This is the accessible text file for GAO report number GAO-13-622 
entitled 'Financial Company Bankruptcies: Need to Further Consider 
Proposals' Impact on Systemic Risk' which was released on July 18, 
2013. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as 
part of a longer term project to improve GAO products' accessibility. 
Every attempt has been made to maintain the structural and data 
integrity of the original printed product. Accessibility features, 
such as text descriptions of tables, consecutively numbered footnotes 
placed at the end of the file, and the text of agency comment letters, 
are provided but may not exactly duplicate the presentation or format 
of the printed version. The portable document format (PDF) file is an 
exact electronic replica of the printed version. We welcome your 
feedback. Please E-mail your comments regarding the contents or 
accessibility features of this document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

July 2013: 

Financial Company Bankruptcies: 

Need to Further Consider Proposals' Impact on Systemic Risk: 

GAO-13-622: 

GAO Highlights: 

Highlights of GAO-13-622, a report to congressional committees. 

Why GAO Did This Study: 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) mandates that GAO report on an ongoing basis on ways to 
make the Code more effective in resolving certain failed financial 
companies. This report examines advantages and disadvantages of 
certain proposals, based on those identified in GAO’s first report, to 
revise the Code for financial company bankruptcies-—specifically, 
proposals (1) to change the role of financial regulators in the 
bankruptcy process; (2) affecting funding of financial company 
bankruptcies; and (3) to change the safe-harbor treatment of QFCs. For 
this report, GAO held two expert roundtables in which participants 
evaluated the proposals using criteria for orderly and effective 
bankruptcies that GAO developed in earlier reports. The criteria are 
minimizing systemic risk, avoiding asset fire sales, ensuring due 
process, maximizing value, and limiting taxpayer liability. GAO 
identified these criteria by reviewing literature and interviewing 
government officials, industry representatives, and legal and academic 
experts. 

What GAO Found: 

Because the Bankruptcy Code (Code) does not specifically address 
issues of systemic risk, experts have proposed giving financial 
regulators a greater role in financial company bankruptcies. However, 
according to experts at a GAO roundtable, such proposals may have 
limited impact and raise certain implementation issues. For example, a 
proposal to require notification before bankruptcy depends on when 
(number of days) notification would be required and with whom (which 
regulators). Experts noted financial companies may not know that they 
will declare bankruptcy even a few days before the event and could 
have many regulators to notify. Experts also noted ways regulators 
already can compel financial companies to declare bankruptcy, and that 
changing the Code to allow regulators to place firms in bankruptcy 
involuntarily could temporarily place a firm in an uncertain legal 
status, eroding firms’ values and endangering market stability. Other 
options, such as having regulatory standards forcing the firm into 
bankruptcy, could improve the likelihood of an orderly resolution, 
according to these experts. Although the proposals reflect the need to 
minimize systemic effects of financial company bankruptcies, the 
Financial Stability Oversight Council (FSOC)-—charged with responding 
to threats to financial stability—-has not considered changes to the 
Code. Consideration could improve FSOC’s ability to address such 
threats in a timely and effective manner. 

Experts emphasized that funding is needed to facilitate orderly and 
effective financial company bankruptcies. They generally agreed that 
prohibiting all federal funding or guarantees of private funding 
likely would lead to fire sales of assets. They agreed that fully 
secured funding should be used only to provide short-run liquidity and 
not for bailouts of insolvent firms’ creditors. Experts suggested a 
private-sector fund could be created for this purpose. Such funds 
could be collected voluntarily, through routine assessments (before a 
bankruptcy), or through a facility similar to the one created for the 
Orderly Liquidation Authority, which allows federal funding at the 
time of a bankruptcy and later recovery of funds through an industry 
assessment. Experts noted some difficulties associated with these 
proposals, including determining whether a firm was insolvent or 
needed liquidity, and identifying permissible types of collateral.
Generally, experts did not agree on advantages or disadvantages of 
proposals to change the safe-harbor treatment of qualified financial 
contracts (QFC). The Code exempts QFCs, such as derivatives, from the 
automatic stay that generally prevents creditors from taking company 
assets in payment of debts before a case is resolved. It also exempts 
QFCs from provisions that allow bankruptcy judges to “avoid” contracts 
entered into within specified times before a filing. Proposals to 
change QFC treatment—-subjecting all or some contracts to the 
automatic stay on a permanent or temporary basis and removing the 
avoidance exemptions-—might address issues raised by extensive 
contract terminations in the early days of financial company 
bankruptcies. Experts said it was unclear what lessons should be 
learned from those experiences. Many noted that narrowing the 
exemptions would reduce the size of derivative markets, but views 
varied about whether such narrowing would increase or decrease 
systemic risk. Some experts said that the current safe harbors 
decrease systemic risk, while others said they increase it by making 
firms more dependent on less-reliable short-term financing. 

What GAO Recommends: 

FSOC should consider the implications for U.S. financial stability of 
changing the role of regulators and the treatment of QFCs in financial 
company bankruptcies. FSOC agreed that a disorderly financial company 
bankruptcy could pose risks to financial stability, but stated that it 
would be premature for FSOC to consider proposals to change the Code. 
GAO reiterated that its recommendation was consistent with FSOC’s 
statutory role and responsibilities. 

View [hyperlink, http://www.gao.gov/products/GAO-13-622]. For more 
information, contact Alicia Puente Cackley at (202) 512-8678 or 
cackleya@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Experts Agreed That Changing Regulatory Involvement May Have Varying 
Impacts and Needs Further Consideration: 

Experts Considered Funding Mechanisms Essential for Bankruptcies of 
Large Financial Companies: 

Experts Had Varying Views on Advantages and Disadvantages of QFC 
Proposals: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Experts, Background, and Agendas for Expert Roundtables: 

Appendix III: Safe-Harbor Treatment of Certain Financial Contracts 
under the Bankruptcy Code: 

Appendix IV: Comments from the Department of the Treasury: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Table: 

Table 1: Assets and Liabilities of Global Systemically Important 
Banking Institutions Headquartered in the United States, Fourth 
Quarter of 2007 and 2012: 

Figures: 

Figure 1: Chapter 11 Process, 2013: 

Figure 2: Primary Dealer Repurchase Agreements and Global Over-the-
Counter Derivatives Markets, 2000 to 2012: 

Figure 3: Expert's Evaluation of How QFC Proposals Would Affect 
Orderliness and Effectiveness of Financial Company Bankruptcies, 2013: 

Figure 4: QFC Termination and the Netting of Obligations: 

Figure 5: Completion of Bilateral Repurchase Agreement and Collateral 
Liquidation: 

Abbreviations: 

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

Federal Reserve: Board of Governors of the Federal Reserve System: 

CFTC: Commodity Futures Trading Commission: 

DIP: debtor-in-possession: 

Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection 
Act: 

FDIC: Federal Deposit Insurance Corporation: 

FSOC: Financial Stability Oversight Council: 

LBHI: Lehman Brothers Holdings, Inc. 

LBI: Lehman Brothers, Inc. 

NAS: National Academy of Sciences: 

NAIC: National Association of Insurance Commissioners: 

OLA: Orderly Liquidation Authority: 

QFC: qualified financial contract: 

SEC: Securities and Exchange Commission: 

SIPA: Securities Investor Protection Act: 

SIPC: Securities Investor Protection Corporation: 

TARP: Troubled Asset Relief Program: 

Code: U.S. Bankruptcy Code: 

Treasury: U.S. Department of the Treasury: 

[End of section] 

GAO:
United States Government Accountability Office: 
441 G St. N.W. 
Washington, DC 20548: 

July 18, 2013: 

Congressional Committees: 

The 2007-2009 financial crisis and the failures of large, complex 
financial companies led some experts to question the adequacy of the 
U.S. Bankruptcy Code (Code) for effectively reorganizing or 
liquidating these companies without causing further harm to the 
financial system.[Footnote 1] Questions raised about the effectiveness 
of the Code have prompted some financial and legal experts--sometimes 
working in interdisciplinary groups--as well as government officials 
and members of Congress to propose changes to the Code, or to the 
supervisory process leading to a bankruptcy filing. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) mandates that we study, at first annually and then at 
specified intervals, issues including the effectiveness of the Code in 
facilitating the orderly liquidation or reorganization of financial 
companies and ways to make the orderly liquidation process under the 
Code for financial companies more effective.[Footnote 2] In July 2011, 
we issued our first report, which addressed the mandate's requirements 
and included proposals for revising the Code to improve the 
orderliness and effectiveness of financial company bankruptcies. 
[Footnote 3] In July 2012, we issued our second report that addressed 
actions taken to implement the Orderly Liquidation Authority (OLA) 
created by the Dodd Frank Act. OLA authorizes the Secretary of the 
Treasury to appoint the Federal Deposit Insurance Corporation (FDIC) 
as a receiver when, among other things, the failure of a financial 
company would have serious adverse effects on financial stability in 
the United States and taking action under OLA would avoid or mitigate 
such adverse effects.[Footnote 4] 

We focus in this report on the advantages and disadvantages of 
proposals from experts, government officials, and legislators to 
change the Code to make bankruptcies of financial companies 
(especially those that pose systemic risk to the financial system) 
more orderly and effective. Specifically, this report examines the 
advantages and disadvantages of proposals (1) to change the role of 
financial regulators and the Department of the Treasury in financial 
company bankruptcies; (2) affecting the funding of financial company 
bankruptcies, and (3) to change the safe-harbor treatment of certain 
financial contracts--including derivatives and repurchase agreements. 
[Footnote 5] 

To address these objectives, we reviewed our earlier work under the 
mandate and that of the Administrative Office of the U.S. Courts 
(AOUSC) and the Board of Governors of the Federal Reserve (Federal 
Reserve), which have similar mandates.[Footnote 6] For this engagement 
we reviewed more recent literature to update the proposals we earlier 
identified for modifying the Code. We relied on criteria for orderly 
and effective bankruptcies that were developed during our earlier 
work. These criteria included minimizing systemic risk, avoiding fire 
sales, maximizing value, promoting due process, and limiting taxpayer 
liability. To evaluate the proposals relative to these criteria, we 
conducted two expert roundtables in which participants evaluated the 
proposed changes to the role of regulators and the safe-harbor 
treatment of certain financial contracts in financial company 
bankruptcies. These roundtables were conducted with the assistance of 
the National Academy of Sciences (NAS). Roundtable participants 
included bankruptcy judges, practicing attorneys, financial 
regulators, industry representatives, and academics. We chose the 
roundtable participants based on their publications demonstrating an 
expertise in bankruptcy and financial regulation, input from 
regulatory bodies and industry groups, and suggestions from NAS. 
Roundtable participants discussed the proposals in relation to the 
criteria of orderliness and effectiveness, potential outcomes of 
implementing the proposals, and how impediments to implementing them 
might be overcome. During our work, we also met with officials from 
AOUSC, the Commodity Futures Trading Commission (CFTC), FDIC, the 
Board of Governors of the Federal Reserve System (Federal Reserve), 
Financial Stability Oversight Council (FSOC), U.S. Department of 
Justice, National Association of Insurance Commissioners (NAIC), 
Securities and Exchange Commission (SEC), and U.S. Department of the 
Treasury (Treasury). See appendix I for more information on our scope 
and methodology and appendix II for more information on the expert 
roundtables. 

We conducted this performance audit from October 2012 to July 2013, 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 
goals of bankruptcy are to give individuals and businesses a "fresh 
start" by eliminating or restructuring debts they cannot fully repay 
and help creditors receive some payment in an equitable manner. The 
filing of a voluntary bankruptcy petition operates as an "automatic 
stay" that generally stops lawsuits, foreclosures, and most other 
collection activities against the debtor, allowing the debtor time to 
eliminate or restructure its debts. In bankruptcy, equitable treatment 
of creditors means that all creditors with substantially similar 
claims shall be classified similarly and receive the same treatment. 
[Footnote 7] For example, a class of secured creditors --those with 
liens or other secured claims against the debtor's property--will 
receive similar treatment. Secured creditors are more likely to get 
some debt repaid than general unsecured creditors, and creditors 
generally 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.[Footnote 8] Proceedings 
under both Chapters 7 and 11 can be voluntary (initiated by the 
debtor) or involuntary (generally initiated by at least three 
creditors). However, in an involuntary proceeding, the debtor can 
defend against the proceeding, including presenting objections within 
21 days of being served the summons of the proceeding. The judge 
subsequently decides whether to grant the creditors' request and 
permit the bankruptcy to proceed, dismiss the request, or enter any 
other appropriate order. 

A reorganization proceeding under Chapter 11 allows debtors, such as 
commercial enterprises, to continue some or all of their operations as 
a way to satisfy creditor claims. The debtor typically remains in 
control of its assets, and is called a debtor-in-possession (DIP). The 
court also, under certain circumstances, can direct the U.S. Trustee 
to appoint a Chapter 11 trustee to take over the affairs of the 
debtor.[Footnote 9] As shown in figure 1, a firm going through a 
Chapter 11 bankruptcy generally will pass through several stages. 

Figure 1: Chapter 11 Process, 2013: 

[Refer to PDF for image: process illustration] 

Affiliated companies: 

Chapter 11 bankruptcy: 

Debtor voluntarily files for bankruptcy: 

Automatic stay: 
Assets: Most legal proceedings against debtor or debtor's property are 
stayed or frozen; 

Meeting of creditors: 
Assets: Debtor may be examined under oath. Creditors invited to attend. 

Disclosure statement: Debtor provides information on the affairs 
sufficient for informed creditor judgment. 

Confirmation of plan: Debtor to fully or partially satisfy creditors. 
Plan must be approved generally by creditors and then by court. 

Potential outcomes (any single one or combination is possible([A]: 

Company (in whole or in part) sold in 363 sale; 
Assets liquidated; 
Company reorganized. 

Case closed. 

Creditors initiate involuntary bankruptcy: 

Automatic stay: 

Debtor successfully contests bankruptcy? 
Yes: Debtor may contest an involuntary proceeding within 21 days of 
being served with a summons. Bankruptcy does not go forward; 
No, enter bankruptcy: 

Meeting of creditors: 
Assets: Debtor may be examined under oath. Creditors invited to attend. 

Disclosure statement: Debtor provides information on the affairs 
sufficient for informed creditor judgment. 

Confirmation of plan: Debtor to fully or partially satisfy creditors. 
Plan must be approved generally by creditors and then by court. 

Potential outcomes (any single one or combination is possible([A]: 

Company (in whole or in part) sold in 363 sale; 
Assets liquidated; 
Company reorganized. 

Case closed. 

Source: GAO analysis of U.S. Court information. 

[A] Potential outcomes also include dismissal of the case or conversion 
to a Chapter 7 liquidation. A 363 sale refers to that section of the 
Code which applies to sales that are free and clear of creditor claims. 

[End of figure] 

Each stage of the Chapter 11 process has key attributes: 

First-day motions. The most common first-day motions relate to the 
continued operation of the debtor's business and involve matters such 
as requests to use cash collateral--liquid assets on which secured 
creditors have a lien or claim--and obtaining financing, if any. They 
may include a motion to pay the prebankruptcy claims of critical 
vendors--those deemed vital to the debtor's continued business 
operations. 

Disclosure. The disclosure statement filed after the bankruptcy 
petition filing must include information on the debtor's assets, 
liabilities, and business affairs sufficient to enable creditors to 
make informed judgments about how to vote on the debtor's plan of 
reorganization and must be approved by the bankruptcy court. 

Plan of Reorganization. A debtor has an exclusive right to file a plan 
of reorganization within the first 120 days of bankruptcy.[Footnote 
10] The court may not confirm the plan unless a sufficient proportion 
of allowed creditors has accepted the plan or would not be impaired by 
the plan. The court's approval also depends on whether there are 
dissenting classes of creditors. If a plan has not been filed by the 
debtor within 120 days or accepted by a sufficient number of creditors 
after 180 days, any interested party--including creditors--may file a 
plan. The plan divides creditors into classes, prioritizing payments 
to creditors. 

Reorganization. Possible Chapter 11 outcomes, which can be used in 
combination, include (1) sale of the company (in whole or in part), 
which is sometimes called a section 363 sale because that section of 
the Code applies to sales that are free and clear of creditor claims 
and interests; (2) liquidation of the company's assets with the 
approval of the court through means other than a 363 sale; and (3) 
actual reorganization of the company in which it emerges from 
bankruptcy with new contractual rights and obligations that replace or 
supersede those it had before filing for bankruptcy.[Footnote 11] 

The debtor, creditors, trustee, or other interested parties, may 
initiate adversary proceedings--in effect, a lawsuit within the 
bankruptcy case to preserve or recover money or property to 
subordinate a claim of another creditor to their own claims, or for 
similar reasons. Furthermore, the Chapter 11 trustee or others may 
bring a preference action (a type of avoidance action) challenging 
certain payments made by a debtor to a creditor generally within 90 
days prior to the bankruptcy filing.[Footnote 12] In addition, 
fraudulent avoidance actions generally can be taken on transfers made 
within 2 years prior to a bankruptcy if payments are determined to be 
fraudulent. As such, an avoidance action can question the payment as a 
preferential or fraudulent transfer of assets and require payments to 
be returned to the debtor. 

Financial Companies and the Bankruptcy Code: 

Large, complex financial companies that are eligible to file for 
bankruptcy generally file under Chapter 11 of the Code. Such companies 
operating in the United States engage in a broad range of financial 
services including commercial banking, investment banking, securities 
and commodities trading, derivatives transactions, and insurance. Many 
of them are organized under both U.S. and foreign laws. The U.S. legal 
structure is frequently premised upon the ownership by a parent 
holding company of various regulated subsidiaries (such as depository 
institutions, insurance companies, broker-dealers, and commodity 
brokers) and other nonregulated subsidiaries that engage in a variety 
of financial activities. Many of these businesses have centralized 
business lines and operations that may be housed in a holding company 
or in one or more subsidiaries. Smaller banking institutions also are 
organized as holding companies, but many of these hold few, if any, 
assets outside a depository institution and generally engage in a 
narrower range of activities. 

Certain financial institutions may not file as debtors under the Code 
and other entities face special restrictions in using the Code: 
[Footnote 13] 

* Insured depository institutions. Under the Federal Deposit Insurance 
Act, FDIC serves as the conservator or receiver for insured depository 
institutions placed into conservatorship or receivership under 
applicable law.[Footnote 14] 

* 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 
subchapter of Chapter 7 of the Code. However, broker-dealers may not 
file for reorganization under Chapter 11.[Footnote 15] 

* Commodity brokers. Commodity brokers, also known as futures 
commission merchants, are restricted to using only a special 
subchapter of Chapter 7 for bankruptcy relief.[Footnote 16] 

Current Role of Financial Regulators in Bankruptcy Proceedings: 

Regulators often play a role in financial company bankruptcies. With 
the exception of CFTC and SEC, the Code does not explicitly name 
federal financial regulators as a party of interest with a right to be 
heard before the court. In practice, regulators frequently appear 
before the court in financial company bankruptcies. For example, as 
receiver of failed insured depository institutions, FDIC's role in 
bankruptcies of bank holding companies is typically limited to that of 
creditor. CFTC has the express right to be heard and raise any issues 
in a case under Chapter 7. SEC has the same rights in a case under 
Chapter 11. SEC may become involved in a bankruptcy particularly if 
there are issues related to disclosure or the issuance of new 
securities. SEC and CFTC also are involved in Chapter 7 bankruptcies 
of broker-dealers and commodity brokers. In the event of a broker-
dealer liquidation, pursuant to the SIPA, the bankruptcy court retains 
jurisdiction over the case and a trustee, selected by the Securities 
Investor Protection Corporation (SIPC), typically administers the 
case. SEC may join any SIPA proceeding as a party. 

The Code does not restrict the federal government from providing DIP 
financing to a firm in bankruptcy, and in certain cases it has 
provided such funding, as it did in the bankruptcies of General Motors 
and Chrysler with financing under the Troubled Asset Relief Program 
(TARP).[Footnote 17] The authority to make new financial commitments 
under TARP terminated on October 3, 2010. In July 2010, the Dodd-Frank 
Act amended section 13(3) of the Federal Reserve Act to prohibit the 
establishment of an emergency lending program or facility for the 
purpose of assisting a single and specific company to avoid 
bankruptcy. Nevertheless, the Federal Reserve may design emergency 
lending programs or facilities for the purpose of providing liquidity 
to the financial system.[Footnote 18] 

The federal government also has provided financial support to 
companies who later declared bankruptcy. For example, CIT Group, Inc. 
received funding from TARP in 2008. CIT subsequently declared 
bankruptcy under Chapter 11 in 2009 and was reorganized. 

