer. 
And second, whether FIBA should provide the Federal Government 
with the ability to initiate an involuntary case against a 
failing covered financial corporation.
    Turning to that first issue, director and officer 
liability, section 1183(c) of FIBA provides that the board of 
directors of a covered financial company, ``shall have no 
liability to shareholders, creditors, or other parties in 
interest for a good faith filing of a petition to commence a 
case under the subchapter or for any reasonable action taken in 
good faith in contemplation of, or in connection with, such a 
petition or transfer under section 1185 or 1186, whether prior 
to or after commencement of the case.''
    This exculpation provision understandably may prompt some 
to question whether FIBA is unwarrantedly shielding directors 
and officers from potential liability for their actions or 
inactions. In my view, for the following reasons, this 
provision is highly justifiable.
    In my experience as a practitioner representing very large 
Chapter 11 debtors, the knowledge, expertise, and commitment of 
the company's pre-petition directors and officers are 
indispensable to effectuating a soft landing into and orderly 
passage through bankruptcy. FIBA incentivizes such conduct by 
removing the specter of legal liability for actions taken as 
responsible fiduciaries.
    The scope and language of section 1183(c) are both 
appropriately limited. The only board decisions that FIBA 
protects from potential liability are for a, ``good faith 
filing of a petition to commence a case,'' and for, ``any 
reasonable action taken in good faith in connection with the 
filing or asset transfer decision.''
    To that end, FIBA merely reinforces the existing 
requirement that a Chapter 11 filing must be made in good 
faith, and if it is not and the case is dismissed, FIBA offers 
no added protection from liability. Moreover, I believe it is 
manifestly sound public policy that any reasonable action taken 
in good faith in contemplation of, or in connection with, the 
filing or asset transfer decision should be protected. If it 
can be shown that the challenged actions were taken in bad 
faith or were unreasonable, the board can and should be held 
liable.
    Importantly, FIBA does not supplant any existing remedies, 
both under the Bankruptcy Code or otherwise applicable law, for 
any board malfeasance. Any legally cognizable director and 
officer misconduct should be prosecutable to the fullest extent 
of the law, and FIBA in no way impedes the ability of law 
enforcement or interested parties from holding directors and 
officers accountable.
    Turning to the second issue, prior versions of FIBA allowed 
the Federal Government to file an involuntary petition 
commencing a Chapter 11 case without the covered financial 
corporation's consent. I and others have testified that this 
grant of authority was an unnecessary and unhelpful 
distraction, and the version of FIBA that passed the House in 
April 2016 did not include this provision. Ideally, the next 
version of FIBA likewise will decline to give the Federal 
Government this ability.
    Most importantly for present purposes is that the Federal 
Government, either through even only the threat of a Title II 
proceeding or through the Federal Government's other general 
regulatory powers, already has sufficient influence to compel a 
covered financial corporation to commence a Chapter 11 case 
without having to resort to a formal involuntary filing 
trigger.
    And regardless of whether Title II remains in place or 
whether FIBA ultimately provides the Federal Government with an 
involuntary filing right, it is exceedingly unlikely, in my 
opinion, that there would ever be an involuntary case of a 
covered financial corporation.
    As its day of reckoning gets closer, an insolvent SIFI 
already will be in active negotiations with its key creditor 
and third-party constituencies over the timing and necessity of 
a potential filing, and it will be highly motivated to file a 
voluntary case before a creditor or regulator is able to 
commence an involuntary proceeding.
    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. Hessler's written statement is available at the 
Committee or on the Committee Repository at: http://
docs.house.gov/meetings/JU/JU05/20170323/105758/HHRG-115-JU05-
Wstate-HesslerS-20170323.pdf.
    Mr. Marino. Thank you, Mr. Hessler.
    Professor Grohsgal.

                  TESTIMONY OF BRUCE GROHSGAL

    Mr. Grohsgal. Thank you.
    Good morning, Chairman Marino, Chairman Goodlatte, Ranking 
Member Cicilline, Member Schneider, and the other Members of 
the Committee. Thank you for inviting me to testify today with 
respect to the Financial Institution Bankruptcy Act of 2017, 
often referred to as FIBA.
    The goal of FIBA is to facilitate the swift and transparent 
resolution of a distressed financial institution under the 
Bankruptcy Code, a goal that I applaud. However, there are 
problems with this bill.
    FIBA uses the special point of entry--the single point of 
entry strategy developed by the FDIC under Dodd-Frank to 
accomplish its goals. Under this strategy, as Chairman Marino 
stated, only the top tier holding company will file for 
bankruptcy. The debtor in the first 2 days of the bankruptcy 
case will then transfer its good assets, including the 
ownership interests in its solvent subsidiaries, to the newly 
formed bridge company.
    I will focus my testimony today on five issues:
    First, the ``no liability'' safe harbor protection that Mr. 
Hessler just referred to for directors under FIBA.
    Second, the provisions of FIBA that will significantly 
weaken the balance sheet of the bridge bank, making its 
obtaining financing in the credit markets less likely and 
making taxpayer bailouts more likely.
    Third, the illusory and opaque nature of the restructuring, 
all of which will occur within 48 hours, with most creditors 
and other parties left out of the process and with minimal, if 
any, knowledge of it or what happened in those 2 days.
    Fourth, the fact that FIBA perpetuates the safe harbors for 
repurchase agreements, derivatives, and other qualified 
financial contracts, despite substantial evidence that the safe 
harbors should be modified or eliminated.
    And fifth, the necessity of retaining the orderly 
resolution authority of Dodd-Frank Title II as a last but 
crucial resort if the financial institution's bankruptcy 
nonetheless poses substantial risk to the financial system. I 
note with respect to that point that this bill does not end 
Title II authority, but other bills that are being repeatedly 
introduced before Congress do.
