Special bankruptcy court for banks mulled in U.S. Senate

January 12, 2010

By Rachelle Younglai

WASHINGTON, Jan 11 (Reuters) – Key U.S. senators are considering the creation of a special bankruptcy court for troubled financial services firms, a person familiar with the plans said on Monday.

Senate Banking Committee members are trying to toughen up parts of a draft bill that overhauls how the financial system is supervised. The draft, introduced by Senate Banking Committee Chairman Christopher Dodd, would create a system to unwind troubled financial firms.

But members of the committee want a more specific and tougher regime to deal with troubled financial firms after the federal government used billions of dollars in taxpayer funds to prop up firms like Bank of America.

Members are discussing a two-stage process that would create a preferential option for bankruptcy followed by a regulator-managed resolution if bankruptcy fails, the person said. The source requested anonymity because the draft is in flux and has not been made public.

Dodd’s proposal would give the Federal Deposit Insurance Corp the authority to dismantle large troubled financial services firms. The FDIC would be able to guarantee debts of firms in receivership.

Some committee members want to craft stricter laws to make sure that the first option for a troubled firm is bankruptcy, the source said. Members also want a system to ensure that counterparties, creditors and shareholders share in the loss if the firm fails, said another person familiar with the plan.

“We’re looking at a bankruptcy concept, a receivership. We’re going to make resolution a very painful process if we go that route and that’s going to be a major step forward with this bill,” Dodd told CNBC TV.

Dodd plans to retire from the Senate by the end of the year but has said he is committed to reforming the country’s financial regulation.

His bill has not been well received by Republicans on the Senate Banking Committee. Now lawmakers from both parties are trying to find consensus on how to regulate everything from banks to executive compensation.

The House of Representatives passed an extensive financial reform bill last year. The House bill gives the FDIC the authority to dismantle insolvent firms through bankruptcy or receivership much like it dismantles failing banks now.

Dodd and Richard Shelby, the top Republican on the Senate Banking Committee, have said they hope to reach a deal on financial reform before the Senate reconvenes on Jan. 20.

Any potential Senate bill would have to be reconciled with the House bill before the president could sign it into law.

(Reporting by Rachelle Younglai; Editing by Phil Berlowitz)

((rachelle.younglai@thomsonreuters.com; +1 202 898 8411))

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