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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

July 2012: 

Bankruptcy: 

Agencies Continue Rulemakings for Clarifying Specific Provisions of 
Orderly Liquidation Authority: 

GAO-12-735: 

GAO Highlights: 

Highlights of GAO-12-735, a report to congressional committees. 

Why GAO Did This Study: 

The Dodd-Frank Act created OLA for resolving failed, systemically 
important financial companies. Since the act was passed in 2010, 
regulators have been developing regulations to implement this 
authority and avoid disorderly resolutions that create substantial 
losses for the financial system. In July 2011, GAO issued the first of 
its statutorily mandated reports on the effectiveness of the 
Bankruptcy Code for resolving or liquidating complex, internationally 
active financial companies. Among the topics examined in this second 
report, GAO reviewed: (1) federal rules or regulations relating to OLA 
and the resolution of financial institutions, including living wills; 
and (2) status of efforts to improve coordination on international 
resolutions, data collection efforts, and the outcomes of financial 
institutions that were in the bankruptcy process. 

To address these objectives, GAO reviewed agencies’ draft and final 
rules related to OLA and comment letters submitted. GAO continued to 
monitor developments related to the Lehman Brothers and Washington 
Mutual bankruptcies, and began monitoring a recent bankruptcy filing 
by MF Global. GAO also studied available data on the number of 
financial company bankruptcies and met with relevant agency and court 
officials. 

GAO makes no new recommendations in this report. GAO provided a draft 
for comment to AOUSC, the Department of the Treasury, and federal 
financial regulators. None provided written comments and technical 
comments have been incorporated, as appropriate. 

What GAO Found: 

The federal financial regulators have issued certain final rules for 
resolving large, complex financial companies under the Dodd-Frank Wall 
Street Reform and Consumer Protection Act’s (Dodd-Frank Act) 
established Orderly Liquidation Authority (OLA). Under OLA, the 
Federal Deposit Insurance Corporation (FDIC) could serve as receiver 
of a failing financial company instead of the company entering the 
bankruptcy process. Regulators continue to address a number of issues 
related to FDIC’s new authority, including how creditors will ensure 
that they receive no less than they would under a Chapter 7 bankruptcy 
liquidation; how certain assets and liabilities would be treated in a 
new company created by FDIC under OLA; and what role the Securities 
Investor Protection Corporation would play in the resolution of a 
broker-dealer under OLA. Regulatory officials reported that they were 
continuing to draft rules to clarify how OLA would be used. FDIC and 
the Board of Governors of the Federal Reserve (Federal Reserve) also 
have issued final rules requiring certain financial companies to file 
resolution plans or “living wills” that must detail how companies 
would resolve their operations through an orderly bankruptcy. 
Regulators told GAO that the plans also would help FDIC plan for the 
exercise of its resolution authority, including OLA. The filing dates 
for these plans are phased in over the next year and a half, with the 
first group of financial companies filing their first plans on July 1, 
2012. However, “nonbank financial companies” that also will need to 
provide plans have yet to be designated. 

International coordination remains a critical component in resolving 
the failure of a large, complex financial company and regulators have 
been taking steps to address this and are testing new data collection 
efforts. Specifically, efforts are under way to develop a universal 
legal entity identifier that allows companies to identify and manage 
risks from companies with which they are engaged in financial 
transactions. This additional information could help regulators in 
resolving internationally active financial companies. Data to identify 
financial institutions filing for bankruptcy protection as well as 
their outcomes are limited. Since neither FDIC nor federal judicial 
agencies have a database that tracks financial companies in 
bankruptcy, the Administrative Office of the U.S. Courts (AOUSC) and 
the Federal Judicial Center have begun a new effort to track financial 
company bankruptcies, but reported court data are untested for this 
purpose. Several large financial institution bankruptcies are still in 
progress. Two of the largest financial company bankruptcies, Lehman 
Brothers Holdings Inc. (Lehman Brothers) and Washington Mutual, Inc.—
both of which filed in September 2008—recently had their 
reorganization plans confirmed by creditors and approved by the 
courts. However, these cases are not yet fully resolved. In the Lehman 
Brothers case, international litigation could take several years to 
resolve. The October 2011 bankruptcy of MF Global Holdings Ltd., a 
holding company with a securities and commodities broker, has raised 
concerns about how commodity customers are treated under a liquidation 
regime and also involves international litigation over customer 
property. These financial company bankruptcies highlight the 
challenges FDIC and other regulators would face in resolving large, 
complex financial companies under the OLA process. 

View [hyperlink, http://www.gao.gov/products/GAO-12-735]. For more 
information, contact Alicia Puente Cackley at (202) 512-8678 or 
cackelya@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

D.C. District Court Revised Its Rule for Judicial Review under OLA: 

Although Regulators Have Issued Rules Related to OLA, Some 
Clarifications Remain Outstanding: 

Financial Company Bankruptcies Remain Difficult to Track and Several 
Major Cases Move Forward: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Status of Selected Rules Related to the Orderly 
Liquidation Authority and Resolution Planning under the Dodd-Frank Act: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Deadlines for Submissions of Initial Resolution Plans, by 
Size of Financial Company: 

Table 2: Chapter 11 Mega-Bankruptcy Filings, by Total Filings and 
Financial Institution Filings, 2000 through 2011: 

Table 3: Selected Final Rules and Actions Completed, as of May 15, 
2012: 

Table 4: Selected Proposed Rules and Actions in Progress, as of May 
15, 2012: 

Table 5: Selected Required Rules That Have Not Yet Been Proposed or 
Had Action as of May 15, 2012: 

Figure: 

Figure 1: Decision Process for Invoking OLA and Appointing FDIC 
Receiver of a Failing Financial Company: 

Abbreviations: 

AOUSC: Administrative Office of the U.S. Courts: 

CFTC: Commodity Futures Trading Commission: 

DIP: debtor-in-possession: 

FDIC: Federal Deposit Insurance Corporation: 

FSOC: Financial Stability Oversight Council: 

LBIE: Lehman Brothers International, Europe: 

LEI: Legal Entity Identifier: 

OLA: Orderly Liquidation Authority: 

SEC: Securities and Exchange Commission: 

SIFI: systemically important financial institutions: 

SIPA: Securities Investor Protection Act: 

SIPC: Securities Investor Protection Corporation: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

July 12, 2012: 

Congressional Committees: 

The 2008 financial crisis and the failures of large, complex financial 
institutions led some experts to question the effectiveness of the 
United States Bankruptcy Code (Code) for resolving or liquidating 
these institutions without causing further harm to the financial 
system.[Footnote 1] In response, Congress created the Orderly 
Liquidation Authority (OLA) as part of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act).[Footnote 2] Under 
OLA, the Secretary of the Treasury may appoint the Federal Deposit 
Insurance Corporation (FDIC) as a receiver for certain insolvent 
financial companies that pose a risk to the financial stability of the 
United States. The Dodd-Frank Act requires FDIC to liquidate certain 
financial companies to maximize the value of the companies' assets, 
minimize losses, mitigate systemic risk, and minimize moral hazard. 
OLA created a new process for resolving large, complex financial 
companies, but policymakers, academic experts, and industry 
participants have raised questions about whether this process would 
achieve the stated goals more effectively than the established 
bankruptcy process. 

As well as creating OLA, the Dodd-Frank Act requires financial 
companies to file periodic resolution plans describing how they could 
be resolved in an orderly manner in the event of material financial 
distress or failure. These "living wills" are intended to allow 
companies and regulators to anticipate possible challenges to their 
resolution under the Code.[Footnote 3] Some policymakers and other 
experts have questioned the usefulness of the resolution plans because 
of the range of scenarios that could lead to a financial institution's 
failure. 

In July 2011, we issued the first of our statutorily mandated reports 
on the effectiveness of the Code for resolving or liquidating complex, 
internationally active, financial institutions.[Footnote 4] Although 
OLA has not been invoked, we have been monitoring the development of 
rules and regulations related to OLA as well as the bankruptcies of 
large financial institutions. Specifically, this report examines: (1) 
actions the U.S. District Court for the District of Columbia (D.C. 
District Court) has taken in response to the judicial review provision 
of OLA, including any revisions to local civil rule 85; (2) federal 
rules or regulations relating to OLA and efforts to improve 
international coordination, including living wills, in resolving 
financial companies; and (3) data collection efforts and outcomes of 
financial institutions that were in the bankruptcy process. 

To address these objectives, we monitored the promulgation of rules 
through agency websites, legal journals, and legal searches. We 
examined comment letters on draft rules, attended webinars from law 
firms, and reviewed academic articles discussing the key challenges 
related to OLA and resolution plan rules.[Footnote 5] We continued to 
review court and regulatory documents to follow developments of two 
large financial company bankruptcies (Lehman Brothers Holdings, Inc. 
and Washington Mutual, Inc.) that we began tracking as case studies in 
our 2011 report. We also began tracking the more recent bankruptcy of 
MF Global Holdings Ltd. We analyzed available data on U.S. 
bankruptcies and determined that they were sufficiently reliable to 
provide some background information on the number of bankruptcies of 
large financial institutions from January 1, 2010, through December 
31, 2011. Finally, we met with officials from the Administrative 
Office of the U.S. Courts (AOUSC), D.C. District Court, the Commodity 
Futures Trading Commission (CFTC), FDIC, the Board of Governors of the 
Federal Reserve System (Federal Reserve), Federal Judicial Center, 
Department of Justice (Justice), Securities and Exchange Commission 
(SEC), Securities Investor Protection Corporation (SIPC), and the 
Department of the Treasury (Treasury), including the Office of 
Financial Research. See appendix I for more information on our scope 
and methodology. 

We conducted this performance audit from August 2011 to July 2012 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

Bankruptcy is a federal court procedure conducted under the Code. The 
goal of bankruptcy is to give individuals and businesses a "fresh 
start" by eliminating or restructuring debts they cannot repay and 
help creditors receive some payment in an equitable manner. The filing 
of a bankruptcy petition operates as an "automatic stay" that stops 
most lawsuits, foreclosures, and most other collection activities 
against the debtor. Under the Code, secured creditors--those with 
liens or other secured claims against the debtor's property--are more 
likely to get some debt repaid than unsecured creditors. Creditors 
typically receive payment of their debts before shareholders receive 
any return of their equity in the failed company. 

Bankruptcy Proceedings: 

Business debtors that are eligible for protection under the Code may 
qualify for liquidation, governed primarily by Chapter 7 of the Code, 
or reorganization, governed by Chapter 11. Proceedings under both 
Chapters 7 and 11 can be voluntary (initiated by the debtor) or 
involuntary (generally initiated by at least three creditors). 
[Footnote 6] 

* A liquidation proceeding--under Chapter 7--is a court-supervised 
procedure by which a trustee takes over the assets of the debtor's 
estate, reduces them to cash, and makes distributions to creditors in 
accordance with the Code's priority scheme. 

* A reorganization proceeding--under Chapter 11--allows debtors that 
are commercial enterprises to continue to operate some or all of the 
debtor's operations as a way to satisfy creditor claims. The debtor 
typically remains in control of its assets under a Chapter 11 
proceeding, and is called a debtor-in-possession (DIP). However, if 
the court determines that there is cause or it is in the best interest 
of creditors, the court can direct the U.S. Trustee to appoint a 
Chapter 11 trustee to take over the affairs of the debtor. A debtor 
(or other interested party) may file a reorganization plan, which 
ultimately may be confirmed by the court. The plan includes details on 
the operations of the reorganization, including disposition or 
retention of property, mergers, and issuance of securities.[Footnote 
7] The plan also divides creditors into classes and directs how the 
creditor classes will be paid. The debtor can terminate burdensome 
contracts and leases, recover assets, and rescale its operations to 
return to profitability. To continue operations, a debtor may obtain 
additional financing, which could be paid before other debts.[Footnote 
8] A debtor also may file a plan of liquidation under Chapter 11 or 
transfer to a Chapter 7 liquidation, which may provide a greater 
return to creditors. 

The U.S. bankruptcy system involves multiple federal entities. While 
bankruptcy courts are located in 90 federal judicial districts, the 
Southern District of New York (which includes Manhattan) and the 
District of Delaware adjudicate a majority of larger corporate or 
business bankruptcy cases, many of which constitute "megacases." 
[Footnote 9] The Judicial Conference of the United States recommends 
national policies and legislation for all aspects of federal judicial 
administration. AOUSC serves as the central administrative support 
entity for the Judicial Conference and the federal courts, including 
bankruptcy courts. For example, AOUSC provides administrative, legal, 
financial, management, and information technology support functions 
for the federal courts. The Federal Judicial Center, an education and 
research agency for the federal courts, assists bankruptcy courts with 
education relating to case administration and management, while the 
majority of Federal Judicial Center research helps inform policy 
decisions of the Judicial Conference of the United States. In 
addition, the Trustee Program at Justice and the Bankruptcy 
Administrator Program oversee bankruptcy trustees and the 
administration of bankruptcy estates, respectively. [Footnote 10] 

It is important to note that certain financial institutions may not 
file as debtors under the Code and other entities face special 
restrictions in using the Code: 

* Insured depository institutions: Under the Federal Deposit Insurance 
Act, FDIC serves as the conservator or receiver for the insured 
depository institutions placed into conservatorship or receivership 
under applicable law.[Footnote 11] 

* Insurance companies: Insurers generally are subject to oversight by 
state insurance commissioners, who have the authority to place them 
into conservatorship, rehabilitation, or receivership. 

