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Is The Bankruptcy Code An Adequate Mechanism For Resolving The Distress Of Systemically Important Institutions?, Edward R. Morrison
Is The Bankruptcy Code An Adequate Mechanism For Resolving The Distress Of Systemically Important Institutions?, Edward R. Morrison
Faculty Scholarship
The President and members of Congress are considering proposals that would give the government broad authority to rescue financial institutions whose failure might threaten market stability. These systemically important institutions include bank and insurance holding companies, investment banks, and other "large, highly leveraged, and interconnected" entities that are not currently subject to federal resolution authority. Interest in these proposals stems from the credit crisis, particularly the bankruptcy of Lehman Brothers. That bankruptcy, according to some observers, caused massive destabilization in credit markets for two reasons. First, market participants were surprised that the government would permit a massive market player to …
Derivatives And The Bankruptcy Code: Why The Special Treatment?, Franklin R. Edwards, Edward R. Morrison
Derivatives And The Bankruptcy Code: Why The Special Treatment?, Franklin R. Edwards, Edward R. Morrison
Faculty Scholarship
The collapse of Long Term Capital Management (LTCM) in Fall 1998 and the Federal Reserve Bank's subsequent efforts to orchestrate a bailout raise important questions about the structure of the Bankruptcy Code. The Code contains numerous provisions affording special treatment to financial derivatives contracts, the most important of which exempts these contracts from the "automatic stay" and permits counterparties to terminate derivatives contracts with a debtor in bankruptcy and seize underlying collateral. No other counterparty or creditor of the debtor has such freedom; to the contrary, the automatic stay prohibits them from undertaking any act that threatens the debtor's assets. …