    I will address these five points briefly in turn.
    First, FIBA gives directors ``no liability'' safe harbor 
protections from any liability for actions taken in 
contemplation of the bankruptcy case or transfers to the bridge 
company. The ``no liability'' safe harbor is highly likely to 
encourage directors to take actions that are risky, self-
serving, and unnecessarily harm Main Street creditors.
    In may safe harbor improvident actions taken over a 
substantial period of time during which the directors of a 
distressed financial institution are contemplating a possible 
bankruptcy filing. This protection is unnecessary, because 
directors already have strong incentives to file for bankruptcy 
rather than risk a Title II Dodd-Frank proceeding, including 
that they will be removed from office in a Title II proceeding 
and that they run the risk under section 210(s) of Dodd-Frank 
that they'll have to disgorge compensation and bonuses.
    ``Good faith,'' as used in the current Bankruptcy Code, 
does not safe harbor directors, ``good faith,'' as used in U.S. 
corporate law, does, and I think it is inappropriate to include 
that in this bill.
    Second, FIBA requires the transfer to the bridge company 
and the assumption of liabilities by the bridge company within 
48 hours of the case, prior to the expiration of the 48-hour 
stay. The order of magnitude of this requirement can't be 
overestimated. JPMorgan Chase has $50 trillion, double the GDP 
of the United States in notional value of derivatives and other 
qualified financial contracts that it assumes would take 18 
months to unwind. Lehman Brothers had 1.2 million different 
derivatives contracts with 65,000 counterparties.
    The 48-hour deadline will result in the bridge company's 
assuming many disadvantageous contracts and leaving many 
advantageous contracts behind. Further, the bridge company must 
assume the entire amount of any debt that's collateralized even 
by a nominal amount of the debtor's property. These provisions 
can be expected to weaken the balance sheet of the bridge 
company, making financing in the credit markets less likely or 
even impossible and making taxpayer bailouts more likely.
    Third, the restructuring that will occur under FIBA is, to 
a great extent, illusory. On the transfers to the bridge 
company, the Bankruptcy Court loses its jurisdiction and 
authority and no further restructuring will take place. And, 
again, that is not a typical bankruptcy process whereby there 
is transparency and creditor involvement, but one in which very 
few parties will do things that people will not be aware of.
    Fourth, FIBA perpetuates the safe harbors of qualified 
financial contracts, which I urge Congress to reconsider.
    And fifth and finally, we still need the orderly resolution 
process of Title II of Dodd-Frank as a last, if crucial, 
resort.
    And I thank the Committee again for inviting me to testify 
today. Thank you.
    Prof. Grohsgal's written statement is available at the 
Committee or on the Committee Repository at: http://
docs.house.gov/meetings/JU/JU05/20170323/105758/HHRG-115-JU05-
Wstate-GrohsgalB-20170323.pdf.
    Mr. Marino. Thank you, Professor.
    The Chair now recognizes the Chairman of the full 
Committee, Congressman Goodlatte, for his questioning.
    Chairman Goodlatte. Thank you, Mr. Chairman.
    Mr. Hessler, I arrived late, so I may not have received all 
the introductions, but I note that you have some advisers and 
support staff behind you, and they have been very well behaved, 
and I wonder if you would care to introduce them to us.
    Mr. Hessler. Thank you very much, Mr. Chairman.
    These are my two oldest children. Our twin 9-year-old sons 
are presently on spring break. And I thank the Subcommittee for 
providing them with what is almost certainly the most unique 
civics lesson for anyone in their third grade class.
    Chairman Goodlatte. I think it's great to have them here.
    Mr. Hessler. Thank you.
    Chairman Goodlatte. You had in the past had some 
reservations regarding the single point of entry approach. Can 
you take us through the evolution of your thought on that? Why 
did your opinion change regarding this approach? And do you 
believe it might be the right method to resolve a failing 
financial institution in bankruptcy?
    Mr. Hessler. Yes, sir. When I did testify in 2014, at that 
point in time the thinking around single point of entry was 
still evolving. I have since become very comfortable with the 
construct and for a few reasons in particular.
    As a threshold matter, to the extent that single-point-of-
entry may be an atypical Chapter 11 mechanism, SIFIs have 
corporate structures that themselves do not comport with 
conventional bankruptcy practice. There are certain of the 
operating subs that actually either cannot file for bankruptcy 
or that would be incapable of surviving a traditional 
bankruptcy proceeding. So the single point of entry I think 
actually the single point of entry approach actually 
facilitates the unique corporate structure of SIFIs.
    Secondly, while the discrete steps of single point of entry 
may be a unique addition to Chapter 11, either if it's via a 
Subchapter V amendment or through the creation of a Chapter 14, 
I do think that the fact that the filing determination as well 
as the transfer determination that are made under the single 
point of entry approach, those are both subject to Bankruptcy 
Court approval. I think that's a critical safeguard and a 
critical protection that similarly is consistent with the 
Bankruptcy Code.
    Thirdly, Mr. Chairman, again, while single point of entry 
would be a unique addition to the Bankruptcy Code, I think it's 
actually analogous to practice that to some extent is already 
occurring, which are rapid fire asset sales under section 363. 
I believe that single point of entry can actually be understood 
as sort of codifying an approach that's already taking place, 
albeit under another name.
    And lastly, I think from the perspective of secured 
creditors and unsecured creditors and equity interest holders, 
the priority scheme and the enforcement of creditor rights 
under single point of entry is consistent with current 
Bankruptcy Code practice.
    So, for all of those reasons, I am comfortable with it.
    Chairman Goodlatte. Thank you.
    Dr. Taylor, we very much appreciate your being here today, 
and your work is well known to many Members of Congress, 
including on this Committee.