* Broker-dealers: Broker-dealers can be liquidated under the 
Securities Investor Protection Act (SIPA) or under a special provision 
of Chapter: 

* 7 of the Code. However, broker-dealers may not file for 
reorganization under Chapter 11.[Footnote 12] 

* Commodity brokers: Commodity brokers, also known as futures 
commission merchants, are restricted to using only a special provision 
of Chapter 7 for bankruptcy relief.[Footnote 13] 

Orderly Liquidation Authority under the Dodd-Frank Act: 

The OLA process could replace the bankruptcy process for certain 
financial companies. Title II of the Dodd-Frank Act established OLA, 
which requires a series of regulatory determinations and may involve 
limited judicial action (see fig. 1). On their own initiative, or at 
the request of the Secretary of the Treasury, regulators may consider 
whether to make a recommendation with respect to whether the Secretary 
should appoint FDIC as receiver for a financial company. Among other 
factors, regulators first must determine that the company generally 
falls under one of four categories:[Footnote 14] 

* bank holding companies (defined under the Bank Holding Company Act); 
[Footnote 15] 

* nonbank financial companies supervised by the Federal Reserve; 
[Footnote 16] 

* any company that is predominantly engaged in activities that the 
Federal Reserve has determined to be financial in nature or incidental 
thereto for purposes of section 4(k) of the Bank Holding Company Act 
(including broker-dealers that are registered with SEC and are members 
of SIPC); or: 

* any subsidiary of a company described in the bullets above that is 
predominantly engaged in activities that the Federal Reserve has 
determined to be financial in nature or incidental thereto for 
purposes of section 4(k) of the Bank Holding Company Act (except for 
insured depository institutions and insurance companies).[Footnote 17] 

In addition to the evaluation of whether the financial company fits 
within one of the categories described above, federal regulators 
recommending whether the Secretary of the Treasury should appoint FDIC 
as receiver must include: 

* an evaluation of whether the financial company is in default or in 
danger of default; 

* a description of the effect that the default of the financial 
company would have on the financial stability in the United States; 

* a description of the effect that the default of the financial 
company would have on economic conditions or financial stability for 
low-income, minority, or underserved communities; 

* a recommendation on the nature and extent of actions to be taken 
under Title II of the Dodd-Frank Act regarding the financial company; 

* an evaluation of the likelihood of a private-sector alternative to 
prevent the default of the financial company; 

* an evaluation of why a case under the Code is not appropriate for 
the financial company; and: 

* an evaluation of the effects on creditors, counterparties, and 
shareholders of the financial company and other market participants. 

Upon recommendation, the Secretary of the Treasury, must invoke OLA if 
the Secretary, in consultation with the President, determines that: 

* the financial company is in default or in danger of default; 

* the failure of the financial company and its resolution under 
otherwise applicable federal or state law would have serious adverse 
effects on the financial stability of the United States; 

* no viable private-sector alternative is available to prevent the 
default; 

* the effect on the claims or interests of creditors, counterparties, 
and shareholders of the financial company and other market 
participants of proceedings under Title II of the Dodd-Frank Act is 
appropriate, given the impact that any action under Title II would 
have on the financial stability of the United States; 

* an orderly liquidation would avoid or mitigate such adverse effects; 
and: 

* the company meets the definition of financial company as described 
above.[Footnote 18] 

Figure 1: Decision Process for Invoking OLA and Appointing FDIC 
Receiver of a Failing Financial Company: 

[Refer to PDF for image: process map] 

1) Financial company begins to fail: 

Regulators (Two-thirds of Federal Reserve Board and additional 
regulators[A]): 
2) Does the failure of the company present a significant risk to the 
financial stability of the United States? 
If no, go to #3; 
If yes, go to #4. 

3) Financial company enters bankruptcy or other insolvency process. 

4) Recommendation to appoint FDIC the receiver of the failing company 
and start the Orderly Liquidation Authority (OLA) process. 

Treasury (in consultation with the President): 
Agrees with the recommendation? 
If no, go to #3; 
If yes, go to #5. 

5) Notification of decision. 

FDIC: 
Board of directors (or similar body) consents or acquiesces with 
determination? 
If yes, go to #6; 
If no, go to #7. 

6) FDIC appointed receiver of the financial company. 

7) D.C. District Court: Court reviews determination: 
Upholds Secretary's determination or fails to act within 24 hours: go 
to #6; 
Finds Secretary's determination arbitrary and capricious: go to #8. 

8) Secretary refiles? 

If yes, go to #7; 
If no, go to #3. 
  
Sources: GAO (data); Art Explosion (images). 

[A] If the financial company or its largest U.S. subsidiary is: (1) a 
broker-dealer, SEC (two-thirds of the commissioners) must approve the 
recommendation in consultation with FDIC; (2) an insurance company, 
the Director of the Federal Insurance Office in Treasury also approves 
the recommendation in consultation with FDIC; or (3) any other 
financial company, FDIC (two-thirds of the Board of Directors) must 
approve the recommendation. 

[End of figure] 

By a two-thirds vote, the Federal Reserve and FDIC (or relevant 
regulator) must agree to make the recommendation to the Secretary of 
the Treasury to place the financial company into receivership. 
[Footnote 19] The Secretary consults with the President and then makes 
a determination to place the company in receivership, and notifies the 
company's board of directors (or equivalent). If the company consents 
or acquiesces to the recommendation, FDIC becomes receiver. If the 
company does not consent, the Secretary through Justice must petition 
the D.C. District Court for an order authorizing the appointment of 
FDIC as receiver.[Footnote 20] The D.C. District Court has 24 hours to 
determine whether the Secretary's determination was arbitrary and 
capricious, in which case FDIC would not become receiver.[Footnote 21] 
If the D.C. District Court failed to act within 24 hours, then FDIC 
would become receiver. The financial company can appeal the D.C. 
District Court's determination, but the receivership would not be 
stayed (or postponed) if it did so. If the D.C. District Court did not 
uphold the Secretary's determination, the Secretary could amend and 
refile or appeal within 30 days. Upon appointment as receiver, FDIC 
becomes successor to and legal custodian of the financial company, 
including assets and operations.[Footnote 22] 

Under authority provided by Title II of the Dodd-Frank Act, when FDIC 
is appointed receiver of the financial company it may take over and 
manage the assets of the company. FDIC must liquidate and wind up the 
affairs of the financial company, and may sell or transfer the assets 
to a bridge financial company, which is a temporary company used to 
maintain the failed company's operations. A bridge financial company 
may purchase assets, assume liabilities, and undertake other functions 
of the financial company. FDIC also has authority to determine the 
validity of creditor claims against the company and pay creditor 
claims. The Dodd-Frank Act generally requires that all creditors of a 
financial company with similar priority be treated similarly; however, 
in certain circumstances FDIC may treat similarly situated creditors 
differently. In some cases, FDIC may repudiate contracts to which a 
financial company is a party or may enforce certain contracts that 
otherwise could have been terminated because of the financial 
company's insolvency. 

Resolution Plans and Other Financial Stability Provisions under the 
Dodd-Frank Act: 

Among its provisions, Title I of the Dodd-Frank Act requires certain 
financial companies to provide regulators with periodic reports on 
their plans for rapid and orderly resolution in the event of "material 
financial distress or failure" under the Code.[Footnote 23] The 
resolution plan must include the following: 

* information on the manner and extent to which any insured depository 
institution affiliated with the company is adequately protected from 
risks arising from the activities of any nonbank subsidiaries of the 
company; 

* full descriptions of the ownership structure, assets, liabilities, 
and contractual obligations of the company; 

* identification of the cross-guarantees tied to different securities, 
identification of major counterparties, and a process for determining 
to whom the collateral of the company is pledged;[Footnote 24] and: 

* any other information that the Federal Reserve and FDIC jointly 
require by rule or order.[Footnote 25] 

The Federal Reserve and FDIC must review the information in these 
resolution plans. If they jointly determine and notify a company that 
its plan is not credible or would not facilitate an orderly resolution 
under the Code, the financial company would have to submit a revised 
plan. A revised plan must discuss in detail revisions that address the 
deficiencies jointly identified by the Federal Reserve and FDIC. The 
revised plan must also address changes, if any, in its business 
operations or corporate structure that the company proposes to make to 
facilitate implementation of the plan. If the company fails to submit 
a satisfactory revised plan, the Federal Reserve and FDIC could impose 
stricter requirements such as higher capital or liquidity requirements 
on the company.[Footnote 26] If the company fails to submit a 
satisfactory revised plan within 2 years of the imposition of stricter 
requirements, the Federal Reserve and FDIC, in consultation with the 
Financial Stability Oversight Council (FSOC), may jointly direct a 
company to divest certain assets or operations jointly identified by 
the Federal Reserve and FDIC as necessary to facilitate an orderly 
resolution under the Code in the event of failure of the company. 
[Footnote 27] 

Additional Rulemaking Authorities under the Dodd-Frank Act: 

The Dodd-Frank Act requires certain regulators to develop and issue 
rules to implement OLA and resolution plan requirements.[Footnote 28] 
For some rules, the regulators must consult with FSOC, a new entity 
established by the Dodd-Frank Act.[Footnote 29] FDIC--in consultation 
with FSOC--has primary responsibility for developing and issuing rules 
and regulations related to its authority as receiver of a failed 
financial company. Other sections of Title II of the Dodd-Frank Act 
also contain specific requirements for FDIC to coordinate with the 
Federal Reserve, SEC, and other banking regulators on key aspects of 
OLA. Under Title I, the Federal Reserve and FDIC must issue joint 
rules on resolution plans. FSOC has the authority to designate nonbank 
financial companies (including foreign nonbank financial companies) 
for Federal Reserve supervision if FSOC determines that such companies 
could pose a threat to the financial stability of the United States. 
[Footnote 30] These nonbank financial companies would have to file 
resolution plans.[Footnote 31] Appendix II lists the primary rules 
related to OLA and resolution plans and their status as of May 15, 
2012. 

D.C. District Court Revised Its Rule for Judicial Review under OLA: 

As we previously reported, the D.C. District Court issued Local Civil 
Rule 85 on January 19, 2011, to implement its judicial review 
requirements under OLA. Generally, the rule reiterated the procedural 
requirements in the Dodd-Frank Act. It provided for a 24-hour review, 
and the financial company has the right to oppose the Secretary's 
petition to invoke an FDIC receivership under OLA. If the court did 
not rule on the petition within 24 hours, or ruled in favor of the 
Secretary, the receivership would proceed immediately. As the rule was 
originally written, the Secretary of the Treasury would have had to 
notify the D.C. District Court under seal at least 48 hours before the 
filing of a petition, which would give the court time to prepare for 
the review. In addition, the original rule did not specifically 
address Rule 6 of the Federal Rules of Civil Procedure regarding the 
24-hour period. Rule 6 states that if a time period ends on a weekend 
or holiday, the period would be extended to the next business day. 
Court officials told us that they included the original 48-hour notice 
because they were concerned about receiving advance notice before an 
OLA filing. Court officials also told us that the D.C. District Court 
was a smaller court that did not hear many business cases and few 
large bankruptcies and therefore they needed the advance notice. 

In letters dated March 2011, FDIC and Treasury objected to 
notification requirements in the rule that required Treasury to 
provide an additional 48-hour notification to the court before filing 
a petition to invoke OLA. In addition, they were concerned about the 
possible use of Rule 6 of the Federal Rules of Civil Procedure to 
extend the 24-hour period for the court to rule and the 48-hour 
notification period. The agencies said that Treasury may not always be 
able to provide the 48-hour notice because of the speed with which a 
financial company could become insolvent. FDIC and Treasury were 
concerned that the use of Rule 6 to calculate the timing of filings 
and decisions effectively would expand the court's 24-hour time frame 
to rule on the petition and the 48-hour notice period. For example, if 
the Secretary's 48-hour notice period or the court's 24-hour review 
period ended on a weekend or holiday, Rule 6 calculations would move 
the ends of those periods to the next business day. According to 
agency officials, this delay could have serious adverse effects on U.S 
financial stability. As a result, the agencies thought the court 
should be prepared to make rulings over the weekend. 

On July 6, 2011, the court issued a revised final rule, which added 
"to the extent feasible" to the requirement that the Secretary of the 
Treasury notify the court 48 hours before filing a petition. In 
addition the revised rule added a section stating that the 48-hour 
notice period and the 24-hour decision period were not subject to Rule 
6, meaning that the time limit would apply without regard to whether 
the time periods ended on a weekend or holiday. FDIC and Treasury 
officials told us that the revisions to the court's rule addressed 
their concerns. The court has not yet tested the effectiveness of the 
rule because, as of May 1, 2012, the Secretary had not sought the 
appointment of FDIC as receiver in an OLA proceeding. 

Although Regulators Have Issued Rules Related to OLA, Some 
Clarifications Remain Outstanding: 

Federal regulators have issued separate final rules for OLA and 
resolution plans, as required by the Dodd-Frank Act. FDIC plans to 
issue additional rules to clarify its use of OLA, such as a joint rule 
with SEC for the resolution of broker-dealers. Because the first 
financial companies will not begin filing resolution plans until July 
2012, it is too soon to determine the effectiveness of the plans. 
Despite the issuance of rules, academics and other experts have 
questioned FDIC's ability to resolve large, systemically important 
financial institutions under OLA because of the complexity of the 
firms involved and challenges relating to international coordination. 
Regulators have reported progress on developing a universal identifier 
for financial companies that would help them identify and manage 
companies' counterparty exposures. 

Federal Regulators Have Issued Final Rules for OLA and Resolution 
Plans: 

Final Rules for OLA. On July 15, 2011, FDIC published a final rule 
(referred to as the Orderly Liquidation Authority Final Rule) under 
rulemaking authority provided by Section 209 of the Dodd-Frank Act. In 
its discussion of the final rule, FDIC noted that the rule represented 
the results of its initial phase of rulemaking for its OLA authority. 
FDIC staff also told us that this final rule included topics addressed 
in an earlier interim final rule and two notices of proposed 
rulemakings.[Footnote 32] 

More specifically, the final rule covers topics under three broad 
categories: (1) the definition of terms in a receivership under OLA 
and other general provisions of an FDIC receivership; (2) the priority 
of payments, including those for administrative expenses and to 
unsecured creditors; and (3) the process for administering claims 
against the failed financial company. The rule also covers other 
aspects of the receivership. For example, the final rule addresses 
FDIC's ability to recover compensation from a current or former senior 
executive who is found substantially responsible for the failure of 
the financial company. In addition, the rule addresses the payment for 
services performed under personal service agreements after FDIC is 
appointed receiver or for the acceptance of services by a bridge 
financial company. FDIC's final rule also discusses the distribution 
of assets in the liquidation of a noninsurance company subsidiary of 
an insurance company. FDIC has indicated that it believes it now has 
in place the regulations necessary to accomplish a resolution under 
OLA, even though it intends to adopt several additional regulations 
over the next year. 