Current Safe-Harbor Treatment for Financial Contracts under the Code: 

Although the automatic stay generally preserves assets and prevents 
creditors from taking company assets in payment of debts before a case 
is resolved and assets are distributed in a systematic way, it is 
subject to exceptions, one of which can be particularly important in a 
financial institution bankruptcy. Commonly referred to as a safe 
harbor, this exception pertains to certain financial and derivative 
contracts, often referred to as qualified financial contracts (QFC). 
[Footnote 19] The types of contracts eligible for the safe harbors are 
defined in the Code. They include derivative financial products, such 
as forward contracts and swap agreements that financial companies (and 
certain individuals and nonfinancial companies) use to hedge against 
losses from other transactions or speculate on the likelihood of 
future economic developments.[Footnote 20] Repurchase agreements, 
collateralized instruments that provide short-term financing for 
financial companies and others, also generally receive safe-harbor 
treatment. 

Safe-harbor treatment was first added to the Code in 1982 for forward 
contracts, commodity contracts, and securities contracts.[Footnote 21] 
In a recent change, the Code's definition of repurchase agreements was 
expanded (in 2005) to include, among other things, agreements for the 
transfer of mortgage related securities, mortgage loans, interests in 
mortgage-related securities or mortgage loans, and government 
securities issued by countries that are members of the Organisation of 
Economic and Co-operation and Development, thereby expanding the scope 
of contracts subject to the safe-harbor treatment. According to the 
legislative history, the purpose of these safe harbors is to maintain 
market liquidity and reduce systemic risk, which we define as the risk 
that the failure of one large institution would cause other companies 
to fail or that a market event could broadly affect the financial 
system rather than just one or a few companies. 

Under the safe-harbor provisions, most counterparties that entered 
into a qualifying transaction with the debtor may exercise certain 
contractual rights even if doing so would otherwise violate the 
automatic stay.[Footnote 22] In the event of insolvency or the 
commencement of bankruptcy proceedings, the nondefaulting party in a 
contract may liquidate, terminate, or accelerate the contract, and may 
offset (net) any termination value, payment amount, or other transfer 
obligation arising under the contract when the debtor files for 
bankruptcy. That is, generally nondefaulting counterparties subtract 
what they owe the bankrupt counterparty from what that counterparty 
owes them (netting), often across multiple contracts. If the result is 
positive, the nondefaulting counterparties can sell any collateral 
they are holding to offset what the bankrupt entity owes them. If that 
does not fully settle what they are owed, they are treated as 
unsecured creditors in any final liquidation or reorganization. 

Safe-harbor provisions also generally exempt certain payments made 
under financial contracts from a preference action seeking to recover 
any payment made by a debtor to a creditor generally within 90 days of 
filing for bankruptcy. In addition, they exempt fraudulent transfers 
made to financial contract counterparties generally within 2 years 
prior to a bankruptcy unless the payments are determined to have been 
intentionally fraudulent. Trustees cannot question the payment made in 
connection with these contracts as a preferential or fraudulent 
transfer of assets and cannot require the payments to be returned to 
the debtor. See appendix III for more information on the current safe-
harbor treatment for derivative and repurchase agreement contracts. 

Experts Agreed That Changing Regulatory Involvement May Have Varying 
Impacts and Needs Further Consideration: 

Experts at our roundtables evaluated proposals to change the roles of 
regulators in financial company bankruptcies. Specifically, they 
discussed proposals to require firms to notify and consult with 
regulators prior to a bankruptcy; allow regulators to commence an 
involuntary bankruptcy; provide regulators with standing or a right to 
be heard in bankruptcy court; and have regulators determine how 
subsidiaries might be consolidated in a bankruptcy. The experts noted 
that the proposals could have varying impacts on the bankruptcy 
process. For example, they viewed most of the proposals as having 
limited impact because regulators already have similar roles in 
bankruptcies, whereas efforts to consolidate subsidiaries in a 
bankruptcy would undermine key legal and regulatory constructs. 
Although experts broadly supported regulatory involvement in financial 
company bankruptcies, they said the proposed changes raise several 
implementation issues, such as determining the number of days prior to 
a bankruptcy that a company would be required to notify regulators and 
which regulator(s) to notify. As a result, the proposals require 
further consideration. FSOC, which is charged with identifying and 
responding to risks to financial stability that could arise from the 
failure of large financial companies, has been identified in some 
proposals as a regulator that should be notified.[Footnote 23] 
However, FSOC has not yet considered implications of changes to the 
role of regulators in the bankruptcies of financial companies. 

Proposals to Further Involve Financial Regulators in Financial Company 
Bankruptcies: 

Several proposals have been made by financial and legal experts, as 
well as government officials, to further involve regulators in 
financial company bankruptcies. The experts at our first roundtable 
discussed four such proposals we identified in our 2011 study. 
[Footnote 24] 

Require debtors to notify and consult with regulators (primary, 
functional, Financial Stability Oversight Council, foreign, or other) 
in advance of filing for bankruptcy.[Footnote 25] Bankruptcy-related 
proposals introduced in the 111th Congress included a notification 
period.[Footnote 26] In prior work, we found that the notice period 
was intended to provide the regulator with some time to facilitate 
actions to minimize the systemic impact of the bankruptcy.[Footnote 
27] During that time, the regulator might be able to find ways to 
maintain critical functions, facilitate an asset sale, identify 
potential creditors that would provide financing for the debtor, or 
determine if a proceeding under OLA would be more appropriate. This 
extra time for preparation could help to maintain the value of the 
institution and reduce systemic disruptions to the wider economy. 

Allow regulators to commence an involuntary bankruptcy if the firm is 
insolvent or in imminent danger of becoming insolvent. This proposal 
was included in the proposal made by the Hoover Institution resolution 
project group to have a separate bankruptcy chapter in the Code--
Chapter 14--for large financial companies.[Footnote 28] The authors of 
that proposed chapter noted that under the existing Code, an 
involuntary bankruptcy proceeding can commence when a firm generally 
is not paying its debts as they become due unless the debts are 
subject to a legitimate dispute. For large financial companies, 
allowing involuntary bankruptcies in response to balance sheet 
insolvency may allow regulators to initiate a bankruptcy at a time 
when they could still limit the spread of damage to other financial 
companies. The Chapter 14 proposal specifically provides primary 
regulators power to commence an involuntary case against a financial 
company in the event that the firm's assets are less than its 
liabilities, at fair valuation, or the firm has unreasonably small 
capital. 

Allow regulators of the debtor or its subsidiaries to have standing or 
a right to be heard in the courts to raise issues relative to 
regulation. Proposals introduced in the 111th Congress contained a 
provision to allow certain financial regulators the right to be heard 
during a bankruptcy case.[Footnote 29] The proposals granted the 
functional regulator, Financial Stability Oversight Council, Federal 
Reserve, Treasury, and any agency charged with administering a 
nonbankruptcy insolvency regime for any component of the debtor the 
right to be heard on any issue in a bankruptcy case.[Footnote 30] 
Experts have contended that regulated institutions have more 
complicated legal structures and products than others; thus, having 
regulatory expertise would provide more timely information to the 
judge and could lead to resolutions that better preserve asset value. 
[Footnote 31] 

Consider the role of regulators in determining what subsidiaries 
should be included in a bankruptcy proceeding and the extent to which 
complex firms might be consolidated in bankruptcy. This proposal would 
give regulators a role in determining whether the court should 
consider the filing of a financial company as a whole under processes 
similar to the doctrine of substantive consolidation--a rarely used 
procedure. In substantive consolidation, the intercompany liabilities 
of related companies are eliminated, the assets of these companies are 
pooled, and the companies' liabilities to third parties are paid from 
the single pool of assets. The proposal also would give regulators a 
role in determining whether existing bankruptcy exclusions for 
insurance companies, broker-dealers, or commodity brokers should be 
maintained. The Hoover Institution resolution project group noted that 
these exclusions can complicate the resolution of a major financial 
institution, because the bankruptcy court can deal only with pieces of 
the firm. 

Experts Noted Limited Effects on Regulator Roles from Most Proposals 
and Trade-offs Relating to Orderliness and Effectiveness: 

The experts at the first roundtable generally supported three of the 
four proposed changes to the role of regulators in bankruptcy 
proceedings, but noted that these proposals might have limited 
effects. None of the experts who responded to written questions 
indicated that requiring notice and consultation with regulators or 
granting regulators a right to be heard in bankruptcy court would 
greatly change the existing bankruptcy process. The experts noted that 
regulators already play these roles in financial company bankruptcies. 

* In response to the proposal to require notice to regulators, the 
experts generally agreed that regulators and financial companies 
usually have a great deal of communication and involvement, 
particularly when an institution is experiencing financial 
difficulties. One expert worried that requiring notice to the 
regulator before filing for bankruptcy might allow regulators to 
prevent the debtor from filing and adversely affect recoveries for 
creditors. 

* In relation to regulatory authority to compel involuntary filings, 
the experts who specifically addressed this proposal said that 
regulators already have ways of forcing a financial company to file 
for bankruptcy through their existing regulatory powers. A few experts 
said that regulators can use the threat of placing the firm into FDIC 
receivership under OLA if the firm does not file voluntarily for 
bankruptcy.[Footnote 32] One expert expressed the view that once 
living wills are in place, regulators may compel a financial company 
to execute its resolution plan by filing for voluntary bankruptcy. 
[Footnote 33] Regulators also can take other actions. For example, 
under the statute, the Federal Reserve and FDIC may jointly take 
corrective action, including ultimately requiring the divestiture of 
certain assets, if they jointly determine that a firm has not been 
able to submit a plan that meets the statutory criteria.[Footnote 34] 
Under SEC and CFTC rules, an undercapitalized securities broker-dealer 
or commodity broker cannot operate and must therefore be liquidated. 
One expert with whom we spoke said that even if regulators were given 
an explicit right to place a firm in involuntary bankruptcy, they 
would be unlikely to use that authority. 

* In response to the proposal to give regulators an explicit right to 
be heard, experts who addressed the issue said regulators are 
routinely heard by the court in bankruptcy proceedings. And as noted 
previously, SEC and CFTC already have legal standing in some cases. 
Court officials said they were not aware of an instance in which a 
regulator was denied the right to be heard by the court. However, 
experts also said making this an express right might have benefits, 
which we discuss later in this report. 

Although experts favored most of the regulatory proposals, they were 
opposed to having regulators decide whether a firm should be resolved 
on a consolidated basis and noted that these changes would undermine 
key legal and regulatory constructs. One expert noted that the idea 
undermined the concept of having corporate separateness for 
subsidiaries. Corporate separateness is generally the principle that a 
parent corporation is not liable for actions taken by its 
subsidiaries. Another expert noted that encouraging substantive 
consolidation as determined by the regulator could have a negative 
impact on the predictability and transparency of the bankruptcy 
process, detracting from the orderliness and effectiveness of that 
process. A third expert noted that treating the legal entities of a 
financial company in bankruptcy on a consolidated basis would conflict 
with the U.S. regulatory structure, which is designed around separate 
legal entities, such as depository institutions, broker-dealers, and 
insurance companies. However, companies continue to manage themselves 
along business lines that cut across legal entities. A regulatory 
expert said that removing the exemption for securities broker-dealers 
and commodity brokers from bankruptcy could undermine the purpose of 
the regulatory construct applied to those entities and the ability of 
regulators to protect customers' assets. An expert noted that 
overriding state insurance regulators could lead to intensive 
litigation. Additionally, NAIC and state insurance officials said that 
the priority structure for bankruptcy is inappropriate for insurers 
because the primary goal in the resolution of an insurance company is 
to protect the policyholders. Because of this, policyholders generally 
receive priority over creditors in an insurance receivership beyond 
any claims supported by collateral. 

Experts at our roundtables also broadly discussed the proposals in 
relation to criteria for orderly and effective bankruptcies (including 
minimizing systemic risk and promoting due process). Most 
fundamentally, these experts had differing views on whether 
bankruptcy, as currently construed, was an appropriate vehicle for 
minimizing systemic risk. Some participants at the roundtable raised 
issues about whether the court could act quickly enough to stem 
systemic spillovers from the debtor company to other companies and 
markets. They noted other potential trade-offs. For example, to act 
quickly in cases involving large and complex financial companies, 
courts might need to shorten notice periods and limit parties' right 
to be heard, which could compromise due process and creditor rights. 
Similarly, one participant said that if the goal was to turn the Code 
into an effective resolution tool, the fundamental balance of power 
among debtor, creditor, and regulator might need to be altered. 
Another was concerned that if regulators become more involved in 
bankruptcy cases, courts might defer to them over other parties, 
undermining the ability of creditors to argue their cases. However, a 
legal expert at the roundtable doubted that the courts would be overly 
solicitous to regulators. Another legal expert noted that regulators 
could enhance due process by educating the court and providing a 
method for verifying information provided by the financial 
institution. One of these participants noted that standards for an 
involuntary bankruptcy initiated by the regulator might require a new 
definition for insolvency that would consider both regulatory and 
systemic interests. 

Nevertheless, many of the experts indicated that regulatory 
involvement in bankruptcies was consistent with minimizing systemic 
risk. These experts said that regulators do and should have influence 
in times of crisis and that commencing a bankruptcy without regulatory 
involvement could be problematic. Additionally, some of the experts at 
the roundtable noted that regulators ought to have the power to compel 
a financial firm to file for bankruptcy because, as one regulatory 
expert said, allowing a financial firm to continue to do business when 
it is in vulnerable financial condition would likely add to concerns 
for systemic risk. 

Experts Generally Agreed That Proposals Need Further Consideration: 

Although experts generally supported proposals to change the roles of 
regulators, they said implementing the proposals relating to notice 
and involuntary proceedings could be difficult. Experts at our 
roundtable said that determining the correct number of days for 
notification to the regulator would be difficult. For example, 
requiring a financial institution to provide notice to and consult 
with regulators 10 days in advance of filing for bankruptcy--the 
number of days specified in proposals introduced in the 111th 
Congress--might not work in practice. One expert said that 10 days can 
be a long time in a financial crisis. Another noted that the firm's 
need to file for bankruptcy might arise very quickly and that a firm 
might only be able to notify its regulator a day or two in advance of 
its filing. As an example, an expert noted the rapid collapse of the 
investment firm Bear Stearns and Co. In 2008, senior management of 
Bear Stearns gave the Federal Reserve Bank of New York a 1-day 
notification, saying that the company would file for bankruptcy 
protection the following day unless it received an emergency loan. In 
the failure of Lehman Brothers, the abruptness of the company's 
bankruptcy did not allow much time for attorneys to prepare for 
filing. Another expert said that a requirement to "notify and consult" 
with the regulator before entering bankruptcy should not interfere 
with the ability of a company to file for bankruptcy. 

Determining which regulators to notify also may be difficult. Complex 
financial companies and their subsidiaries may have many regulators 
domestically and internationally. As a result, determining which 
regulator a bank holding company or nonbank financial company would 
notify if a domestic or foreign subsidiary were nearing insolvency is 
not clear. One expert noted that because large financial companies 
have many regulators, before a firm could file for bankruptcy it would 
be important to identify in advance which regulators to notify. 
Proposals introduced in the 111th Congress would have required that a 
nonbank financial company consult with its functional regulator, FSOC, 
and any agency charged with administering a nonbankruptcy insolvency 
regime for any component of the debtor firm, which could be a large 
number of regulators.[Footnote 35] The proposals define functional 
regulator as the federal regulatory agency with the primary regulatory 
authority, such as an agency listed in section 509 of the Graham-Leach-
Bliley Act. Some roundtable experts said that prebankruptcy 
consultation should be with the firm's primary regulator, although 
none of them defined this term. 

FSOC--which under the Dodd-Frank Act is charged with identifying and 
responding to risks to U. S. financial stability--was included as a 
regulator in the notification and consultation proposal.[Footnote 36] 
Treasury officials, including those who support FSOC, interpret the 
Dodd-Frank Act as having a preference for resolving financial 
companies through bankruptcy and said that FSOC has focused its 
activities on implementing its responsibilities under the act. 
Furthermore, in its annual reports FSOC has described the role that 
resolution plans are supposed to play in fostering orderly resolutions 
under the Code. Specifically, under the Dodd-Frank Act, bank holding 
companies with total consolidated assets of $50 billion or more and 
nonbank financial companies designated by FSOC for enhanced 
supervision by the Federal Reserve are required to submit resolution 
plans to the Federal Reserve, FDIC, and FSOC. FSOC's 2013 Annual 
Report included a recommendation that the Federal Reserve and FDIC 
implement their resolution plan authorities in a manner that better 
prepares firms and authorities for a rapid and orderly resolution 
under the Code.[Footnote 37] 

However, in our discussion with Treasury officials, including those 
who support FSOC, they noted that FSOC does not routinely evaluate 
proposals that could alter the role of regulators in the bankruptcy 
process or other changes to the Code that might reduce systemic risk, 
such as narrowing the safe harbor treatment of QFCs. While current law 
does not specify a role for FSOC related to the potential filing of a 
bankruptcy by a systemically important financial company, when MF 
Global declared bankruptcy, FSOC met in emergency session to monitor 
the event and subsequently reported that the MF Global bankruptcy had 
not roiled markets.[Footnote 38] Treasury officials and staff that 
support FSOC said that FSOC is focused on implementing provisions in 
the Dodd-Frank Act. Since helping to develop rules to implement OLA is 
explicit in the Dodd-Frank Act, FSOC has described activities related 
to these provisions and made recommendations--but has not considered 
the implications of changing the role of regulators under the Code. 
Although the Dodd-Frank Act does not amend the Code or explicitly call 
for FSOC to consider such changes, changing the role of regulators 
could potentially impact FSOC's ability to identify and respond to 
systemic risks in a timely fashion. 

The roundtable experts noted that allowing financial regulators to 
initiate an involuntary bankruptcy for financial companies raised a 
number of implementation questions including appropriate time frames 
and standards. These experts generally agreed that lengthy time frames 
included in the rules for an involuntary bankruptcy filed by a 
creditor could reduce the value of a systemically important financial 
institution and endanger market stability.[Footnote 39] However, one 
expert expressed concern over the possibility of regulators acting too 
quickly to place an institution in bankruptcy, especially during a 
financial crisis in which asset valuations might be in dispute. A 
legal expert noted that considering what the appropriate standard for 
placing a financial institution in bankruptcy would be was important. 
The expert noted the difficulty of distinguishing between an insolvent 
company and one experiencing temporary liquidity needs. Another expert 
proposed that a bankruptcy initiated by the regulator should require a 
standard similar to the standard in place for placing a firm in FDIC 
receivership under OLA.[Footnote 40] The regulators at the roundtable 
thought that a regulatory framework that required firms to meet 
certain standards or be placed in bankruptcy--as currently exists for 
commodities brokers and securities broker-dealers--might alleviate 
some of the disadvantages posed by the creditor rules and would not 
necessarily require a change in the Code. 

Experts Considered Funding Mechanisms Essential for Bankruptcies of 
Large Financial Companies: 

One criterion for an effective bankruptcy or resolution process is to 
limit taxpayer liability. Legislators have made proposals to limit the 
ability of the Treasury or the Federal Reserve to help finance 
bankruptcies of financial companies. For example, proposals introduced 
in the 111th Congress specifically would have forbidden the U.S. 
Treasury and Federal Reserve from participating in bankruptcy 
financing. However, some proposals recognize the difficulty of 
financing bankruptcies of large financial companies, especially during 
a crisis. The Chapter 14 proposal made by the Hoover Institution 
resolution project group would allow the government to provide 
subordinated DIP financing to companies with assets greater than $100 
billion (subsidiaries included) with a hearing and the court's 
approval and oversight.[Footnote 41] Experts at our roundtable 
discussed the appropriate role of the government in providing 
financing for firms in bankruptcy. 

Experts Considered Fully Secured Federal or Industry Funding 
Mechanisms Essential for Orderly and Efficient Bankruptcies: 

Experts at our roundtables emphasized that many of the proposals to 
make the bankruptcy process more orderly and effective depend on 
having an adequate funding mechanism. As a result, experts at the 
first roundtable generally agreed that changing the Code to prevent 
any federal funding of these bankruptcies would not be consistent with 
orderly and effective resolutions. In their written responses to a 
question asking what the most important changes would be to achieve 
most of the elements of an orderly and effective bankruptcy, experts 
most consistently responded that proposals to provide adequate 
funding, rather than to restrict it, were the most important changes 
that could be made. All but one of the eight experts responding put 
providing a funding source as the most important change to avoid fire 
sales. Experts said that support for federal funding rested on two 
propositions. First, voluntary private funding likely would be 
unavailable to finance the bankruptcy of a systemically important 
financial company. Second, the government should distinguish between 
funding for a bailout and funding that provided short-term liquidity. 

Experts did not think that voluntary private funding would be 
available to finance a systemically important financial company 
because these companies are large and some of them grew substantially 
over the course of the financial crisis (see table 1). Solutions that 
were possible during the crisis, such as JPMorgan Chase providing 
funding for Bear Stearns, or Barclays' purchase of parts of Lehman, 
would be unlikely in the future because some firms have gotten much 
larger. Experts also noted that obtaining funding would be especially 
difficult during a period of general financial distress when firms 
large enough to provide funding might be experiencing difficulties 
themselves. 

