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Is the Bankruptcy Code an Adequate Mechanism for Resolving the Distress of Systemically Important Institutions?

Edward R. Morrison

Columbia Law School

December 30, 2009

Columbia Law and Economics Working Paper No. 362

Lehman’s bankruptcy has triggered calls for new approaches to rescuing systemically important institutions. This essay assesses and confirms the need for a new approach. It identifies the inadequacies of the Bankruptcy Code and advocates an approach modeled on the current regime governing commercial banks. That regime includes both close monitoring when a bank is healthy and aggressive intervention when it is distressed. The two tasks - monitoring and intervention - are closely tied, ensuring that intervention occurs only when there is a well-established need for it. The same approach should be applied to all systemically important institutions. President Obama and the Congress are now considering such an approach, though it is unclear whether it will establish a sufficiently close connection between the power to intervene and the duty to monitor. The proposed legislation is unwise if it gives the government power to seize an institution regardless of whether it was previously subject to monitoring and other regulations.

Number of Pages in PDF File: 16

Keywords: Financial Regulation, Financial Institutions, Systemic Risk, Bankruptcy, Chapter 11, Lehman Brothers, Systemically Important Institutions

JEL Classification: G01, G18, G24, G28, G33, G38, K22, K29

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Date posted: January 4, 2010  

Suggested Citation

Morrison, Edward R., Is the Bankruptcy Code an Adequate Mechanism for Resolving the Distress of Systemically Important Institutions? (December 30, 2009). Columbia Law and Economics Working Paper No. 362. Available at SSRN: http://ssrn.com/abstract=1529802 or http://dx.doi.org/10.2139/ssrn.1529802

Contact Information

Edward R. Morrison (Contact Author)
Columbia Law School ( email )
435 West 116th Street
New York, NY 10025
United States
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