In addition, FDIC published a final rule (the Mutual Insurance Holding 
Company Treated as Insurance Company Rule) concerning the treatment of 
mutual insurance holding companies on April 30, 2012. Mutual insurance 
holding companies are owned by policyholders, not stockholders, and 
generally have been subject to state insurance insolvency regimes. In 
its final rule, FDIC sought to make the resolution of mutual insurance 
companies conform to state insurance statutes for the resolution of 
such companies. 

Proposed Rules Related to OLA. FDIC, in consultation with FSOC, also 
has issued two proposed rules related to OLA to clarify certain 
technical issues. First, FDIC and Treasury jointly issued a notice of 
proposed rulemaking on November 25, 2011, governing the calculation of 
the maximum obligation FDIC could incur as receiver under OLA, as 
required by the Dodd-Frank Act.[Footnote 33] The proposed rule (the 
Maximum Obligation Limitation Rule) outlines a calculation that limits 
the total outstanding obligations that FDIC can incur in connection 
with the liquidation of a financial company under OLA and defines 
terms such as "obligations."[Footnote 34] FDIC issued a second 
proposed rule on March 20, 2012, which relates to its enforcement of 
subsidiary and affiliate contracts as the receiver of a covered 
financial company. The proposed rule (Enforcement of Subsidiary and 
Affiliate Contracts by the FDIC as Receiver of a Covered Financial 
Company Proposed Rule) clarifies FDIC's authority to preserve the 
value of a failed financial company's assets and business lines by 
enforcing certain contracts of subsidiaries and affiliates of the 
financial company. FDIC as receiver has authority to enforce contracts 
guaranteed by the financial company even though the counterparty has 
the contractual right to terminate or accelerate the contract based on 
the insolvency of the financial company. FDIC must transfer the 
guarantee and all related assets to a bridge financial company or 
third party or provide adequate protection for the obligations. 
According to FDIC, this authority will help enable it to place a 
financial company at the holding company level into receivership 
without placing solvent subsidiaries into receivership, while also 
helping to mitigate systemic risk and maintain financial stability. 

Final Rule on Resolution Plans. On November 1, 2011, FDIC and the 
Federal Reserve published a final rule (the Resolution Plans Final 
Rule) implementing the Dodd-Frank Act requirement under section 
165(d). Under this requirement, bank holding companies with at least 
$50 billion in total consolidated assets (including foreign banking 
organizations that are treated as bank holding companies) and nonbank 
financial companies supervised by the Federal Reserve must 
periodically submit resolution plans.[Footnote 35] Although this rule 
requires these types of financial institutions to submit plans 
describing how they would be resolved through the bankruptcy process, 
regulators reported that having companies file resolution plans would 
help FDIC in planning for the exercise of the possible use of its 
resolution authorities, including OLA. Regulators anticipate the plans 
also would provide additional insights on these companies' structure 
and complexity, including funding sources and counterparties. In 
addition, the Federal Reserve noted that the plans will assist in its 
supervisory efforts to ensure that companies operate in a manner that 
is both safe and sound and do not pose risks to financial stability 
generally. The final rule addresses information required in the plans, 
steps for submitting the plans, requirements for updating plans, and 
steps regulators may take for addressing inadequate plans.[Footnote 
36] Under the rule, a company's resolution plan must take into account 
different economic scenarios provided to the company by the Federal 
Reserve; the scenarios will be developed in the Federal Reserve's 
rules on stress testing. As shown in table 1, the deadlines for 
resolution plans are staggered by company size. Plans for the largest 
bank holding companies are due in July 2012. 

Table 1: Deadlines for Submissions of Initial Resolution Plans, by 
Size of Financial Company: 

Size of bank holding company or nonbank financial company (dollars in 
assets)[A]: Large (greater than $250 billion); 
Deadline for first resolution plan: July 1, 2012. 

Size of bank holding company or nonbank financial company (dollars in 
assets)[A]: Medium ($100-$250 billion); 
Deadline for first resolution plan: July 1, 2013. 

Size of bank holding company or nonbank financial company (dollars in 
assets)[A]: Small (less than $100 billion); 
Deadline for first resolution plan: December 31, 2013. 

Sources: Federal Reserve and FDIC. 

[A] The rule determines a U.S. company's size by reviewing total 
nonbank assets as reported to the Federal Reserve (or for foreign-
based companies, total U.S. nonbank assets). 

[End of table] 

Regulators Plan to Issue Additional Rules to Clarify OLA: 

FDIC and other regulators noted in our discussions that although they 
completed a final rule for OLA and drafted several other rules, 
regulators are working on, but have not yet issued, certain mandated 
rules. In addition, the final rule does not address a number of 
important issues. Most of the outstanding rules related to OLA are 
required under the Dodd-Frank Act. Three of these are rules FDIC must 
issue jointly with other regulators: 

* Orderly liquidation of broker-dealers (no statutory deadline); 

* Recordkeeping for qualified financial contracts (due July 21, 2012); 
[Footnote 37] and: 

* Source of strength (due July 21, 2012).[Footnote 38] 

FDIC officials reported that each of these three rules was in a 
different stage of development, with the recordkeeping rule for 
qualified financial contracts closest to being issued, potentially as 
an interim rule before the statutory deadline in July. 

Joint Rule Development: 

Besides addressing the complexity of OLA, regulators told us that 
coordination and reaching consensus with different regulators 
represented a challenge in drafting and issuing OLA-related rules, 
particularly given the number of rulemakings required of some 
regulators and resource constraints. As part of the OLA rule 
development process, FDIC must consult with different members of FSOC 
and in some cases is statutorily mandated to work with specific 
regulators or agencies.[Footnote 39] Regulators also have had to 
address how certain rules would avoid conflicts with other rules and 
help ensure consistency with other requirements mandated under the 
Dodd-Frank Act. 

For example, under the Dodd-Frank Act, FDIC and SEC must, after 
consultation with SIPC, develop a rule for the orderly liquidation of 
broker-dealers that are subject to OLA.[Footnote 40] Under OLA, FDIC, 
as receiver of a failed broker-dealer, or in a case in which the 
largest U.S. subsidiary of a financial company is a broker-dealer, 
would appoint SIPC as trustee for the liquidation. However, in our 
earlier discussions with FDIC, SEC, and SIPC officials, they noted 
that the Dodd-Frank Act did not clearly delineate SIPC's role in a 
broker-dealer resolution under OLA, which may pose challenges in such 
a case. For instance, if FDIC as the receiver of a broker-dealer put 
the broker-dealer into a bridge institution, the agencies would need 
to determine what SIPC's role would be and how creditor and customer 
claims would be handled.[Footnote 41] FDIC officials told us that this 
rule would govern the relationship between FDIC and SIPC. Although 
there is no statutory deadline for this rule, SIPC officials 
emphasized the importance of the rule to clarify SIPC's participation 
so as to avoid confusion in any future resolution under OLA. FDIC and 
SIPC officials told us that they met together with SEC for the first 
time on May 3, 2012, to discuss developing this rule. FDIC officials 
reported that they anticipate issuing a final rule by the end of 2012. 

SEC officials told us that other Dodd-Frank requirements were a 
complicating factor in the development of the required rule on 
recordkeeping for qualified financial contracts. Under FDIC's 
proposal, financial companies would have to provide FDIC with 
information on swaps and other contracts similar to the information 
that they would provide regulators under other Dodd-Frank 
requirements.[Footnote 42] FDIC officials told us that they are 
actively working with other regulators on the rule, which is due in 
July 2012. In another example, Federal Reserve staff told us that 
rulemaking related to the source of strength rule involved significant 
policy decisions, including to which bank holding companies the rule 
would apply, and how this requirement relates to other requirements 
for bank holding companies.[Footnote 43] FDIC officials told us that 
they have reached out to the Federal Reserve and Office of the 
Comptroller of the Currency to start developing this rule (also due in 
July 2012) but do not have an estimated issuance date. 

Development of other OLA-Related Rules: 

FDIC officials told us that other OLA-related rules--either mandated 
by the Dodd-Frank Act or recommended by others--detailing key aspects 
of FDIC's authority as receiver, as well as the treatment of 
creditors, were still in the design phase or had not been drafted. 
First, the final rule on FDIC's general authority under OLA does not 
fully define the universe of financial companies for which FDIC could 
be receiver.[Footnote 44] In an earlier proposed rule, FDIC included a 
definition of financial companies (under its authority under Title II 
of the Dodd-Frank Act) but in the final rule, the agency deferred 
finalizing this definition until the Federal Reserve issued its final 
rule on the definition of nonbank financial companies (under its 
authority for enhanced supervision under Title I of the Dodd-Frank 
Act). The Federal Reserve has issued two proposed rules on the 
definition of financial companies and officials from FDIC and the 
Federal Reserve told us that they have been coordinating to make their 
definitions consistent.[Footnote 45] FDIC officials told us that they 
anticipated issuing a final rule defining financial companies by the 
end of 2012. 

Second, the final rule on FDIC's general authority also has not 
defined how creditors under an OLA proceeding would receive no less 
than they would under a Chapter 7 bankruptcy proceeding, as mandated 
under the Dodd-Frank Act. In using this authority, FDIC would have to 
quickly assess the valuation of the company under Chapter 7. In 
comments on the proposed rule, industry groups and a federal regulator 
called for greater clarification about how FDIC would do its 
assessment.[Footnote 46] FDIC officials told us that they have started 
to develop a "minimum recovery" rule to respond to these concerns and 
clarify how creditors would receive no less than they would under a 
Chapter 7 bankruptcy proceeding. 

Third, FDIC plans to clarify through rulemaking how it would establish 
and maintain a bridge financial company. FDIC, as receiver of a failed 
financial company, may organize a bridge financial company to merge 
the failed financial company with another company, or to transfer any 
assets and liabilities of the failed company to the bridge financial 
company, without obtaining approval or consent from creditors. In the 
OLA final rule, FDIC also recognized that the treatment of assets and 
liabilities transferred to a bridge financial company needed 
additional clarification. FDIC officials told us that they expected to 
issue a rule by the end of 2012 clarifying the use of bridge financial 
companies. In January 2012, FDIC discussed the role of the bridge 
financial company and said in its view, a bridge entity would help 
preserve continuity of operations for the failed financial company and 
would provide time for FDIC to develop resolution options, including 
merger with another company, conversion into a recapitalized company, 
a stock sale, or a purchase and assumption transaction, much as the 
agency does when it sells failed banks to another institution. More 
recently, FDIC's Acting Chair discussed the use of a bridge financial 
company as part of FDIC's resolution strategy.[Footnote 47] Under this 
strategy, FDIC, as receiver, initially would own the bridge financial 
company. As owner, FDIC would (1) create a capital base by effectively 
converting some of the debt from the former parent company into equity 
in the new bridge company, (2) obtain any necessary liquidity from the 
Orderly Liquidation Fund in Treasury, and (3) appoint a new board of 
directors and chief executive officer from the private sector. The 
Dodd-Frank Act allows for a bridge financial company to be established 
for 2 years, with the ability to extend it for 1 year (up to three 
times).[Footnote 48] 

Furthermore, FDIC must issue rules related to its ability to impose 
assessments on financial companies to pay for any losses or 
obligations incurred while taking a failed company into receivership. 
Under the Dodd-Frank Act, FDIC first must use the proceeds from the 
sale of assets from the failed company to cover any losses. However, 
FDIC may borrow Treasury funds to finance operations with the 
requirement that FDIC later assess financial companies covered under 
OLA to pay for any losses not covered by asset sales.[Footnote 49] 
(The Maximum Obligation Limitation Rule discussed earlier determines 
the maximum amount that FDIC can borrow from Treasury.) FDIC, in 
consultation with Treasury, must develop rules to clarify its 
authority to impose assessments. FDIC also must establish a risk 
matrix for imposing assessments after taking into account 
recommendations from FSOC.[Footnote 50] However, FDIC and Treasury 
officials told us that FDIC had not started drafting this rule and 
there is no statutory deadline to do so. 

The Dodd-Frank Act also requires FDIC to issue rules about records 
retention for a financial company under OLA and purchaser eligibility 
under OLA.[Footnote 51] FDIC faces no statutory deadline for 
completing these rules, and FDIC officials told us that they 
considered them to be of lower priority. Lastly, FDIC may issue 
additional rulemakings through its general authority under Title II of 
the Dodd-Frank Act, in consultation with FSOC.[Footnote 52] FDIC plans 
to issue a rule about the orderly liquidation of a commodity broker, 
but officials told us that they would coordinate any rulemaking with 
changes CFTC might make to its rule related to commodity broker 
bankruptcies.[Footnote 53] 

Concerns Have Been Raised about FDIC's Limited Experience with 
Resolving Large, Complex Institutions: 

Although FDIC and other regulatory officials noted that resolution 
plans could help prepare for the possible failure of a large financial 
company, not enough time has passed to determine the effectiveness of 
the living will requirement in assisting financial companies to 
prepare for bankruptcy (as discussed earlier) as well as aiding FDIC 
in the use of its Title II authority. As mentioned previously, the 
largest bank holding companies are required to submit resolution plans 
by July 1, 2012. As of May 2012, FSOC had not yet designated the 
systemically important nonbank financial companies, and the resolution 
plan final rule states that these companies do not have to file 
earlier than 270 days from their date of designation.[Footnote 54] 
Federal Reserve and FDIC staff told us that they anticipated that 9 or 
10 bank holding companies would file in the first wave of submissions. 
Federal Reserve officials told us that they have been in discussions 
with the largest bank holding companies since the rule was finalized. 
[Footnote 55] Although entities commenting on the draft rule for 
resolution plan requirements brought up concerns about the definition 
of government support to financial companies and the confidentiality 
of proprietary data, regulatory officials believe that they have 
largely addressed these issues in the final rule. As of May 2012, 
details on the credit exposure reporting requirements had not been 
specified. Federal Reserve officials told us that the requirement for 
credit exposure reports will be included in a separate rulemaking 
related to single-party credit exposure limitation.[Footnote 56] 

In the bankruptcy process, the resolution or liquidation of large, 
complex, internationally active financial firms involves multiple 
challenges. As we discussed in our 2011 report, these challenges 
include identifying funding sources and counterparties and dealing 
with complex corporate structures across international 
jurisdictions.[Footnote 57] Financial and legal experts have noted 
that resolution plans might not be as helpful as hoped during times of 
financial distress because of the need for current information--much 
of a company's contracts, assets, and liabilities could change 
dramatically from day to day. The final rule for resolution plans 
under Title I requires financial companies to stress test their 
portfolios under multiple scenarios to identify the financial firm's 
risks. However, the scenarios may not anticipate the type of financial 
crisis that could eventually lead to a firm's insolvency. Because of 
these challenges and the reported burden associated with developing 
the plans, some industry and academic experts have questioned the 
merits of the plans. FDIC noted their expectation that the plans, when 
complete, would provide important information for its advance planning 
to facilitate any necessary liquidation of a firm, irrespective of the 
cause of the firm's failure. 

