@ _ FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, 0c 20829 SHEILA © BAIR CHAIRMAN, February 17, 2010 CONFIDENTIAL Honorable Bob Corker United States Senate Washington, D.C. 20510 Dear Senator Corker: ‘Thank you for the opportunity to review the proposed draft of Title {1 on Enhanced Resolution Authority. | appreciate your willingness to work with me on our shared goals of ending “too big to fail,” making sure that shareholders and other creditors will absorb the losses from a failure, and protecting the public. Iam very pleased that the draft provides the scope of powers necessary to accomplish the mission, while reaching all market participants ~ including broker-dealers and insurance companies ~ that contributed to the current crisis We also support a focused and expedited judicial review process before initiation ofa FDIC resolution of a large, interconnected non-bank financial firm. As the draft provides, a review process could be created independent of the bankruptcy courts to censure that u high hurdle was met before applying the new resolution system. As you know, in a systemic crisis, quick and decisive action is essential to prevent further damage to the system, and to ensure that there is never again pressure for a bail-out. This ‘means that any judicial review process must be completed within 24 hours without further delays from any appeals and, once resolution is approved, the FDIC must be empowered to act quickly and decisively. However, | am concemed that the “Supervising Court” proposed in this draft yoes much further. Instead, it effectively gives this court authority to second guess virtually all decisions by the FDIC. The draft could empower judges to order specific actions in the resolution, such as federal funding of creditors, require sales of assets to certain Parties, and issue injunctions stopping the resolution or the bridge company's operations. Ifthe new authority is going to be effective, the FDIC must be able to take decisive action throughout the receivership and bridge company’s operations to limit systemic risks, while controlling costs. To achieve this, the FDIC"s current process provides broad authority to act and bars court orders to require or prohibit certain actions. It fully protects creditors by providing a right to go to court and recover money damages for any Hinancial losses under the statutory claims priority. {belive the draft can be restructured relatively simply to provide for judicial review of the decision to close the financial firm, while giving the FDIC the flexibilityneeded to achieve an effective resolution process. To do this, I would recommend edits to remove the Supervising Counts authority to enter orders stopping or directing the resolution process (in Section 208(e)), and to clarify the role of the court. For example, in discussions with bankruptcy attorneys which FDIC staff undertook at the request of your office, evervone agreed there is parity of treatment of creditors between bankruptcy and the resolution process. (I hope they are not telling you something different.) To avoid misunderstandings, we should clarify that all claims against the FDIC, acting as eceiver or operator for any bridge, be pursued through the claims procedure in Section 204, be limited to money damages, and that the flexibility provided in Section 208 is not limited by the court approval process. Since it's covered by the claims procedures and right 10 go to court, there is no need for a special grant of jurisdiction to the Supervising Court over creditors’ claims in Section 204(a). A few other provisions should be tightened to accomplish this. These edits can be completed quickly and would provide full protection to creditors, but allow us to adopt a process that can achieve our shared goals. ‘The FDIC process is designed to protect financial stability while minimizing costs, to the government in an orderly wind down, My concem is that authorizing the Supervising Court to truly supervise, and second guess, resolution decisions leads to a process like bankruptcy that cannot achieve the speed and cost controls we all want. A judicial process is designed to resolve competing claims of private parties without consideration of the public interest and will inevitably be driven by the failed institution's creditors and the attorneys who represent them, A perfect illustration of the problem is the Lehman bankruptcy, which created massive market uncertainty, inequity among, creditors, and has paid out more than $500 million to advisors and attomeys as valuable assets remain in limbo under bankruptcy jurisdiction and thousands of claims remain unresolved. If, instead, we provide for judicial approval for the use of the new resolution process, but limit further court action to adjudication of claims by creditors for money damages, we can accomplish the goals of a quick and decisive resolution, while protecting creditors” legitimate interests Judicial oversight is not needed to protect creditors” legitimate interests. Under