Table 1: Assets and Liabilities of Global Systemically Important 
Banking Institutions Headquartered in the United States, Fourth 
Quarter of 2007 and 2012: 

U.S. dollars in millions: 

Banking institution: Bank of America Corp.; 
2007: Assets: $1,720,688; 
2007: Liabilities: $1,571,489; 
2012: Assets: $2,212,004; 
2012: Liabilities: $1,974,902. 

Banking institution: Bank of New York Mellon, Corp.; 
2007: Assets: $197,839; 
2007: Liabilities: $168,269; 
2012: Assets: $359,301; 
2012: Liabilities: $321,858. 

Banking institution: Citigroup, Inc.; 
2007: Assets: $2,187,631; 
2007: Liabilities: $2,068,725; 
2012: Assets: $1,864,660; 
2012: Liabilities: $1,673,663. 

Banking institution: Goldman Sachs Group, Inc.; 
2007: Assets: $1,119,796; 
2007: Liabilities: $1,076,996; 
2012: Assets: $938,770; 
2012: Liabilities: $862,546. 

Banking institution: JPMorgan Chase & Co.; 
2007: Assets: $1,562,147; 
2007: Liabilities: $1,438,006; 
2012: Assets: $2,359,141; 
2012: Liabilities: $2,154,273. 

Banking institution: Morgan Stanley; 
2007: Assets: $1,045,409; 
2007: Liabilities: $1,014,140; 
2012: Assets: $780,960; 
2012: Liabilities: $711,223. 

Banking institution: State Street Corp.; 
2007: Assets: $142,937; 
2007: Liabilities: $131,628; 
2012: Assets: $222,229; 
2012: Liabilities: $201,358. 

Banking institution: Wells Fargo & Co.; 
2007: Assets: $575,442; 
2007: Liabilities: $527,528; 
2012: Assets: $1,422,968; 
2012: Liabilities: $1,264,057. 

Banking institution: Total; 
2007: Assets: $8,551,889; 
2007: Liabilities: $7,996,781; 
2012: Assets: $10,160,034; 
2012: Liabilities: $9,163,880. 

Source: GAO analysis of SEC and Federal Reserve data. 

Note: These U.S. banking institutions were designated by the Financial 
Stability Board as of November 1, 2012. The board defines systemically 
important financial institutions 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. Data are from December 
2007 and December 2012 except for the 2007 assets and liabilities for 
Goldman Sachs Group, Inc. and Morgan Stanley. These data were reported 
in November 2007. 

[End of table] 

Several experts noted that any government funding would need to 
distinguish between bailing out an insolvent company, which they 
opposed, and providing short-term liquidity for a solvent company 
providing collateral, which they generally supported. One of the legal 
experts defined a bailout as the government putting in equity capital 
to support existing creditors. Legal and academic experts at our 
roundtables compared the provision of fully secured, liquidity funding 
with providing lender-of-last resort funding. They referred 
specifically to the Federal Reserve providing short-term liquidity 
through its discount window to solvent depository institutions with 
eligible collateral to secure the loan. The Federal Reserve accepts a 
very broad range of collateral to secure such loans.[Footnote 42] Our 
roundtable experts generally agreed that funding for liquidity needs 
was essential and noted that in a period of financial distress the 
federal government might be the only entity with enough resources to 
provide such funding. 

Although experts at the roundtables did not think voluntary private 
funding likely would be available for financing or other liquidity 
support during the bankruptcy of a large financial company, they did 
consider whether the industry as a whole might provide such support. 
They noted several options for such funding. 

* The industry could create a fund or mechanism for providing 
liquidity to firms that needed it. 

* The government could assess companies prior to a bankruptcy as it 
does for the deposit insurance fund. 

* The government could raise funds through postbankruptcy assessments, 
while meeting immediate needs through temporary federal funding as 
with the Orderly Liquidation Fund under Title II of the Dodd-Frank 
Act. Under OLA, the Treasury may make funds available through an 
Orderly Liquidation Fund to FDIC as the receiver of a covered 
financial company.[Footnote 43] 

A few of the experts noted that some government guarantees might 
facilitate private-sector financing. 

As with many of the proposals, our roundtable experts noted that 
implementing a proposal to allow fully secured federal funding for 
liquidity needs raised some difficulties. First, they noted the 
difficulty of distinguishing between an insolvent company and one 
experiencing temporary liquidity needs. This distinction is 
particularly difficult in a period of financial stress when valuation 
of assets may be difficult. For example, the value of some of Lehman 
Brothers Holding, Inc.'s (LBHI) real estate assets has increased since 
the time of its bankruptcy in 2008. 

Second, experts at the first roundtable noted that the Dodd-Frank Act 
amendments to section 13(3) of the Federal Reserve Act might apply to 
some Federal Reserve funding related to a bankruptcy.[Footnote 44] 
This provision restricts the Federal Reserve from providing funding to 
a single distressed company but would allow it to provide funding to 
the financial system. Similar funding provided under the Primary 
Dealer Credit Facility in September 2008 (prior to the Dodd-Frank Act 
amendments), allowed Lehman Brothers, Inc. (LBI)--the broker-dealer 
and commodity broker subsidiary of LBHI--to remain a going concern 
after LBHI declared bankruptcy, thus facilitating the transfer of some 
assets to Barclays later that week. The remaining parts of LBI were 
liquidated in a SIPA proceeding. Under the terms of the loans provided 
through the Primary Dealer Credit Facility, the Federal Reserve Bank 
of New York became a secured creditor of the firm, giving it higher 
priority in the event of a bankruptcy. We found in 2011 that LBI and 
Barclays had repaid their overnight loans with interest, according to 
Federal Reserve officials. One legal and financial expert suggested 
that the Federal Reserve would be in compliance with the amendments to 
section 13(3) if it set up a fund for firms being resolved under the 
Code for large financial companies. 

Third, experts noted that determining what types of assets firms could 
use to collateralize government or industry funding might be 
difficult. Although the Federal Reserve had accepted assets with 
significant tail risk (the probability of a rare event occurring that 
would result in great losses) as collateral during the crisis, experts 
noted that such risky assets might not be acceptable in the future. 

Roundtable Experts Were Concerned about Using Federal Funding for 
Preferences to Some Creditors: 

We asked the experts at our first roundtable to discuss the advantages 
and disadvantages of the proposal made by the Hoover Institution 
resolution project group that calls for using subordinated government 
debt to provide payments to certain short-term creditors early in a 
bankruptcy proceeding. Such subordinated loans would be repaid with a 
lower priority than that of other creditors. The proposal further 
proposes a "claw-back" procedure if the preferred creditors have 
received more than they were entitled to when the reorganization or 
liquidation is finalized. The proposal was made to stem systemic 
concerns--the failure at one financial company spreading to others 
because short-term creditors would not have access to funds. Reliance 
on short-term funding exacerbated the financial crisis of 2007-
2009.[Footnote 45] And as has been noted by some Federal Reserve 
officials, regulatory reform has not yet addressed the risks to 
financial stability posed by short-term wholesale funding.[Footnote 46] 

Legal experts at the roundtable agreed that such payments could be 
made by treating certain short-term creditors as critical vendors 
during first-day motions. However, experts who discussed this issue at 
the first roundtable said that making decisions about providing 
funding to certain short-term creditors during a bankruptcy was not 
the best way to address systemic concerns associated with short-term 
liquidity. They noted that such a proposal would increase uncertainty 
for creditors during a bankruptcy proceeding. Two experts noted that 
they would not want to use subordinated federal funding. Another 
explained that the point of subordinating the funding is to help 
ensure that the government uses such funding to address concerns about 
liquidity rather than to defray certain creditors' losses. However, 
such funding would expose taxpayers to potential liability. 

Instead, those experts who discussed this proposal at the first 
roundtable said that changing the Code to give an explicit priority to 
short-over long-term creditors would be preferable. They noted that an 
explicit priority would be a better option in that it would help to 
address systemic risk and lead to a more predictable bankruptcy 
process. In addition, such a priority might provide an incentive for 
firms to continue to provide short-term funding when a financial 
company experiences distress. One legal expert noted that the special 
bankruptcy laws for railroads had a provision that any creditor 
providing funding in the 6 months leading up to a bankruptcy had 
priority over other creditors in that bankruptcy proceeding. This type 
of provision might have created an incentive to provide funding to a 
railroad experiencing short-term financing issues and thus, might have 
prevented a bankruptcy. However, a legal expert at our second 
roundtable said that this would create unfair treatment for creditors 
providing long-term financing, because long-and short-term creditors 
were members of the same creditor class. 

While a priority for short-over long-term creditors might reduce the 
incentive to withdraw funding leading up to a bankruptcy and reduce 
the likelihood of systemic issues associated with liquidity shortages 
during a bankruptcy, it could have additional consequences. For 
example, such a priority would provide more of an incentive for 
creditors to provide short-rather than long-term funding. If there 
were less likelihood that these short-term creditors would lose their 
funds in the case of a default because they had priority over other 
creditors, they might be less likely to monitor the credit-worthiness 
of borrowers. As a result, the market might be less likely to 
discipline companies that take on excessive risk. Although promoting 
market discipline is not among the criteria we identified for orderly 
and effective bankruptcies, it is a goal of the Dodd-Frank Act. 

Experts Had Varying Views on Advantages and Disadvantages of QFC 
Proposals: 

Experts at our roundtables evaluated proposals to change the treatment 
of certain QFCs relative to criteria for orderly and effective 
financial company bankruptcies. Specifically, they discussed the 
effects of proposals for removing all safe harbors for QFCs; partially 
rolling back safe harbors on specific contracts; implementing a 
temporary stay for all or certain contracts; and allowing trustees to 
"avoid" contracts entered into within specified periods prior to the 
bankruptcy filing if they are determined to be preferential or 
fraudulent.[Footnote 47] The experts generally agreed that limiting 
safe-harbor treatment would affect derivative and repurchase agreement 
markets and could limit short-term funding options for financial 
companies especially in periods of distress. However, the experts had 
differing views on the advantages and disadvantages of the proposals, 
and those views are still evolving as lessons learned from the 
treatment of these contracts during the Lehman Brothers bankruptcy 
remain unclear. 

Experts Generally Agreed That Limiting Safe-Harbor Treatment of QFCs 
Would Affect Markets and Funding Availability: 

The roundtable experts generally agreed that limiting the safe-harbor 
treatment--removing it all together or providing it to a more limited 
set of contracts--would reduce the use of derivatives and repurchase 
agreements. Some experts have noted that these markets grew 
substantially after additional types of contracts were granted safe-
harbor treatment in 2005 (see fig. 2). However, one expert we spoke 
with noted that in his opinion the industry has tended to overstate 
the impact that limiting the safe harbors would have on the size of 
the markets, which the expert thought would likely be minimal. 

Figure 2: Primary Dealer Repurchase Agreements and Global Over-the-
Counter Derivatives Markets, 2000 to 2012: 

[Refer to PDF for image: stacked line graph and stacked vertical bar 
graph] 

Primary Dealer Repurchase Agreements: 

Dollars in trillions: 

Date: 1/5/2000; 
Term Repurchase Agreements: $0.581; 
Overnight/Continuing Repurchase Agreements: $0.640. 

Date: 2/2/2000; 
Term Repurchase Agreements: $0.641; 
Overnight/Continuing Repurchase Agreements: $0.719. 

Date: 3/1/2000; 
Term Repurchase Agreements: $0.564; 
Overnight/Continuing Repurchase Agreements: $0.717. 

Date: 4/5/2000; 
Term Repurchase Agreements: $0.614; 
Overnight/Continuing Repurchase Agreements: $0.736. 

Date: 5/3/2000; 
Term Repurchase Agreements: $0.731; 
Overnight/Continuing Repurchase Agreements: $0.733. 

Date: 6/7/2000; 
Term Repurchase Agreements: $0.695; 
Overnight/Continuing Repurchase Agreements: $0.747. 

Date: 7/5/2000; 
Term Repurchase Agreements: $0.661; 
Overnight/Continuing Repurchase Agreements: $0.740. 

Date: 8/2/2000; 
Term Repurchase Agreements: $0.781; 
Overnight/Continuing Repurchase Agreements: $0.749. 

Date: 9/6/2000; 
Term Repurchase Agreements: $0.649; 
Overnight/Continuing Repurchase Agreements: $0.758. 

Date: 10/4/2000; 
Term Repurchase Agreements: $0.714; 
Overnight/Continuing Repurchase Agreements: $0.732. 

Date: 11/1/2000; 
Term Repurchase Agreements: $0.818; 
Overnight/Continuing Repurchase Agreements: $0.738. 

Date: 12/6/2000; 
Term Repurchase Agreements: $0.770; 
Overnight/Continuing Repurchase Agreements: $0.787. 

Date: 1/3/2001; 
Term Repurchase Agreements: $0.693; 
Overnight/Continuing Repurchase Agreements: $0.776. 

Date: 2/7/2001; 
Term Repurchase Agreements: $0.833; 
Overnight/Continuing Repurchase Agreements: $0.782. 

Date: 3/7/2001; 
Term Repurchase Agreements: $0.818; 
Overnight/Continuing Repurchase Agreements: $0.835. 

Date: 4/4/2001; 
Term Repurchase Agreements: $0.776; 
Overnight/Continuing Repurchase Agreements: $0.862. 

Date: 5/2/2001; 
Term Repurchase Agreements: $0.888; 
Overnight/Continuing Repurchase Agreements: $0.854. 

Date: 6/6/2001; 
Term Repurchase Agreements: $0.916; 
Overnight/Continuing Repurchase Agreements: $0.900. 

Date: 7/4/2001; 
Term Repurchase Agreements: $0.858; 
Overnight/Continuing Repurchase Agreements: $0.893. 

Date: 8/1/2001; 
Term Repurchase Agreements: $0.937; 
Overnight/Continuing Repurchase Agreements: $0.971. 

Date: 9/5/2001; 
Term Repurchase Agreements: $0.820; 
Overnight/Continuing Repurchase Agreements: $0.997. 

Date: 10/3/2001; 
Term Repurchase Agreements: $0.738; 
Overnight/Continuing Repurchase Agreements: $1.024. 

Date: 11/7/2001; 
Term Repurchase Agreements: $0.933; 
Overnight/Continuing Repurchase Agreements: $1.026. 

Date: 12/5/2001; 
Term Repurchase Agreements: $0.961; 
Overnight/Continuing Repurchase Agreements: $1.023. 

Date: 1/2/2002; 
Term Repurchase Agreements: $0.710; 
Overnight/Continuing Repurchase Agreements: $0.967. 

Date: 2/6/2002; 
Term Repurchase Agreements: $0.915; 
Overnight/Continuing Repurchase Agreements: $1.031. 

Date: 3/6/2002; 
Term Repurchase Agreements: $0.858; 
Overnight/Continuing Repurchase Agreements: $1.016. 

Date: 4/3/2002; 
Term Repurchase Agreements: $0.928; 
Overnight/Continuing Repurchase Agreements: $1.015. 

Date: 5/1/2002; 
Term Repurchase Agreements: $1.073; 
Overnight/Continuing Repurchase Agreements: $1.021. 

Date: 6/5/2002; 
Term Repurchase Agreements: $1.038; 
Overnight/Continuing Repurchase Agreements: $1.034. 

Date: 7/3/2002; 
Term Repurchase Agreements: $1.113; 
Overnight/Continuing Repurchase Agreements: $1.004. 

Date: 8/7/2002; 
Term Repurchase Agreements: $1.217; 
Overnight/Continuing Repurchase Agreements: $1.110. 

Date: 9/4/2002; 
Term Repurchase Agreements: $1.128; 
Overnight/Continuing Repurchase Agreements: $1.158. 

Date: 10/2/2002; 
Term Repurchase Agreements: $1.140; 
Overnight/Continuing Repurchase Agreements: $1.143. 

Date: 11/6/2002; 
Term Repurchase Agreements: $1.260; 
Overnight/Continuing Repurchase Agreements: $1.149. 

Date: 12/4/2002; 
Term Repurchase Agreements: $1.219; 
Overnight/Continuing Repurchase Agreements: $1.153. 

Date: 1/1/2003; 
Term Repurchase Agreements: $0.799; 
Overnight/Continuing Repurchase Agreements: $1.122. 

Date: 2/5/2003; 
Term Repurchase Agreements: $1.004; 
Overnight/Continuing Repurchase Agreements: $1.156. 

Date: 3/5/2003; 
Term Repurchase Agreements: $0.935; 
Overnight/Continuing Repurchase Agreements: $1.190. 

Date: 4/2/2003; 
Term Repurchase Agreements: $0.952; 
Overnight/Continuing Repurchase Agreements: $1.182. 

Date: 5/7/2003; 
Term Repurchase Agreements: $1.096; 
Overnight/Continuing Repurchase Agreements: $1.176. 

Date: 6/4/2003; 
Term Repurchase Agreements: $1.128; 
Overnight/Continuing Repurchase Agreements: $1.267. 

Date: 7/2/2003; 
Term Repurchase Agreements: $1.045; 
Overnight/Continuing Repurchase Agreements: $1.264. 

Date: 8/6/2003; 
Term Repurchase Agreements: $1.264; 
Overnight/Continuing Repurchase Agreements: $1.261. 

Date: 9/3/2003; 
Term Repurchase Agreements: $1.100; 
Overnight/Continuing Repurchase Agreements: $1.205. 

Date: 10/1/2003; 
Term Repurchase Agreements: $0.997; 
Overnight/Continuing Repurchase Agreements: $1.253. 

Date: 11/5/2003; 
Term Repurchase Agreements: $1.160; 
Overnight/Continuing Repurchase Agreements: $1.268. 

Date: 12/3/2003; 
Term Repurchase Agreements: $1.200; 
Overnight/Continuing Repurchase Agreements: $1.373. 

Date: 1/7/2004; 
Term Repurchase Agreements: $0.983; 
Overnight/Continuing Repurchase Agreements: $1.381. 

Date: 2/4/2004; 
Term Repurchase Agreements: $1.197; 
Overnight/Continuing Repurchase Agreements: $1.454. 

Date: 3/3/2004; 
Term Repurchase Agreements: $1.180; 
Overnight/Continuing Repurchase Agreements: $1.470. 

Date: 4/7/2004; 
Term Repurchase Agreements: $1.111; 
Overnight/Continuing Repurchase Agreements: $1.427. 

Date: 5/5/2004; 
Term Repurchase Agreements: $1.271; 
Overnight/Continuing Repurchase Agreements: $1.453. 

Date: 6/2/2004; 
Term Repurchase Agreements: $1.394; 
Overnight/Continuing Repurchase Agreements: $1.480. 

Date: 7/7/2004; 
Term Repurchase Agreements: $1.241; 
Overnight/Continuing Repurchase Agreements: $1.518. 

Date: 8/4/2004; 
Term Repurchase Agreements: $1.394; 
Overnight/Continuing Repurchase Agreements: $1.502. 

Date: 9/1/2004; 
Term Repurchase Agreements: $1.378; 
Overnight/Continuing Repurchase Agreements: $1.531. 

Date: 10/6/2004; 
Term Repurchase Agreements: $1.343; 
Overnight/Continuing Repurchase Agreements: $1.579. 

Date: 11/3/2004; 
Term Repurchase Agreements: $1.482; 
Overnight/Continuing Repurchase Agreements: $1.591. 

Date: 12/1/2004; 
Term Repurchase Agreements: $1.388; 
Overnight/Continuing Repurchase Agreements: $1.689. 

Date: 1/5/2005; 
Term Repurchase Agreements: $1.201; 
Overnight/Continuing Repurchase Agreements: $1.616. 

Date: 2/2/2005; 
Term Repurchase Agreements: $1.244; 
Overnight/Continuing Repurchase Agreements: $1.780. 

Date: 3/2/2005; 
Term Repurchase Agreements: $1.336; 
Overnight/Continuing Repurchase Agreements: $1.703. 

Date: 4/6/2005; 
Term Repurchase Agreements: $1.235; 
Overnight/Continuing Repurchase Agreements: $1.725. 

Date: 5/4/2005; 
Term Repurchase Agreements: $1.390; 
Overnight/Continuing Repurchase Agreements: $1.840. 

Date: 6/1/2005; 
Term Repurchase Agreements: $1.420; 
Overnight/Continuing Repurchase Agreements: $1.899. 

Date: 7/6/2005; 
Term Repurchase Agreements: $1.257; 
Overnight/Continuing Repurchase Agreements: $1.860. 

Date: 8/3/2005; 
Term Repurchase Agreements: $1.374; 
Overnight/Continuing Repurchase Agreements: $1.858. 

Date: 9/7/2005; 
Term Repurchase Agreements: $1.497; 
Overnight/Continuing Repurchase Agreements: $1.932. 

Date: 10/5/2005; 
Term Repurchase Agreements: $1.280; 
Overnight/Continuing Repurchase Agreements: $1.919. 

Date: 11/2/2005; 
Term Repurchase Agreements: $1.450; 
Overnight/Continuing Repurchase Agreements: $1.967. 

Date: 12/7/2005; 
Term Repurchase Agreements: $1.619; 
Overnight/Continuing Repurchase Agreements: $2.009. 