Furthermore, although FDIC has been working to further clarify its 
authority under OLA, several academic and other experts have raised 
concerns about FDIC's overall ability to effectively initiate the 
resolution of large and complex firms without causing broader market 
disruption. As we discussed in our 2011 report, FDIC has issued an 
analysis of how it would have handled the failure of Lehman under OLA; 
some criticized the analysis for its assumptions about Barclays 
Capital Inc.(Barclays)'s ability to obtain regulatory approval to 
purchase Lehman's distressed assets at a time of widespread weakness 
in the financial markets.[Footnote 58] According to Lehman's 
bankruptcy examiner, Barclays was interested in acquiring Lehman prior 
to Lehman's bankruptcy and did purchase certain assets of Lehman's 
following bankruptcy. According to FDIC, its willingness to absorb the 
first $40 billion in Lehman's losses would have addressed concerns of 
Barclays' U.K. regulators. FDIC officials told us that they have been 
given sufficient powers to resolve such firms in order to limit 
further market disruption. FDIC officials reported that having access 
to funding would allow the receiver to make payments to creditors 
shortly after the time of failure and would help to maintain financial 
stability. In addition, they noted that the receiver would be able to 
establish a bridge financial company, as discussed earlier, to 
maintain the operations of the company without engaging in a bailout 
of stockholders of the failed firm. FDIC reported it received strong 
support for its proposals under OLA during a public forum with 
academic experts in January 2012.[Footnote 59] 

Others have noted FDIC's lack of experience in resolving financial 
companies as complex as Lehman with multiple international 
subsidiaries. As one SIPC official told us, Lehman collapsed within 24 
hours--a much shorter planning period than that to which FDIC is 
accustomed when resolving failed banks. In response, FDIC officials 
noted that they likely would have reviewed a firm's resolution plan 
and been kept abreast of actions taken by the firm's supervisor. As 
FDIC notes in its paper on the hypothetical liquidation of Lehman 
under OLA, FDIC would have been engaged for months prior to the 
failure of the firm. In addition, we noted in our 2011 report, there 
have been few large scale bankruptcies of complex, internationally 
active financial firms. 

However, others have noted that today's largest financial companies 
have structures and asset sizes that dwarf those of Lehman, which 
remains the largest Chapter 11 debtor in U.S. history. FDIC also could 
be limited in its ability to manage the failure of an internationally 
active financial institution because it would be responsible for 
resolving the domestic subsidiaries of a failed company. Certain 
subsidiaries, assets, and creditors would be subject to separate 
insolvency regimes in various countries.[Footnote 60] 

International Coordination Remains a Key Challenge, Although 
Regulators Have Made Progress on a Universal Identifier: 

International Coordination Efforts: 

As discussed in our 2011 report, cross-border resolutions of 
internationally active financial institutions such as Lehman Brothers 
remain a challenge, due to the manner in which different countries' 
insolvency proceedings interact. In comments on the proposed 
resolution plan rules, several entities called for international 
coordination on the submission and approval of resolution plan 
requirements, as many internationally active financial institutions 
will be subject to resolution regimes in multiple countries. U.S. and 
international regulators have recognized this challenge and in July 
2011 the Financial Stability Board issued a consultative document that 
proposed a requirement to mandate that all designated global 
systemically important financial institutions (SIFI) have recovery and 
resolution plans.[Footnote 61] In addition, the document called for 
cross-border cooperation agreements to enable countries' resolution 
authorities to act collectively to resolve internationally active 
financial institutions in an orderly and less-costly way. 

After receiving comments on its proposal, the Financial Stability 
Board released an updated list of key attributes of effective regimes 
for resolving failed SIFIs in October 2011.[Footnote 62] These 
attributes addressed issues such as the scope and independence of the 
country's resolution authority, the essential powers and authorities 
of the resolution authority, and how jurisdictions can facilitate 
cross-border cooperation in resolutions of SIFIs. Members of the G20 
endorsed the attributes in November 2011.[Footnote 63] FDIC and 
Federal Reserve officials report that the Dodd-Frank Act's Title II 
authority for FDIC to resolve systemically important financial 
institutions and its Title I requirement for these institutions to 
file periodic resolution plans follow the key attributes designated by 
the Financial Stability Board. Federal Reserve staff told us that the 
United States was ahead of some jurisdictions in adopting these 
provisions. In a November 2011 update (the latest available), the 
Financial Stability Board wrote that many jurisdictions had not 
implemented adequate legal frameworks for resolving global SIFIs and 
substantial further work on recovery and resolution plans as well as 
cross-border cooperation was needed. 

FDIC, the Federal Reserve, and other international regulators that are 
members of the Financial Stability Board have formed "crisis 
management groups" to review the recovery and resolution plans for 
global SIFIs. Officials from both U.S. agencies told us that the 
crisis-management groups for five of the U.S. global SIFIs have met 
with their international regulatory counterparts during the past year. 
In particular, they discussed progress for the planning efforts of 
these institutions. FDIC also has reported starting bilateral 
discussions with the foreign regulators of U.S.-based global SIFIs to 
identify any impediments to orderly resolution and implement any 
changes to address those challenges. FDIC noted that these discussions 
have led to the drafting of several memorandums of understanding with 
international regulators. FDIC further reported in January 2012 that 
their analysis has shown that in a crisis the U.S.-based global SIFIs 
would have a limited number of international regulators with which to 
work. For these financial institutions, more than 90 percent of the 
"total reported foreign activity" was located in from one to three 
foreign jurisdictions and more than 80 percent of this activity came 
from legal entities in the United Kingdom. 

However, Federal Reserve staff told us developing plans for cross-
border resolution under the Bankruptcy Code remains a challenge. While 
the United States is requiring companies to file resolution plans that 
must detail how companies would resolve themselves under the Code, in 
some countries, regulators complete a resolution plan that discusses 
resolving the company without further market disruptions. In contrast, 
financial companies in those countries only have to complete a 
recovery plan that discusses ways to restore strength to a company 
under financial stress. Therefore, foreign banking organizations, 
which must file resolution plans in the United States, could face a 
different set of requirements in their home countries. 

Development of Global Legal Entity Identifier: 

U.S. and international regulators have cited the development of the 
Legal Entity Identifier (LEI) as a code for financial institutions and 
regulators to better identify and manage institutions' relationships 
with other institutions--allowing them to more effectively measure and 
monitor systemic risk. In addition, FDIC officials told us that the 
use of an LEI should help regulators in resolving a financial company 
during the OLA process because its adoption would allow large, 
systemically important financial companies to identify their many 
component entities, which generally are organized along business 
rather than legal lines. As we discussed in our 2011 report, the 
resolution of these companies involves unwinding the complex 
interrelationships among the entities in order to address creditor 
claims.[Footnote 64] 

Currently, a single financial institution may be identified or coded 
in different ways by a firm doing business with that institution. For 
example, JP Morgan Chase, Inc. may be referred to as JPMC, Chase, and 
JPMorgan. Regulators have cited a universal identifier for financial 
institutions as particularly helpful in the identification of parties 
in transactions involving over-the-counter derivatives.[Footnote 65] 
When Lehman collapsed in 2008, other financial institutions struggled 
to determine their counterparty exposure to the firm, causing further 
market disruptions. 

The financial industry has been exploring a universal identifier for 
decades, but recently regulators have pushed for a global mandate. The 
Dodd-Frank-created Office of Financial Research issued a policy 
statement in 2010 seeking comment on the development of an LEI. 
[Footnote 66] Since then, the Office of Financial Research and the 
Financial Stability Board have held roundtables and the financial 
industry has convened panels on the development of an LEI. In January 
2012, the Financial Stability Board convened an expert group of 
regulators (supported by an industry advisory panel of experts) to 
provide recommendations on the governance framework for the LEI with a 
goal of endorsement by the G20 summit in June 2012. On May 30, the 
Financial Stability Board endorsed the expert group's recommendations 
for a governance and operational framework for an LEI. In addition, 
the Financial Stability Board's specification for an LEI standard is 
derived from the technical standard for a 20-digit alphanumeric code 
published in May 2012 by the International Organization for 
Standardization. 

Global acceptance of an LEI requires determining its governance and 
regulatory oversight. An Office of Financial Research official told us 
that the Financial Stability Board's LEI Expert Group has broken into 
committees to discuss issues including governance, operating model, 
reference data and confidentiality, funding, and implementation. The 
official said that the governance committee also has been considering 
a model in which a nonprofit entity would administer the process. 
According to Treasury, the Financial Stability Board published a 
report in mid-June 2012 including recommendations for the appropriate 
governance framework for a global LEI. U.S. regulators reported that 
the first iteration of LEI structure will be limited to the code 
itself and a minimal set of reference data, not information about 
ownership hierarchies, because of confidentiality concerns. In its 
commodity swap reporting rule (which goes into effect July 16, 2012), 
CFTC became the first U.S. regulator to require financial companies to 
use LEIs.[Footnote 67] SEC also has published a proposed securities 
swap reporting rule that requires the use of an LEI provided by an 
international organization when available.[Footnote 68] The Financial 
Stability Board has recommended a target for global implementation of 
the LEI standard by March 2013. 

Financial Company Bankruptcies Remain Difficult to Track and Several 
Major Cases Move Forward: 

In the 2011 report, we found that comprehensive data on the number of 
financial companies in bankruptcy are not readily available. 
Bankruptcy data are collected for provisions relevant to the Code and 
for management of cases. While federal agencies currently do not 
collect information to identify certain bankrupt entities, the Federal 
Judicial Center is starting to assemble a specialized database of 
financial company bankruptcies from the past 10 years. Two large cases 
we began tracking in our 2011 report, Lehman Brothers and Washington 
Mutual, are moving forward, but these cases along with the more recent 
bankruptcy of MF Global illustrate the challenges in resolving large, 
complex financial institutions. 

Data on Financial Company Bankruptcies Are Limited: 

As we reported last year, tracking financial company bankruptcies is 
difficult because data are limited. Specifically, data on the number 
of financial company bankruptcies and their outcomes have been 
difficult to obtain. Neither AOUSC, the Trustees' Office in Justice, 
nor FDIC collect information on the number of financial companies in 
bankruptcy. We previously reported that AOUSC collects some data on 
bankruptcy outcomes, such as the closing date for large cases. 
However, AOUSC does not specifically include information on bankruptcy 
cases involving financial institutions, or track outcomes such as the 
value of creditor returns or the value of firms emerging from 
bankruptcy. The bankruptcy courts only collect data on the type of 
business in which an institution is engaged if the data are pertinent 
to provisions of the Code (for example if the business was a broker-
dealer subject to a SIPA proceeding) and these data are used for case 
processing rather than overall study. AOUSC officials told us they 
have been considering having the bankruptcy courts include the North 
American Industry Classification System code when a company files for 
bankruptcy. However, AOUSC and Federal Judicial Center officials told 
us that this new requirement would require a modification to the 
Official Bankruptcy Forms. These officials told us that this process 
generally takes 2 years and follows the process for amending the 
Federal Rules of Bankruptcy Procedure, except the process does not 
require approval by the Supreme Court or an opportunity for review by 
Congress. 

AOUSC provides the Trustee Program's bankruptcy filing data. Officials 
told us these data include whether the debtor is a person or a 
corporation, whether it is a small business, the case number, the name 
and address of the debtor, and the status of the case (that is, 
whether a plan has been filed or if the case has been dismissed), and 
other types of information. However, officials told us they do not 
flag financial companies and cannot track them separately. FDIC 
officials told us that although they track individual cases of bank 
holding companies in bankruptcy, such as Washington Mutual, Inc. and 
Colonial Bank, they do not have a database that aggregates these case 
records. 

Although AOUSC officials told us that they currently were not 
routinely collecting any data that would allow the identification and 
tracking of financial company bankruptcies, AOUSC and the Federal 
Judicial Center have undertaken a collaborative effort to create a 
specialized database of financial companies that have filed for 
bankruptcy protection from 2000 to 2010, but they have concerns about 
the reliability of these data as they are untested for this 
purpose.[Footnote 69] According to a Federal Judicial Center official, 
the purpose of the database is to compile information useful in 
understanding the effectiveness of Chapter 7 and Chapter 11 of the 
Code in facilitating the orderly liquidation or reorganization of 
financial companies. Officials told us developing such a database has 
been challenging, due to the resources needed and coding concerns. 
[Footnote 70] A Federal Judicial Center official told us they had 
developed an online coding form to document more information about 
each case and held a training session for the student coders. One of 
the items researchers must code is the type of financial company, 
which is not information the courts currently collect. Some outcomes 
included in the database, such as details about the sale of all 
assets, are more difficult to find in court dockets. In addition, the 
official told us determining the level of detail on each case to 
include in the database has been a challenge. For example, the 
official told us they attempted to limit the complexity of information 
for staff to code, while still documenting the necessary data for 
further study. To address this issue, the official told us that the 
Federal Judicial Center is undertaking various data verification 
processes, including a process by which two independent coders will 
code the same information and a third, more experienced researcher 
will reconcile any differences between them.[Footnote 71] Despite 
these efforts, AOUSC officials told us that they currently are not 
able to determine how effective this database will be in allowing them 
to track large financial company bankruptcies, partly because of 
concerns over using data reported by the companies filing for 
bankruptcy. 

