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Rolling Back the Repo Safe Harbors

Business Lawyer, Vol. 69, August 2014

Columbia Law and Economics Working Paper No. 492

Harvard Law School Center for Law, Economics, and Business, Discussion Paper No. 793

34 Pages Posted: 23 Aug 2014 Last revised: 2 Jun 2017

Edward R. Morrison

Columbia Law School

Mark J. Roe

Harvard Law School

Christopher S. Sontchi

United States Bankruptcy Courts, District of Delaware

Date Written: August 21, 2014

Abstract

Recent decades have seen substantial expansion in exemptions from the Bankruptcy Code’s normal operation for repurchase agreements. These repos, which are equivalent to very short-term (often one-day) secured loans, are exempt from core bankruptcy rules such as the automatic stay that enjoins debt collection, rules against prebankruptcy fraudulent transfers, and rules against eve-of-bankruptcy preferential payment to favored creditors over other creditors. While these exemptions can be justified for United States Treasury securities and similarly liquid obligations backed by the full faith and credit of the United States government, they are not justified for mortgage-backed securities and other securities that could prove illiquid or unable to fetch their expected long-run value in a panic. The exemptions from baseline bankruptcy rules facilitate this kind of panic selling and, according to many expert observers, characterized and exacerbated the financial crisis of 2007-2009. The exemptions from normal bankruptcy rules should be limited to United States Treasury and similarly liquid securities, as they once were. The more recent expansion of the exemption to mortgage-backed securities should be reversed.

Keywords: safe harbors, bankruptcy, financial crisis, contagion, bank run, qualified financial contracts, derivatives, orderly liquidation authority, repo, Lehman Brothers, wholesale money market

JEL Classification: G20, G28, G32, G33, G38, K22

Suggested Citation

Morrison, Edward R. and Roe, Mark J. and Sontchi, Christopher S., Rolling Back the Repo Safe Harbors (August 21, 2014). Business Lawyer, Vol. 69, August 2014; Columbia Law and Economics Working Paper No. 492; Harvard Law School Center for Law, Economics, and Business, Discussion Paper No. 793. Available at SSRN: https://ssrn.com/abstract=2484565

Edward Morrison

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Mark Roe (Contact Author)

Harvard Law School ( email )

Griswold 502
Cambridge, MA 02138
United States
617-495-8099 (Phone)
617-495-4299 (Fax)

Christopher Sontchi

United States Bankruptcy Courts, District of Delaware ( email )

824 North Market St.
5th floor
Wilmington, DE 19801
United States

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