Date: 1/4/2006; 
Term Repurchase Agreements: $1.138; 
Overnight/Continuing Repurchase Agreements: $1.959. 

Date: 2/1/2006; 
Term Repurchase Agreements: $1.280; 
Overnight/Continuing Repurchase Agreements: $2.020. 

Date: 3/1/2006; 
Term Repurchase Agreements: $1.315; 
Overnight/Continuing Repurchase Agreements: $2.039. 

Date: 4/5/2006; 
Term Repurchase Agreements: $1.235; 
Overnight/Continuing Repurchase Agreements: $2.030. 

Date: 5/3/2006; 
Term Repurchase Agreements: $1.403; 
Overnight/Continuing Repurchase Agreements: $2.012. 

Date: 6/7/2006; 
Term Repurchase Agreements: $1.421; 
Overnight/Continuing Repurchase Agreements: $2.078. 

Date: 7/5/2006; 
Term Repurchase Agreements: $1.004; 
Overnight/Continuing Repurchase Agreements: $2.097. 

Date: 8/2/2006; 
Term Repurchase Agreements: $1.132; 
Overnight/Continuing Repurchase Agreements: $2.163. 

Date: 9/6/2006; 
Term Repurchase Agreements: $1.075; 
Overnight/Continuing Repurchase Agreements: $2.197. 

Date: 10/4/2006; 
Term Repurchase Agreements: $1.104; 
Overnight/Continuing Repurchase Agreements: $2.194. 

Date: 11/8/2006; 
Term Repurchase Agreements: $1.331; 
Overnight/Continuing Repurchase Agreements: $2.197. 

Date: 12/6/2006; 
Term Repurchase Agreements: $1.172; 
Overnight/Continuing Repurchase Agreements: $2.324. 

Date: 1/3/2007; 
Term Repurchase Agreements: $1.082; 
Overnight/Continuing Repurchase Agreements: $2.210. 

Date: 2/7/2007; 
Term Repurchase Agreements: $1.423; 
Overnight/Continuing Repurchase Agreements: $2.224. 

Date: 3/7/2007; 
Term Repurchase Agreements: $1.367; 
Overnight/Continuing Repurchase Agreements: $2.368. 

Date: 4/4/2007; 
Term Repurchase Agreements: $1.382; 
Overnight/Continuing Repurchase Agreements: $2.308. 

Date: 5/2/2007; 
Term Repurchase Agreements: $1.574; 
Overnight/Continuing Repurchase Agreements: $2.406. 

Date: 6/6/2007; 
Term Repurchase Agreements: $1.475; 
Overnight/Continuing Repurchase Agreements: $2.369. 

Date: 7/4/2007; 
Term Repurchase Agreements: $1.340; 
Overnight/Continuing Repurchase Agreements: $2.345. 

Date: 8/1/2007; 
Term Repurchase Agreements: $1.483; 
Overnight/Continuing Repurchase Agreements: $2.440. 

Date: 9/5/2007; 
Term Repurchase Agreements: $1.300; 
Overnight/Continuing Repurchase Agreements: $2.555. 

Date: 10/3/2007; 
Term Repurchase Agreements: $1.299; 
Overnight/Continuing Repurchase Agreements: $2.563. 

Date: 11/7/2007; 
Term Repurchase Agreements: $1.565; 
Overnight/Continuing Repurchase Agreements: $2.618. 

Date: 12/5/2007; 
Term Repurchase Agreements: $1.458; 
Overnight/Continuing Repurchase Agreements: $2.701. 

Date: 1/2/2008; 
Term Repurchase Agreements: $1.156; 
Overnight/Continuing Repurchase Agreements: $2.544. 

Date: 2/6/2008; 
Term Repurchase Agreements: $1.374; 
Overnight/Continuing Repurchase Agreements: $2.873. 

Date: 3/5/2008; 
Term Repurchase Agreements: $1.530; 
Overnight/Continuing Repurchase Agreements: $2.972. 

Date: 4/2/2008; 
Term Repurchase Agreements: $1.178; 
Overnight/Continuing Repurchase Agreements: $2.781. 

Date: 5/7/2008; 
Term Repurchase Agreements: $1.434; 
Overnight/Continuing Repurchase Agreements: $2.758. 

Date: 6/4/2008; 
Term Repurchase Agreements: $1.490; 
Overnight/Continuing Repurchase Agreements: $2.864. 

Date: 7/2/2008; 
Term Repurchase Agreements: $1.199; 
Overnight/Continuing Repurchase Agreements: $2.560. 

Date: 8/6/2008; 
Term Repurchase Agreements: $1.293; 
Overnight/Continuing Repurchase Agreements: $2.732. 

Date: 9/3/2008; 
Term Repurchase Agreements: $1.295; 
Overnight/Continuing Repurchase Agreements: $2.708. 

Date: 10/1/2008; 
Term Repurchase Agreements: $0.999; 
Overnight/Continuing Repurchase Agreements: $2.598. 

Date: 11/5/2008; 
Term Repurchase Agreements: $0.936; 
Overnight/Continuing Repurchase Agreements: $2.418. 

Date: 12/3/2008; 
Term Repurchase Agreements: $0.846; 
Overnight/Continuing Repurchase Agreements: $2.331. 

Date: 1/7/2009; 
Term Repurchase Agreements: $0.580; 
Overnight/Continuing Repurchase Agreements: $2.006. 

Date: 2/4/2009; 
Term Repurchase Agreements: $0.635; 
Overnight/Continuing Repurchase Agreements: $2.185. 

Date: 3/4/2009; 
Term Repurchase Agreements: $0.685; 
Overnight/Continuing Repurchase Agreements: $2.132. 

Date: 4/1/2009; 
Term Repurchase Agreements: $0.534; 
Overnight/Continuing Repurchase Agreements: $1.930. 

Date: 5/6/2009; 
Term Repurchase Agreements: $0.738; 
Overnight/Continuing Repurchase Agreements: $1.847. 

Date: 6/3/2009; 
Term Repurchase Agreements: $0.778; 
Overnight/Continuing Repurchase Agreements: $1.821. 

Date: 7/1/2009; 
Term Repurchase Agreements: $0.650; 
Overnight/Continuing Repurchase Agreements: $1.661. 

Date: 8/5/2009; 
Term Repurchase Agreements: $0.743; 
Overnight/Continuing Repurchase Agreements: $1.766. 

Date: 9/2/2009; 
Term Repurchase Agreements: $0.690; 
Overnight/Continuing Repurchase Agreements: $1.842. 

Date: 10/7/2009; 
Term Repurchase Agreements: $0.714; 
Overnight/Continuing Repurchase Agreements: $1.701. 

Date: 11/4/2009; 
Term Repurchase Agreements: $0.766; 
Overnight/Continuing Repurchase Agreements: $1.641. 

Date: 12/2/2009; 
Term Repurchase Agreements: $0.784; 
Overnight/Continuing Repurchase Agreements: $1.695. 

Date: 1/6/2010; 
Term Repurchase Agreements: $0.729; 
Overnight/Continuing Repurchase Agreements: $1.536. 

Date: 2/3/2010; 
Term Repurchase Agreements: $0.748; 
Overnight/Continuing Repurchase Agreements: $1.693. 

Date: 3/3/2010; 
Term Repurchase Agreements: $0.829; 
Overnight/Continuing Repurchase Agreements: $1.738. 

Date: 4/7/2010; 
Term Repurchase Agreements: $0.789; 
Overnight/Continuing Repurchase Agreements: $1.705. 

Date: 5/5/2010; 
Term Repurchase Agreements: $0.831; 
Overnight/Continuing Repurchase Agreements: $1.728. 

Date: 6/2/2010; 
Term Repurchase Agreements: $0.883; 
Overnight/Continuing Repurchase Agreements: $1.777. 

Date: 7/7/2010; 
Term Repurchase Agreements: $0.742; 
Overnight/Continuing Repurchase Agreements: $1.776. 

Date: 8/4/2010; 
Term Repurchase Agreements: $0.809; 
Overnight/Continuing Repurchase Agreements: $1.819. 

Date: 9/1/2010; 
Term Repurchase Agreements: $0.871; 
Overnight/Continuing Repurchase Agreements: $1.911. 

Date: 10/6/2010; 
Term Repurchase Agreements: $0.886; 
Overnight/Continuing Repurchase Agreements: $1.838. 

Date: 11/3/2010; 
Term Repurchase Agreements: $0.902; 
Overnight/Continuing Repurchase Agreements: $1.934. 

Date: 12/1/2010; 
Term Repurchase Agreements: $0.917; 
Overnight/Continuing Repurchase Agreements: $1.923. 

Date: 1/5/2011; 
Term Repurchase Agreements: $0.782; 
Overnight/Continuing Repurchase Agreements: $1.705. 

Date: 2/2/2011; 
Term Repurchase Agreements: $0.812; 
Overnight/Continuing Repurchase Agreements: $1.842. 

Date: 3/2/2011; 
Term Repurchase Agreements: $0.845; 
Overnight/Continuing Repurchase Agreements: $1.931. 

Date: 4/6/2011; 
Term Repurchase Agreements: $0.744; 
Overnight/Continuing Repurchase Agreements: $1.810. 

Date: 5/4/2011; 
Term Repurchase Agreements: $0.799; 
Overnight/Continuing Repurchase Agreements: $1.882. 

Date: 6/1/2011; 
Term Repurchase Agreements: $0.831; 
Overnight/Continuing Repurchase Agreements: $2.005. 

Date: 7/6/2011; 
Term Repurchase Agreements: $0.793; 
Overnight/Continuing Repurchase Agreements: $1.790. 

Date: 8/3/2011; 
Term Repurchase Agreements: $0.823; 
Overnight/Continuing Repurchase Agreements: $1.937. 

Date: 9/7/2011; 
Term Repurchase Agreements: $0.939; 
Overnight/Continuing Repurchase Agreements: $1.987. 

Date: 10/5/2011; 
Term Repurchase Agreements: $0.881; 
Overnight/Continuing Repurchase Agreements: $1.837. 

Date: 11/2/2011; 
Term Repurchase Agreements: $0.962; 
Overnight/Continuing Repurchase Agreements: $1.834. 

Date: 12/7/2011; 
Term Repurchase Agreements: $1.054; 
Overnight/Continuing Repurchase Agreements: $1.750. 

Date: 1/4/2012; 
Term Repurchase Agreements: $0.792; 
Overnight/Continuing Repurchase Agreements: $1.715. 

Date: 2/1/2012; 
Term Repurchase Agreements: $0.840; 
Overnight/Continuing Repurchase Agreements: $1.814. 

Date: 3/7/2012; 
Term Repurchase Agreements: $0.969; 
Overnight/Continuing Repurchase Agreements: $1.859. 

Date: 4/4/2012; 
Term Repurchase Agreements: $0.839; 
Overnight/Continuing Repurchase Agreements: $1.792. 

Date: 5/2/2012; 
Term Repurchase Agreements: $0.879; 
Overnight/Continuing Repurchase Agreements: $1.846. 

Date: 6/6/2012; 
Term Repurchase Agreements: $0.941; 
Overnight/Continuing Repurchase Agreements: $1.854. 

Date: 7/4/2012; 
Term Repurchase Agreements: $0.887; 
Overnight/Continuing Repurchase Agreements: $1.713. 

Date: 8/1/2012; 
Term Repurchase Agreements: $0.852; 
Overnight/Continuing Repurchase Agreements: $1.828. 

Date: 9/5/2012; 
Term Repurchase Agreements: $0.883; 
Overnight/Continuing Repurchase Agreements: $1.848. 

Date: 10/3/2012; 
Term Repurchase Agreements: $0.874; 
Overnight/Continuing Repurchase Agreements: $1.796. 

Date: 11/7/2012; 
Term Repurchase Agreements: $0.947; 
Overnight/Continuing Repurchase Agreements: $1.820. 

Date: 12/5/2012; 
Term Repurchase Agreements: $0.973; 
Overnight/Continuing Repurchase Agreements: $1.895. 

Over-the-Counter Derivatives Market: 

Dollars in trillions: 

Date: 2000: Q2; 
FX Contracts: $15.49; 
Interest Rate Contracts: $64.12; 
Equity-linked Contracts: $1.65; 
Commodity Contracts: $0.58; 
Unallocated: $12.16. 

Date: 2000: Q4; 
FX Contracts: $15.67; 
Interest Rate Contracts: $64.67; 
Equity-linked Contracts: $1.89; 
Commodity Contracts: $0.66; 
Unallocated: $12.31. 

Date: 2001: Q2; 
FX Contracts: $16.91; 
Interest Rate Contracts: $67.47; 
Equity-linked Contracts: $1.88; 
Commodity Contracts: $0.59; 
Unallocated: $12.91. 

Date: 2001: Q4; 
FX Contracts: $16.75; 
Interest Rate Contracts: $77.57; 
Equity-linked Contracts: $1.88; 
Commodity Contracts: $0.60; 
Unallocated: $14.38. 

Date: 2002: Q2; 
FX Contracts: $18.07; 
Interest Rate Contracts: $89.95; 
Equity-linked Contracts: $2.21; 
Commodity Contracts: $0.78; 
Unallocated: $16.50. 

Date: 2002: Q4; 
FX Contracts: $18.45; 
Interest Rate Contracts: $101.66; 
Equity-linked Contracts: $2.31; 
Commodity Contracts: $0.92; 
Unallocated: $18.33. 

Date: 2003: Q2; 
FX Contracts: $22.07; 
Interest Rate Contracts: $121.80; 
Equity-linked Contracts: $2.80; 
Commodity Contracts: $1.04; 
Unallocated: $21.95. 

Date: 2003: Q4; 
FX Contracts: $24.48; 
Interest Rate Contracts: $141.99; 
Equity-linked Contracts: $3.79; 
Commodity Contracts: $1.41; 
Unallocated: $25.51. 

Date: 2004: Q2; 
FX Contracts: $27.00; 
Interest Rate Contracts: $164.63; 
Equity-linked Contracts: $4.52; 
Commodity Contracts: $1.27; 
Unallocated: $22.64. 

Date: 2004: Q4; 
FX Contracts: $29.29; 
Interest Rate Contracts: $190.50; 
Equity-linked Contracts: $4.38; 
Commodity Contracts: $1.44; 
Credit Default Swaps: $6.40; 
Unallocated: $26.61. 

Date: 2005: Q2; 
FX Contracts: $31.08; 
Interest Rate Contracts: $204.80; 
Equity-linked Contracts: $4.55; 
Commodity Contracts: $2.94; 
Credit Default Swaps: $10.21; 
Unallocated: $29.09. 

Date: 2005: Q4; 
FX Contracts: $31.36; 
Interest Rate Contracts: $211.97; 
Equity-linked Contracts: $5.79; 
Commodity Contracts: $5.43; 
Credit Default Swaps: $13.91; 
Unallocated: $30.79. 

Date: 2006: Q2; 
FX Contracts: $38.13; 
Interest Rate Contracts: $262.53; 
Equity-linked Contracts: $6.78; 
Commodity Contracts: $6.39; 
Credit Default Swaps: $20.35; 
Unallocated: $38.33. 

Date: 2006: Q4; 
FX Contracts: $40.27; 
Interest Rate Contracts: $291.58; 
Equity-linked Contracts: $7.49; 
Commodity Contracts: $7.12; 
Credit Default Swaps: $28.65; 
Unallocated: $43.03. 

Date: 2007: Q2; 
FX Contracts: $48.65; 
Interest Rate Contracts: $347.31; 
Equity-linked Contracts: $8.59; 
Commodity Contracts: $7.57; 
Credit Default Swaps: $42.58; 
Unallocated: $53.21. 

Date: 2007: Q4; 
FX Contracts: $56.24; 
Interest Rate Contracts: $393.14; 
Equity-linked Contracts: $8.47; 
Commodity Contracts: $8.46; 
Credit Default Swaps: $58.24; 
Unallocated: $61.39. 

Date: 2008: Q2; 
FX Contracts: $62.98; 
Interest Rate Contracts: $458.30; 
Equity-linked Contracts: $10.18; 
Commodity Contracts: $13.23; 
Credit Default Swaps: $57.40; 
Unallocated: $70.46. 

Date: 2008: Q4; 
FX Contracts: $50.04; 
Interest Rate Contracts: $432.66; 
Equity-linked Contracts: $6.47; 
Commodity Contracts: $4.43; 
Credit Default Swaps: $41.88; 
Unallocated: $62.67. 

Date: 2009: Q2; 
FX Contracts: $48.73; 
Interest Rate Contracts: $437.23; 
Equity-linked Contracts: $6.58; 
Commodity Contracts: $3.62; 
Credit Default Swaps: $36.10; 
Unallocated: $62.29. 

Date: 2009: Q4; 
FX Contracts: $49.18; 
Interest Rate Contracts: $449.87; 
Equity-linked Contracts: $5.94; 
Commodity Contracts: $2.94; 
Credit Default Swaps: $32.69; 
Unallocated: $63.27. 

Date: 2010: Q2; 
FX Contracts: $53.15; 
Interest Rate Contracts: $451.83; 
Equity-linked Contracts: $6.26; 
Commodity Contracts: $2.85; 
Credit Default Swaps: $30.26; 
Unallocated: $38.33. 

Date: 2010: Q4; 
FX Contracts: $57.80; 
Interest Rate Contracts: $465.26; 
Equity-linked Contracts: $5.63; 
Commodity Contracts: $2.92; 
Credit Default Swaps: $29.90; 
Unallocated: $39.54. 

Date: 2011: Q2; 
FX Contracts: $64.70; 
Interest Rate Contracts: $553.24; 
Equity-linked Contracts: $6.84; 
Commodity Contracts: $3.20; 
Credit Default Swaps: $32.41; 
Unallocated: $46.50. 

Date: 2011: Q4; 
FX Contracts: $63.35; 
Interest Rate Contracts: $504.12; 
Equity-linked Contracts: $5.98; 
Commodity Contracts: $3.09; 
Credit Default Swaps: $28.63; 
Unallocated: $42.61. 

Date: 2012: Q2; 
FX Contracts: $66.65; 
Interest Rate Contracts: $494.02; 
Equity-linked Contracts: $6.31; 
Commodity Contracts: $2.99; 
Credit Default Swaps: $26.93; 
Unallocated: $42.03. 

Date: 2012: Q4; 
FX Contracts: $67.36; 
Interest Rate Contracts: $489.70; 
Equity-linked Contracts: $6.25; 
Commodity Contracts: $2.59; 
Credit Default Swaps: $25.07; 
Unallocated: $41.61. 

Source: FSOC 2013 Annual Report, Bank for International Settlements 
(right chart). 

[End of figure] 

Several of the roundtable experts thought that if downsizing these 
markets was a goal, it should be done directly through regulations 
rather than through changes in the Code. For example, the experts 
noted that derivatives markets have been undergoing vast change as a 
result of requirements in the Dodd-Frank Act (such as requiring 
certain contracts to be tracked more effectively and traded on 
exchanges). However, another expert noted that it would be good if the 
Code were consistent with regulatory goals. Limiting the safe harbors 
would reduce the availability of short-term funding for financial 
companies. Short-term funding for financial companies creates 
flexibility, but, at the same time, it sets the stage for potential 
runs on firms. 

Experts Held Varying Views on Proposal Impacts Relative to Orderliness 
and Effectiveness: 

As figure 3 shows, there was little consensus in written responses 
provided by our roundtable experts on how, if at all, changes in QFC 
treatment under the Code would affect the orderliness and 
effectiveness of financial company bankruptcies (see app. II for more 
detailed information on the proposals).[Footnote 48] However, most of 
our roundtable experts responded that removing all of the safe harbors 
would detract from orderliness and effectiveness and none of them 
responded that this would greatly enhance orderliness and 
effectiveness. For the other proposals, the experts were split fairly 
evenly in their written responses between those who thought the 
proposal would enhance the orderliness and effectiveness and those who 
thought it would detract from orderliness and effectiveness. Many of 
the experts who thought allowing trustees to "avoid" contracts would 
detract from orderly and effective bankruptcies chose "greatly 
detract." Generally, those experts representing industry interests 
noted that the proposals would detract from orderliness and 
effectiveness, and those in favor of adopting certain proposals 
thought that industry opposition would be difficult to overcome. 

Figure 3: Expert's Evaluation of How QFC Proposals Would Affect 
Orderliness and Effectiveness of Financial Company Bankruptcies, 2013: 

[Refer to PDF for image: horizontal bar graph] 

Proposal 1: Make all QFCs subject to the automatic stay; 
Number responding: 
Greatly enhance orderliness and effectiveness: 0; 
Moderately enhance orderliness and effectiveness: 2; 
No change in orderliness and effectiveness: 1; 
Moderately detract from orderliness and effectiveness: 2; 
Greatly detract from orderliness and effectiveness: 9. 

Proposal 2: Make some QFCs subject to the automatic stay; 
Number responding: 
Greatly enhance orderliness and effectiveness: 5; 
Moderately enhance orderliness and effectiveness: 1; 
No change in orderliness and effectiveness: 0; 
Moderately detract from orderliness and effectiveness: 4; 
Greatly detract from orderliness and effectiveness: 3. 