As in our 2011 report, to examine the number of large financial 
companies filing for bankruptcy protection, we matched AOUSC data on 
Chapter 11 megacases with data from a private firm on financial 
company bankruptcies to determine the number of financial companies in 
bankruptcy during the past decade. Table 2 describes both the total 
megacase filings and those megacases that are financial companies. 

Table 2: Chapter 11 Mega-Bankruptcy Filings, by Total Filings and 
Financial Institution Filings, 2000 through 2011: 

Year: 2000; 
Chapter 11 mega-case filings: 
Total number of filings: 63; 
Number of financial institution filings: 2. 

Year: 2001; 
Chapter 11 mega-case filings: 
Total number of filings: 101; 
Number of financial institution filings: 1. 

Year: 2002; 
Chapter 11 mega-case filings: 
Total number of filings: 88; 
Number of financial institution filings: 2. 

Year: 2003; 
Chapter 11 mega-case filings: 
Total number of filings: 73; 
Number of financial institution filings: 1. 

Year: 2004; 
Chapter 11 mega-case filings: 
Total number of filings: 54; 
Number of financial institution filings: 0. 

Year: 2005; 
Chapter 11 mega-case filings: 
Total number of filings: 31; 
Number of financial institution filings: 2. 

Year: 2006; 
Chapter 11 mega-case filings: 
Total number of filings: 25; 
Number of financial institution filings: 0. 

Year: 2007; 
Chapter 11 mega-case filings: 
Total number of filings: 13; 
Number of financial institution filings: 4. 

Year: 2008; 
Chapter 11 mega-case filings: 
Total number of filings: 79; 
Number of financial institution filings: 4. 

Year: 2009; 
Chapter 11 mega-case filings: 
Total number of filings: 118; 
Number of financial institution filings: 6. 

Year: 2010; 
Chapter 11 mega-case filings: 
Total number of filings: 40; 
Number of financial institution filings: 1. 

Year: 2011; 
Chapter 11 mega-case filings: 
Total number of filings: 35; 
Number of financial institution filings: 1. 

Year: Total; 
Chapter 11 mega-case filings: 
Total number of filings: 720; 
Number of financial institution filings: 24. 

Sources: GAO analysis of AOUSC and New Generations data. 

[End of table] 

Three Major Financial Institution Bankruptcy Cases Continued to Move 
Forward: 

We continued to monitor two financial megacases, Washington Mutual, 
Inc. (Washington Mutual) and Lehman Brothers Holdings, Inc. (Lehman) 
and began monitoring a third, MF Global Holdings Ltd. (MF Global). 
Washington Mutual and Lehman are making progress in their bankruptcy 
proceedings, with several issues outstanding. Both financial 
institutions filed for Chapter 11 protection in September 2008. A new 
case involves MF Global, a holding company with a broker-dealer and 
commodity broker, which filed for Chapter 11 protection in October 
2011. Each case illustrates the complexities of liquidating large 
financial institutions. 

Washington Mutual. As we discussed in our 2011 report, the parties to 
the bankruptcy had agreed to a revised settlement report in late 2010, 
but confirmation of that plan was delayed due to various claims by 
shareholders and some creditors. These delays continued throughout 
2011 because of additional hearings to discuss allegations of insider 
trading by hedge funds. Shareholders alleged that several hedge funds 
had access to discussions about the settlement plan through their 
attorneys and later bid on creditor claims. The parties entered 
mediation in October 2011 and reached a settlement and submitted a 
plan on December 12, 2011. A Delaware bankruptcy court judge confirmed 
the plan on February 17, 2012. As discussed in the 2011 report, the 
plan set forth the allocation of the tax refund among all of the 
parties: up to $2.2 billion to Washington Mutual's holding company; up 
to $2.2 billion to J.P. Morgan Chase, Inc. (the new owner of the 
depository bank); up to $850 million to FDIC; and $335 million to the 
bank's bondholders. As of May 2012, the judge told us that she had 
been advised that the majority of the claims had been resolved. 
Further payouts will be distributed through a liquidating trust. 
Washington Mutual, Inc. is being reorganized as a reinsurance company 
that will be funded by capital contributions from new bondholders, not 
by the creditors from the original debtor. 

Lehman Brothers. On June 29, 2011, Lehman filed a disclosure statement 
that set out the plan for distribution of assets to the creditors of 
23 Lehman debtor entities. This plan was made after extensive 
negotiations with representatives of major creditor groups, including 
those that supported substantive consolidation and those that did not. 
This plan represents a compromise between the parties by providing for 
adjustments in payments to creditors. In November 2011, creditors 
approved Lehman's reorganization plan. The bankruptcy court confirmed 
the plan in December 2011. The plan included numerous settlements 
between the holding company and other counterparties, including a 
series of bilateral settlements with foreign affiliates and creditors. 
As a result, creditors reduced the amount of claims asserted against 
Lehman by more than $295 billion. According to Lehman, distributions 
to creditors totaling $22.5 billion began on April 17, 2012. A second 
distribution is planned for September 2012. 

The resolution of Lehman's broker-dealer, Lehman Brothers Inc., 
continues through the SIPC process. According to SIPC officials, 
almost all of the 100,000 claims had been satisfied as of May 2012. 
However, some of the remaining claims are among the largest and 
involve complex litigation over who meets the definition of "customer" 
under SIPA.[Footnote 72] According to the SIPA Trustee, there are over 
2,100 claims with a total value of nearly $42 billion that are still 
unresolved. One of the largest of these claims involves Lehman's 
overseas affiliate--Lehman Brothers International, Europe (LBIE)--
which is pursuing two types of claims against Lehman Brothers Inc. 
[Footnote 73] The first is an "omnibus customer claim" on behalf of 
approximately 1,100 LBIE clients against Lehman Brothers Inc., of 
which $6 billion in claims for securities and $2 billion in claims for 
cash have been allowed by the SIPA Trustee. A remaining $6.7 billion 
remains under dispute.[Footnote 74] The second is a "house claim" on 
its own behalf against Lehman Brothers Inc., of which $8.9 billion 
remains under dispute. The trustee said he does not recognize LBIE as 
a "customer" of Lehman Brothers Inc. because it does not meet the 
definition of "customer" under SIPA. According to SIPC officials, 
Lehman Brothers Inc. never held reserves on behalf of LBIE. These 
issues remain in litigation and may go to trial in 2013. 

The SIPA Trustee for Lehman Brothers Inc. has initiated litigation 
against other counterparties over payment distribution, which also 
remains ongoing. In the first case, the SIPA Trustee is in litigation 
with Barclays involving issues surrounding its purchase of assets of 
Lehman Brothers Inc., immediately after Lehman filed for bankruptcy. 
According to the SIPA Trustee's report, the dispute centers on 
competing interpretations of the Asset Purchase Agreement (defining 
the terms of the sale of certain Lehman Brothers Inc. assets to 
Barclays) between Lehman, Barclays, and Lehman Brothers, Inc. and 
involves contested claims to approximately $7 billion of "disputed 
assets."[Footnote 75] This case is currently on appeal.[Footnote 76] 

In a second case, SIPC officials told us the SIPA Trustee has filed an 
adversary proceeding against Citibank seeking the return of a $1 
billion deposit Lehman Brothers Inc. made with Citibank during Lehman 
Brothers Inc.'s last week in operation. The case involves Citibank's 
setoff of Lehman Brothers Inc.'s obligations against Lehman Brothers 
Inc.'s deposits at Citibank and affiliated entities.[Footnote 77] 
Citibank claims it set off the deposit shortly before Lehman Brothers 
Inc.'s SIPA liquidation process began in September 2008. The SIPA 
Trustee also has been seeking the turnover of approximately $300 
million deposited in Lehman Brothers Inc. accounts at various Citibank 
locations around the world. According to the SIPA Trustee, Citibank 
has been attempting to set off these deposits against a component of 
the Lehman Brothers Inc. obligations (approximately $1.26 billion) 
that are related to a settlement service provided by Citibank. 
[Footnote 78] 

In addition, the SIPA Trustee has been pursuing claims against LBIE on 
behalf of the broker-dealer's customers. The SIPA Trustee alleges that 
LBIE has assets that belong to Lehman Brothers Inc. customers. 
According to the SIPA Trustee, due to the hundreds of thousands of 
transactions between Lehman Brothers Inc. and LBIE, the final outcome 
and amounts available for SIPC's customer distribution are heavily 
dependent on LBIE's own resolution in the United Kingdom. The SIPA 
Trustee has filed claims against LBIE totaling almost $16 billion. 
According to the SIPA Trustee, he and his advisers have been engaged 
in discussions with LBIE about the extent to which LBIE will allow the 
SIPA Trustee's claim. The SIPA Trustee said the result of this process 
will have a major impact on the resolution of the U.S.-based Lehman 
Brothers Inc. estate and the SIPA Trustee's ability to satisfy claims 
of customers and other creditors of the broker-dealer. 

MF Global. MF Global has been in the bankruptcy process since October 
31, 2011, and has faced challenges due to missing customer funds and 
property. MF Global was a large, globally active company with a 
commodity and securities broker-dealer. The firm was based in the 
United States, with operations in multiple countries, including 
Australia, Canada, Hong Kong, India, Japan, Singapore, and the United 
Kingdom. As of mid-2011, the holding company had total assets of 
almost $46 billion. MF Global's stock price declined during 2011, 
falling from about $8 a share at the start of the year to below $4 in 
early October and below $2 by late October. According to the SIPA 
Trustee, MF Global's exposure to European debt and poor earnings 
reports led to credit downgrades and increased demands for collateral 
from MF Global's counterparties. This in turn led to an increased loss 
of confidence in MF Global as customers began to close their accounts 
and withdraw funds. 

According to CFTC, the failure of the MF Global commodity broker (MF 
Global Inc.) is unprecedented in the size and scope of missing 
customer funds. Ordinarily, the designated self-regulatory 
organization, in coordination with CFTC, would have arranged for the 
sale of a failed commodity broker to another commodity broker, but in 
the case of MF Global Inc., the missing customer funds and possible 
fraud prevented this from occurring, according to CFTC officials. 
These officials said they increased their involvement in the MF Global 
case after the company was downgraded by credit rating agencies on 
October 27, 2011. Despite repeated inquiries, MF Global Inc. was not 
able to provide supporting records for its calculations of segregated 
customer accounts. Because CFTC lacks authority to put the commodity 
broker into bankruptcy, when customer money was found missing, SEC and 
CFTC determined that a SIPC-led bankruptcy was the appropriate course 
of action to protect customer accounts and assets. 

The MF Global bankruptcy has highlighted issues related to resolving 
an international broker-dealer and commodity broker and the effect on 
customer payments. According to SIPC officials, for the securities 
estate, the SIPA Trustee is using SIPA, and for the commodities 
estate, the Trustee is applying subchapter IV of Chapter 7 of the Code 
to the extent consistent with SIPA, as well as applicable commodities 
law.[Footnote 79] While a SIPA proceeding and the bankruptcy process 
for a commodity broker are similar, there are important differences. 
Under the bankruptcy process for a commodity broker, to the extent 
that the debtor's general estate is insufficient to pay for the 
estate's administrative expenses, these expenses are paid from 
customer property ahead of the claims of customers. However, under the 
SIPA process, customer property is used to pay customers, and is 
available to pay estate expenses only if all customers have been 
satisfied in full. These differences could have a distinct effect on 
the funds available to customers, depending on the amount of the 
administrative expenses being paid compared to the amount of the 
general estate and the amount of the customer claims. In addition, 
SIPC may advance up to $500,000 for each customer holding securities 
(and a maximum of $250,000 for customers holding cash) while the 
liquidation is ongoing, which enables the trustee to provide some 
relief to securities customers relatively quickly. SIPC has no 
authority to make advances to satisfy commodities claims and the 
liquidation process for a commodity broker has no such provision. In 
MF Global, more than 30,000 commodity customer claims were filed 
compared with approximately 300 securities customer claims. 

Because different customer estates are available to securities and 
commodity customers, each type of customer is receiving a different 
recovery percentage. CFTC officials told us they have been working to 
identify customer property for these estates, and SIPC officials told 
us the CFTC has closely cooperated with the SIPA Trustee. [Footnote 
80] However, SIPC officials said the CFTC's regulations that implement 
bankruptcies for commodity brokers have been cumbersome to follow. In 
addition, according to SIPC officials, the SIPA Trustee's authority to 
conduct bulk transfers from the insolvent commodity broker-dealer to 
other broker-dealers is vague. 

According to the SIPA Trustee, a large volume of transactions occurred 
in the final week of MF Global's operations. The SIPA Trustee's report 
stated that the company's information technology system could not 
handle this increased volume, leading to transactions that were not 
recorded or recorded incorrectly. The report estimated that "fail 
transactions" (in which a counterparty fails to deliver cash or 
securities) were five times the normal volume in the final week. 
Following the bankruptcy filing, the SIPA Trustee conducted an 
investigation examining 840 cash transactions in excess of $10 million 
that totaled $327 billion and 20,000 cash transfers below $10 million 
that totaled $9 billion. In addition the SIPA Trustee has been 
examining securities transactions valued at more than $100 billion. 
The SIPA Trustee has sought to connect cash transfers from 
counterparties to the transfers of securities from MF Global to locate 
more customer funds. 