    I wonder if you might give us your thoughts on this bill in 
the context of something like the Lehman insolvency. If that 
were to occur a year from now, after this law were in effect 
and in operation would the bill improve the resolution process 
for that firm?
    And in that context, take some of Professor Grohsgal's 
criticisms and let us know whether you think that the speed, 
which to many of us seems essential, can be handled, given the 
enormity of some of the financial institutions.
    Mr. Taylor. So I think the answer to that question is most 
important for this Committee and for any group thinking about 
this reform. So quite a while ago, we, working at Stanford 
Hoover Institution, thought about a counterfactual: What would 
have happened in 2008 had this act been passed, in the case of 
Lehman?
    I was an extraordinarily good, thorough study by Emily 
Kapur at Stanford. She just received her law degree and Ph.D. 
in economics. She went through case by case, using a lot of the 
reports on the data, and showed how smooth it could have worked 
over the weekend. The new firm would have been operating on 
Monday morning with virtually no contagion, no spread. And 
there was enough at that point of what we call now loss-
absorbing capital to make this work with the data at the time.
    So I think it's a very revealing study. I recommend every 
Member of the Committee and others read it.
    One thing about it is she was under the assumption when we 
ran this--we've called this Chapter 14 in the past, because 
there was no Chapter 14 code. We started working on this before 
Dodd-Frank was passed, actually. And always had the notion that 
it would be good to have a primary regulator available to file 
in the first. I listened to Mr. Hessler's remarks.
    So Emily assumed that the Fed would be the primary 
regulator, which is how Dodd-Frank would write, and looked at 
gauges, mechanisms, objective indicators that the Fed could use 
to begin this filing.
    So I think it's very important that if the bill goes back 
or if the conference committee eventually wants to have the 
primary regulator have the ability to begin the proceeding, 
that it be done in the most objective way possible, looking at 
indicators, looking at things that are--to be accountable, so 
that it continues this very, I think, predictable kind of 
process that we're all aiming for.
    Chairman Goodlatte. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Marino. The Chair recognizes now the Ranking Member of 
the full Judiciary Committee for his opening statement.
    Mr. Conyers. Thank you, Mr. Chairman.
    I would like consent to submit my opening statement and go 
straight to the questions, if I can.
    Mr. Marino. Without objection.
    Statement submitted by the Honorable John Conyers Jr., 
Michigan, Ranking Member, Committee on the Judiciary. This 
material is available at the Committee and can be accessed on 
the Committee Repository at: http://docs.house.gov/meetings/JU/
JU05/20170323/105758/HHRG-115-JU05-MState-C000714-20170323.pdf.
    Mr. Conyers. Thank you very much.
    I wanted to start with Judge Walrath. I apologize for 
missing your presentation. But Professor Grohsgal argues that 
FIBA does not solve the problem of post-petition financing and 
that it actually makes the problem worse. What do you think of 
that?
    Judge Walrath. I respectfully disagree with my colleague 
from Delaware. I think that there are two aspects of FIBA that 
are important here, and the first relates to his concern about 
insulating the board of directors, because he suggested it 
would cause risky behavior.
    I disagree. I think it is very important in all bankruptcy 
cases, but particularly in a case that would involve a 
systemically important financial institution, it is important 
for the board to act quickly. And for them to delay because 
they may feel that they may have some liability by delaying 
could be critical and could spell the death knell of the 
filing. It is important in all bankruptcy cases that they get 
counseled quickly, and if they need to restructure, to file 
quickly.
    I think that if they file quickly enough and they follow 
this mechanism of transferring sufficient funds to keep the 
financial institution itself viable, which I understand is a 
construct of this legislation, it would assure that they are 
viable, and the public would perceive them as viable without 
additional financing.
    Mr. Conyers. Thank you.
    Professor Grohsgal, could you give us your response, 
please?
    Mr. Grohsgal. Thank you, Ranking Member Conyers. I would be 
pleased to do so.
    There is a narrow issue here and there is a broader issue. 
The narrow issue is that section 210(s) of Dodd-Frank presently 
is pretty much the only basis upon which directors can be held 
accountable for excessively risky and often self-serving 
decisions that were made in the process of dealing with the 
problems of a distressed company.
    I would expect, as a practicing lawyer for 30 years, that 
if I represented one of those directors, one of the first 
things I would say, if a bankruptcy turned into a Title II 
proceeding, which it could, that pretty much any of those 
decisions I made was made in the interest of propping up the 
company in contemplation of the bankruptcy filing.
    So there's nothing in this bill that doesn't make it clear 
that the FDIC is still free to take actions to seek to disgorge 
the compensation of bonuses of these executives who may have 
harmed Wall Street, which is the reason for 210(s). That's the 
narrow issue.
    The broader issue, again, is that ``good faith'' is a term 
of art used in U.S. corporate law which gives capacious 
deference to directors of companies. The idea is to encourage 
risk-taking that might make that business organization a 
profit. It has a much different meaning in the Bankruptcy Code. 
There is no counterpart to it in the Bankruptcy Code that 
insulates directors. And, again, these directors are already 
very much incentivized to file bankruptcy rather than risk a 
Title II, the reasons being, first, that they stay in control 
of the company, and second, that they don't run the risk of 
having their compensation and bonuses disgorged.
    Mr. Conyers. Thank you.
    Mr. Grohsgal. Thank you, sir.
    Mr. Conyers. While you're at it, you acknowledge that 
current bankruptcy law is not optimally designed for orderly 
resolution of large financial institutions. Are you convinced 
of that?
    Mr. Grohsgal. I actually am not convinced of it. I don't 
think that all of the evidence is in on that. Harvey Miller, 
the dean, I would say, of the New York Bankruptcy Bar, for whom 
I had great respect and who passed away not that long ago, 
actually thought that the Lehman bankruptcy worked quite well. 
I think that that problem is overrated, frankly, or overstated.
