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Lindsey Chessum

Published onJun 04, 2012
Lindsey Chessum

Recently, the Report of the Examiner in the Chapter 11 proceedings of Lehman Brothers Holdings, Inc., was released. The documents display that the Lehman collapse was less a matter of forces outside the control of the bank and more due to matters of hubris and ill-advised decisions. The released documents indicate that the board and management of Lehman Brothers were warned and aware of the risks that faced their business in 2007 and 2008. Yet, despite the warnings and awareness, the documents exhibit the arrogance of the board and management, causing Lehman Brothers to dismiss the knowledge and warnings of the company being in jeopardy. This arrogance and hubris exemplified by the board and management of Lehman Brothers underlies the exacerbation of the inevitable and pervasive moral hazard dilemma found in the financial markets. The conceitedness and haughtiness coupled with the intensification of the moral hazard dilemma led to some banks, including Lehman Brothers, to continue to think they could put their interests first.

The Orderly Liquidation Processes and the Living Wills and Contingency Plans found in Sections 165 and 204 of the Dodd-Frank Act can help confine the hubris and arrogance exemplified by Lehman Brothers’ management and board and limit the desire to put the interests of the bank first. By making the “Too-Big-to-Fail” (TBTF) institutions map out how they can be orderly resolved in great detail, banks like Lehman Brothers can no longer afford to conceitedly dismiss the knowledge and warnings of the company being in jeopardy. Similarly, by enveloping systemically important, non-bank financial firms into the comprehensive Orderly Liquidation regime, the signs and information pointing to a company being at risk cannot be ignored through bravado.

What is more, these provisions from Dodd-Frank have gained more traction from Lehman Brothers moving through bankruptcy. Around March 6, 2012, Lehman emerged from what is the biggest bankruptcy in United States history. The Presiding Judge James Peck called the bankruptcy, “the ‘most impossibly challenging’ bankruptcy ever.” Lehman’s lead attorney stated, “it was an extremely difficult and enormously time-consuming case,…I had to increase my high blood pressure pills.” Yet, despite all the difficulties, the firm has moved through the bankruptcy process relatively smoothly, although no measures were taken to plan for or handle an orderly liquidation or resolution. Accordingly, in light of the Lehman Brothers bankruptcy one can see that a TBTF or a systemically important, non-bank financial organization can be dealt with through bankruptcy proceedings. Therefore, the implementation of the Orderly Liquidation Processes and the Living Wills and Contingency Plans will only aid in making a liquidation and resolution fluid and successful. Consequently, there should be great confidence that the procedures and devices are in place so TBTFs and systemically important, non-bank financial firms should not be bailed out again and allowed to avoid the ramifications of their decisions.

Some opponents of Dodd-Frank may say that the act does not go far enough in handling the arrogance and hubris displayed by Lehman Brothers that intensifies the moral hazard dilemma. They would argue that Dodd-Frank should have busted up the TBTF firms. However, this argument does not take into account the circumstances surrounding the TBTF organizations. Phillip Swagel, a Treasury economist that was working within the department breaking the TBTF banks apart revealingly stated:

“[t]he simple truth is that it was not feasible to force a debt for equity swap – one of the measures that could have aided in breaking up a TBTF institution – or to rapidly enact laws necessary to make this feasible. To academics who made this suggestion to me directly, my response was to gently suggest that they spend more time in Washington, DC.”

If it was not feasible to force or enact laws to speedily move a TBTF through bankruptcy when these institutions were failing or on the brink of failure, there is no way it is now feasible to break them up after they have stabilized. The practicalities of the situation do not lend themselves to allowing a tearing apart of the TBTFs. This especially holds true after the enactment of the “Troubled Asset Relief Program” (TARP). It is unlikely that the U.S. Government is going to bailout the TBTFs in their current structure to only turn around and later dissolve that current structure. As a consequence, Dodd-Frank’s Orderly Liquidation Processes and the Living Wills and Contingency Plans provisions adequately confine the bravado and arrogance exemplified by Lehman Brothers’ management and board and limit the desire to put the interests of the bank first, while going as far as circumstances and politics will allow.

Through the Orderly Liquidation Processes and the Living Wills and Contingency Plans found in Sections 165 and 204, Dodd-Frank addresses the haughtiness exemplified by the board and management of Lehman Brothers and underlies the exacerbation of the pervasive moral hazard dilemma found in the financial markets. By establishing explicit and detailed powers and steps to resolve and liquidate TBTFs and systemically important, non-bank financial firms, Dodd-Frank makes it apparent that procedures and parameters are in place to handle a failed institution, without the need for the government to prop up the institution. The Orderly Liquidation Processes and the Living Wills and Contingency Plans lay out the consequences that will result from arrogantly ignoring the signs pointing to a company being at risk. Furthermore, the Orderly Liquidation Processes and the Living Wills and Contingency Plans laying out the consequences will make banks and non-bank financial firms think twice before putting their interest ahead of any other considerations.

* Matthew S. Wigton is entering his last year in the JD/MBA program, graduating in May of 2013. He plans on practicing in the business law field or business consulting area after graduating. He currently is the Symposium Editor of the Journal of Business and Intellectual Property Law.

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