The resolution of MF Global Inc. also has been hampered by differences 
in laws of various jurisdictions and the location of foreign assets. 
According to the SIPA Trustee, differences in insolvency laws and a 
lack of legal precedent have contributed to significant gaps in 
commodity customer protection between the United States and foreign 
jurisdictions. SIPC officials and the SIPA Trustee said customers who 
had accounts for trading on domestic exchanges and customers who had 
accounts to take physical delivery of commodities received an 80 
percent return on their account from the first interim distribution; 
however, the customers with accounts for trading on foreign exchanges 
will receive only a 10 percent return from this distribution. The 
officials explained that most of the property for customers on foreign 
exchanges is in the United Kingdom and according to the SIPA Trustee, 
these assets are now under the control of foreign bankruptcy trustees, 
similar to other international bankruptcies. The SIPA Trustee said 
that recovery of foreign assets was uncertain and would take time, 
adding that these issues were usually the last to be resolved and only 
after litigation.[Footnote 81] At a June 1, 2012, hearing, a target 
date of April 9, 2013, was set by the U.K. court. 

The recent bankruptcy cases involving large complex financial 
institutions illustrate the potential challenges FDIC will have in an 
OLA proceeding, including resolving a securities and commodity broker, 
a company with significant international presence, and cases involving 
complex litigation. As described previously, MF Global customer 
property may be located in other countries, complicating the trustee's 
efforts to obtain it. The trustee for Lehman's broker-dealer has been 
involved in litigation with one of Lehman's foreign affiliates for 
several years. Because OLA will only apply to domestic entities, 
international coordination and voluntary cooperation with foreign 
regulators will be essential for the resolution of a global company. 
As discussed earlier, FDIC and other regulators have been taking steps 
to improve international coordination of the resolution of large, 
systemically important financial institutions but challenges remain. 
Regulators have yet to clarify the roles and responsibilities of FDIC 
and SIPC during the liquidation of a broker-dealer under OLA, 
including the treatment of securities customers, commodity customers, 
and general creditors. On May 3, 2012, FDIC conducted an exercise with 
SEC and CFTC simulating a hypothetical failure of a systemically 
important financial institution with both a securities broker and 
commodity broker to better understand gaps in the OLA process and 
assist in their rulemaking process. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to AOUSC, CFTC, Departments of 
Justice and the Treasury, FDIC, Federal Judicial Center, Federal 
Reserve, National Association of Insurance Commissioners, SEC, and 
SIPC for review and comment. The National Association of Insurance 
Commissioners did not provide comments. We received technical comments 
from the remaining agencies, which we incorporated as appropriate. 

We are sending copies of this report to the appropriate congressional 
committees, the Director of the Administrative Office of the U.S. 
Courts, the Chairman of the Commodity Futures Trading Commission, the 
Assistant Attorney General for Administration at the Department of 
Justice, the Secretary of the Treasury, the Chairman of the Federal 
Deposit Insurance Corporation, the Director of the Federal Judicial 
Center, the Chairman of the Board of Governors of the Federal Reserve 
System, the Chief Executive Officer of the National Association of 
Insurance Commissioners, the Chairman of the Securities and Exchange 
Commission, and the Chairman of the Securities Investor Protection 
Corporation, and other interested parties. The report also is 
available at no charge on the GAO website at [hyperlink, 
http://www.gao.gov]. 

If you or your staff members have any questions about this report, 
please contact Alicia Puente Cackley at (202) 512-8678 or 
cackleya@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. Major contributors to this report are listed in appendix III. 

Signed by: 

Alicia Puente Cackley: 
Director, Financial Markets and Community Investment: 

List of Committees: 

The Honorable Tim Johnson: 
Chairman: 
The Honorable Richard C. Shelby: 
Ranking Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Patrick Leahy: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Member: 
Committee on the Judiciary: 
United States Senate: 

The Honorable Spencer Bachus: 
Chairman: 
The Honorable Barney Frank: 
Ranking Member: 
Committee on Financial Services: 
House of Representatives: 

The Honorable Lamar Smith: 
Chairman: 
The Honorable John Conyers, Jr. 
Ranking Member: 
Committee on the Judiciary: 
House of Representatives: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

As required under section 202 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act), this report examines: (1) 
actions the U.S. District Court for the District of Columbia (D.C. 
District Court) has taken in response to the judicial review provision 
of Orderly Liquidation Authority (OLA), including any revisions to 
Local Civil Rule 85; (2) federal rules or regulations relating to OLA 
and efforts to improve international coordination, including living 
wills, in resolving financial companies; and (3) data collection 
efforts and the outcomes of financial institutions that were in the 
bankruptcy process. 

Generally to address our objectives, we reviewed the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010 and 
its rulemaking requirements. We also conducted interviews with 
officials at the Administrative Office of the U.S. Courts (AOUSC); 
Commodity Futures Trading Commission; Federal Deposit Insurance 
Corporation (FDIC); Board of Governors of the Federal Reserve System 
(Federal Reserve); Federal Judicial Center; Securities and Exchange 
Commission; Securities Investor Protection Corporation; Department of 
the Treasury (Treasury); and the U.S. District Court for the District 
of Columbia (D.C. District Court). We reviewed relevant literature and 
reports issued since our last report, including those written by AOUSC 
and the Federal Reserve in response to mandates in the Dodd-Frank Act. 

Specifically to address the first objective on actions the D.C. 
District Court took in response to the judicial review provision of 
the OLA, we monitored the website for the D.C. District Court for 
changes in Local Civil Rule 85. We interviewed the Chief Judge and 
other officials from the court to discuss how the rule would be 
implemented in case of a petition under OLA and the changes made to 
the rule in response to comments from FDIC and Treasury. We also 
discussed these changes with officials from FDIC and Treasury to 
obtain their views on the amended rule and how they expected the rule 
to be implemented. 

To address the second objective on federal regulations relating to OLA 
and the resolution of financial institutions, we searched the Federal 
Register and monitored the websites of FDIC and the Federal Reserve to 
determine if relevant rules related to FDIC's authority under Title II 
and resolution planning had been issued. We also monitored the 
development of other related rules, including the Federal Reserve's 
rule related to the definition of nonbank financial companies and the 
Financial Stability Oversight Council's designation of systemically 
important financial institutions. We reviewed proposed, interim final, 
and final rules under these authorities; they are presented in 
appendix II. We reviewed comment letters on the rules, testimonies by 
regulatory officials, roundtable discussions held by FDIC, legal 
opinions and law firm client updates, and seminars conducted by law 
firms on FDIC's new authority under Title II. We reviewed updates from 
the Financial Stability Board on international coordination of related 
resolution and recovery planning and monitored the websites of the 
Financial Stability Board and Treasury's Office of Financial Research 
for developments on the Legal Entity Identifier. We also participated 
in financial industry presentations on the development and challenges 
of adoption of the Legal Entity Identifier. 

To address the third objective on data collection and the status of 
financial institutions in the bankruptcy process, we spoke to 
officials from AOUSC, the Federal Judicial Center, and the Trustee 
Program at the Department of Justice to learn more about potential 
sources of financial company bankruptcy data. However, as discussed in 
our report, we found that no single source for financial company 
bankruptcy data is available. To provide some background information 
on the number of bankruptcies of large financial institutions from 
January 1, 2010, through December 31, 2011, we used data (as we did 
for last year's report) on Chapter 11 megacases collected by AOUSC and 
compared these cases with bankruptcy data from New Generations 
Research, Inc. New Generations, Inc., is a private company that takes 
data from U.S. bankruptcy filings and augments it with industry-
specific data, including the type of industry of the debtor. We spoke 
with federal officials familiar with New Generations, Inc., and they 
consider it to be reliable for tracking bankruptcy cases. We also 
spoke to representatives from New Generations, Inc. regarding their 
data collection and reliability methods. We concluded that the data 
were reliable for tracking bankruptcy cases. AOUSC provided lead case 
data on megacases (involving assets of more than $100 million and more 
than 1,000 creditors) that included date and location of filing and 
some information on how closed cases were concluded (such as by sale, 
liquidation, or reorganization). By matching data on bankruptcies of 
financial institutions from New Generations with the AOUSC-provided 
megacase data, we were able to provide some context on the number of 
Chapter 11 megacases that represented financial institutions. We 
decided the data were sufficiently reliable for that purpose because 
there was a reasonable match between cases in the two data sets. As 
with our previous report, AOUSC provided only data on Chapter 11 cases 
and not Chapter 7. According to AOUSC officials, virtually all 
megacases were originally filed as Chapter 11 cases. 

In addition to our general tracking of financial institution 
bankruptcies, we continued to monitor two major financial company 
bankruptcies--Lehman Brothers Holdings, Inc. and Washington Mutual, 
Inc.--on which we reported as case studies in 2011.[Footnote 82] We 
also began monitoring a new major financial company bankruptcy, MF 
Global Holdings, Inc., that filed for Chapter 11 protection in October 
2011. For each of these cases, we reviewed court documents such as 
court orders, trustee reports, and reorganization plans. We also 
interviewed federal officials on their involvement in these cases. We 
reviewed these data to provide illustrative examples of some of the 
challenges and complexities of financial company megacases; for 
example, challenges in resolving an internationally active company or 
cases involving complex legal issues. We verified information about 
these cases with federal officials. We concluded that the information 
in these sources was sufficiently reliable for our purposes. 

We conducted this performance audit from August 2011 to July 2012, in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Status of Selected Rules Related to the Orderly 
Liquidation Authority and Resolution Planning under the Dodd-Frank Act: 

The following are rules either mandated by the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act) or initiated by 
the Federal Deposit Insurance Corporation (FDIC) or other agencies. As 
discussed in the report, FDIC has been considering additional rules 
under its Title II authority. Table 3 includes a list of rules and 
actions that have been completed by the regulators and the courts 
related to the orderly liquidation authority (OLA), resolution 
planning, or bankruptcy. 

Table 3: Selected Final Rules and Actions Completed, as of May 15, 
2012: 

Agency/court: FDIC and the Board of Governors of the Federal Reserve 
System (Federal Reserve); 
Section of Dodd-Frank Act: Section 165(d); 
Rule: Resolution Plans Final Rule; 
Status: FDIC and the Federal Reserve published the final rule on 
November 1, 2011 (76 Fed. Reg. 67323).[A] The first plans are due in 
July 2012; 
The final rule was based on a proposed rule from April 2011 (76 Fed. 
Reg. 22648); 
FDIC also issued a resolution plans rule for depository institutions 
with $50 billion in total assets effective April 1, 2012 (77 Fed. Reg. 
3075, published January 23, 2012); 
The April rule supercedes the interim final rule effective January 1, 
2012 (76 Fed. Reg. 58379, published September 21, 2011). 

Agency/court: U.S. District Court for the District of Columbia; 
Section of Dodd-Frank Act: Section 202(b); 
Rule: Local Civil Rule 85: Outlines the court's judicial review of a 
petition from the Secretary of the Treasury to allow FDIC to act as a 
receiver for a potentially insolvent financial company; 
Status: The court issued the rule January 19, 2011, and amended the 
rule on July 6, 2011, after receiving comments from FDIC and the 
Department of the Treasury (Treasury). 

Agency/court: FDIC; 
Section of Dodd-Frank Act: [Empty]; 
Rule: Establishment of the FDIC Systemic Resolution Advisory Committee; 
Status: Office was established. Signed April 28, 2011 (76 Fed. Reg. 
25352, May 4, 2011). 

Agency/court: FDIC; 
Section of Dodd-Frank Act: Section 209; 
Rule: Orderly Liquidation Authority Final Rule: 
Final rule to implement certain provisions to resolve covered 
financial companies, including (i) recoupment of compensation from 
senior executives and directors; (ii) the clarification of power to 
avoid fraudulent or preferential transfers; (iii) the priorities of 
expenses and unsecured claims; and (iv) the administrative process for 
initial determination of claims; 
Status: FDIC issued this final rule on July 15, 2011, and it became 
effective August 15, 2011 (76 Fed. Reg. 41626); 
This final rule incorporates aspects of earlier rulemakings: 
* A notice of proposed rulemaking from October 19, 2010, described as 
"Phase I" (75 Fed. Reg. 64173); 
* An interim final rule on Phase I issued January 25, 2011 (76 Fed. 
Reg. 4207); 
* A proposed rulemaking from March 23, 2011 ("Phase II") (76 Fed. Reg. 
16324). 

Agency/court: FDIC; 
Section of Dodd-Frank Act: Section 209; 
Rule: Mutual Insurance Holding Company Treated as Insurance Company 
Final Rule; 
Status: FDIC issued the final rule on April 30, 2012 (77 Fed. Reg. 
25349). 

Sources: Dodd-Frank Act, D.C. District Court, FDIC, Federal Reserve, 
and Treasury. 

[A] We have listed the dates published in the Federal Register, rather 
than the date the agencies published on their websites. 

[End of table] 

See table 4 for the status of various rules that have yet to be 
finalized. 

Table 4: Selected Proposed Rules and Actions in Progress, as of May 
15, 2012: 

Agency/court: Treasury-Office of Financial Research; 
Section of Dodd-Frank Act: Sections 151-154; 
Rule: Global Initiative to Establish a Legal Entity Identifier (LEI) 
for Financial Institutions; 
Status: Treasury issued a proposed policy statement for comment on 
November 30, 2010. Comments were due January 31, 2011 (75 Fed. Reg. 
74146); 
The Financial Stability Board (an international body of regulators 
that addresses issues related to global financial stability) has 
created an LEI Expert Panel with the goal of introducing a global 
proposal for adoption by the G-20 summit in June 2012.[A]. 

Agency/court: Federal Reserve; 
Section of Dodd-Frank Act: Section 102(b); 
Rule: Definition of Company "Predominantly Engaged in Financial 
Activities"; 
Status: The Federal Reserve published a Supplemental Notice of 
Proposed Rulemaking and Request for Comment on April 10, 2012 (77 Fed. 
Reg. 21494). Comments are due May 25, 2012; 
This was based on an earlier proposed rule that was published on 
February 11, 2011 (76 Fed. Reg. 7731). 