    I do think that there is something to be said for amending 
the Bankruptcy Code to make it better able to address these 
kinds of business failures. However, this bill in many ways 
provides for bankruptcy in name only.
    That 2-day process is not a sale that we're accustomed to 
with respect to the sale of a business as a going concern in a 
bankruptcy case, where there is notice to creditors, where they 
have a chance to participate, where creditors committees can 
weigh in about it. There's no testing of the market. It's not a 
sale to anyone. It's simply a wholesale transfer of assets 
determined by the debtor and by a bankruptcy judge within 2 
days to a bridge company. There's no--it's not a traditional 
sale at all. It's not like anything in bankruptcy.
    So my problem with this, in part, is that, again, it's 
bankruptcy in name only. It dresses the process up as a normal 
bankruptcy proceeding, but it's not.
    Mr. Conyers. Look, the collapse and subsequent bankruptcy 
of Lehman Brothers had a catastrophic impact on the financial 
marketplace. And on the other hand, you appear to strongly 
oppose H.R. 1667. Do you think the bankruptcy law should be 
changed to better accommodate future Lehman Brothers?
    Mr. Grohsgal. I would note in passing that AIG also failed 
without going into bankruptcy, as did Bear Stearns, as did many 
other financial institutions, most of which did not go into 
bankruptcy. And to attribute what happened during the financial 
crisis to a single bankruptcy probably overemphasizes that 
issue.
    But to answer your question, I think that enhancing the 
provisions of the Bankruptcy Code to enable a proper financial 
institution bankruptcy is a very good idea, and I commend this 
Subcommittee for--and the Committee--for attempting to do so.
    There are a number of things that could actually accomplish 
that, I think. One would be to extend the automatic stay longer 
than 2 days. That would in and of itself accomplish a great 
deal.
    The second would be to address the issue which causes these 
kinds of legislation to make the process happen within 2 days, 
which is that there's no automatic stay with respect to 
repurchase agreements, even those backed by mortgages. There is 
no automatic stay for derivatives and other qualified financial 
contracts, which drove the FDIC to come up with this 2-day 
process and which I believe probably drove this Committee, in a 
good faith effort to address this issue, to confront this 
problem.
    An easy solution would be to limit or eliminate the 
automatic--the safe harbors for qualified financial contracts, 
and then we would find ourselves back in a more realistic 
bankruptcy environment and process.
    Mr. Conyers. Professor Grohsgal, I appreciate your 
comments.
    And, Mr. Chairman, I yield back the balance of my time, if 
any.
    Mr. Marino. Thank you so much, Mr. Conyers.
    The chair now recognizes the gentleman from Florida, 
Congressman Gaetz.
    Mr. Gaetz. Thank you, Mr. Chairman, for holding this 
hearing.
    And thank you all for being here.
    Judge Walrath, I'd be very interested in your thoughts on 
the role of transparency in the bankruptcy process, and 
particularly the mechanisms by which appropriate transparency 
measures can facilitate resolution in a Subchapter V scenario.
    Judge Walrath. Yes. As I stated, pleadings generally are 
public. The courtroom is open to everybody. There are a lot of 
press reports.
    I think the more information that the public has about what 
is going on, the more confidence they will have in the process. 
In addition, the ability for anyone who has an interest in the 
proceeding, not just the FDIC, not just the secured lenders, 
but everybody affected by it.
    And one compelling story was in the Washington Mutual case, 
a shareholder appeared in court because he felt that the plan 
of reorganization just was not fair, because it treated him 
differently from other people in his class. And he was allowed 
to stand up and speak. And he was absolutely right; the 
Bankruptcy Code is premised on fairness and equal treatment. 
And he won that argument.
    That is a very strong--it's the hallmark of our judicial 
system that people will be heard. And it is clear that, even if 
they lose, if they feel that they have been heard by a judge in 
open court, they feel more confidence in the judicial system.
    So that's why I think it is very important to have an open 
system.
    Mr. Gaetz. And, Your Honor, how can that transparency 
facilitate resolution specifically, rather than simply lending 
more trust to the process? Are there circumstances where that 
transparency can facilitate more complete resolution of claims?
    Judge Walrath. I think that, because bankruptcy is a 
consensual process, by and large, a lot of what is discussed 
and resolved happens outside of court. But it ultimately must 
be revealed in court, must be presented. In bankruptcies, it is 
subject to the vote of affected parties.
    So all of that transparency is important, and it can assist 
in the restructuring process. We've had multibillion-dollar 
companies reorganize, companies that were critical to their 
industry and to the American economy, all reorganized in the 
public eye, and I think it's critical.
    Mr. Gaetz. Mr. Taylor, you spoke in your testimony of the 
impact of predictability on this area of law. How should we 
remedy the predictability challenges that contributed to the 
circumstances we found ourselves in in 2008?
    Mr. Taylor. Well, I think that is a good example of the 
lack of predictability, because there was a bailout in the case 
of Bear Stearns, there was not in the case of Lehman, there was 
in the case of AIG. People didn't know what to expect. And to 
some extent, that's why we're here, to figure out a way to 
replace that uncertainty.
    That uncertainty is very damaging to the financial markets. 
I think it was one of the reasons the crisis was worse than it 
otherwise might have been.
    I think it's also very important to limit, or prevent the 
bailouts, and legislation like this goes a long way to doing 
that. There is an alternative to a bailout now that's possible 
so that, say, Lehman could be operating the next day without a 
bailout. It's very important for risk-taking, proper risk-
taking.
    And I think that the reliance on the rule of law that comes 
from the Bankruptcy Code, as Judge Walrath has indicated, is 
very important for establishing this. This is what's going to 
happen. It's not subject to the whims of a particular 
government agency. And I think that that's what I would stress.
    And so that's the reason we got interested in it long ago. 
Thank you.
