The Making of Lehman Brothers II
A serious legislative effort, supported by the Trump administration, is underway to reduce the level of scrutiny applied to banks that are on the verge of becoming systemically important. If congressional Republicans have their way, financial stability will be at greater risk than at any time since the 2008 crisis.
WASHINGTON, DC – Last week, with some fanfare, the US Treasury Department released a report on what to do about the Orderly Liquidation Authority. The OLA, created under the Dodd-Frank financial reform legislation of 2010, was intended to prevent a recurrence of what happened in September 2008, when one failing firm, Lehman Brothers, was able to trigger a cascade effect that nearly destroyed the financial system.
The OLA allows the Federal Deposit Insurance Corporation (FDIC), subject to reasonable safeguards, to take over a failing financial firm and wind it down in an orderly manner – very much in line with what happens, with some regularity, when a small bank becomes insolvent. Although the Treasury report reads more like a political document rather than a well-reasoned technical assessment, it still comes to a sensible conclusion: keep the OLA in place. Unfortunately, the report also masks a broader legislative and regulatory agenda that will add unnecessary risk – and a lot of it – to the financial system.
The OLA has attracted a great deal of bipartisan support in recent years, including on the FDIC’s Systemic Resolution Advisory Committee (the SRAC, of which I am a member). But some highly influential Republicans on the House Financial Services Committee have attacked the OLA relentlessly, arguing that it represents a government bailout-in-waiting. They want to abolish it, and insist that failing financial firms simply go through a court-supervised bankruptcy process.