Threat Level Red: Congress Tinkering with the Bankruptcy Code (Again)
As if they didn’t muck it up enough 5 years ago, key senators are trying to change the face of bankruptcy. This time, instead of a “No Creditor Left Behind” bill, the suggested reform includes creation of a “special” bankruptcy court to deal with failed financial companies.
The new law is still in its infancy, with many of the provisions in flux. One proposal would give the Federal Deposit Insurance Corp the authority to dismantle large troubled financial services firms. The new regulations, authored by lame-duck Connecticut Senator Christopher Dodd are designed to avoid a bailout and force insolvent financial institutions down the road of bankruptcy.
First reports indicate that the bill would drive troubled financial firms to bankruptcy first. If the bankruptcy option fails, then the “nuclear” option appears to be placing the bank into receivership with the FDIC as receiver (conflict of interest, anyone?) Moreover, there are few details related this special court. At first blush, however, the notion of a “special court” dilutes the bankruptcy process altogether. With this bill, Dodd aims to stick it the banks and ”make resolution a very painful process.” But is he also sticking it those who face personal bankruptcies?
Funny that the guy who accepted the “friends and family” mortgage rate from banks is suddenly anti-bank. I suppose it’s only right, considering Congress made bankruptcy a painful process for the broken consumer in 2005. Bankruptcy would be equal opportunity - debtors’ prison for all, and Congress holds the keys. I’m not advocating bank bailouts over bankruptcy, but Congress has not exactly given me confidence in its ability to overhaul bankruptcy for the better.
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