Proposal 3: Make QFCs subject to a temporary stay; 
Number responding; 
Greatly enhance orderliness and effectiveness: 5; 
Moderately enhance orderliness and effectiveness: 2; 
No change in orderliness and effectiveness: 0; 
Moderately detract from orderliness and effectiveness: 4; 
Greatly detract from orderliness and effectiveness: 3. 

Proposal 4: Allow trustees to “avoid” contracts[A]; 
Number responding; 
Greatly enhance orderliness and effectiveness: 1; 
Moderately enhance orderliness and effectiveness: 4; 
No change in orderliness and effectiveness: 0; 
Moderately detract from orderliness and effectiveness: 2; 
Greatly detract from orderliness and effectiveness: 7. 

Source: GAO. 

[A] Trustees' generally can "avoid" contracts entered into in the 90 
days prior to a bankruptcy if they are determined to be preferential; 
up to 2 years prior to a bankruptcy if they are determined to be 
fraudulent. 

[End of figure] 

Experts at the roundtable noted that even if there was high-level 
agreement on what changes to the Code were needed, legal experts might 
disagree on the precise details. For example, with regard to the safe-
harbor exemptions from avoidance actions--trustees' ability to "avoid" 
transfers entered into in the 90 days prior to a bankruptcy if they 
are determined to be preferential or up to 2 years prior to a 
bankruptcy if they are determined to be fraudulent--some legal experts 
at the second roundtable said that the courts were giving preferential 
treatment to contracts that in principle should not be receiving it. 
Specifically, they said that the courts were interpreting section 
546(e) of the Code in a way that allows contracts that otherwise might 
be considered preferential or fraudulent to remain in force.[Footnote 
49] As a result, they noted that changes to the Code might be made to 
tighten that section. For example, a roundtable expert said that 
section 546(e) of the Code should be changed so that fictional 
transactions, such as Ponzi scheme payments, would not receive such 
treatment.[Footnote 50] Another legal expert cited a number of cases 
in which contracts entered into within 90 days prior to the bankruptcy 
filing, which would be considered preferential without the safe-harbor 
exemption, were being given safe-harbor treatment. For example, in the 
bankruptcy case of communications company Quebecor, insurance 
companies that held private placement notes that qualified for safe-
harbor treatment had received 105 cents on the dollar while other 
unsecured creditors received a fraction of a dollar.[Footnote 51] The 
expert and others said that it might be useful to allow a judge to 
make decisions relative to some contracts. However, one expert at the 
roundtable noted that this could be a very long, complex process. In 
addition, allowing the judge to decide which contracts would get safe-
harbor treatment when counterparties defaulted would increase the 
uncertainty attached to those contracts. 

Our roundtable experts also varied in their evaluations of the 
proposals relative to some of the specific criteria we had identified 
for orderliness and effectiveness such as limiting systemic risk, 
avoiding fire sales, maximizing value, and preserving due process. 

Limiting Systemic Risk and Avoiding Fire Sales: 

When explicitly asked, some experts responded that limiting the safe 
harbors would increase systemic risk, while others responded that 
limiting them would reduce it. Such a dichotomy could result from 
differences in the way the experts viewed markets.[Footnote 52] Having 
the safe harbors likely increases dependence on short-term funding and 
thus increases the chance for a run if questions arise about a 
company's financial soundness. In addition, needing to sell off assets 
because of a lack of funding could lead to a spiral of falling asset 
prices. However, safe harbors are also thought to limit systemic 
effects before and during a bankruptcy. According to an expert at the 
second roundtable, if counterparties are certain about the safe-harbor 
treatment of their contracts, such treatment may limit runs prior to 
bankruptcy because counterparties know they will be able to terminate 
or liquidate their positions in case of default. In addition, the safe 
harbors primarily exist to limit market turmoil during a bankruptcy--
that is, they are to prevent the insolvency of one firm from spreading 
to other firms and possibly threatening the collapse of an affected 
market. Although FSOC has reported on threats to financial stability 
from derivative and repurchase agreement markets, as with proposals to 
change regulators' roles under the Code, they have not considered the 
implications of potential changes to the safe-harbor treatment of 
these contracts during bankruptcy. 

The roundtable experts made a number of specific points relative to 
the impact of QFC treatment on systemic risk and fire sales of assets. 
One expert at the second roundtable noted that during the early days 
of the Lehman Bankruptcy, he thought that the QFC terminations would 
lead to a systemic event in derivatives markets, but that did not 
happen. The expert questioned whether the lack of a systemic event 
reflected Lehman's small share of the market--5 percent--or the safe-
harbor protection. In contrast, the commercial paper market did 
experience a systemic event--becoming illiquid after the Lehman 
bankruptcy. However, another participant noted that it was not the 
claims process in a bankruptcy that caused systemic risk; it was the 
uncertainty, the effect on counterparties, and market reactions. 
Roundtable participants also discussed the likelihood that safe-harbor 
treatment or bankruptcy in general could create asset fire sales. One 
expert noted that fire sales were more likely to occur in the period 
leading up to bankruptcy rather than after the bankruptcy was filed. 
Another industry expert noted that some unpublished research suggests 
that fire sales of Lehman's assets that might have resulted from the 
treatment of QFCs did not take place following the bankruptcy filing. 
Instead, counterparties terminated only those contracts that had 
maintained their value. 

Maximizing Value: 

Roundtable experts noted that conflicts might arise depending on 
whether the goal of a bankruptcy proceeding was to maximize value for 
the economy, for the debtors, or for the creditors. One legal expert 
noted that in a time of financial crisis, balancing market 
expectations and needs against the needs of an individual company was 
difficult. Debtors usually are expected to fare best when companies 
can be reorganized under Chapter 11. Under Chapter 11, the purpose of 
the automatic stay is to preserve the value of companies while debtors 
consider their options. However, one roundtable expert noted that with 
the rapid dissolution of value for a financial company as a result of 
the safe harbors, liquidation is a more likely outcome than 
reorganization. Another expert noted that even if QFCs were stayed, 
value could dissipate quickly in financial company bankruptcies 
because that value rests on the confidence of the debtors' 
counterparties. In addition, one expert raised concern about the 
impact of the safe harbors on the remaining value for creditors after 
QFC positions were terminated. In a bankruptcy, creditors compete with 
counterparties to derivative contracts and repurchase agreements for a 
firm's assets. Allowing the QFCs to be terminated while other debts 
are stayed means there are fewer assets available for those creditors. 
However, since creditors know that they are less well protected in 
bankruptcy, they should command a higher price for the risk they are 
taking when they provide credit. So, determining whether creditors are 
being disadvantaged overall is difficult. 

Roundtable participants also discussed whether a temporary stay for 
QFCs would enhance the value of a financial company; however, as noted 
earlier, they were split on whether this would contribute or detract 
from the overall orderliness and effectiveness of financial company 
bankruptcies. For example, while several experts said that a temporary 
stay might facilitate a sale of a company's derivatives to a third 
party, the sale would increase concentration in the market and 
ultimately contribute to greater overall systemic risk. Other experts 
agreed that a temporary stay would be useful only to the extent that 
an exit strategy, such as selling to a third-party buyer, was 
available or a bridge company--which is a temporary company used to 
maintain the failed company's operations--could be constructed. These 
experts cited the case of General Motors as an example of what they 
were suggesting. However, the newly formed company in the case of 
General Motors was not temporary. In contrast, one expert presented a 
hypothetical example that did not involve a sale of the whole entity 
to a third party or the construction of a bridge company. In this 
example the judge would have from a 10 to 12 day stay, which might 
allow the judge to dispose of pieces of the company, leaving a small 
enough entity that its assets could be liquidated through normal 
bankruptcy proceedings. However, other experts noted that it might be 
difficult to determine what the appropriate number of days for a 
temporary stay might be. 

Maintaining Due Process and Providing Certainty: 

Several of the experts at our roundtables questioned whether 
bankruptcy reforms designed to deal with systemically important 
financial companies would adequately protect due process given the 
need to move quickly in such a bankruptcy. They suggested that due 
process might be compromised or would depend on the ability of 
counterparties and creditors to take action after regulators or courts 
make decisions (as is the case with OLA). For example, if preferences 
were given to some counterparties or creditors during a temporary 
stay, other counterparties or creditors would have the right to take 
action to recover value or "claw back" value later in the process, as 
opposed to having a judge consider the views of all of the parties 
prior to making any decisions. 

Roundtable experts noted that some changes to the Code relative to the 
treatment of QFCs could create uncertainty in the process. 
Specifically, counterparties need certainty about bankruptcy treatment 
when they enter a contract. To provide that certainty, several experts 
agreed that changes should be detailed in the terms of the contract 
rather than determined at the time of the bankruptcy. However, one of 
the experts noted that even with provisions specified in the Code, 
counterparties might still be uncertain for some time about how 
certain contracts would be treated. Although the Code had been amended 
in 2005 to extend safe-harbor treatments to more types of repurchase 
agreements, that expert said that uncertainty as to how the courts 
would treat repurchase agreements contributed to the Lehman Brothers 
bankruptcy. Leading up to the bankruptcy, counterparties were 
unwilling to extend new short-term funding because of the uncertainty--
essentially precipitating a run on the firm. 

Our roundtable experts noted other issues that would arise relative to 
making any changes in the Code, such as whether contracts that already 
existed would be processed under the Code at that time or under the 
new Code. One expert said that contracts should be grandfathered, 
while another pointed out that the grandfathered contracts might be 
around for another 30 years, creating other difficulties. While it is 
difficult to assess how many contracts would be long term, key 
contracts are thought to be used for overnight funding. When the 2005 
changes were made to expand the contracts receiving safe-harbor 
treatment, the new treatment applied to all contracts, including those 
that had been entered into prior to that time. Some roundtable experts 
further suggested that not knowing which judge will have a case and 
how that judge will make decisions can introduce additional 
uncertainty into the treatment of certain contracts. 

Not knowing whether a qualified financial contract would be subject to 
the Code or OLA creates further uncertainty about how a contract will 
be treated. Under the latter, FDIC becomes the receiver of the company 
and QFCs are stayed for 1 business day. During that day, FDIC has an 
opportunity to transfer a company's derivatives to a third-party or 
bridge company. Under OLA, FDIC can choose to transfer contracts with 
one company to the bridge company while choosing not to transfer those 
with another company. However, if FDIC chooses to transfer a contract 
with a specific company, it would have to transfer all of the 
contracts with that company.[Footnote 53] There was some presumption 
among roundtable participants that very large systemically important 
institutions would be resolved under OLA rather than through 
bankruptcy. However, FDIC officials testified before the Subcommittee 
on Oversight and Investigations of the House Committee on Financial 
Services in April 2013 that under the Dodd-Frank Act, bankruptcy is 
the preferred resolution framework in the event of a failure of a 
systemically important financial company.[Footnote 54] 

Experts Noted That Lessons Learned from Lehman Bankruptcy Are Still 
Unclear: 

Experts at our roundtable said that the lessons learned from the 
Lehman bankruptcy that might be applied in considering changes to the 
safe harbors are still unclear. Early reports and statements about the 
LBHI bankruptcy said that in the first 5 weeks after LBHI filed for 
bankruptcy, approximately 80 percent of its derivatives counterparties 
terminated contracts that were not subject to the automatic stay. 
[Footnote 55] However, some of the initial counterparty claims have 
been found to have been overstated. Two experts at our second 
roundtable specifically noted that the large initial loss in value 
was, in part, the result of LBHI counterparties' initially overstating 
their claims against LBHI, and subsequently some of these claims have 
been overturned in adversary proceedings. For example, Swedbank AB, a 
Swedish bank, that was a creditor of LBHI, sought to offset Lehman's 
payment obligations under prepetition swaps with deposits Lehman had 
made at Swedbank after filing for bankruptcy. The Bankruptcy Court of 
the Southern District of New York ruled against Swedbank, holding that 
the post petition deposits could not be used to offset prepetition 
swaps.[Footnote 56] In another proceeding involving the Lehman 
bankruptcy, a lender, Bank of America, seized the debtor's account 
funds, which were unrelated to any safe-harbor transaction, to set off 
certain contracts that could receive safe-harbor treatment. The court 
ruled that the bank's use of the funds to set off the transactions 
violated the automatic stay.[Footnote 57] Further, some experts no 
longer supported proposals they had originally made in response to 
Lehman's early perceived losses. 

As a result, experts continue to weigh whether changes to the 
treatment of derivatives and repurchase agreements under the Code are 
needed. The Hoover Institution resolution project group continues to 
discuss their proposals and plans to issue additional publications on 
their Chapter 14 proposals. The American Bankruptcy Institute has a 
Commission to Study the Reform of Chapter 11 and has appointed 
advisory committees to consider various aspects, including the 
treatment of QFCs. Its work is expected to continue for some time. 
Throughout the roundtable discussion, the participants noted that 
changes to the Code should not be made without considering ongoing 
changes in the broader legal and regulatory environment for 
derivatives. Specifically, they noted that the Dodd-Frank Act calls 
for a number of significant changes in the regulation of derivatives 
that are still being implemented, and the industry is looking at 
potential changes to derivatives contracts. Finally, experts noted the 
need to make changes consistently across international borders, 
especially in the United States and United Kingdom. During the Lehman 
Brothers bankruptcy, differences in the treatment of various contracts 
caused courts in the United States and United Kingdom to rule in 
opposing ways on the same contracts. 

Conclusions: 

The financial crisis and the failures of some large financial 
companies raised questions about the adequacy of the Code for 
effectively reorganizing or liquidating these companies without 
causing further harm to the financial system. Although the Dodd-Frank 
Act created OLA, an alternative resolution process, filing for 
bankruptcy under the Code remains the preferred resolution mechanism 
even for systemically important financial companies. Some proposals to 
modify the Code recognize that currently the Code may not adequately 
address threats to financial stability. Some proposals--changing the 
role of regulators in the bankruptcy process, creating funding 
mechanisms, and limiting the safe-harbor treatment of qualified 
financial contracts--may address this potential shortcoming. However, 
experts are not ready to recommend specific changes to the Code and 
the proposals require further consideration. FSOC--which was 
established under the Dodd-Frank Act to identify and respond to 
threats to financial stability--has not specifically considered 
changes to the role of regulators in bankruptcy or the treatment of 
QFCs. Although the Dodd-Frank Act does not explicitly require FSOC to 
assess changes to the Code, it is well positioned to take a broad view 
of potential changes within the context of other regulatory and market 
changes prescribed by the act. It is also well positioned to decide 
the appropriate level of attention such changes merit. Such attention 
to the systemic implications of financial company bankruptcies could 
improve FSOC's ability to take timely and effective action to identify 
and respond to threats to U.S. financial stability. 

Recommendations for Executive Action: 

To fulfill FSOC's role under the Dodd-Frank Act to identify and 
respond to threats to financial stability, we recommend that the 
Secretary of the Treasury, as Chairperson of FSOC, in consultation 
with other FSOC members, consider the implications for U.S. financial 
stability of changing the role of regulators and narrowing the safe 
harbor treatment of qualified financial contracts in financial company 
bankruptcies. 

Agency Comments: 

We provided a draft of this report to AOUSC, CFTC, FDIC, the Federal 
Reserve, NAIC, the Departments of the Treasury and Justice, and SEC, 
for review and comment. CFTC, FDIC, NAIC, and SEC provided technical 
comments, which we have incorporated as appropriate. AOUSC, the 
Federal Reserve, and Department of Justice did not provide comments. 
Treasury's Under Secretary for Domestic Finance, on behalf of the 
Chairperson of FSOC, provided written comments, which are reprinted in 
appendix IV. 

In commenting on our draft report, FSOC said that it shares our 
concern that a disorderly financial company bankruptcy could pose 
risks to financial stability. However, FSOC stated that it would be 
premature for FSOC to prioritize the consideration of proposals to 
amend the Code until the Dodd-Frank Act is fully implemented or there 
is evidence of risks that cannot be adequately addressed within 
existing law. FSOC added that the Federal Reserve Board and FDIC are 
currently implementing provisions of the Dodd-Frank Act requiring 
designated financial companies to submit resolution plans ("living 
wills") to facilitate their orderly resolution under the Code. FSOC 
also noted that it is facilitating communication and coordination on 
the implementation of OLA and living will requirements. FSOC noted 
further that the council is engaged in a variety of other actions to 
address risks to financial stability posed by the failure of one or 
more financial companies such as the designation of nonbank financial 
companies. 

We acknowledge FSOC's efforts to implement the Dodd-Frank Act and the 
actions they have taken to address risks to financial stability, 
including some actions related to implementing OLA. However, rather 
than considering changes to the Code after the Dodd-Frank Act is fully 
implemented, our recommendation is intended to encourage FSOC to 
actively address such changes in conjunction with these efforts--
particularly as some suggested changes would affect regulators' and 
ultimately FSOC's ability to respond to the failure of a large complex 
institution. First, changing the role of regulators in a financial 
company bankruptcy could be critical for effective resolution. For 
example, the point at which regulators become aware of an impending or 
actual financial company bankruptcy could be critical to determining 
whether its living will could be used to improve the orderliness and 
effectiveness of the bankruptcy. Similarly, timing could be critical 
in determining whether to use OLA, which is to be used if a bankruptcy 
under the Code were determined to have serious adverse effects on U.S. 
financial stability. Second, narrowing the treatment of QFCs could 
also have implications for limiting systemic risk. As some members of 
the council have stated publicly, bankruptcy remains the preferred 
method for resolving failing financial companies. Given that 
preference and FSOC's charge to identify and respond to risks to U.S. 
financial stability, our recommendation--that FSOC consider the 
implications for U.S. financial stability of changing the role of 
regulators and narrowing safe harbor treatment of QFCs in financial 
company bankruptcies--is consistent with its statutory role and 
responsibilities. 

We are sending copies of this report to the appropriate congressional 
committees, the Director of the Administrative Office of the U.S. 
Courts, Chairman of the Commodity Futures Trading Commission, Attorney 
General, Secretary of the Treasury, Chairman of the Federal Deposit 
Insurance Corporation, Director of the Federal Judicial Center, 
Chairman of the Board of Governors of the Federal Reserve System, 
Chief Executive Officer of the National Association of Insurance 
Commissioners, Chairman of the Securities and Exchange Commission, 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 V. 

Signed by: 

Alicia Puente Cackley: 
Director Financial Markets and Community Investment: 

List of Committees: 

The Honorable Tim Johnson: 
Chairman: 
The Honorable Mike Crapo: 
Ranking Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

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

The Honorable Jeb Hensarling: 
Chairman: 
The Honorable Maxine Waters: 
Ranking Member: 
Committee on Financial Services: 
House of Representatives: 

The Honorable Robert W. Goodlatte: 
Chairman: 
The Honorable John Conyers, Jr.
Ranking Member: 
Committee on the Judiciary: 
House of Representatives: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

Section 202(e) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) mandated that we report on the 
orderliness and efficiency of financial company bankruptcies every 
year for 3 years after passage of the act, in the fifth year, and 
every 5 years thereafter.[Footnote 58] This report, the third in the 
series, examines the advantages and disadvantages of certain proposals 
to modify the Bankruptcy Code (Code) for financial company 
bankruptcies. Specifically this report examines the advantages and 
disadvantages of proposals (1) to change the role of financial 
regulators in the bankruptcy process; (2) affecting the funding of 
financial company bankruptcies; and (3) to change the safe-harbor 
treatment of qualified financial contracts (QFC), including 
derivatives and repurchase agreements. 

To address all of our objectives, we reviewed relevant laws, including 
the Code and the Dodd-Frank Act as well as GAO reports that addressed 
bankruptcy issues and financial institution failures. We specifically 
reviewed the reports we issued during the first 2 years of the mandate 
as well as reports written under the same or similar mandates by the 
Administrative Office of the United States Courts (AOUSC) and the 
Board of Governors of the Federal Reserve System (Federal 
Reserve).[Footnote 59] We also updated our review of published 
economic and legal research on the effectiveness of bankruptcies that 
we had originally completed during the first year of the mandate. For 
the original search we relied on Internet search databases (including 
EconLit and Proquest) to identify studies published or issued after 
2000 up through 2010. We reviewed these articles to further determine 
the extent to which they were relevant to our engagement, that is, 
whether they discussed criteria for effectiveness of the bankruptcy 
process, key features of the bankruptcy process, or proposals for 
improving the bankruptcy process. We augmented this Internet search 
with articles provided by those we interviewed or obtained from 
conferences. In addition, we reviewed a number of prior GAO reports on 
financial institutions and the financial crisis. For this report, we 
replicated the literature search for 2011 and 2012. Further we met 
with officials at the following federal government agencies: AOUSC; 
the Commodity Futures Trading Commission; Federal Deposit Insurance 
Corporation; Department of Justice; Department of the Treasury, 
including officials who support the Financial Stability Oversight 
Council (FSOC); Federal Reserve; and Securities and Exchange 
Commission. In addition we met with officials of the National 
Association of Insurance Commissioners and members of insurance 
departments in Illinois, Iowa, and Texas. 

