This is a presentation I prepared while at Georgetown University Law Center in 2001 on Orderly Liquidation Authority under the then newly enacted Dodd-Frank Act.

1. Orderly Liquidation
Authority
Georgetown University Law Center | Federal Regulation of Financial Institutions | Fall 2011 | Simon Lacey |
sl673@law.georgetown.edu
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2. Overview
1. OLA in the overall context of Dodd-Frank
2. OLA in the context of other (similar) instruments
3. Policy issues | problems addressed
4. How OLA is intended to work
5. Criticism of OLA as a policy instrument
6. Further reading | sources
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3. OLA in the context of Dodd-Frank
Dodd Frank: “An Act to promote the financial stability of the United States by improving
accountability and transparency in the financial system, to end "too big to fail", to protect the
American taxpayer by ending bailouts, to protect consumers from abusive financial services
practices, and for other purposes.”
Title I – Financial Stability
Title II – Orderly Liquidation Authority
Title III – Transfer of Powers to the Comptroller, the FDIC, and the Fed
Title IV – Regulation of Advisers to Hedge Funds and Others
Title V – Insurance
Title VI – Improvements to Regulation
Title VII – Wall Street Transparency and Accountability
Title VIII – Payment, Clearing and Settlement Supervision
Title IX – Investor Protections and Improvements to the Regulation of Securities
Title X – Bureau of Consumer Financial Protection
Title XI – Federal Reserve System Provisions
Title XII – Improving Access to Mainstream Financial Institutions
Title XIII – Pay It Back Act
Title XIV – Mortgage Reform and Anti-Predatory Lending Act
Title XV – Miscellaneous Provisions
Title XVI – Section 1256 Contracts3 |

4. OLA in the context of other
(similar) instruments
 Prompt Corrective Action Introduced in 1991 under the Federal
Deposit Insurance Corporation Improvement Act (FDICIA).
 Resolution by the FDIC
• Purchase & Assumption Transaction (FDIC arranges
for an acquirer to purchase some or all of the failed bank’s assets
and assume some or all of the bank’s liabilities.)
• Deposit Payoff (straight liquidation)
• Open Bank Assistance (except in cases of systemic risk,
open bank assistance must meet least-cost resolution requirement
and must not in any way benefit the bank’s shareholders.
 Conservatorship (essentially just used as a preliminary stage to
liquidation)
 Resolution Plans (“Living Wills”) as required under section
165(d) of Title I of the Dodd0Frank Act.
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5. Policy issues | problems addressed
 Eliminate taxpayer bailouts of companies that
are “too big to fail”
 Ensure that private sector (creditors and shareholder)
bear the cost of the proceedings (not taxpayers)
 Ensure management is removed
“The result is a law that attempts to balance the goals of the
bankruptcy and customer protection laws with the goals of
preserving or restoring financial stability, public confidence and
reasonable risk taking that may have been disrupted as a result of a
financial panic”
Davis Polk Financial Reform Summary
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6. How OLA is intended to work
Covered Financial Companies
 Title II of the Dodd-Frank Act defines “financial company” as a
company that is incorporated or organized under any provision
of federal or state law and is a:
 BHC;
 Nonbank financial company supervised by the Federal Reserve Board;
 Company that is “predominantly engaged” in activities the FRB has
determined to be financial in nature under Section 4(k) of the BHCA;
or
 Any subsidiary of the foregoing that is predominantly engaged in
activities the FRB has determined to be financial in nature
under Section 4(k) of the BHCA.
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7. How OLA is intended to work
 Process for Determining that a Financial Company is
Subject to the New Orderly Liquidation Regime
 Written Recommendation to Appoint Receiver
 Systemic Risk Determination by Treasury
 Judicial Review of Determination
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8. How OLA is intended to work
 Determination by the Treasury Secretary:
 That the financial company is “in default or in danger of default”;
 Failure of the financial company and its resolution under otherwise
applicable insolvency law would have serious adverse effects on
financial stability in the US;
 No viable private sector alternative is available to prevent the default
of the financial company;
 Effect of using OLA on claims of various stakeholders and other market
participants would be appropriate given the beneficial impact of using
OLA on US financial stability;
 Use of OLA authority better than the alternatives under otherwise
applicable insolvency law
 Federal regulatory agency has ordered the financial company to
convert all of its convertible debt instruments
 Company satisfies the definition of a financial company under the statute.
