Transaction Simplicity

Abstract

This paper, forthcoming Columbia Law Review's Sidebar, is a short response to Skeel & Jackson's Transaction Consistency and the New Finance in Bankruptcy, 112 COLUM. L. REV. 152 (2012).

I embrace the basic Skeel and Jackson premise that like agreements should be treated alike under the Bankruptcy Code. But I depart from them insomuch as they engage in a resorting of agreements: repos would be treated one way under their proposals, swaps another.

I argue that two simple changes would better address the pressing problems of the special treatment of derivatives in bankruptcy. First, opening the door to judicial recharacterization of putative derivatives and repos that are really just disguised versions of other transactions would solve much of the problem associated with the overbroad safe harbors. A supply contract that is rewritten as a swap should be treated as a supply contract, and the bankruptcy court should have the power to do just that. This is a simpler version of transactional consistency.

And the Bankruptcy Code should be harmonized with Dodd-Frank. This is the simpler, immediate solution to Skeel and Jackson’s concerns about financial institutions in bankruptcy, and if we are to take the financial regulators at their word, we must anticipate that a few financial institutions will be resolved under chapter 11. If chapter 11 is the complement to OLA, there should be consistency amongst the two proceedings.

These are not perfect solutions, but rather first steps. They are, however, steps that should be easily achievable.

Keywords: Swaps, safe harbors, derivatives, chapter 11, OLA, title II