A number of prominent voices on Capitol Hill and numerous commentators on bank policy do not much like Title II of the Dodd-Frank Act (DFA).  That is the Title labeled “Orderly Resolution Authority.”  It is sometimes misnamed in public writ as Orderly Liquidation Authority, an important and unfortunate error, since liquidation is only one of several options available in the case of failure of a financial firm, and the one most likely to destroy what value may remain in a firm.  Keep in mind that insolvency does not mean that there is no value left, just less value than what the firm owes.  There are ways to resolve a firm that maximize that value, and other ways that destroy it.

Our nation’s bankruptcy laws are generally intended—and to a large degree designed—to preserve value.  Title II of Dodd-Frank—written in law as secondary, a recourse to the bankruptcy process—has been criticized by some for being punitive, prone to destroy value, and by others as too vulnerable to use in propping up failed firms that should be removed from the financial playing field.

The Treasury Department released on February 21 a long anticipated study of Title II.  It seeks to address both sets of criticisms, i.e. improving the process of resolution in a way that removes failed financial institutions while preserving value.  Its basic approach is to strengthen the bankruptcy process, embracing an oft-discussed approach of creating a new Title 14 in the bankruptcy code.  It also offers recommendations intended to remove some of the chances for abuse of discretion to which critics of DFA Title II point.  This rests firmly on the recognition that under DFA, bankruptcy is relied upon as a first recourse, Title II resolution procedures to be a resort only if bankruptcy would not work.  Theoretically, a strong and viable bankruptcy approach should make DFA Title II irrelevant.

Bert Ely, who cut his teeth on the 1980s S&L meltdown with an early and perspicacious recognition that the problem was bigger than anyone was willing to admit (and who has never taken his hand off the financial industry’s pulse), has offered a quick and brief review of the Treasury plan and its chances for achieving its goals.  Well worth the read.