We relied on our earlier work and the updated literature review to 
establish criteria for orderliness and effectiveness and to develop a 
list of proposals related to the role of regulators in the bankruptcy 
process or the role of government in financing bankruptcies, as well 
as proposals to change the safe-harbor treatment of certain financial 
contracts. In our earlier work, we analyzed the results of the 
literature review and expert interviews to determine criteria for 
orderliness and effectiveness of financial company bankruptcies. These 
criteria are minimizing systemic risk, avoiding fire sales, maximizing 
value; preserving due process, and minimizing taxpayer liability. In 
that work, we also used the literature review to determine the range 
of proposals that had been made to reform the bankruptcy process for 
financial institutions. We categorized some of the proposals into 
groups, such as those that included a role for the regulators or 
modified the treatment of qualified financial contracts, and then 
asked the experts looking at these categories and specific proposals 
to tell us which they considered had merit and should be included for 
further consideration and why. We also updated the literature review 
to determine whether earlier proposals had evolved, proposals had been 
subject to critical review, or additional proposals had been made. As 
we had for our earlier work, we surveyed relevant government agencies 
for information on newer studies they had or were conducting or were 
aware of related to our objectives. 

To obtain expert views on existing proposals and how these proposals 
might be improved, we convened two roundtables to discuss the 
advantages and disadvantages of specific proposals. The roundtables 
were held at the National Academy of Sciences (NAS) and staff at NAS 
assisted with determining who would sit on the roundtables. Generally, 
roundtable members were chosen for their expertise on bankruptcy and 
financial institutions and markets. We also discussed potential 
experts for our roundtables with the relevant government agencies 
listed previously. Specifically, we relied on a list of experts 
compiled for the first report under this mandate. These experts 
represented a wide range of interests including academics, industry 
representatives, judges, and practicing attorneys. The experts had 
made proposals, written extensively on bankruptcies or financial 
institutions, or were recommended by relevant government agencies. In 
addition, relevant government agencies and NAS suggested additional 
potential participants for our roundtables, whom we considered using 
our original criteria and the balance of the experts at the 
roundtables. Final participants for the roundtables were chosen for 
their expertise and to ensure that a number of interested parties were 
included. These included academics, industry representatives, judges, 
practicing attorneys, and regulators. To ensure that participants 
represented a broad range of views and interests and that we fully 
understood those interests, we required that participants complete a 
conflict of interest form. See appendix II for a list of participants 
in each roundtable, as well as background materials and agendas. 

Participants at the first roundtable held on April 1, 2013, discussed 
the role of regulators in the bankruptcy process for financial 
companies and how those bankruptcies might be financed.[Footnote 60] 
The proposals discussed were: 

1. Require the debtor to notify and consult with regulators (primary, 
functional, Financial Stability Oversight Council, foreign, or other) 
in advance of filing for bankruptcy. 

2. Allow regulators (primary, functional, Financial Stability 
Oversight Council, foreign, or other) to commence an involuntary 
bankruptcy in the event that the firm is insolvent or in imminent 
danger of becoming insolvent. 

3. Allow regulators (primary, functional, Financial Stability 
Oversight Council, foreign, or other) of the debtor or its 
subsidiaries to have standing or a right to be heard in the courts to 
raise issues relative to regulation. 

4. Consider the role of regulators (primary, functional, Financial 
Stability Oversight Council, foreign, or other) in determining what 
subsidiaries should be included in a bankruptcy proceeding, the extent 
to which complex firms might be consolidated in bankruptcy, including 
the possibility of revoking the exclusion from bankruptcy for 
insurance companies and the exclusion from Chapter 11 for stock and 
commodities brokers. 

5. Restrict U.S. Treasury and Federal Reserve from participating in 
bankruptcy financing. 

6. Allow the government to provide subordinated debtor-in-possession 
financing to companies with assets greater than $100 million 
(subsidiaries included) with a hearing and the court's approval and 
oversight. 

Similarly, participants in the second roundtable, held on April 10, 
2013, discussed proposals to change the safe-harbor treatment of 
certain financial contracts such as derivatives and repurchase 
agreements.[Footnote 61] The proposals discussed during this 
roundtable were: 

1. Removing all safe harbors for qualified financial contracts. 

2. Partially rolling back safe harbors on specific contracts; such as: 

a. allowing only contracts traded on an exchange to have safe-harbor 
treatment; 

b. limiting collateral sales of repos by counterparties to cash-like 
or highly marketable securities; or: 

c. allowing roll backs with approval of the Financial Stability 
Oversight Council or the courts. 

3. Implementing a temporary stay for all or certain contracts. 

4. Exercising certain "reach back" avoiding powers for qualified 
financial contracts. 

In both cases participants discussed the advantages and disadvantages 
of the proposals relative to our criteria for orderly and effective 
bankruptcies. In addition they discussed impediments to implementing 
proposals and how these impediments could be addressed. The agendas 
for the roundtables are included in appendix II. To meet our 
objectives, we also interviewed some experts that were not able or did 
not choose to participate in the roundtables on their views about the 
proposals. 

We used regulatory data to provide context for some expert statements. 
For expert statements on the growth of large financial institutions 
since the 2007-2009 financial crisis, we used data from the Federal 
Reserve and SEC to provide measures of the growth of global 
systemically important banks from 2007 to 2012. For expert statements 
about the growth of markets for repurchase agreements and derivatives 
related to changes in the Code in 2005, we used data from FSOC's 2013 
Annual Report, which is signed by the principals of 9 federal agencies 
and the independent member with insurance expertise, and the Bank for 
International Settlements to provide measures of the growth of 
repurchase agreements and derivatives from 2000 to 2012. 

We conducted this performance audit from October 2012 to July 2013 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: Experts, Background, and Agendas for Expert Roundtables: 

This appendix includes a list of the experts who participated in our 
roundtables, background information that was provided to the experts 
prior to the roundtables, and the agendas for the roundtables 
discussions. 

Expert Participants: 

Donald Bernstein, Davis Polk & Wardwell: 

Robert Bliss, Wake Forest University: 

Patrick Bolton, Columbia University: 

Josh Cohn, International Swaps and Derivatives Association: 

Christine M. Cumming, Federal Reserve Bank of New York: 

Marcia Goldstein, Weil, Gotshal & Manges: 

Allan Gropper, U.S. Bankruptcy Court, Southern District of New York: 

Randall Guynn, Davis Polk & Wardwell: 

Kevin Kelly, JPMorgan Chase & Co. 

Michael Krimminger, Cleary Gottlieb Steen & Hamilton: 

Christopher LaRosa, Securities Investor Protection Corp. 

Stephen Lubben, Seton Hall University: 

Carter McDowell, Securities Industry and Financial Markets Association: 

Thomas McGowan, Securities and Exchange Commission: 

Knox McIlwain, Cleary Gottlieb Steen & Hamilton: 

James Millstein, Millstein & Co. 

Edward Morrison, University of Chicago: 

James Peck, U.S. Bankruptcy Court, Southern District of New York: 

Mark Roe, Harvard University: 

Paul Saltzman, The Clearing House: 

Kenneth Scott, Stanford University: 

Bruce Tuckman, New York University: 

David Wall, Federal Deposit Insurance Corp. 

Mary Walrath, U.S. Bankruptcy Court, District of Delaware: 

Robert Wasserman, Commodity Futures Trading Commission: 

Background Information-Roundtable 1: 

National Academies/Government Accountability Office Roundtable on
Role of Regulators and the Treasury in Financial Company Bankruptcies: 
Information for Participants: 

Introduction: 

This roundtable will inform potential findings for the U.S. Government 
Accountability Office’s (GAO) ongoing work on the effectiveness of the 
U.S. Bankruptcy Code (Code) in facilitating the orderly liquidation or 
reorganization of financial companies. Congress mandated this work 
under Section 202(e) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. Among other things, GAO’s first report in response to 
this mandate—Bankruptcy: Complex Financial Institutions and 
International Coordination Pose Challenges (GAO-11-707)—developed 
criteria for orderly and effective bankruptcies and cataloged 
proposals for revising the Code to improve the orderliness and 
effectiveness of financial company bankruptcies. This GAO bankruptcy 
study will focus on the advantages and disadvantages of some proposals 
to change the Code to make bankruptcies of financial companies—-
especially those posing systemic risk-—more orderly and effective. 

Under a standing arrangement between the two institutions, GAO has 
asked the National Academies to host this meeting and help identify 
and invite participants. This roundtable provides a forum for experts 
with different backgrounds and experience to discuss some of the key 
issues concerning possible bankruptcy reforms, including potential 
outcomes, consequences, and tradeoffs. GAO identified these issues 
through literature reviews and interviews with a broad range of 
experts from the financial regulatory and legal communities, academia, 
and the financial services industry. An agenda for the meeting with 
location and time is appended to this document. 

Proposals: 

During the April 1, 2013 Bankruptcy Roundtable, participants will be 
asked to discuss their views and insights on elements of proposals GAO 
identified that focus on changing the role of financial regulators in 
Chapter 11 cases involving financial institutions. Such proposals 
include: 

* requiring the debtor to notify and consult with regulators in 
advance of filing for bankruptcy; 

* allowing regulators to commence an involuntary bankruptcy in the 
event that the firm is insolvent or in imminent danger of becoming 
insolvent; 

* allowing regulators (primary, functional, Financial Stability 
Oversight Council, foreign, or other) of the debtor or its 
subsidiaries to have standing or a right to be heard in the courts to 
raise issues relative to regulation; 

* allowing regulators (primary, functional, Financial Stability 
Oversight Council, foreign, or other) of the debtor or its 
subsidiaries to file plans for reorganization and motions under 
Section 363, such as motions for the use, sale, and lease of property; 
and; 

* considering the role of regulators in determining what subsidiaries 
should be included in a bankruptcy proceeding, the extent to which 
complex firms might be consolidated in bankruptcy, including the 
possibility of revoking the exclusion from bankruptcy for insurance 
companies and the exclusion from Chapter 11 for stock and commodities 
brokers. 

Furthermore, proposals have been made to limit or specify the ability 
of the Treasury or the Federal Reserve to help finance bankruptcies of 
financial institutions. The roundtable will consider the proposals and 
discuss the appropriate role of the government in providing financing 
for firms in bankruptcy. The proposals to be discussed are: 

* bills introduced in the 111th Congress that specifically would 
forbid the U.S. Treasury and Federal Reserve from participating in 
bankruptcy financing; and; 

* the Chapter 14 proposal made by the Working Group on Economic Policy 
at the Hoover Institution that would allow the government to provide 
subordinated debtor-in-possession financing to companies with assets 
greater than $100 million (subsidiaries included) with a hearing and 
the court’s approval and oversight. 

Further details on the proposals listed above may be found in the 
following sources: 

* Robert Bliss and George Kaufman. “Resolving Large Complex Financial 
Institutions: The Case for Reorganization.” April 2011. [hyperlink, 
http://www.clevelandfed.org/research/conferences/2011/4-14-
2011/Bliss_kaufman.pdf]. 

* Kenneth E. Scott and Thomas Jackson, eds., Bankruptcy Not Bailout: A 
Special Chapter 14 (Stanford, Calif.: Hoover Institution Press, 2012). 

* Institute for International Finance. Making Resolution Robust: 
Completing the Legal and Institutional Frameworks for Effective Cross-
Border Resolution of Financial Institutions. (Washington, D.C.: 
Institute for International Finance, June 2012). 

* Consumer Protection and Regulatory Enhancement Act. HR 3310, 111th 
Cong., 1st sess., Congressional Record (July 24, 2009): E1964-E1967. 

* Bankruptcy Integrity and Accountability Act, Senate Amendment 3832, 
111th Cong., 2nd sess., Congressional Record (May 5, 2010): S3620-3624. 

Criteria for Orderly and Effective Resolutions or Bankruptcies for 
Financial Institutions: 

Roundtable participants will be asked to discuss the proposals with 
consideration of their possible effects on the orderliness and 
effectiveness of the bankruptcy process. For our July 2011 report 
Bankruptcy: Complex Financial Institutions and International 
Coordination Pose Challenges (GAO-11-707), we interviewed legal, 
economic, and finance experts and reviewed relevant literature to 
develop criteria for orderly and effective bankruptcies of financial 
companies. We found that orderliness and effectiveness generally were 
associated with the following characteristics: 

* Limit systemic risk; 

* Avoid asset fire sales; 

* Preserve due process: 
- Ensure predictability and transparency; 
- Ensure creditor rights; 

* Maximize Value; 
- Of the firm in a reorganization; 
- To the creditors in a liquidation; 

* Limit taxpayer liability. 

The principles we established for orderly and effective resolutions 
are generally consistent with those described in the Financial 
Stability Board’s October 2011 report Key Attributes of Effective 
Resolution Regimes for Financial Institutions, and with principles 
described in our 2009 report on proposals to modernize the U.S. 
financial regulatory system. 

Further details on the criteria described above may be found in the 
following sources: 

* GAO, Bankruptcy: Complex Financial Institutions and International 
Coordination Pose Challenges, GAO-11-707 (Washington, D.C.: July 19, 
2011). 

* GAO, Financial Regulation: A Framework for Crafting and Assessing 
Proposals to Modernize the Outdated U.S. Financial Regulatory System, 
GAO-09-216 (Washington, D.C.: July 22, 2009). 

* Financial Stability Board, Key Attributes of Effective Resolution 
Regimes for Financial Institutions (Washington, D.C.: October 2011). 

Roundtable Sessions and Topics for Discussion: 

The roundtable will consist of three sessions that have been 
structured to help GAO examine potential complexities in and effects 
of implementing proposed reforms. The first session focuses on the 
practical mechanics of the proposed changes to the Code. The second 
session focuses on potential outcomes of the proposals and effects on 
orderliness and effectiveness. The final session focuses on the 
challenges of financing large financial company bankruptcies. 

Session 1: Implications for Regulators and Courts of Proposals for 
Changing Regulatory Input: 

Background: 

GAO is interested in the mechanics of the changes in the role of 
regulators in the identified proposals and what the “on the ground” 
implications might be if these changes were enacted. For example, 
which regulators would a financial company notify of an intent to file 
a bankruptcy, and how would the regulator(s) be notified. 

Topics for Discussion: 

* Changes from current regulatory and court activities; 

* Possible regulatory and legal impediments; 

* Modifications to proposals to overcome impediments. 

Session 2: Relationship of Potential Outcomes of Proposals to Measures 
of Orderliness and Effectiveness: 

Background: 

Changes to regulatory input in the bankruptcy process may have a range 
of effects. GAO is interested in how the outcomes of the proposed 
changes might be evaluated using the criteria of orderliness and 
effectiveness. Characteristics of orderliness and effectiveness in a 
financial company bankruptcy include mitigating systemic risk, 
avoiding asset fire sales, ensuring due process, maximizing value, and 
minimizing taxpayer cost. 

Topics for Discussion: 

* Likely short-term outcomes. 

* Potential secondary effects. 

* Effects on the orderliness and effectiveness of financial company 
bankruptcies and potential tradeoffs among criteria. 

* Modifications to proposals to minimize any negative impacts. 

Session 3: Financing Financial Company Bankruptcies with Minimal 
Taxpayer Liability: 

Background: 

One principle for an effective bankruptcy or resolution process is to 
limit taxpayer liability, and bills introduced in the 111th Congress 
specifically forbid the U.S. Treasury and Federal Reserve from 
participating in bankruptcy financing. However, some proposals 
recognize the difficulty of financing bankruptcies of large financial 
companies, especially during a crisis. For example, Chapter 14 would 
allow the federal government to provide subordinated debtor-in-
possession financing to companies with assets greater than $100 
million (subsidiaries included) with a hearing and the court’s 
approval and oversight. 

Topics for Discussion: 

* Funding challenges for large or multiple financial company 
bankruptcies. 

* Federal funding role in previous bankruptcies. 

* Ways to finance large or multiple financial company bankruptcies 
that limit taxpayer liability. 

Background Information-Roundtable 2: 

National Academies/Government Accountability Office Roundtable on
The Treatment of Derivatives in Financial Company Bankruptcies: 
Information for Participants: 

Introduction: 

This roundtable will inform potential findings for the U.S. Government 
Accountability Office's (GAO) ongoing work on the effectiveness of the 
U.S. Bankruptcy Code (Code) in facilitating the orderly liquidation or 
reorganization of financial companies. Congress mandated this work 
under Section 202(e) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. Among other things, GAO's first report in response to 
this mandate—-Bankruptcy: Complex Financial Institutions and 
International Coordination Pose Challenges (GAO-11-707)-—developed 
criteria for orderly and effective bankruptcies and cataloged 
proposals for revising the Code to improve the orderliness and 
effectiveness of financial company bankruptcies. This GAO bankruptcy 
study will focus on the advantages and disadvantages of some proposals 
to change the Code to make bankruptcies of financial companies—-
especially those posing systemic risk-—more orderly and effective. 

Under a standing arrangement between the two institutions, GAO has 
asked the National Academies to host this meeting and help identity 
and invite participants. This roundtable provides a forum for experts 
with different backgrounds and experience to discuss some of the key 
issues concerning possible bankruptcy reforms: potential outcomes, 
implementation challenges and tradeoffs, and actions that could be 
taken to mitigate impediments or tradeoffs. GAO identified these 
issues through literature reviews and interviews with a broad range of 
experts from the financial regulatory and legal communities, academia, 
and the financial services industry. An agenda for the meeting with 
location and time is appended to this document. 

Proposals: 

During the April 10, 2013 Bankruptcy Roundtable, participants will be 
asked to discuss their views and insights on elements of proposals GAO 
identified that focus on changing safe harbor treatment for 
derivatives and repurchase (repo) contracts that qualify for such 
treatment—often called qualified financial contracts or QFCs—as well 
as the current treatment of such contracts. Proposals for change 
include: 

* Removing all safe harbors for QFCs; 

* Rolling back safe harbors on specific contracts; 
- Allowing only contracts traded on an exchange to have safe-harbor 
treatment; 
- Limiting collateral sales of repos by counterparties to cash-like or 
highly; marketable securities; 
- Allowing roll backs with approval of the Financial Stability 
Oversight Council or the courts; 

* Implementing a temporary stay for all or certain contracts;
* Keeping contracts open after bankruptcy with revaluations determined 
by the courts; and
* Exercising certain "reach back" avoiding powers for QFCs. 

Further details on the proposals listed above may be found in the 
following sources: 

* Kenneth E. Scott and Thomas Jackson, eds., Bankruptcy Not Bailout: A 
Special Chapter 14 (Stanford, Calif.: Hoover Institution Press, 2012). 

* Stephen J. Lubben, "Repeal the Safe Harbors." American Bankruptcy 
Institute Law Review, vol. 18, 2010. [hyperlink, 
http://ssrn.com/abstract=1497040]. 

* Robert Bliss and George Kaufman, "Resolving Large Complex Financial 
Institutions: The Case for Reorganization," April 2011. [hyperlink, 
http://www.clevelandted.org/research/conferences/201114-14-
011/Blisskaufman.pdf]. 

* Bruce Tuckman, "Amending Safe Harbors to Reduce Systemic Risk in OTC 
Derivatives Markets," Center for Financial Stability, working paper, 
April 22, 2010. [hyperlink, 
http://wvi/w.moodys.com/microsites/crc2011/papers/BruceTuckman.pdf]. 

* Darrell Duffie and David Skeel, "A Dialogue on the Costs and 
Benefits of Automatic Stays for Derivatives and Repurchase 
Agreements," University of Pennsylvania Law School, Institute for Law 
and Economics, Research Paper 12-2, March 2012. [hyperlink, 
http://ssrn.com/abstract=1982095]. Also included in Bankruptcy Not 
Bailout: A Special Chapter 14. 

* Consumer Protection and Regulatory Enhancement Act. HR 3310, 111th 
Cong., 1st sess., Congressional Record (July 24, 2009): E1964-E1967. 

* Bankruptcy Integrity and Accountability Act, Senate Amendment 3832, 
111th Cong., 2nd sess., Congressional Record (May 5, 2010): S3620-3624. 

Criteria for Orderly and Effective Resolutions or Bankruptcies for 
Financial Institutions Roundtable participants will be asked to 
discuss the proposals with consideration of their possible effects on 
the orderliness and effectiveness of the bankruptcy process. For our 
July 2011 report Bankruptcy: Complex Financial Institutions and 
International Coordination Pose Challenges (GAO-11-707), we 
interviewed legal, economic, and finance experts and reviewed relevant 
literature to develop criteria for orderly and effective bankruptcies 
of financial companies. We found that orderliness and effectiveness 
generally were associated with the following criteria: 

* Limit systemic risk; 

* Avoid asset fire sales; 

* Preserve due process: 
- Ensure predictability and transparency; 
- Ensure creditor rights; 

* Maximize Value: 
- Of the firm in a reorganization; 
- To the creditors in a liquidation; 

* Limit taxpayer liability. 

The criteria we established for orderly and effective resolutions are 
generally consistent with those described in the Financial Stability 
Board's October 2011 report Key Attributes of Effective Resolution 
Regimes for Financial Institutions, and with principles described in 
our 2009 report on proposals to modernize the U.S. financial 
regulatory system. 