    Mr. Gaetz. Thank you for that answer. I agree 
wholeheartedly.
    Mr. Hessler, you spoke to the issue of the retention of 
existing management for a newly formed bridge or a holding 
company. Why is that important?
    Mr. Hessler. Well, the expertise of management, of the 
directors and officers, and the continuity that that provides 
for the company as they continue to exercise their fiduciary 
duties to maximize the value of the corporation, it's critical. 
I think it's absolutely indispensable that----
    Mr. Conyers. Turn on your mike, please.
    Mr. Hessler. Excuse me. Thank you, sir.
    In fact, I think maybe the best way to examine this is a 
comparison of what FIBA would provide for versus what Title II 
would provide for. In reverse order, Title II provides for 
essentially just wholesale cleaning out directors and officers 
upon the commencement of a proceeding by the FDIC.
    I think that would be disastrous for an organization. 
Having gone through multiple multibillion-dollar bankruptcies 
as debtor's counsel, the initial days of a case, even the most 
well-planned case, are relatively chaotic. There's a huge 
amount of tumult upon a filing. And to lose the expertise of 
the directors and officers immediately upon the commencement of 
that proceeding I think would be disastrous.
    For that reason, I think FIBA appropriately allows for the 
continuation of management, which is actually consistent with 
Chapter 11 in its present form, which embodies the concept of a 
debtor in possession, which is management and the directors and 
officers are allowed to continue to operate the corporation, 
subject to existing Bankruptcy Code provisions that provide for 
the removal of management if, in fact, there has been any 
improper misconduct.
    Mr. Gaetz. Thank you, Mr. Chairman.
    Mr. Marino. Thank you.
    I will ask my questions now. But before I get into mine, 
Brad Schneider had to leave and get to somewhere else. All of 
us have to be in three places at one time today. But Brad 
wanted to know, Judge Walrath, you, in your opening statement, 
said we needed more judges. Can you give Brad and this panel an 
indication of how many more judges do you think we need?
    Judge Walrath. Well, it does provide for a minimum of 10 
only.
    Mr. Marino. Yes.
    Judge Walrath. Of course, the Chief Justice could appoint 
more. But I think having a threshold of 20 is critical. We 
need--at least 2 in each circuit. So 22, 20, I think would be 
sufficient.
    But we don't know what will happen. With only one 
designated judge in a circuit, the legislation requires that 
the hearing be held in the district where the filing occurs. To 
get somebody there quickly enough. You can have procedures 
where there's some notice that something is going to happen 
without it being revealed publicly. But I think two in each 
circuit would be critical.
    Mr. Marino. Thank you.
    Mr. Hessler, based on a response by the professor, I want 
to ask you this. To the extent that there are bad managers, 
does Bankruptcy Code provide for methods to remove those 
managers? Number two, and are other remedies outside of 
bankruptcy available to parties to address improper actions by 
the board?
    Mr. Hessler. Yes, Mr. Chairman. The Bankruptcy Code 
presently expressly provides for creditors or other parties in 
interest to seek for the appointment of an examiner, which can 
conduct an investigation into the actions of management. It 
also provides for the potential appointment of a trustee if, in 
fact, the court finds that there has been improper managerial 
misconduct, and that trustee can actually take over for 
existing directors and officers and manage the case.
    I have to say that is extraordinarily rare. Obstreperous 
creditors often threaten to bring those motions and sometimes 
bring those, but, you know, as Judge Walrath can probably 
attest, the actual appointment of a trustee to supplant and 
displace existing management is really extraordinarily rare.
    And also, as I indicated in my testimony, in my experience, 
the overwhelming--I'm not even sure I can put a high enough 
percentage--99.9 percent of directors and officers take their 
fiduciary duties extraordinarily seriously and they are very, 
very responsible fiduciaries.
    And that's why I actually think that FIBA appropriately 
provides for them to--as does the current Bankruptcy Code--
provides for them to continue within the management of a 
covered financial corporation, which, again, in contrast to 
Title II, which provides they're all going to get fired if the 
FDIC commences a proceeding, even the most meritorious conduct 
by those fiduciaries. It's almost impossible to believe that 
that otherwise can't influence their thinking as they pursue 
responsible restructuring strategies.
    Mr. Marino. Thank you.
    Let's back up here a moment, because many people are not 
aware of the purpose of bankruptcy and what is the upside, what 
is the downside. So let's go back to a law school 101 course. 
And would each of you, if you care to--and I'll start with the 
judge--give me an explanation to tell my mother, who is 84 
years old and keeps telling me that, ``You better do things 
right there, that's why I voted for you.''
    But explain to the public what bankruptcy is and what it 
does and what would happen if we didn't have a bankruptcy 
process, please.
    Judge Walrath. I'll try.
    I think some people view bankruptcy as somebody's going to 
file bankruptcy and get out of paying their debts.
    Mr. Marino. Yes.
    Judge Walrath. And it's wrong and it's improper. And a lot 
of people who file are humiliated because of that, because 
they're hardworking and they got into situations where they 
simply cannot deal with their situation.
    But I think from the business perspective, bankruptcy was 
passed--or has a very important position in our economy. It is 
the escape valve. It's the steam, let-off-the-steam valve.
    Without bankruptcy, there would be little innovation in 
this country. Does anybody believe that Bill Gates would have 
dropped out of Harvard to start his company if he felt that all 
of his assets and his parents' assets would be forfeited and he 
might go to debtors' prison if he failed?
    Very few people would do anything to create an invention or 
do an innovation, and that is what is the lifeblood of this 
country. We always had the West. If you failed in the East, you 
went a little further West. It is really what has helped build 
America. Our innovation is what has made us succeed.
    And we need a relief valve, and that is the Bankruptcy 
Code, for people who do not succeed.
    Mr. Marino. Doctor, if you care.
