Dodd-Frank: Title II – Orderly Liquidation Authority is a law designed to efficiently and expeditiously shut down large, complex financial companies that are on the verge of collapse. This law serves as an alternative to bankruptcy and aims to safeguard the American economy by ensuring that shareholders and creditors bear the losses of the failed company, removing the management responsible for the company’s financial state, and guaranteeing that claimants receive at least the same amount they would have obtained through bankruptcy. Additionally, the law establishes a priority list for settling claims, with executives and shareholders being the last to be paid. It also prohibits the use of taxpayer funds to rescue a company placed under receivership under Title II, meaning that failing financial institutions will be compelled to liquidate. To prepare for financial distress or failure, large financial companies must develop plans for a swift and organized wind-up process.
Title II, also known as the Orderly Liquidation provision of the Dodd-Frank Act, is a process designed to efficiently liquidate large, complex financial companies that are on the verge of failure. It serves as an alternative to bankruptcy and appoints the Federal Deposit Insurance Corporation (FDIC) as a receiver to oversee the liquidation process. The FDIC is granted specific powers and a timeframe of three to five years to complete the liquidation. The main objectives of Title II are to safeguard the stability of the American economy, ensure that shareholders and creditors bear the losses of the failed company, remove responsible management, and guarantee that claimants receive at least the same amount they would have received in a bankruptcy liquidation.
For instance, during the financial crisis of 2008, numerous large financial institutions faced severe financial difficulties, leading the government to provide over $1.7 trillion in bailouts. Despite these efforts, more than 250 banks failed between 2008 and 2010, and Lehman Brothers, one of the largest investment banks in the United States, filed for the largest Chapter 11 bankruptcy in U.S. history. This highlighted the necessity for a government authority, like Title II, to efficiently liquidate large, complex financial institutions and prevent future bailouts.
Title II establishes a claims process for asserting claims against a defaulting financial company and outlines a set of rules for asset liquidation and payment prioritization. Claims are paid in the following order: administrative costs, the government, employee wages and benefits, general and senior liabilities, junior obligations, executive salaries, and obligations to shareholders and equity holders. This prioritization ensures that executives, directors, and shareholders are the last to receive payment, thereby holding them accountable for the company’s failure. Additionally, Title II includes provisions to hold executives liable, such as the executive clawback provision, which allows the FDIC to recover incentive payments and other compensation given to executives up to two years prior to the company’s failure.
Dodd-Frank: Title II – Orderly Liquidation Authority is a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in response to the 2008 financial crisis. It grants the government the authority to liquidate failing financial institutions in an orderly manner to prevent a systemic collapse.
The Orderly Liquidation Authority applies to any financial institution that is deemed to be in danger of default and whose failure could pose a threat to the stability of the U.S. financial system. This includes banks, insurance companies, and other non-bank financial institutions.
The purpose of the Orderly Liquidation Authority is to provide a framework for the government to intervene and wind down failing financial institutions in a controlled manner, minimizing the impact on the broader economy and protecting taxpayers from bearing the burden of bailouts.
The Orderly Liquidation Authority is an alternative to bankruptcy for systemically important financial institutions. It allows the government to take control of the failing institution and manage its liquidation process outside of the traditional bankruptcy court system.
The Orderly Liquidation Authority can be initiated by the Secretary of the Treasury, in consultation with the President, after determining that a financial institution is in danger of default and poses a threat to the financial system. The decision is made based on recommendations from the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC).
The Dodd-Frank Act includes provisions to protect the rights of creditors and shareholders during the Orderly Liquidation process. Creditors are entitled to receive compensation based on the value of their claims, and shareholders may receive residual value after all other claims are satisfied.
The costs of the Orderly Liquidation process are initially covered by the Orderly Liquidation Fund, which is established by the Treasury Department. However, the Act requires that any funds expended from the Orderly Liquidation Fund be recouped through assessments on the financial industry, ensuring that taxpayers are not solely responsible for the costs.
Yes, a financial institution has the right to challenge the decision to initiate the Orderly Liquidation process in federal court. However, the court’s review is limited to determining whether the Secretary of the Treasury’s determination was arbitrary and capricious.
The Act requires that the FDIC, as the receiver of the failing institution, make efforts to preserve and maximize the value of the institution’s assets, including the potential sale or transfer of the institution to a private entity. This may involve retaining employees or transferring them to the acquiring entity.
The Orderly Liquidation Authority aims to prevent the disorderly collapse of systemically important financial institutions, which could have severe consequences for the broader economy. By providing a structured process for the resolution of failing institutions, it helps maintain financial stability and reduces the risk of contagion in the financial system.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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