Agency/court: FDIC; 
Section of Dodd-Frank Act: Section 209; 
Rule: Definition of Company Predominantly Engaged in Activities That 
Are Financial in Nature; 
Status: As part of a proposed rule on OLA, FDIC proposed criteria for 
this definition (76 Fed. Reg. 16324). However, in the final rule on 
OLA, FDIC stated that it would wait to finalize the criteria until the 
Federal Reserve issued its rule defining nonbank financial companies 
under Title I (76 Fed. Reg. 41626).[B] The Federal Reserve's proposed 
rule is not yet final (see above). 

Agency/court: FDIC and Treasury; 
Section of Dodd-Frank Act: Section 210(n)(7); 
Rule: Calculation of the Maximum Obligation Limitation under OLA; 
Status: Proposed rule published November 25, 2011, for 60-day comment 
period ending January 24, 2012 (76 Fed. Reg. 72645). FDIC approved a 
final rule on April 23, 2012, but Treasury has not given final 
approval[C]. 

Agency/court: FDIC; 
Section of Dodd-Frank Act: Section 210(c)(16); 
Rule: Enforcement of Subsidiary and Affiliate Contracts by FDIC as 
Receiver of a Covered Financial Company; 
Status: Proposed rule published March 27, 2012, for a 60-day comment 
period ending May 29, 2012 (77 Fed. Reg. 18127). 

Sources: Dodd-Frank Act, FDIC, Federal Reserve, and Treasury. 

[A] Treasury reported delivering global LEI governance recommendations 
for endorsement by the G20 in June 2012. 

[B] After we completed our analysis, FDIC published an amendment to 
the proposed criteria on June 18, 2012, that clarified the activities 
that would be considered financial in nature or incidental thereto for 
the purposes of Title II (77 Fed. Reg. 36194). 

[C] Treasury approved the rule, and it was published on the June 22, 
2012 (77 Fed. Reg. 37554). 

[End of table] 

Finally, table 5 provides the status of selected required rules that 
have yet to be proposed or had any action taken. 

Table 5: Selected Required Rules That Have Not Yet Been Proposed or 
Had Action as of May 15, 2012: 

Agency/court: FDIC/Securities and Exchange Commission (SEC); 
Section of Dodd-Frank: Section 205(h); 
Rule: Orderly Liquidation Procedures for Broker-Dealers: Issue joint 
rules, in consultation with Securities Investor Protection Corporation 
(SIPC), establishing procedures for FDIC, SEC, and SIPC to implement 
orderly liquidation for covered brokers and dealers; 
Status: Rule has not been proposed. No mandated timeline. 

Agency/court: FDIC/Primary Financial Regulators[A]; 
Section of Dodd-Frank: Section 210(c)(8)(H); 
Rule: Joint Rulemaking on Recordkeeping for Qualified Financial 
Contracts: The Dodd-Frank Act requires the primary financial 
regulatory agencies to adopt rules regarding recordkeeping 
requirements for qualified financial contracts of financial companies 
necessary or appropriate to assist FDIC in the event of an orderly 
liquidation. If no rule is in place by July 21, 2012, then the 
chairperson of the Financial Stability Oversight Council (Secretary of 
the Treasury), in consultation with FDIC, shall develop a rule; 
Status: According to interviews with agency officials, FDIC has 
circulated a draft for review among regulators, but it has not been 
publicly released. A final or interim rule is required to be finalized 
by July 21, 2012. 

Agency/court: FDIC/Treasury; 
Section of Dodd-Frank: Section 210(o)(6); 
Rule: Risk-Based Assessment: The Dodd-Frank Act requires FDIC to issue 
rules to carry out risk-based assessments of covered financial 
companies to cover obligations incurred by FDIC in becoming receiver 
of a failed financial company; 
Status: Treasury officials told us that they had not been consulted on 
the drafting this rule. There is no statutory deadline. 

Agency/court: FDIC/Federal Banking Agencies; 
Section of Dodd-Frank: Section 616(d); 
Rule: Source of Strength Proposed Rule: The Dodd-Frank Act requires 
the appropriate federal banking agencies to jointly issue rules 
requiring bank holding companies, savings and loan holding companies, 
and other companies that control insured depository institutions to 
serve as sources of financial strength for their subsidiary depository 
institutions; 
Status: FDIC and Federal Reserve staff told us that they are working 
with the Office of the Comptroller of the Currency on this rule, which 
is required by July 21, 2012. 

Sources: Dodd-Frank Act, FDIC, Federal Reserve, and Treasury. 

[A] Primary Financial Regulators are defined in Section 2 of the Dodd-
Frank Act. 

[End of table] 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above, Debra Johnson, Assistant 
Director; Nancy Barry; Rachel DeMarcus; Katherine Bittinger Eikel; 
William R. Chatlos; Dean P. Gudicello; Jonathan M. Kucskar; Marc W. 
Molino; Barbara M. Roesmann; and Jessica Sandler made major 
contributions to this report. Technical assistance was provided by 
JoAnna Berry and David Martin. 

[End of section] 

Footnotes: 

[1] Insured depository institutions and insurance companies may not 
file for debtor protection under the U.S. Bankruptcy Code, and broker-
dealers qualify for liquidation, but not reorganization. 

[2] Pub. L. No. 111-203, 124 Stat. 1376 (2010). 

[3] Pub. L. No. 111-203, Title I, § 165 (d). 123 Stat. 1376, 1426-1427 
(2010), codified at 12 U.S.C. § 5365(d). 

[4] See GAO, Bankruptcy: Complex Financial Institutions and 
International Coordination Pose Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-11-707] (Washington, D.C.: July 19, 
2011) for the first study reported under this mandate. We must report 
on the judicial review for OLA and the effectiveness of the Code 
annually for 3 years after the passage of the act and every 5 years 
after the date of enactment. Dodd-Frank Act § 202(e); 12 U.S.C. § 
5382(e). The Administrative Office of the United States Courts also 
must conduct a study of bankruptcy and the process for orderly 
liquidation for financial companies. The Board of Governors of the 
Federal Reserve System has a similar requirement. Dodd-Frank Act § 216. 

[5] We also studied the reports related to the section 202(e) and 
section 216 mandates. See Administrative Office of the United States 
Courts, Report Pursuant to Section 202(e) of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act of 2010 (Washington, D.C.: 
July 2011) and Board of Governors for the Federal Reserve System, 
Study of the Resolution of Financial Companies Under the Bankruptcy 
Code (Washington, D.C.: July 2011). Pursuant to Dodd-Frank Act § 215, 
the Financial Stability Oversight Council (FSOC) in July 2011 
published Report to Congress on Secured Creditor Haircuts, which 
examined allowing regulators to treat a portion of fully secured 
creditors' claims as unsecured in a resolution proceeding. 

[6] Voluntary cases are permitted under 11 U.S.C. § 301. Involuntary 
cases are permitted under 11 U.S.C. § 303. 

[7] See 11 U.S.C. § 1123. 

[8] This is known as DIP financing and is available under 11 U.S.C. § 
364. 

[9] AOUSC defines a "mega" Chapter 11 case as a single case or set of 
jointly administered or consolidated cases that involves $100 million 
or more in assets and 1,000 or more creditors. See GAO, Federal 
Bankruptcy Judges: Measuring Judges' Case-Related Workload, 
[hyperlink, http://www.gao.gov/products/GAO-09-808T] (Washington, 
D.C.: June 16, 2009). 

[10] The United States Trustee Program covers 84 of the 90 bankruptcy 
courts and consists of the Executive Office for U.S. Trustees which is 
led by a director; 21 regions managed by U.S. Trustees; and 95 field 
offices supervised by Assistant U.S. Trustees. The mission of the U.S. 
Trustee Program is to promote the integrity of the bankruptcy system. 
The U.S. Trustee Program oversees the administration of all bankruptcy 
cases filed by individual and business debtors in every federal 
judicial district except for Alabama and North Carolina. The U.S. 
Trustee's specific duties in a case depend on the chapter under which 
a debtor files and the facts of the case. Bankruptcy Administrators, 
who are employees of the federal judiciary, perform the functions of 
the U.S. Trustees in the remaining six bankruptcy courts in Alabama 
and North Carolina. See [hyperlink, 
http://www.justice.gov/ust/eo/ust_org/index.htm]. 

[11] 12 U.S.C. § 1821(c). 

[12] Chapter 7 of the Code contains special provisions for the 
liquidation of stockbrokers. 11 U.S.C. §§ 741-753. Under SIPA, the 
SIPC initiates a liquidation proceeding, the primary purpose of which 
is to protect customers against financial losses arising from the 
insolvency of their brokers. Once a protective decree has been applied 
for under SIPA, any other pending bankruptcy proceeding involving the 
debtor stockbroker is stayed, and the court where the application is 
filed has exclusive jurisdiction over that stockbroker. SIPC 
participation can displace a Chapter 7 liquidation pending the SIPA 
liquidation, but provisions of the Code apply in a SIPA liquidation to 
the extent they are consistent with SIPA. See 15 U.S.C. §§ 
78eee(b)(2)(B), 78fff(b). Because the stockbrokers discussed in this 
report are also dealers registered with the SEC as broker-dealers, we 
generally use the term broker-dealer rather than stockbroker in this 
report. 

[13] Chapter 7 of the Code contains special provisions for commodity 
broker liquidation (11 U.S.C. §§ 753, 761-767), and CFTC's rules 
relating to bankruptcy are set forth at 17 C.F.R. § 190.01 et seq. 

[14] Dodd-Frank Act § 201(a)(11); 12 U.S.C. § 5381(a)(11). The company 
must be incorporated or organized under federal or state law. 

[15] Bank Holding Company Act of 1956, 12 U.S.C. § 1841 et seq. 

[16] Under the Dodd-Frank Act, Title I, FSOC may require that a 
nonbank financial company become subject to Federal Reserve Board 
supervision. The Federal Reserve has issued a proposed rule on 
criteria for determining whether a company is predominantly engaged in 
financial activities for purposes of determining whether the company 
is a nonbank financial company under Title I of the Dodd-Frank Act. 
See appendix II for further details. 

[17] Under the Dodd-Frank Act § 210(a)(1)(E), if FDIC is appointed 
receiver of a financial company, it has the authority to appoint 
itself as receiver of any subsidiary of the financial company if FDIC 
and the Secretary of the Treasury jointly determine that the 
subsidiary is in danger of default, such action would mitigate serious 
adverse effects on the financial stability or economic conditions in 
the United States, and such action would facilitate the orderly 
liquidation of the financial company. Although this authority does not 
apply to insurance companies or certain broker-dealers, special 
provisions may apply in those cases. For example, if the Secretary 
makes a determination with respect to an insurance company or if an 
insurance company is a subsidiary or affiliate of a financial company, 
the liquidation or rehabilitation of the insurance company is to be 
conducted under applicable state law. However, if the state regulator 
has not filed the appropriate judicial action within 60 days after the 
date of the Secretary's determination, then FDIC will have the 
authority to stand in place of the state regulator and file the 
appropriate judicial action to place the company into orderly 
liquidation under state law. Dodd-Frank Act § 203(e); 12 U.S.C. § 
5383(e). 

[18] Dodd-Frank Act § 203(b); 12 U.S.C. § 5383(b). The Secretary's 
determination also must include whether a federal regulatory agency 
has ordered the financial company to convert all of its convertible 
debt instruments that are subject to the regulatory order. 

[19] If the financial company or its largest U.S. subsidiary is a 
broker-dealer, then two-thirds of SEC Commissioners and two-thirds of 
the Federal Reserve Board approve the recommendation, in consultation 
with FDIC. If the financial company or its largest U.S. subsidiary is 
an insurance company, then the Director of the Federal Insurance 
Office in Treasury approves the recommendation along with the Federal 
Reserve. For all other types of companies, two-thirds of the Federal 
Reserve and two-thirds of the FDIC Board of Directors approve the 
recommendation in consultation with FDIC. Dodd-Frank Act § 203(a); 12 
U.S.C. § 5383(a). 

[20] Justice files the petition on behalf of Treasury. See generally 
28 U.S.C. § 516. 

[21] The D.C. District Court's review is limited to the Secretary's 
determination that the financial company is (1) in default or danger 
of default; and (2) satisfies the definition of a financial company. 

[22] Title II also establishes additional authorities for FDIC as 
receiver, such as the ability to set up a bridge financial company, 
and collect funding for the OLA process from the financial industry 
after a company has gone through OLA. Dodd-Frank Act, § 210(o); 12 
U.S.C. § 5390(o). Under the Dodd-Frank Act, GAO must review and report 
on the Treasury Secretary's decision to appoint FDIC as receiver. Dodd-
Frank Act § 203(c)(5), 12 U.S.C. § 5383(c)(5) discusses these 
responsibilities in more detail. 

[23] The Dodd-Frank Act, § 165(d)(1), states that the Federal Reserve 
and FDIC must review the resolution plans. Resolution plans are often 
referred to as living wills. The companies that must file reports are: 
(1) nonbank financial companies designated by FSOC for supervision by 
the Federal Reserve, (2) bank holding companies with $50 billion or 
more in consolidated assets, and (3) foreign banking organizations 
with $50 billion or more in total consolidated assets that are or are 
treated as bank holding companies. 12 U.S.C. § 5365(d)(1). The 
resolution plans should not assume an orderly liquidation under Title 
II. 

[24] Cross-guarantees are not specifically defined in the act but 
refer to contracts and other interconnections the financial company 
has with other parties. 

[25] Dodd-Frank Act § 165(d);12 U.S.C. § 5365(d). 

[26] Id. at § 165(d)(5)(A); 12 U.S.C. § 5365(d)(5)(A). 

[27] Id. at § 165(d)(5)(B); 12 U.S.C. § 5365(d)(5)(B). 