    Mr. Taylor. So I never went to law school.
    Mr. Marino. Congratulations.
    Mr. Taylor. So I never took Bankruptcy 101. I've taught 
Economics 1 for many years.
    I think that to me the Bankruptcy Code is so important 
because it provides a process when people get into a situation 
where their debt is unsustainable for one form or another. It's 
organized. The rule of law comes into action. You might not 
have written everything down in your bond agreements, but 
there's a way to take care of that. There's priorities that are 
set, so people know what they're getting into.
    So from an economic perspective, I think that's 
extraordinarily important. Otherwise, things fall apart. You 
don't know what to expect. And I would stress that very highly.
    The word ``bankruptcy,'' of course, means different things 
to different people. But for me, it's a way that the law is 
being applied in situations which arise all the time. The 
numbers that Judge Walrath gave are amazing, the number of 
cases that these have handled. So it's a very important part of 
our economy.
    Mr. Marino. I was a prosecutor for most of my career, and I 
sat next--my office was right next door to the bankruptcy 
judge. And I saw the process. I had many discussions with them.
    Thank you, Doctor.
    Mr. Hessler.
    Mr. Hessler. If I could just add very quickly, I agree with 
everything Judge Walrath and Dr. Taylor said.
    Let me focus now from a different perspective also, though, 
which is from the creditor's perspective. Bankruptcy is 
obviously essential for fixing companies.
    But also what bankruptcy provides, the bankruptcy system 
and the Bankruptcy Code, is a very orderly, structured, 
transparent, and predictable set of mechanisms for creditors to 
enforce their rights and for them to have an avenue to seek to 
recover from a company what they are otherwise owed.
    In my written testimony, I actually tried to address FIBA 
from the perspective of incentives that the debtors face, but 
also creditor incentives and also regulator incentives. And so 
I think that's a critical aspect of the bankruptcy system that 
shouldn't be overlooked as well, which is it's not just a 
safety valve for the company, it's a safety valve for creditors 
to otherwise seek to maximize repayment for the debts that they 
owed.
    Mr. Marino. Thank you.
    Professor.
    Mr. Grohsgal. Thank you, sir.
    First of all, I'd like to state for the record that I took 
my bankruptcy course when the Bankruptcy Code had been passed 
but was not yet effective. And my professor speculated through 
the whole class what all of it meant. And the miracle is he was 
right about a lot of it. And I remember it from time to time. I 
still am astonished at how predictive he was about all of this.
    The Supreme Court has addressed this issue in numerous 
cases, going back to the 1800s. The Bankruptcy Code does not 
state what its purposes are, but the purposes that the Supreme 
Court has stated should govern the decisions by bankruptcy 
judges mostly are as follows.
    First, the purpose of bankruptcy, especially in Chapter 11, 
is to maximize distributions to creditors. Second, those 
distributions should be made on an equitable basis in 
accordance with the rules set forth in the bankruptcy.
    And in the case of Chapter 11, the purpose is to preserve 
going concerns so that businesses are preserved, their creditor 
relationships are preserved, businesses that rely on their 
custom stay in business, their employees are not fired, et 
cetera. And that not only helps the counterparties to that 
institution, to that business, but it also does maximize 
returns to creditors.
    So going back to the 1930s, that's been the major focus of 
Chapter 11.
    My major concern with this bill is that it could have done 
that a lot better, and a few things concern me especially. The 
first is that this wholesale transfer of qualified financial 
contracts, which is likely to occur in the first 2 days, will 
reduce distributions to creditors, because many disadvantageous 
contracts can be expected to be assigned and assumed to the 
bridge company, and many good contracts will probably be left 
behind.
    My second concern----
    Mr. Marino. On that note, let me interrupt.
    Mr. Grohsgal. Yes, sir. Yes.
    Mr. Marino. How much time?
    Mr. Grohsgal. The edge of the knife, Chairman Marino, is 
that we have this thought that qualified financial contracts 
should be protected in the sense that they are not subject 
currently to the automatic stay anywhere.
    My own view is that somewhere between 2 days and the 3 
weeks that's afforded to most notice--for most motions--the 
notice period for most motions in a Bankruptcy Court, would be 
a vast improvement. The longer, the better. My own view is that 
they should be subject to the automatic stay, I'll be blunt.
    But understanding that I am in the minority here at this 
hearing and I'm kind of standing up here for a position that I 
appreciate is not accepted wholeheartedly by my colleagues here 
or by all of you, however much longer than 2 days would vastly 
improve the process.
    I would emphasize that a 2-day process is not transparent. 
A 2-day process is the inside players going in front of a 
bankruptcy judge who won't even have time to consider the 
propriety of assuming tens of thousands of qualified financial 
products on such short notice. So some longer period of time 
would be great, I think.
    Mr. Marino. We have more time than I thought we would. If 
you do not mind, the Ranking Member and I are going to keep you 
a little longer, if it's okay with you.
    So I'm going to recognize the Ranking Member, Congressman 
Conyers.
    Mr. Conyers. Thank you, Mr. Chairman.
    I have only one question. I direct it to Professor 
Grohsgal.
    One of your main concerns about H.R. 1667 is that it 
reduces moral hazard by absolving a financial institution's 
directors from liability under a Subchapter 5 case filing. 
Prior iterations of FIBA considered last Congress included, to 
me, rather broad liability exculpation for a debtor's 
directors. But the current version appears to narrow that 
provision, as reflected in section 1183. I think you're onto 
that.
    What are your thoughts about the current version, and do 
you have any recommendations for any further refinement, sir?
    Mr. Grohsgal. Yes, I do. My first thought on reading this 
in the prior legislation--and it appeared there too--is that if 
I were defending a director of a failed company that had failed 
twice--it first had failed because it filed a bankruptcy 
petition, and then failed because that bankruptcy proceeding 
still posed sufficient systemic risk that the FDIC and the 
other authorities put it into a Title II receivership--that if 
that happened, the first thing I would do if I was representing 
that director would be to say: Well, how many of the decisions 
were made in contemplation of the bankruptcy filing?
