FDIC proposes big bank, brokerage liquidation procedure

Introduction

The Federal Deposit Insurance Corp. sketched out today a set of proposed regulations for liquidating in an orderly way any big banks, brokerage firms, insurors, or financial companies whose demise could rattle the U.S. financial industry.

The FDIC plan, which will be open for 30 days of public comment once it is formally published in the Federal Register, aims to help the ailing company continue key operations, services, and transactions during its liquidation to maximize the value of its assets. Toward that end, the FDIC would be appointed receiver of the troubled company and give itself the power to create a bridge financial company that would not be saddled with debt, bad assets, or shareholders as it tries to stabilize and liquidate the original company.

“This authority is an important tool for the elimination of ‘too big to fail’ because it provides the FDIC with the authority to prevent a disorderly collapse, while ensuring that bail-outs of failing companies will not occur,” the agency’s proposal says.

That means all creditors, shareholders, and debt holders should expect losses or financial haircuts, the FDIC said. The plan would bar any extra payments to holders of long-term senior debt, subordinated debt, or equity that would result in those investors recovering more than other creditors entitled to the same priority of payments under the law, the FDIC said.

Once the bridge company has stabilized the sick company, the FDIC promised to “move as expeditiously as possible” to sell all operations and assets back to the private sector.

Additionally, the Securities and Exchange Commission would have to sign off on the FDIC being appointed receiver if the company or its largest U.S. subsidiary is a brokerage firm, while the Fed would make the recommendation if the sick company or its largest subsidiary is an insurance company.

The FDIC’s new power for orderly liquidation authority, mandated by the Dodd-Frank financial reform law, has been sought by FDIC Chairman Sheila Bair since the 2008 credit crisis as a way to avoid pumping taxpayer dollars into troubled financial companies.