Reed Initiative Seeks to Restore Fairness to Bankruptcy Code

WASHINGTON, DC — With Congress poised to consider changing U.S. bankruptcy laws in
a way that would put the rights of financial firms with large risky bets ahead of
the claims of average Americans, U.S. Senator Jack Reed (D-RI) today introduced the
Bankruptcy Fairness Act. This legislation would help bolster financial stability on
Main Street and Wall Street by requiring experts and regulators to conduct the
research necessary to ensure the safety of the financial system before making
changes to the Bankruptcy Code.

«One of the many lessons we learned from the financial crisis is that reckless Wall
Street behavior can have devastating consequences for middle-class families. But
instead of fixing broken bankruptcy laws to protect taxpayers and working families,
some Congressional Republicans want to change the Bankruptcy Code in favor of big
financial institutions. We must stop this before middle-class Americans are asked,
yet again, to bail out the rich,» said Reed. «This bill aims to put an end to the
policy of ‘pay the big banks first and the little guy later’ and ensure a more level
playing field for all.»

Senator Reed’s bill directs federal financial stability agencies to study the
economic impact of special Wall Street privileges known as «safe harbors;» which
allow derivatives contracts to be paid ahead of other creditors, such as small
businesses and employees. It also asks the agencies to study the availability of
private financing for a big bank that needs to resolve itself in bankruptcy without
a taxpayer bailout, and whether the big firms are still so top-heavy with large
risky Wall Street bets that there is no safe place to offload these contracts if
they fail. In addition, the bill asks the federal agencies to address many
unanswered questions about the Republican-sponsored financial institution bankruptcy
legislation, including how a mega-bank can guaranty that it will go from a state of
failure to a complete recovery in 48 hours, without making changes to its structure
or operations.

In addition, Reed’s bill would ensure that the judges who preside over bankruptcy
cases involving multibillion dollar financial institutions continue to possess the
financial expertise needed to oversee the orderly resolution of a failed mega bank,
so that the failure of another jumbo bank is less likely to affect other parts of
our economy.

The bill also permits the federal agencies that supervise large complex financial
institutions to offer their advice and expertise to the bankruptcy court whenever a
mega bank files for bankruptcy. This is important because these federal agencies
can assist the court in deciphering complex financial products while also providing
the court with an independent assessment of how the court’s decisions could affect
financial stability in the United States.

«Congress should do its homework before changing the Bankruptcy Code in a way that
could further tilt the system to benefit Wall Street at the expense of taxpayers.
There are currently legislative proposals that would let Wall Street banks cut to
the front of the bankruptcy line and take more than their fair share, while ordinary
creditors, such as employees and customers, have to wait in the back. When a jumbo
bank gets in trouble, why should those customers who place the riskiest bets, such
as large Wall Street hedge funds, get paid back in full while ordinary customers may
not get paid back at all? Should shareholders be prevented from holding the mega
bank’s board of directors accountable for most actions, when a mega bank files for
bankruptcy? Is it really possible for a trillion-dollar mega bank to be processed
through bankruptcy safely in just 48 hours without hurting our economy? Is it fair
that ordinary creditors, such as small businesses, who are owed their hard earned
dollars, would be given virtually no notice of a mega bank’s bankruptcy, making it
nearly impossible for them to fight for their rights?» asked Reed. «These are
important, incredibly complex, questions that need thorough answers. My bill would
help ensure Congress has these answers and restore fairness and balance to the
Bankruptcy Code for hardworking Americans.»

The Bankruptcy Fairness Act is cosponsored by U.S. Senators Sherrod Brown (D-OH);
Jeff Merkley (D-OR); Sheldon Whitehouse (D-RI) and Richard Blumenthal (D-CT).