[28] Regulatory agencies have authorizing statutes that set out their 
authority and responsibilities for developing and issuing regulations. 
An agency's statute can prescribe formal rulemaking. The 
Administrative Procedure Act establishes procedures and broadly 
applicable federal requirements for informal rulemaking, also known as 
notice and comment rulemaking. This act generally requires agencies to 
publish a notice of proposed rulemaking in the Federal Register. After 
giving interested persons an opportunity to comment on the proposed 
rule, the agency may then publish the final rule. Agencies also may be 
subject to additional requirements imposed by other statutes specific 
to the agency. 

[29] FSOC consists of 14 federal and state agency heads and an 
independent member with insurance expertise. The council was created 
to (1) identify risks to the financial stability of the United States 
that could arise from the material financial distress or failure, or 
ongoing activities, of large, interconnected bank holding companies or 
nonbank financial companies, or that could arise outside of the 
financial services marketplace; (2) promote market discipline, by 
eliminating expectations on the part of shareholders, creditors, and 
counterparties of such companies that the U.S. government will shield 
them from such losses in the event of failure; and (3) respond to 
emerging threats to the stability of the U.S. financial system. 

[30] Dodd-Frank Act § 113; 12 U.S.C. § 5323. 

[31] Dodd-Frank Act § 165(d); 12 U.S.C. § 5365(d)(1). 

[32] FDIC published a notice of proposed rulemaking on October 19, 
2010, an interim final rule on January 25, 2011, and a notice of 
proposed rulemaking on March 23, 2011. See appendix II for a complete 
list of rules and other actions. 

[33] The Dodd-Frank Act expressly prohibits "bailouts" to a specific 
firm. Under OLA, FDIC must maximize the value of the assets of the 
financial company under receivership in the context of liquidation. 
However, the Dodd-Frank Act allows FDIC as receiver of a failed 
company to borrow funds from Treasury to carry out the orderly 
liquidation. 

[34] FDIC's Board of Directors approved a final Maximum Obligation 
Limitation Rule on April 23, 2012. After we completed our analysis, 
Treasury approved the final rule in June 2012 and the rule was 
published in the Federal Register on June 22, 2012. 

[35] FDIC also has issued a rule requiring resolution plans for 
depository institutions with total assets of $50 billion or more. 
These rules were promulgated under the Federal Deposit Insurance Act. 

[36] Federal Reserve staff also made some technical changes in the 
final rule to clarify how companies with large depository institution 
subsidiaries should prepare plans when their largest asset would be 
resolved outside of the bankruptcy process. 

[37] Qualified financial contracts are financial agreements including 
securities and commodities contracts, forward contracts, and 
repurchase and swap agreements. Certain counterparties to these 
agreements are exempt from the automatic stay under the Code and other 
bankruptcy provisions. The automatic stay is designed to prevent 
creditors from taking action against or collecting assets from the 
debtor before approval from the bankruptcy court, but the exemption 
allows the counterparty to the qualified financial contract to close 
out the contract when the debtor files for bankruptcy and seize 
collateral if the company has an obligation to the counterparty. Under 
OLA, qualified financial contracts are subject to a 1-day stay and 
counterparties cannot terminate their contracts until 5:00 p.m. of the 
day after FDIC begins its receivership. During this time, FDIC may 
have transferred the contract to a bridge financial company or 
repudiated (rejected) it. 

[38] Dodd-Frank Act § 616(d); 12 U.S.C. § 1831o-1. 

[39] Agency officials told us that potential rules are discussed among 
FSOC members through the Orderly Liquidation Authority, Resolution 
Plans Committee. FDIC staff told us that there are protocols under 
which draft rules are provided to FSOC members and the committee. FSOC 
members can put forth suggestions for rules. For example, FDIC and 
Treasury obtained feedback on the draft Maximum Obligation Limitation 
proposed rule through this process. 

[40] Dodd-Frank Act § 205(h). 

[41] SIPC uses its fund, established by SIPA, to make advances to 
satisfy customer claims for missing cash and securities, including 
notes, stocks, bonds, and certificates of deposit. The fund is 
financed through annual assessments of SIPC member firms. 15 U.S.C. § 
78aaa et seq. 

[42] Swaps are contracts in which two parties agree to exchange 
periodic interest payments, especially when one payment is at a fixed 
rate and the other varies according to the performance of a reference 
rate, such as the prime rate. 

[43] The Dodd-Frank Act § 616(d) amended the Federal Deposit Insurance 
Act to require any company that controls an insured depository 
institution to serve as a source of financial strength for that 
insured depository institution. This provision applies to bank holding 
companies, savings and loan holding companies, and any other company 
that controls an insured depository institution. Section 616(d) 
provides that "source of financial strength" means the ability of the 
company to provide financial assistance to the subsidiary insured 
depository institution in the event of its financial distress. 12 
U.S.C. § 1831o-1. 

[44] As discussed earlier, FDIC's authority under OLA would extend to 
those companies "predominantly engaged in activities that the Federal 
Reserve has determined are financial in nature or incidental thereto 
for purposes of section 4(k) of the Bank Holding Company Act." The 
final OLA rule did not define how FDIC would make this determination. 

[45] See appendix II for a complete list of the proposed rules and 
their timelines. 

[46] Although the Dodd-Frank Act does not provide authority for FDIC 
to treat a portion of secured creditors' claims as unsecured (or take 
a "haircut" on recoveries), FSOC in its study of this topic did not 
find that haircuts were needed to promote market discipline or protect 
taxpayers. See Report to the Congress on Secured Creditor Haircuts 
(Washington, DC: July 18, 2011). 

[47] Martin J Gruenberg. "Remarks to the Federal Reserve Bank of 
Chicago Bank Structure Conference" (Chicago, Ill.: May 10, 2012). 

[48] The same limitation applies to bridge banks under receivership of 
FDIC under the Federal Deposit Insurance Act. 12 U.S.C. § 1821(n)(9). 
Under the Dodd-Frank Act, FDIC's receivership appointment has a limit 
of 3 years with two possible 1-year extensions. Dodd-Frank Act § 
202(d); 12 U.S.C. § 5383(d). 

[49] The Dodd-Frank Act specifically states OLA is not a bailout to 
individual firms. Section 214 provides that all financial companies 
put into OLA must be liquidated and all funds expended in the 
liquidation shall be recovered through disposition of assets or 
assessments on the financial sector. 12 U.S.C. § 5394, Section 1101 
amended the section 13(3) of the Federal Reserve Act to prohibit the 
Federal Reserve Board from authorizing direct loans for the purpose of 
assisting a single and specific company to avoid bankruptcy, as it did 
in the 2008 financial crisis. 12 U.S.C. § 343. 

[50] FDIC would first assess creditors in the liquidation that 
received additional payments as defined in the Dodd-Frank Act. If 
assessments imposed on claimants are insufficient, FDIC may assess any 
bank holding company with total consolidated assets of at least $50 
billion, any nonbank financial company supervised by the Federal 
Reserve Board, and other financial companies with total consolidated 
assets of at least $50 billion. The universe of companies that may be 
required to pay for an assessment also depends on the definition of 
financial company, which has not yet been finalized. Dodd-Frank Act § 
210(o)(1)(D), 12 U.S.C. § 5390(o)(1)(D). 

[51] For regulations regarding records retention, see § 210(a)(16)(D), 
and for purchaser eligibility, see §210(r). FDIC may issue rules on 
termination of a receivership; see Dodd-Frank Act § 202(d)(5). 

[52] Dodd-Frank Act § 209; 12 U.S.C. § 5389. FDIC has developed the 
Office of Complex Financial Institutions for carrying out its Title II 
responsibilities and has begun to track potential circumstances under 
which OLA would be warranted. 

[53] 17 C.F.R. § 190.01 et seq. 

[54] Financial Stability Oversight Council, Authority to Require 
Supervision and Regulation of Certain Nonbank Financial Companies, 77 
Fed. Reg. 21637 (April 11, 2012),12 C.F.R. §§ 243.3(a)(2), 381.3(a)(2). 

[55] The resolution plans rule was published in November 2011. See 
appendix II for further details. 

[56] Under the Dodd-Frank Act, the Federal Reserve must issue 
regulations that prohibit each nonbank financial company supervised by 
the Federal Reserve and bank holding company with at least $50 billion 
in assets from having credit exposure to any unaffiliated company that 
exceeds 25 percent of the capital stock and surplus. Dodd-Frank Act § 
165(e)(1); 12 U.S.C. § 5365(e)(1). The Dodd-Frank Act also requires 
that the Federal Reserve require supervised nonbank financial 
companies and bank holding companies to file credit exposure reports 
that generally would include (1) the nature and extent to which the 
company has credit exposure to other significant nonbank financial 
companies and significant bank holding companies, and (2) the nature 
and extent to which other significant nonbank financial companies and 
significant bank holding companies have credit exposure to that 
company. Dodd-Frank Act § 165(d)(2); 12 U.S.C. § 5365(d)(2). 

[57] See [hyperlink, http://www.gao.gov/products/GAO-11-707]. 

[58] See [hyperlink, http://www.gao.gov/products/GAO-11-707] and FDIC, 
"The Orderly Liquidation of Lehman Brothers Holdings Inc. under the 
Dodd-Frank Act," FDIC Quarterly, vol. 5, no. 2 (May 2011). 

[59] FDIC Systemic Resolution Advisory Committee meeting, January 2012. 

[60] FDIC could maintain certain subsidiaries, assets, and 
relationships with certain creditors in other countries in order to 
avoid insolvency regimes in those countries and maintain the value of 
the failed U.S. company. As we discuss later in this report, 
international insolvency regimes have created challenges for those 
resolving Lehman and MF Global. 

[61] The Financial Stability Board brings together central bank 
officials, finance and treasury officials, and financial institution 
regulators as well as representatives from the International Monetary 
Fund and the World Bank to address issues related to global financial 
stability. In November 2011, the Financial Stability Board defined 
SIFIs as "financial institutions whose distress or disorderly failure, 
because of their size, complexity and systemic interconnectedness, 
would cause significant disruption to the wider financial system and 
economic activity." The Financial Stability Board identified 29 
companies as global SIFIs in the November 2011 statement and plans to 
update the list each year. 

[62] Financial Stability Board, "Key Attributes of Effective 
Resolution Regimes for Financial Institutions" (October 2011). 

[63] The G20 or Group of Twenty includes representatives of nations 
with major economies. During its summits, heads of state, financial 
ministers, and heads of central banks consult and coordinate on issues 
related to the international financial system. 

[64] See [hyperlink, http://www.gao.gov/products/GAO-11-707]. 

[65] Over-the-counter derivatives refer to derivatives not traded on a 
formal exchange. 

[66] The Office of Financial Research supports the Financial Stability 
Oversight Council and member agencies by collecting and standardizing 
financial data, performing applied and essential long-term research, 
developing tools for risk measurement and monitoring, performing other 
related services, and making the results of the activities of the 
office available to financial regulatory agencies. The office operates 
as part of Treasury. 

[67] CFTC has clarified its rule that financial institutions may use 
an interim identifier if the LEI was not adopted by July 16, 2012. See 
77 Fed. Reg. 2136 (Jan. 13, 2012). 

[68] See 75 Fed. Reg. 75208 (Dec. 2, 2010) for the proposed securities 
swap reporting rule. In addition, an SEC official told us that under a 
form all SEC-registered investment advisers must file with SEC, they 
are requested to include an LEI for either themselves or their fund. 
Similarly private funds (hedge funds) also will be requested to list 
an LEI. Under a proposed rule, SEC would provide stock exchanges with 
the option of using LEIs to identify broker-dealers and all entities 
with which the broker-dealer executes trades. 75 Fed. Reg. 32556 (June 
8, 2010). 

[69] AOUSC officials told us the reported court data are reliable for 
the purpose of reporting required statutory case statistics. 

[70] Because of the time needed to review individual court dockets, 
AOUSC and Federal Judicial Center staff have recruited University of 
Maryland law students to assist in the initial coding effort. 

[71] This process is also known as "double-coding for inter-rater 
reliability." 

[72] Under SIPA, customers generally receive their distribution before 
any other group. Generally, a "customer" means any person who has a 
claim on account of securities received, acquired, or held by the 
debtor in the ordinary course of business. 15 U.S.C. § 78lll(2). 

[73] LBIE was Lehman's principal European broker-dealer. 

[74] See SIPA Trustee report. 

[75] The "disputed assets" consist of assets in Lehman Brothers Inc.'s 
Rule 15c3-3 customer reserve accounts (the "Rule 15c3-3 Assets"), 
margin used to support derivatives trading (the "Margin Assets"), and 
certain assets in LBI's clearance boxes at the Depository Trust and 
Clearing Corporation (the "Clearance Box Assets"). 

[76] According to the SIPA Trustee, both he and Barclays appealed 
portions of the bankruptcy court's opinion to the U.S. District Court 
for the Southern District of New York. On June 5, 2012, the District 
Court issued its order, and the SIPA Trustee has filed an appeal to 
the Second Circuit. 

[77] Setoff is essentially the right to balance and cancel mutual 
claims between parties. 

[78] Specifically, the settlement service related to payments for 
foreign exchange transactions through the Continuous Linked Settlement 
system. 

[79] 15 U.S.C. § 78fff-1(b). 

[80] Commodity customer property includes property unlawfully 
converted that is still part of the estate, 17 CFR § 190.08(a)(ii)(F), 
and received by margin that was withdrawn and recovered by avoidance 
powers of the trustee.17 CFR § 190.08(a)(ii)(D). 

[81] As noted in [hyperlink, http://www.gao.gov/products/GAO-11-707], 
regulators and legal officials have mechanisms to coordinate the 
bankruptcies of international companies, such as the United Nations 
Commission on International Trade Law's Model Law on Cross-Border 
Insolvency (adopted in the United States as Chapter 15 of the 
Bankruptcy Code), insolvency protocols, and memorandums of 
understanding, but these are not comprehensive. Commodity brokers and 
entities subject to SIPA proceedings are outside Chapter 15. 11 U.S.C. 
§ 1501(c). 

[82] We also reported on the bankruptcy of CIT Group in our 2011 
report, but this case was completed. 

[End of section] 

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