    And my defense to the disgorgement proceeding from the FDIC 
would be all of those decisions were made in contemplation of 
the bankruptcy filing. For example, we needed to give that 
senior executive a million-dollar bonus so he would stay with 
the company and continue to work with us toward the bankruptcy 
and preserve the company and hopefully even avoid the 
bankruptcy. That would be the first thing I'd think of in 
defending such a person.
    There's nothing wrong with that. We are advocates as 
lawyers to our clients. If I were on the other side 
representing the FDIC, I'd be arguing the opposite.
    But my first concern was the narrow one I expressed 
previously, which is this provides a defense to that kind of a 
proceeding. I don't think that was this Committee's intention 
in writing this, but I think it's there.
    My second concern is this. The bankruptcy process is 
already a very redemptive process for the directors and 
officers of a business organization. They're not held liable, 
they're left in control, et cetera. We don't need this. They 
have plenty of incentives to stay in power, to continue to 
govern the company. And I agree with the concept of debtor in 
possession. And they have a disincentive of letting the company 
go into Title II. So we don't need it.
    And, frankly, I think that there's something to be said for 
the fact that Main Street was harmed by the financial crisis 
much more than Wall Street. And I honestly think this sends 
that message again, which is that the insiders are protected 
and the family company that cut the lawn for that financial 
institution is outside of the door and gets no protection at 
all. They are second-ranked creditors and everybody else is in 
on the game. That's my third concern.
    Mr. Conyers. Thank you.
    Attorney Hessler, would you add anything onto what has just 
been said?
    Mr. Hessler. I would. I would largely disagree, pursuant to 
my remarks, and I don't want to belabor those too much.
    I would say some narrowing of the language, I think, would 
be fine. I mean, to the extent it's, you know, the reference to 
in contemplation of or in connection with, I think some 
additional drafting clarification around that perhaps would be 
merited. I am comfortable with how it's drafted at the moment, 
but to the extent that folks wanted additional clarity on that.
    I will say, again, we can't just always look at this solely 
from the perspective of the company, though. I think it's 
important to look at it from the perspective of creditors. And 
what I think 1183(c) is also helpful for is dissuading what I 
would call sort of strike suits by creditors; that this being 
in there is going to make it more difficult for them to come in 
and try and throw sand in the gears of the bankruptcy process 
by, you know, lobbing in all kinds of allegations and trying to 
otherwise hold up management with lawsuits.
    If I can just add one other thing also, which I feel 
probably hasn't been addressed thus far this morning, but I 
think is quite critical. The 48 hours that--for the first 48 
hours of the case, that's post-filing, that's when the asset 
transfer determination happens, the bankruptcy case is not over 
in 48 hours. It's merely the transfer of the assets to the 
bridge financial company. The equity in the bridge financial 
company at that point is held by the special trustee for the 
benefit of the creditors, who then go through a conventional 
Chapter 11 case.
    So a FIBA proceeding is not a 48-hour proceeding. The 48 
hours, that's just the starting line. And once those assets are 
transferred--and the 48-hour window is quite deliberately 
designed, given the special nature of financial company assets, 
which is they can't survive in bankruptcy longer than a 
presumed 48 hours. At that point, though, a conventional 
bankruptcy case does at that point occur, subject to all of the 
transparency, predictability, creditor rights, a plan of 
reorganization, the absolute priority rule, and exclusivity.
    A conventional bankruptcy case then follows the transfer of 
the assets. And, again, to the extent that there needs to be a 
valuation of those assets, the equity of the bridge financial 
company is being held for the benefit of creditors, and it will 
ultimately be distributed pursuant to a plan of reorganization.
    Thank you, sir.
    Mr. Conyers. Judge Walrath, would you add anything?
    Judge Walrath. I would agree with the remarks of Mr. 
Hessler. And there was some mention of we have sales under 
section 363 all the time in bankruptcy and often on a quick 
deadline. This allows for the transfer of those assets in order 
to protect them, but it's unlike the sales in bankruptcy that 
we normally have where the whole value of that company goes to 
the buyer.
    Mr. Hessler is correct. The value of those transferred 
assets remains with the bridge company, and if that value 
remains, it is the creditors and the left-behind debtor who 
benefit from it. So nothing is being transferred out of or away 
from the creditors. If there is value there and it's preserved 
by transferring outside of the bankruptcy case, it will be for 
the benefit of creditors.
    Mr. Conyers. Thank you.
    Did you want to add anything, Professor Taylor?
    Mr. Taylor. Thank you, Congressman. Two things.
    On the idea of moral hazard being made worse by this, it's 
completely opposite. The whole idea of bailouts is that people 
get advantage and that it creates huge risk-taking and huge 
moral hazard. So this is reducing it. And don't forget the 
creditors that get bailed out. This is really trying to prevent 
that. And even with the Title II, there's a possibility of that 
happening.
    Just quickly, on the safe harbor and the 2 days, you do 
have to be concerned about the contagion effects if you go 
beyond the 2 day. Two days is already kind of a compromise. And 
I think--don't forget that there's a lot of concerns of the 
spread of this if you don't treat some safe harbor for the 
qualified financial contracts.
    Mr. Conyers. Professor Grohsgal, I'll give you the last 
word on this.
    Mr. Grohsgal. Thank you, sir.
    I would respond in a couple of quick ways.
    Though I agree that the bankruptcy will proceed with 
respect to the creditors left behind, my view is that the cake 
is baked. By the time the assets are transferred to the bridge 
bank, the damage has been done. The disadvantageous contracts 
have been assumed, the good contracts have been left behind, 
because there simply wasn't enough time to evaluate them in a 
stressful situation.
