I have never understood why exactly bank regulators need new, so-called resolution authority for banks when there is something called Chapter 11, unless of course they don't plan to use it, in which case there's no reason to provide it to them other than to engage in the complete pretense that they do.
And neither evidently does this panel of bankruptcy and restructuring experts.
Yes, the powers that be fear that the markets would freak at a Chapter 11 filing by a bank that's too big to fail, and that might trigger a run on the bank by its counterparties, or even on the counterparties themselves. But how would a decision by regulators to press the resolution button not have the same effect?
And that is that the authorities are afraid to touch the third rail of financial reform: effective derivatives reform.
In this context, that means eliminating the automatic stay that swaps enjoy thanks to so-called bankruptcy "reform" that was enacted in 2005.
That would prevent counterparties from stepping in front of other creditors and seizing collateral, the way Goldman Sachs did in the case of AIG.
And perhaps there's the real rub. My sense is that Washington doesn't really want to make Goldman wait in line with other creditors while a bankruptcy court sifts through everyone's claims. Maybe regulators fear that there would then be a run on Goldman, and that the discretion that they would retain with resolution authority, along with the opacity of the process, would help prevent that from happening. In other words, transparency and an above-board process don't work in the case of shutting down insolvent banks.
If so, I just wish they'd come out and say so we could all stop scratching our heads.
Still, Lubben doesn't buy that argument. As he points out, Chapter 11 needn't be messy or time consuming, as evident in the Lehman proceeding as well as those of GM and Chrysler. "The GM, Chrysler, and Lehman sale hearings show that speed, respect for the collateral effects of a case, and due process are not inconsistent," Lubben wrote.
Nonetheless, Washington seems to want to be able to favor some creditors over others as it sees fit, and we've all seen how that's worked out.