The Orderly Liquidation of Lehman Brothers Holdings Inc. under the Dodd-Frank Act

Posted on Monday, April 25, 2011

The FDIC released a report, The Orderly Liquidation of Lehman Brothers Holdings Inc. under the Dodd-Frank Act, today examining how the FDIC could have structured an orderly resolution of Lehman Brothers Holdings Inc. under the orderly liquidation authority of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) had that law been in effect in advance of Lehman's failure.

Lehman’s bankruptcy filing on September 15, 2008, was a signal event of the financial crisis. The disorderly and costly nature of the bankruptcy -- the largest financial bankruptcy in U.S. history -- contributed to the massive financial disruption of late 2008. The lengthy bankruptcy proceeding has allocated resources elsewhere that could have otherwise been used to pay creditors. Through February 2011, more than $1.2 billion in fees have been charged by attorneys and other professionals principally for administration of the debtor's estate.

The FDIC report concludes that Title II of the Dodd-Frank Act could have been used to resolve Lehman by effectuating a rapid, orderly and transparent sale of the company's assets. This sale would have been completed through a competitive bidding process and likely would have incorporated either loss-sharing to encourage higher bids or a form of good firm-bad firm structure in which some troubled assets would be left in the receivership for later disposition. Both approaches would have achieved a seamless transfer and continuity of valuable operations under the powers provided in the Dodd-Frank Act to the benefit of market stability and improved recoveries for creditors. As required by the Dodd-Frank Act, there would be no exposure to taxpayers for losses from Lehman's failure.

The report will appear in a forthcoming issue of the FDIC Quarterly, scheduled for release in June. The FDIC Quarterly is available on the FDIC's Web site at: http://www.fdic.gov/bank/analytical/quarterly/index.html.

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