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9. How OLA is intended to work
 Judicial Review of Determination
 If the board of directors of the company does not acquiesce
to the appointment of the FDIC as receiver, Treasury must
confidentially petition the US District Court for the District of
Columbia for an order authorizing the appointment
 The court, in a confidential proceeding, would review on
an “arbitrary and capricious” standard Treasury’s
determination that the covered financial company was
(a) in default or in danger of default, and
(b) is a “financial company” as defined under
Title II of the Dodd-Frank Act.
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10. How OLA is intended to work
FDIC Appointment; Receivership Duties and Powers
 Orderly Liquidation Modeled on FDIA
 Take over the assets of and operate the financial company, to sell assets or transfer assets to a
bridge financial company, and to merge the covered financial company with another company;
 Value and prioritize claims;
 Avoid fraudulent transfers and preferences;
 Seek injunctive relief against any asset anywhere (without the necessity of showing irreparable harm);
 Prioritize administrative expenses of the receiver;
 Repudiate contracts, including qualified financial contracts, and limit damages for such repudiation;
 Transfer qualified financial contracts and give notification of transfer;
 Impose a one business-day (effectively allowing a weekend to transfer) automatic stay of termination
rights for qualified financial contracts (as opposed to the three days in the original Senate-passed bill);
 Recognize security interests and customer interests;
 Enforce contracts;
 Invalidate ipso facto clauses;
 Require consent for the termination, acceleration, or declaration of default under any contract to which
the covered financial institution is a party;
 Pursue directors and officers of a covered financial company for gross negligence or tortuous conduct;
 Create and operate bridge financial companies; and
 Prohibit settlements with secrecy agreements and protective orders.
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11. Criticism of OLA as
a policy instrument
 The fact that most large (systemically important) financial
institutions operate across multiple jurisdictions and thus
forcing a financial company of such size to liquidate could:
 Be unworkable in practical terms
 Run contrary to the US’s foreign policy interests
 Instrument works more as a disincentive for the executive
management and boards of such institutions to stay out of
the zone where they might come in to consideration for OLA.
 OLA seen as a replacement for open bank assistance but
now the only scope the government has for injecting funds
into a troubled systemically important financial institution
would be once it has decided to liquidate it.
 Lack of judicial oversight or review
 Forces FDIC to pick which creditors are made whole and which
not, and thereby threatens to entrench crony capitalism
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12. Further reading | sources
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13. Additional sources
 Financial Regulatory Reform: How Does It Help, How Does It Hurt? (A panel featuring:
Kenneth Griffin, Raymond McDaniel Jr., Jim Millstein, Thomas Wilson, and moderated by
Alan Schwartz | The Milken Institute | May 11, 2011)
http://www.milkeninstitute.org/events/gcprogram.taf?function=detail&eventid=gc11&EvID=2818
 FDIC’s Resolution Handbook (for a practical guide on how resolution
authority worked before OLA
http://www.fdic.gov/bank/historical/reshandbook/
 Wikipedia’s page on Dodd–Frank Wall Street Reform and Consumer Protection Act
http://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer_Protection_Act
 The Orderly Liquidation of Lehman Brothers Holdings under the Dodd-Frank Act
http://www.fdic.gov/regulations/reform/lehman.html
 GOA Report Bankruptcy: Complex Financial Institutions and International
Coordination Pose Problems
http://www.gao.gov/new.items/d11707.pdf
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14. Orderly Liquidation
Authority
Georgetown University Law Center | Federal Regulation of Financial Institutions | Fall 2011 | Simon Lacey |
sl673@law.georgetown.edu
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