Further details on the criteria described above may be found in the 
following sources: 

* 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). 

* GAO, Financial Regulation: A Framework for Crafting and Assessing 
Proposals to Modernize the Outdated U.S. Financial Regulatory System, 
[hyperlink, http://www.gao.gov/products/GA0-09-216] (Washington, D.C.: 
July 22, 2009). 

* Financial Stability Board, Key Attributes of Effective Resolution 
Regimes for Financial Institutions (Washington, D.C.: October 2011). 

Roundtable Sessions and Topics for Discussion: 

The roundtable consists of three sessions that have been structured to 
help GAO address the effects of the proposed reforms. The first 
session focuses on the potential outcomes of the proposed changes to 
safe harbors and any effects on the orderliness and effectiveness of 
the bankruptcy process. The second session focuses on the potential 
challenges of implementing the proposed changes and the roles of 
interested parties. The final session focuses on further actions that 
might be taken to preserve current treatment benefits or overcome 
potential challenges for proposals. 

Session 1: Potential Outcomes of Proposals: 

Background: 

GAO is interested in the outcomes and effects of the proposed changes 
to safe harbors for QFCs and how such changes might affect the 
orderliness and effectiveness of the bankruptcy process for financial 
companies. 

Questions for Discussion: 

* Likely immediate and short-term impact; 

* Secondary effects (e.g., financial institutions rewriting financial 
contracts so that they still get safe-harbor treatment); 

* Evaluation of current treatment of QFCs and proposals using criteria 
of orderliness and effectiveness; 

* Potential tradeoffs among criteria. 

Session 2: Implementing Change: 

Background: 

Changes to safe harbors would affect a number of interested parties. 
GAO is interested in how the proposed changes might affect the roles 
of such parties and what the most notable challenges in implementing 
those changes would be, including the likelihood that experts will 
agree on the need for specific changes. 

Questions for Discussion: 

* Roles of Congress, courts, and regulators; 

* Effects on QFC market and market participants; 

* Challenges to implementing change; 

* Likelihood of consensus. 

Session 3: Further Actions: 

Background: 

The first two sessions explored possible positive and negative effects 
of QFC proposals and impediments to implementing those proposals. In 
this session, GAO is interested in exploring further actions that 
might be taken to preserve benefits of the current treatment, limit 
any potential negative effects of the proposals, and overcome any 
impediments to implementing those proposals. These actions include 
specific next steps, such as additional studies that need to be 
performed, or a potential timetable for implementing possible changes 
in the safe-harbor treatment of QFCs. 

Questions for Discussion: 

* Mitigating any negative effects of proposals while preserving 
positive aspects of QFC treatment; 

* Overcoming implementation challenges; 

* Next steps. 

Roundtable Agendas: 

Roundtable on Bankruptcy Reform: 
Proposed Changes to the Role of Regulators and Treasury in
Financial Company Bankruptcies: 

Sponsored by the U.S. Government Accountability Office and Convened by 
the National Academies: 
Keck Center — Room 105: 
500 Fifth Street, NW: 
Washington, DC, 20001: 

April 1, 2013: 

9:30 a.m. Check-in/Reception. 

10:00 a.m. Welcome and Overview of GAO Studies and Roundtable Goals; 
Introduction of Panelists and Overview of Meeting Format and 
Procedures. 

10:15 a.m. Discussion Session 1: Implications for Regulators and 
Courts of Proposals for Changing Regulatory Input. 

11:45 a.m. Lunch. 

12:30 p.m. Discussion Session 2: Relationship of Potential Outcomes of 
Such Proposals to Measures of Orderliness and Effectiveness. 

2:00 p.m. Break. 

2:15 p.m. Discussion Session 3: Financing Financial Company 
Bankruptcies with Minimal Taxpayer Liability. 

3:15 p.m. Wrap-up. 

4:00 p.m. Adjourn. 

Roundtable on Bankruptcy Reform: 
Proposed Changes to the Treatment of Derivative Contracts
in Financial Company Bankruptcies: 

Sponsored by the U.S. Government Accountability Office and Convened by 
the National Academies: 
500 Fifth Street, NW: 
Washington, DC, 20001: 

April 10, 2013: 

9:30 a.m. Check-in/Reception. 

10:00 a.m. Welcome and Overview of GAO Studies and Roundtable Goals; 
Introduction of Panelists and Overview of Meeting Format and 
Procedures. 

10:05 a.m. Discussion Session 1: Potential Outcomes of Proposals. 

11:00 a.m. Break. 

11:10 a.m. Resume Session 1. 

12:00 p.m. Lunch. 

12:45 p.m. Discussion Session 2: Implementing Change. 

2:15 p.m. Break. 

2:30 p.m. Discussion Session 3: Further Actions. 

3:45 p.m. Wrap-up. 

4:00 p.m. Adjourn. 

[End of section] 

Appendix III: Safe-Harbor Treatment of Certain Financial Contracts 
under the Bankruptcy Code: 

Overview of Financial Derivatives: 

Financial derivatives derive their value from an underlying reference 
item or items, such as equities, debt, exchange rates, and interest 
rates. Parties involved in financial derivative transactions do not 
need to own or invest in the underlying reference items, and often do 
not. These products are agreements that shift risks from one party to 
another--each commonly referred to as a counterparty. Such shifting of 
risks may allow companies to offset other risks--hedging--or to take 
advantage of expectations of obtaining an economic gain due to changes 
in the value of the underlying reference items--speculation. Although 
some transactions are bilateral in that they involve only two 
counterparties, derivatives can be used to structure more complicated 
arrangements involving multiple transactions and parties. 

Financial derivatives are sold and traded on regulated exchanges or in 
private, over-the-counter markets that allow highly customized 
transactions specific to the needs of the counterparties. A master 
netting agreement sets out the terms governing contractual actions 
between counterparties with multiple derivative contracts. This 
agreement provides for the net settlement of all contracts, as well as 
cash collateral, through a single payment, in a single currency, in 
the event of default on or termination of any one contract. Generally 
counterparties net payments to each other under the contract, and, if 
a counterparty defaults, the nondefaulting counterparty can 
immediately close-out open contracts by netting one against the other. 
It can also receive payment under what is called set off, which is the 
discharge of reciprocal or mutual obligations to the extent of the 
smaller obligation. For example, a nondefaulting bank can take funds 
from a defaulting party's bank deposit held by the bank as payment for 
what the bank is owed on a contract it has with the defaulting party 
as long as the deposit existed prior to the default. 

Contracts Qualified for Special Treatment under the Code: 

Financial derivatives receive special treatment under the Code and 
thus are sometimes called qualified financial contracts (QFC). 
[Footnote 62] The Code includes five categories commonly considered 
QFCs, which include various types of derivatives. Contracts may fall 
into more than one category. The Code includes specific definitions of 
the agreements and transactions covered. In addition, to have 
protection under the Code, the counterparty with the debtor also must 
meet specified definitions. The types of derivatives qualifying for 
special treatment are generally described as follows: 

Securities contract. Securities contact is a broad term defining a 
financial agreement between counterparties and may include contracts 
for the purchase and sale of various financial products such as a 
group or index of securities, mortgage loans, certificates of deposit, 
and extensions of credit for settlement purposes.[Footnote 63] Margin 
loans are one type of extension of credit through a financial 
intermediary for the purchase, sale, carrying, or trading of 
securities. Margin loans do not include other loans secured with 
securities collateral.[Footnote 64] Securities contracts also include 
options to purchase and sell securities, or other financial products. 
Options give their holders the right, but not the obligation, to buy 
(call option) or sell (put option) a specified amount of the 
underlying reference item at a predetermined price (strike price) at 
or before the end of the contract. 

Commodities contract. In a commodities contract the commodities buyer 
agrees to purchase from the commodities seller a fixed quantity of a 
commodity at a fixed price on a fixed date in the future.[Footnote 65] 
Commodities can consist of agricultural goods, metals, and goods used 
for the production of energy such as crude oil. For example, to hedge 
against the risk of rising oil prices, oil refineries can enter a 
commodities contract to fix a price today for a future supply shipment. 

Forward contract. A "forward contract" is a contract for the purchase, 
sale, or transfer of a commodity with a maturity date more than 2 days 
after the contract is entered into.[Footnote 66] Under the Code, a 
forward contract can include, but is not limited to, a lease, swap, 
hedge transaction, deposit, or loan.[Footnote 67] As an example, a 
firm may want to limit risk to fluctuations in service costs, such as 
electricity prices. The firm may enter into a forward contract with an 
electricity provider to obtain future service at a fixed rate. 

Swap Agreement. A swap involves an ongoing exchange of one or more 
assets, liabilities, or payments for a specified period. Swaps include 
interest rate swaps, commodity-based swaps, and broad-based credit 
default swaps. Security-based swaps include single-name and narrow-
based credit default swaps and equity-based swaps.[Footnote 68] As an 
example, interest rate swaps allow one party to exchange a stream of 
variable-rate interest payments for a stream of fixed-rate interest 
payments. These products help market participants hedge their risks or 
stabilize their cash flows. Alternatively, market participants may use 
these products to benefit from an expected change in interest rates. A 
credit default swap is generally a contract between two parties where 
the first party promises to pay the second party if a third party 
experiences a credit event such as failing to pay a debt. Credit 
default swaps are contracts that act as a type of insurance, or a way 
to hedge risks, against default or another type of credit event 
associated with a security such as a corporate bond. 

Repurchase agreements are also qualified to receive special treatment 
under the Code and are thus considered to be a QFC. In a repurchase 
agreement one party sells a security, or a portfolio of securities, to 
another party and agrees to repurchase the security or portfolio on a 
specified future date--often the next day--at a prearranged price. 
[Footnote 69] The security, or portfolio of securities, serves as 
collateral for the transaction. In a reverse repurchase agreement, a 
security is purchased with the agreement to resell on a specified 
future date. Repurchase agreements have been used to provide financial 
institutions with funding for operations. 

A bilateral repurchase agreement--a repurchase agreement solely 
between two counterparties--can be viewed as two subtransactions 
referred to as initiation and completion.[Footnote 70] A repurchase 
agreement is similar to a loan secured by collateral. A firm will lend 
cash to a counterparty at an interest rate in exchange for assets 
provided by the counterparty as collateral. In a repurchase agreement, 
a cash provider willing to invest cash will agree to purchase 
securities from a collateral provider, or repurchase agreement dealer. 
Repurchase agreement dealers are typically distinguished as the 
counterparty selling securities, or providing collateral, at 
initiation. The market value of the securities purchased will 
typically exceed the value of cash loaned to the dealer. When a 
repurchase agreement matures, securities are sold back to the 
collateral provider and cash plus interest are returned to the cash 
provider. Collateral providers or dealers are generally large 
financial institutions, such as subsidiaries within bank holding 
companies. Cash providers are firms such as, but not limited to, other 
large financial institutions, hedge funds, and money market funds. 
Under the Code, U.S. Treasury debt securities, agency debt issues, 
mortgage-backed securities, and other assets can be used as collateral 
in repurchase agreement transactions. 

Treatment of QFCs under the Code: 

For most of the debtor's assets, the Code provides an automatic stay, 
or freeze, when the bankruptcy petition is filed. That is, the filing 
generally stops lawsuits, foreclosures, and most other collection 
activities against the debtor allowing the debtor or a trustee time to 
eliminate or restructure debts. For example, set-off of any debt owed 
to the debtor that arose before the filing against any claim against 
the debtor is prohibited.[Footnote 71] Additionally, in certain 
situations debtors may not terminate or modify an executory contract 
at any time after the bankruptcy is filed solely because of a 
provision in the contract that is conditioned on the insolvency or 
financial condition of the debtor or the filing of bankruptcy or the 
appointing of a trustee.[Footnote 72] However, the QFC's described 
previously receive safe-harbor treatment that generally exempts them 
from the automatic stay. Instead, the contractual rights--to 
liquidate, accelerate, or terminate--of nondefaulting counterparties 
conditioned on the insolvency or financial condition of one of the 
counterparties or the filing of bankruptcy or the appointing of a 
trustee, such as netting and setoff, are activated.[Footnote 73] 
Counterparties with claims against the debtor's property are typically 
referred to as creditors. 

Some contracts that are generally considered QFCs may not be eligible 
for safe-harbor treatment or may be otherwise limited. For example: 

* Repurchase agreements, where the debtor is a stockbroker or 
securities clearing agency, and securities contracts that are resolved 
under the Securities Investor Protection Act of 1970 (SIPA) or any 
statute administered by Securities and Exchange Commission (SEC). 
[Footnote 74] 

* Certain commodity contracts involved in a commodity broker's 
liquidation under Chapter 7. For example, a commodity broker creditor 
may not net or offset an obligation to a commodity broker debtor. 
[Footnote 75] 

* Repurchase agreements are treated differently from some other 
contracts in that any excess of the market prices received on 
liquidation over the amount of the stated repurchase agreement price 
and all expenses in connection with the liquidation of the repurchase 
agreement must be deemed property of the debtor's estate, subject to 
the available rights of setoff.[Footnote 76] 

* For master netting agreements, the right to terminate, liquidate, or 
accelerate is only applicable to the extent it is permissible for each 
type of QFC.[Footnote 77] 

After entities exercise their rights of netting for individual QFCs 
and under master netting agreements, some debtors still may be 
indebted to the creditor. Generally, the creditors' remaining claims 
will receive the same treatment accorded other unsecured creditors. 
[Footnote 78] 

The figures below illustrate the safe-harbor exemption from the 
automatic stay in simplified, yet practical scenarios: 

Figure 4 illustrates a bilateral contract, in which two counterparties 
are able to net opposing obligations of a contract, or, stated 
otherwise, net payments under a single master netting agreement. In 
this example, under current market conditions of an existing QFC, Firm 
A owes $100 to Firm B while Firm B owes $120 to Firm A. If Firm B 
files under the Code, the QFC is not stayed due to the safe harbor and 
Firm A receives the net proceeds of $20 ahead of Firm B's other 
creditors. However, Firm A has no guarantee of recouping the total 
value from the QFC due to other factors, such as a change in market 
conditions. Without the safe harbors, Firm A would not have been able 
to terminate the transaction and could have been exposed to further 
market risk. 

[Refer to PDF for image: illustration] 

Firm A: 

Qualified financial contract (QFC): $100 owed to Firm B. 

Firm B: 
Qualified financial contract (QFC): $120 owed to Firm B; 
Non-QFC assets; 
Declares bankruptcy; 
$20 via netting agreement after bankruptcy declared. 

Source: GAO. 

[End of figure] 

Figure 5 depicts the typical completion of a repurchase agreement 
transaction along with the possibility that the creditor liquidates 
collateral in certain situations. In the case of a repurchase 
agreement, if a dealer files under the Code after the initiation but 
prior to completion, the cash provider at initiation will be left with 
the collateral provided by the dealer. Under the safe harbor, the cash 
provider has the option to terminate the transaction with the 
insolvent dealer. As illustrated in figure 4, the cash provider may 
terminate the transaction and sell the collateral in the open market 
to a third party. Without the safe harbor, concerns have been raised 
that a stay on the overnight repurchase agreement market could result 
in adverse market impacts due to simultaneous sales of collateral. 

Figure 5: Completion of Bilateral Repurchase Agreement and Collateral 
Liquidation: 

[Refer to PDF for image: illustration] 

Cash provided at initiation (e.g. hedge fund): 
Collateral (bilateral repurchase agreement as qualified financial 
contract (QFC); 
Collateral may be sold to third party firm; 
Collateral returned to Collateral provider. 

Collateral provider at initiation (e.g. bank): 
Cash from cash provider; 
Cash plus interest returned to cash provider; 
Declares bankruptcy. 

Source: GAO. 

[End of figure] 

QFCs are generally also exempt from avoidance or claw back provisions 
under the Code. These provisions generally require that the trustee 
may avoid, or take back, any payments made during the 90 days before 
the filing of a bankruptcy petition if those payments are preferential 
or 2 years before the filing of the petition if those payments are 
fraudulent.[Footnote 79] But, for QFCs, a trustee may not recover 
certain transfers made by or to a swap participant, repurchase 
agreement participant, commodity broker, forward contract merchant, 
stockbroker, financial institution, financial participant, or 
securities clearing agency in connection with securities contracts, 
commodity contracts, forward contracts, repurchase agreements, or 
swaps that were done before the bankruptcy filing.[Footnote 80] Also, 
a trustee may not recover transfers made by or to a master netting 
agreement participant or any individual contract covered by a master 
netting agreement that was made before the bankruptcy filing.[Footnote 
81] Since many QFCs are short term, and likely to be agreed to well 
within the 90 day window, these exemptions provide protection to many 
QFCs including those under master netting agreements. 

[End of section] 

Appendix IV: Comments from the Department of the Treasury: 

Department of The Treasury: 
Under Secretary: 
Washington, D.C. 

July 10,2013: 

Ms. Alicia Puente Cackley: 
Director, Financial Markets and Community Investment: 
Government Accountability Office: 
441 G St., NW: 
Washington, D.C. 20548: 

Dear Ms. Puente Cackley: 

I am writing on behalf of Secretary Lew, who is the Chairperson of the 
Financial Stability Oversight Council (Council). We appreciate the 
opportunity to review the Government Accountability Office's (GAO) 
draft report GAO-13-622 (the Draft Report) regarding advantages and 
disadvantages of certain proposals to revise the Bankruptcy Code for 
financial company bankruptcies. 

The Council shares the GAO's concern that a disorderly financial 
company bankruptcy could pose risks to financial stability. However, 
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the 
Act) provided regulators with important new tools to address these 
concerns, and until such tools are fully implemented or there is 
evidence of risks that cannot be adequately addressed within existing 
law, it would be premature for the Council to prioritize the 
consideration of proposals to amend the Bankruptcy Code. Importantly, 
the Board of Governors of the Federal Reserve System (Federal Reserve 
Board) and the Federal Deposit Insurance Corporation are currently 
implementing provisions of the Act requiring financial companies to
submit resolution plans ("living wills") to facilitate their orderly 
resolution under the Bankruptcy Code in the event of their material 
financial distress or failure. These living wills are a critical
element of the bankruptcy process for large financial companies. It is 
important to allow the regulators sufficient time to evaluate these 
plans, especially given that not all covered companies have made their 
first submissions. 

The Council is focused on efforts that most effectively achieve its 
statutory mandate to respond to emerging threats to the stability of 
the U.S. financial system. The Council is engaged in a wide variety of 
actions to address risks to financial stability posed by the failure 
of one or more financial companies, including: 

* Designating nonbank financial companies whose material financial 
distress could pose a threat to financial stability for supervision by 
the Federal Reserve Board. The designation of these nonbank financial 
companies also subjects these firms to enhanced prudential standards 
which will reduce the likelihood, and the severity of the impact on
U.S. financial stability, of their failure. 

* Facilitating communication and coordination on the implementation of 
the orderly liquidation authority, resolution plans, and other aspects 
of existing law that seek to mitigate risks to financial stability 
from the disorderly failure of a financial company. 

* Engaging in real-time monitoring and communication about risks to 
financial stability, such as risks posed by Superstorm Sandy and the 
bankruptcy filing of MF Global. As the Draft Report notes, the Council 
met in emergency session on the day MF Global declared bankruptcy to 
monitor the event and its impact on markets. 

The Draft Report recommends that the Council consider proposals from 
the 111th Congress as will as proposals from certain academic and 
research-focused sources. These proposals included changing the role 
of financial regulators in the bankruptcy process and the treatment of 
qualified financial contracts. The GAO held two expert roundtables in 
which participants evaluated these proposals. While the Council 
recognizes that discussing and making recommendations to Congress on 
various possible changes to the Bankruptcy Code could contribute to 
the debate on these issues, the Draft Report notes that GAO's panel of 
experts was not ready to recommend specific changes to the Bankruptcy 
Code--a further indication that Council prioritization of
these proposals would be premature. 

We strongly support GAO's efforts to carry out its responsibilities 
under the Act. Although we have concerns with the Draft Report's 
recommendation, we are committed to the implementation of the Act and 
continuing our efforts to fulfill the statutory mission of the Council 
in the most effective, efficient, and transparent way possible. Thank 
you again for the opportunity to engage with your staff over the past 
three years in fulfilling your mandate to study this issue and to 
review and comment on the Draft Report. We look forward to working 
with you in the future. 

Sincerely, 

Signed by: 

Mary J. Miller: 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

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

Staff Acknowledgments: 

In addition to the contact named above, Debra Johnson (Assistant 
Director), Nancy S. Barry, Rudy Chatlos, Risto Laboski, Marc Molino, 
Barbara Roesmann, Jessica Sandler, and Jason Wildhagen made 
significant contributions to this report. Other assistance was 
provided by Janet Eackloff and Walter Vance. 

[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] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 
No. 111-203, § 202(e), 124 Stat. 1376 (2010). 

[3] 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). 