    And I would emphasize again that this is not a typical 
bankruptcy and that the creditors here who are being favored, 
again, unfortunately, will be disproportionately Wall Street 
creditors over Main Street creditors.
    And I want to mention one last thing which did not come up, 
which is there is a provision here that undoes a very important 
provision of Bankruptcy Code that also favors Wall Street over 
Main Street, and that is a provision that says that if a 
secured party's collateral is worth less than its claim, all it 
gets is the value of its collateral.
    Here, the bridge bank has to further weaken its balance 
sheet by assuming that debt in full, again, in a way that 
disadvantages Main Street creditors and also weakens the 
balance sheet of the bank.
    So I thank you for giving me the last word, sir.
    Mr. Conyers. Well, I thank all of you for your additional 
thoughts on this. It's a great panel of witnesses.
    And I thank the chairman.
    Mr. Marino. Judge Walrath, I'm not sure if I caught it, but 
did you address the issue concerning the professor's issue with 
the 2-day?
    Judge Walrath. It would be great to have a lot more time, 
but what needs to be done can be done in 48 hours. We are used 
to dealing with debtor in possession financing, paying critical 
vendors, paying employees. Lots of critical motions are filed 
on this first day, and judges have to deal with them literally 
within 48 hours of that filing. We have first days 
approximately 24 hours after a case is filed, because we 
recognize a business, an operating business needs to continue 
to operate.
    So I am not as concerned as Professor Grohsgal is about the 
48-hour rule.
    Mr. Marino. Professor, I'm assuming that you don't have a 
problem with a bankruptcy action going to a Federal judge as 
quickly as possible for oversight. Am I correct in my 
assumption?
    Mr. Grohsgal. I'm sorry, sir. I didn't precisely follow 
your question.
    Mr. Marino. In my legislation, we want to get a bankruptcy 
case to a Federal judge as quickly as possible for oversight. 
You do not have a problem with that, do you?
    Mr. Grohsgal. No, Your Honor. I am a firm believer in a 
quick, a swift, but deliberative process for a company that is 
in distress, whether a regular business organization or a 
financial institution. One thing that Delaware early on 
recognized is the need for speed.
    My issue is with the fact that this is so quick, with all 
the moving parts and all of the assets in play, that what we 
have is not a deliberative process. It's just too quick to do 
that.
    Mr. Marino. Dr. Taylor, do you want to respond to that? I 
noticed a little concern.
    Mr. Taylor. I think the speed is the goal and it's outlined 
how it can be done. It hasn't been done yet, to be sure, but 
testing it out on previous cases is important. The experience 
of judges is important.
    But the speed is essential to make this work. And the idea 
of opening for business on Monday morning to take account of 
the time zones is crucial.
    Mr. Marino. Attorney Hessler, I think in Title I--and my 
counsel here has been advising me on some of these issues that 
he's very brilliant at--but discuss the living will aspect and 
the benefit of that.
    Mr. Hessler. Sure. The living will, it's interesting, 
because part of the FIBA debate is also getting wrapped up in 
the Title II debate and whether Title II should be repealed 
from Dodd-Frank. The living wills that are found within Title I 
of Dodd-Frank actually are very helpful for what is 
contemplated by FIBA.
    Again, the 48 hours that's been a lot of the focus of 
today's hearing that is really fast. That, however, is preceded 
by an extraordinary amount of planning. And the living wills 
require even ostensibly healthy financial institutions to be 
putting in place a blueprint and be putting in place a plan 
that there could actually be an orderly 48-hour determination 
for the transfer of contracts.
    I actually think what's also contemplated by FIBA the way I 
read it is, I think what's actually anticipated is the entire 
book of qualified financial contracts are going to get 
transferred.
    So to say 48 hours is too short a time period to go through 
what might be hundreds of thousands, if not millions of 
qualified financial contracts and make individual 
determinations, I think that is correct. I don't think that 
that's realistic for 48 hours, but I don't think that's what's 
anticipated. I think the entire book is likely to get 
transferred.
    Mr. Marino. Judge, what will the impact be on the 48-hour 
aspect if we do not have more bankruptcy judges? Will we be 
able to still stick to that schedule of 48 hours?
    Judge Walrath. Well, if a procedure is put in place--in 
Delaware, we have a procedure where if a large case is 
contemplated to be filed, we get several weeks' advance notice. 
The name of the company is never mentioned. But our clerk of 
court is advised, and the clerk of court puts in procedures to 
be sure that there is a judge available at the time that the 
anticipated filing is done.
    In those procedures are put in place, I understand the 
circuit chief will be advised that a filing is anticipated. If 
we can have a procedure where the designated bankruptcy judge 
is advised that it is contemplated that there may be a filing, 
you need to be available, then I think it could work.
    I would be nicer to have more than one person. If somebody 
is on vacation in Europe, for example, we might have a problem. 
But since they have to have the hearing in that district, you 
need time to get them there.
    Mr. Marino. And a lot of that's going to depend, for the 
most part, on the complexity and the size of that case.
    Judge Walrath. Yes.
    Mr. Marino. All right.
    Well, lady and gentlemen, I want to thank you all very much 
for being here today. We came in just slightly under the wire. 
And this concludes today's hearing.
    Once again, I can't tell you how much I learn from these 
hearings. And each of you have--you've taught me well today, 
and I appreciate that very much.
    So 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.

              Additional Material Submitted for the Record

    Statement submitted by the Honorable John Conyers, Jr., 
Michigan, Committee on the Judiciary. This material is 
available at the Committee and can be accessed on the Committee 
Repository at:
        http://docs.house.gov/meetings/JU/JU00/20170308/105660/
        HHRG-115-JU00-20170308-SD002.pdf
        
        
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