[4] See GAO, Bankruptcy: Agencies Continue Rulemakings for Clarifying 
Specific Provisions of Orderly Liquidation Authority [hyperlink, 
http://www.gao.gov/products/GAO-12-735] (Washington, D.C.: July 12, 
2012). 

[5] Such contracts are often referred to as qualified financial 
contracts because they qualify for safe harbor treatment--that is, they 
are not subject to the automatic stay in bankruptcy proceedings that 
generally stops most lawsuits, foreclosures, and many other collection 
activities against the debtor. 

[6] See [hyperlink, http://www.gao.gov/products/GAO-11-707]; 
[hyperlink, http://www.gao.gov/products/GAO-12-735]; AOUSC, 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 Second Report Pursuant to 
Section 202(e) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010, Pub. L. No. 111-203 (2010), (Washington, D.C.: 
July 2012); and Federal Reserve, Study on the Resolution of Financial 
Companies under the Bankruptcy Code (Washington, D.C.: July 2011). 

[7] This treatment is also called pari passu, meaning "on equal 
footing," and in usage often refers to treating things equally, without 
showing preference. In the context of bankruptcy, it refers to 
creditors of the same class receiving the same prorated (or pro rata) 
share of payment, according to the amount of the claim. 

[8] 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. This report discusses in 
depth Chapter 11 reorganization. 

[9] If certain conditions are met, the court directs the U.S. Trustee 
to appoint a Chapter 11 trustee upon request of the U.S. Trustee, 
certain other parties, or on its own motion. 

[10] Also, there are many other findings a court must make in order to 
confirm a plan of reorganization, aside from acceptance or lack of 
impairment. For example, the court must find that the plan is feasible. 
Additionally, the 180-day rule allowing third parties to file a plan is 
tied to voting (i.e., acceptance of the plan by a sufficient number of 
impaired creditors) on a plan filed by the debtor and not just court 
approval. See Code section 1121(c)(3). 

[11] Potential outcomes also include dismissal of the case or 
conversion to a Chapter 7 liquidation. 

[12] A preference action can be asserted for payments made to an 
insider within a year prior to the bankruptcy filing. 

[13] Financial companies that the Secretary of the Treasury determines 
meet the conditions specified under OLA--including that their failure 
and resolution under otherwise applicable federal or state law would 
have serious adverse effects on financial stability in the United 
States--may be resolved under an FDIC receivership, broadly similar to 
that currently used to resolve insured depositories. 

[14] 12 U.S.C. § 1821(c). 

[15] Chapter 7 of the Code contains special provisions for the 
liquidation of stockbrokers. 11 U.S.C. §§ 741-753. Under SIPA, the 
Securities Investor Protection Corporation (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, 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 
SEC as broker-dealers, we generally use broker-dealer rather than 
stockbroker in this report. 

[16] 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. 

[17] Dodd-Frank Act, Pub. L. No. 111-203, § 1101(a). 

[18] The term "qualified financial contract" is not used in the Code. 

[19] A swap is a type of derivative that involves an ongoing exchange 
of one or more assets, liabilities, or payments for a specified period. 
Financial and nonfinancial firms use swaps and other over-the-counter 
derivatives to hedge risk, or speculate, or for other purposes. A 
futures contract is a contract that is standardized and traded on an 
organized futures exchange, while a forward contract is privately 
negotiated among the buyer and seller. 

[20] In general, a commodity contract is a contract between two parties 
where the commodities buyer agrees to purchase from the commodities 
seller a fixed quantity of a commodity at a fixed price on a fixed date 
in the future. A "forward contract" is a contract for the purchase, 
sale, or transfer of a commodity with a maturity date more than two 
days after the contract is entered into. A securities contract 
generally refers to a contract defining a financial agreement between 
counterparties. A securities contract includes contracts for the 
purchase and sale of various financial products such as a group or 
index of securities, mortgage loans, certificates of deposits, and 
extensions of credit for settlement purposes. See appendix III for more 
information on securities contracts. 

[21] A contractual right includes a right set forth in the rules or 
bylaws of, among others, a derivatives clearing organization, a 
multilateral clearing organization, a national securities exchange or 
association, or a securities clearing agency. 

[22] The Dodd-Frank Act does not assign FSOC a direct role in deciding 
whether a company should go through OLA. 

[23] We provided the experts with another proposal on granting 
regulators the right to file reorganization plans and motions for sale 
of property but experts spent almost no time addressing it so it is not 
included in this discussion. 

[24] The Gramm-Leach-Bliley Act defines a federal functional regulator 
as (a) the Board of Governors of the Federal Reserve System, (b) the 
Office of the Comptroller of the Currency, (c) the Board of Directors 
of FDIC, (d) the Director of the Office of Thrift Supervision (no 
longer existent), (e) the National Credit Union Administration Board, 
and (f) the Securities and Exchange Commission. 

[25] Bankruptcy Integrity and Accountability Act, Senate Amendment 
3832, 111th Cong., 2nd sess., Congressional Record (May 5, 2010): 
S3620-3624 and Consumer Protection and Regulatory Enhancement Act. HR 
3310, 111th Cong., 1st sess., Congressional Record (July 24, 2009): 
E1964-E1967. 

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

[27] The Hoover Institution resolution project group was established in 
2009 under the auspices of the Working Group on Economic Policy at the 
Hoover Institution at Stanford University. The group has proposed that 
a new chapter--Chapter 14--of the Code be created to address 
bankruptcies of large financial companies. For these proposals see 
Kenneth E. Scott and Thomas Jackson, eds., Bankruptcy Not Bailout: A 
Special Chapter 14 (Stanford, Calif.: Hoover Institution Press, 2012). 

[28] See Bankruptcy Integrity and Accountability Act Senate Amendment 
3832, and Consumer Protection and Regulatory Enhancement Act. HR 3310. 

[29] The House proposal included an entity with a similar conceptual 
function to FSOC, which it called the Market Stability and Capital 
Adequacy Board. 

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

[31] NAIC and state insurance officials noted that generally state 
insurance regulators place insurance companies into receivership. 
However, insurers can voluntarily request to be so placed. Under OLA, 
state insurance regulators retain this right. However, under the Dodd-
Frank Act if an insurance company or subsidiary has been designated for 
orderly resolution and the state insurance regulators have not taken 
action within 60 days, FDIC can stand in place of the insurance 
regulators. 

[32] Under the living wills provision of Title I of the Dodd-Frank Act 
and the implementing regulations, certain large complex financial 
companies must provide the Federal Reserve, FDIC, and FSOC with plans 
that detail how they could be resolved under the Code (or other 
applicable non-OLA regime) in a way that substantially mitigates the 
risk that the failure of the company would have serious adverse effects 
on financial stability in the United States. See Dodd-Frank Act § 
165(d), 12 C.F.R. § 381.2(o). 

[33] Dodd-Frank Act, Pub. L. No. 111-203, § 165(d)(5). If the Federal 
Reserve and FDIC determine that the plans are not credible or would not 
facilitate an orderly resolution under the Code, the agencies may 
impose more stringent capital, leverage or liquidity requirements or 
restrictions on the growth, activities, or operations of the company 
until an acceptable plan is submitted, or require divestiture of 
certain assets if no acceptable plan is submitted within 2 years. 

[34] Bankruptcy Integrity and Accountability Act, Senate Amendment 
3832, 111th Cong., 2nd sess., Congressional Record (May 5, 2010): 
S3620-3624 and Consumer Protection and Regulatory Enhancement Act. HR 
3310, 111th Cong., 1st sess., Congressional Record (July 24, 2009): 
E1964-E1967. Both proposals provided FSOC, or an entity with a similar 
conceptual function, the right to a prebankruptcy petition 
consultation. The House bill referred to the similar agency with the 
conceptual function similar to FSOC as the Market Stability and Capital 
Adequacy Board. 

[35] We have reported and testified before Congress on FSOC's 
management structure and mechanisms for meeting its mission. See GAO, 
Financial Stability: New Counsel and Research Office Accountability and 
Transparency of Their Decisions [hyperlink, 
http://www.gao.gov/products/GAO-12-886] (Washington, D.C.: Sept. 11, 
2012) and Financial Stability: Continued Actions Needed to Strengthen 
New Counsel and Research Office [hyperlink, 
http://www.gao.gov/products/GAO-13-467T] (Washington, D.C.: Mar. 14, 
2013). 

[36] See FSOC, 2012 Annual Report (Washington, D.C.: July 2012). 

[37] MF Global Holdings Ltd. and MF Global Finance USA Inc. filed on a 
consolidated basis for relief under Chapter 11 bankruptcy protection on 
October 31, 2011. The jointly registered broker-dealer and commodities 
broker subsidiaries of MF Global Holdings, operating as MF Global Inc., 
entered liquidation proceedings under SIPA. 

[38] Debtors can defend against an involuntary proceeding including 
presenting objections within 21 days of being served the summons. 

[39] The factors to be addressed are set forth in section 203(b) of the 
Dodd-Frank Act. Before the Secretary of the Treasury, in consultation 
with the President, makes a decision to seek the appointment of FDIC as 
receiver of a financial company, at least two-thirds of those serving 
on the Board of Governors of the Federal Reserve System and at least 
two-thirds of those serving on the Board of Directors of FDIC must vote 
to make a written recommendation to the Secretary of the Treasury to 
appoint FDIC as receiver. In the case of a broker-dealer, the 
recommendation must come from the Federal Reserve and SEC, in 
consultation with FDIC, and in the case of an insurance company from 
the Federal Reserve and the Director of the Federal Insurance Office, 
in consultation with FDIC. 

[40] In a bankruptcy proceeding, creditors often provide financing for 
the debtor to have immediate case as well as ongoing working capital 
during a reorganization process. This financing is called DIP 
financing. The DIP financer usually requires that its loan be secured 
with collateral and paid as an administrative expense of the estate, 
giving it priority over all prepetition creditors of the firm. 
Occasionally, such a loan is given priority over other administrative 
expenses. Such an arrangement is called a super priority. In contrast, 
a subordinated loan to a DIP would receive payment only after 
administrative expenses, other DIP lenders, and other creditors are 
paid. 

[41] See Federal Reserve, Federal Reserve Collateral Guidelines, 
[hyperlink, http://www.frbdiscountwindow.org/FRcollguidelines.pdf], 
accessed on May 7, 
2013. 

[42] If income from the liquidated assets of the financial company is 
insufficient to repay the borrowings, the FDIC may, if necessary, 
impose assessments on certain financial companies. 

[43] Section 1101 of the Dodd-Frank Act provides that these emergency 
lending programs under section 13(3) of the Federal Reserve Act are not 
available to borrowers that are insolvent, which is defined to include 
entities that are in bankruptcy. See 12 U.S.C. § 343(B)(ii). 

[44] For example, in [hyperlink, 
http://www.gao.gov/products/GAO-11-707], we found that Lehman faced a 
liquidity crisis just prior to declaring bankruptcy when banks refused 
to lend money for its brokerage and other services. As a result, 
Lehman had difficulty rolling over borrowings of about $100 billion 
dollars every day to pay off maturing commercial paper and other 
commitments. More generally, when questions about the quality of 
subprime mortgages arose, investors became unwilling to make loans 
secured by a wide range of assets. When they could not borrow to meet 
their obligations, financial institutions were forced to sell assets, 
putting additional downward pressure on asset prices. As a result, 
some financial institutions had to put up more collateral and further 
mark down asset values leading to further intertwined downward spirals 
in asset and funding markets. 

[45] Daniel K. Tarullo, "Evaluating Progress in Regulatory Reforms to 
Promote Financial Stability, (speech at the Peterson Institute for 
International Economics, Washington, D.C., May 3, 2013) and William C. 
Dudley, "Fixing Wholesale Funding to Build a More Stable Financial 
System," (speech at the New York Bankers Association's 2013 Annual 
Meeting and Economic Forum, New York, N.Y., Feb. 1, 2013). 

[46] Trustees can avoid contracts entered into in the 90 days prior to 
a bankruptcy if they are determined to be preferential; up to two years 
prior to a bankruptcy if they are determined to be fraudulent. We 
provided the experts with another proposal--keeping contracts open 
after bankruptcy with revaluations determined by the courts--but 
experts did not address it, so it is not included in this discussion. 

[47] We provided the experts with another proposal on keeping contracts 
open after bankruptcy with revaluations determined by the courts but 
experts spent almost no time addressing it so it is not included in 
this discussion. 

[48] Section 546(e) states, with certain exceptions, the trustee may 
not avoid a transfer that is a margin payment or settlement payment 
made by or to a commodity broker, forward contract merchant, 
stockbroker, financial institution, financial participant, or 
securities clearing agency, or that is a transfer made by or to one of 
the entities listed above in connection with a securities contract, 
commodity contract, or forward contract made before the bankruptcy. 

[49] See for example, Picard v. Katz, 462 B.R. 447, 451-52 (S.D.N.Y. 
2011). 

[50] In September 2012, the District Court upheld a Bankruptcy Court 
ruling that Quebecor's payment of more than $376 million to purchase 
and redeem a series of private placement notes that an affiliated 
company had issued years earlier were settlement payments. In re: 
Quebecor World (USA) Inc., 480 B.R. 468 (S.D.N.Y. 2012). By being 
deemed settlement payments, the money was protected by the § 546(e) 
safe harbor which prevented the bankruptcy estate from pulling the 
money back into the estate and permitted the note holders to retain the 
money they had been paid. This decision was based on an earlier 
decision in the Enron case. In the June 2011 Enron decision, the 
Appeals Court determined that Enron's payments to certain companies to 
retire specific commercial paper prior to its maturity was within the § 
546(e) safe harbor because they were settlement payments. Thus, Enron's 
trustees could not have the commercial paper holders return that money 
to the Enron estate. In re: Enron Creditors Recovery Corp., 651 F.3d 
329 (2011). The Quebecor District Court decision was upheld by the 
Appeals Court in June 2013. In re: Quebecor World (USA) Inc., 2013 U.S. 
App. LEXIS 11615 (2d App., June 10, 2013). 

[51] Mark J. Roe, "The Derivatives Market's Payment Priorities as 
Financial Crisis Accelerator," Stanford Law Review, Vol. 63, no. 3 
(March 2011). 

[52] If FDIC chooses not to transfer a contract with a specific 
company, none of the contracts with that company may be transferred. 

[53] FDIC, Statement of Federal Deposit Insurance Corporation on Who Is 
Too Big To Fail? Examining the Application of Title I of the Dodd-Frank 
Act (Washington D.C.: Apr. 16, 2013). 

[54] See appendix III for information on how qualified contracts may be 
liquidated, terminated, or accelerated under the Code. 

[55] In re Lehman Bros. Holdings, Inc., 433 B.R. 101(Bankr. S.D. N.Y. 
2010) ("Memorandum Decision Granting Debtors' Motion Pursuant to 
Sections 105(a) and 362 of the Bankruptcy Code for an Order Enforcing 
the Automatic Stay Against and Compelling Payment of Post-Petition 
Funds by Swedbank AB"). The decision said that the payments lacked 
mutuality. 

[56] Bank of America, N.A. v. Lehman Brothers Holdings, Inc., 439 B.R. 
811 (Bankr. S.D. N.Y. 2010). 

[57] Pub. L. No. 111-203, § 202(e). The Administrative Office of the 
U.S. Courts (AOUSC) is also required to address Pub. L. No. 111-203, § 
202(e) on the same time frame. The Board of Governors of the Federal 
Reserve System (Federal Reserve) was required to address a similar 
mandate--Pub. L. No. 111-203, § 216--in July 2011. 

[58] 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) and Bankruptcy: Agencies Continue Rulemakings for Clarifying 
Specific Provisions of Orderly Liquidation Authority, [hyperlink, 
http://www.gao.gov/products/GAO-12-735] ((Washington, D.C.: July 12, 
2012); AOUSC, 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 Second Report Pursuant to Section 202(e) of the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. 
No. 111-203 (2010), (Washington, D.C.: July 2012); and Federal 
Reserve, Study on the Resolution of Financial Companies under the 
Bankruptcy Code (Washington, D.C.: July 2011). 

[59] We provided the experts with another proposal on granting 
regulators the right to file reorganization plans and motions for sale 
of property but experts spent almost no time addressing it so it is not 
included in this discussion. See appendix II. 

[60] We provided the experts with another proposal on keeping contracts 
open after bankruptcy with revaluations determined by the courts, but 
experts spent almost no time addressing it so it is not included in 
this discussion. See Appendix II. 

[61] The Code does not define a QFC or use this term specifically. 

[62] See 11 U.S.C. § 741(7). 

[63] H.R. Rep. No. 109-031. 

[64] See 11 U.S.C. § 761(4). Commodity is defined by cross-referencing 
the Commodity Exchange Act, which defines commodity to include 
agricultural products and "all services, rights, and interests in which 
contacts for future delivery are presently or in the future dealt in." 
A "commodity contract" includes purchases and sales of commodities for 
future delivery on, or subject to the rules of a contract market or 
board of trade. Olympic Natural Gas, 294 F. 3d 737.741 (5th Cir. 2002). 

[65] See 11 U.S.C. § 101(25). The definition of "forward contact" in 
the Code has been found to include four elements: (1) a contract for 
the sale of a commodity; (2) with a delivery date more than two days 
after execution; (3) by a forward contract merchant; and (4) that is 
not otherwise subject to the rules of a board of trade. See In re MBS 
Management Services, Inc., 432 B.R. 570 (Bankr. E.D. La. 2010), aff'd 
2010 WL 1899764 (E.D. La. 2011). 

[66] See 11 U.S.C. § 101(53B). 

[67] See 11 U.S.C. § 101(47). 

[68] Triparty repurchase agreements include three parties: the 
borrower, the lender, and a triparty agent that facilitates the 
repurchase agreement transaction by providing custody of the securities 
posted as collateral and valuing the collateral, among other services. 

[69] 11 U.S.C. § 362(a). 

[70] 11 U.S.C. § 365(e)(1). In bankruptcy, an executory contract is one 
in which both parties to the contract have future performance 
obligations that, if unperformed by either party, would result in a 
material breach. See Regen Capital I, Inc., v. Halperin, 547 F. 3d 484 
(2d Cir. 2008); Olah v. Baird, 567 F. 3d 1207 (10th Cir. 2009). 

[71] See 11 U.S.C. §§ 555, 556, 559, 560. Note that the phrase 
"liquidate, terminate and accelerate" was added to the Code through 
amendments in 2005. Previously, the right to liquidate was provided for 
securities contracts, commodity contracts, forward contracts and 
repurchase agreements, while the right to terminate was provided for 
swaps. H.R. Rep. No. 109-031. 

[72] 11 U.S.C. § 555; 11 U.S.C. § 559. 

[73] 11 U.S.C. § 561(b)(2). 

[74] 11 U.S.C. § 559. 

[75] 11 U.S.C. § 561(a). 

[76] See 11 U.S.C. § 753; 11 U.S.C. § 767. 

[77] 11 U.S.C. § 547; 11 U.S.C. § 548. 

[78] 11 U.S.C. § 546(e), (f) and (g). 

[79] 11 U.S.C. § 546(j). For both 11 U.S.C. § 546(e), (f), (g) and (j), 
the protection from pull back is not provided if the transfer was done 
based on fraud under 11 U.S.C. § 548(a)(1). For the master netting 
agreements it cannot be more than the extent that the trustee could 
otherwise avoid the transfer made under an individual contract covered 
by the master netting agreement. 11 U.S.C. § 546(j). 

[End of section] 

GAO’s Mission: 

The Government Accountability Office, the audit, evaluation, and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the 
performance and accountability of the federal government for the 
American people. GAO examines the use of public funds; evaluates 
federal programs and policies; and provides analyses, recommendations, 
and other assistance to help Congress make informed oversight, policy, 
and funding decisions. GAO’s commitment to good government is 
reflected in its core values of accountability, integrity, and 
reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO’s website [hyperlink, http://www.gao.gov]. Each 
weekday afternoon, GAO posts on its website newly released reports, 
testimony, and correspondence. To have GAO e-mail you a list of newly 
posted products, go to [hyperlink, http://www.gao.gov] and select 
“E-mail Updates.” 

Order by Phone: 

The price of each GAO publication reflects GAO’s actual cost of 
production and distribution and depends on the number of pages in the 
publication and whether the publication is printed in color or black 
and white. Pricing and ordering information is posted on GAO’s 
website, [hyperlink, http://www.gao.gov/ordering.htm]. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 
TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, 
MasterCard, Visa, check, or money order. Call for additional 
information. 

Connect with GAO: 

Connect with GAO on facebook, flickr, twitter, and YouTube.
Subscribe to our RSS Feeds or E mail Updates. Listen to our Podcasts.
Visit GAO on the web at [hyperlink, http://www.gao.gov]. 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 
Website: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]; 
E-mail: fraudnet@gao.gov; 
Automated answering system: (800) 424-5454 or (202) 512-7470. 

Congressional Relations: 

Katherine Siggerud, Managing Director, siggerudk@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, DC 20548. 

Public Affairs: 

Chuck Young, Managing Director, youngc1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, DC 20548. 

[End of document]