the FDIC's current process creditors have the immediate right to go to court after the FDIC decides whether to pay or not within defined time periods. Once the creditor goos to court, the court gives no deference to the FDIC's decision on the claim. [ understand that some bankruptcy advocates are telling you that constant court oversight is necessary for “transparency.” To provide additional transparency, we would certainly agree to regular reporting to the Council, to Congress, and to the public. We already provide extensive disclosures of our bank resolutions. We pride ourselves on transparency. If'we limit the Supervising Court to approval of the initiation of the resolution, | believe we will achieve better management of the financial costs. A court will not have the same incentives to control costs because it will not be the steward for the fund. In contrast, financial discipline will be provided by the FDIC as the statutory fund manager and in its role in collecting risk-based assessments from the industry.Finally, as a creation of Congress, the FDIC will be much more accountable to Congress and the Treasury Department than will the judicial branch. In contrast, there would be much less accountability by a court should it decide to give favored status to certain creditors, fund certain types of loans, micromanage the bridge bank, or otherwise pursue an activist agenda which could increase resolution costs. Congress, the FDIC, and ultimately taxpayers will have no recourse In summary, we are eager to work with you to streamline this process into one involving an upfront judicial approval mechanism, while providing the resolution authority with the flexibility to implement quick action to reduce costs and protect the public. [have asked my staff to suggest amendments to your draft and will have them to you shortly. Jbent Sincerely, Cort Fu Mate ee 7 me Sheila C. Bair@ _ FEDERAL DEPOSIT INSURANCE CORPORATION, Wastington, OC 20429 SHEILA ©. BAIR CONFIDENTIAL CHAIRMAN January 21, 2010 Honorable Bob Corker Honorable Mark R. Warner United States Senate Washington, D.C. 20510 Dear Senators Corker and Wamer: It was great seeing you both last week. It was good (o hear your current thinking ona resolution process to end “too big to fail.” 1 very much appreciate the way you have embraced this as a priority issue. To restore market discipline and reduce the risk of future failures, we must make clear-by statute-that shareholders and creditors-not the government-will absorb the losses when large systemic institutions fail because of their own mismanagement. It is essential that the statutory framework provides for a “resolution” mechanism” not a “bailout” mechanism; and we will be happy to work with ‘you to avoid language in any legislation that would permit “open institution” support for hailing firms I think we all agree that bankruptey should continue to be the primary way to resolve insolvent firms of all types. I think we also all recognize that in the event of a failure of a large, inter-connected financial firm, it may be necessary to apply a FDIC- style resolution to protect the public from systemic disruptions. The question becomes, ‘what should be the trigger for such a resolution and what safeguards would assure its proper use? Approval by super majorities of the Fed, the FDIC, as well as the Treasury and the President sets a high hurdle. However, ift is considered essential, | believe a judicial review process could be created as a second step, pethaps through a special circuit-court level review independent of the bankruptcy courts fer careful consideration, I must strongly advise against trying to inject a bankruptey process as a required “first step” in the resolution mechanism. If a bankruptey filing must happen first, derivatives counterparties will use their rights under the Bankruptcy Code to dump their contracts and their associated collateral immediately. This is allowed by the Bankruptcy Code, and it could precipitate the market collapse we are trying to avoid. By contrast, under the resolution authority proposals, and the FDI Act, the FDIC has the ability to prevent termination and dumping of these contracts and transfer them to another firm or to a bridge firm. This would prevent one of the major causes of systemic collapses to the financial markets. Second, the review process must be completed quickly. Financial firms, particularly the largest financial firms, depend on access to market liquidity. The FDIC- style resolution process allows immediate creation of a bridge firm to keep operationsgoing and maintain confidence. However, if action is delayed, funding would dry up, asset valucs would be lost, and staff would flee. This would greatly reduce the franchise value of the failed institution, meaning lower recoveries as the institution is broken up and sold off. Third, and related to the prior point, we should never provide temporary ‘government funding for a firm already in bankruptcy. (I understand we agree on that point.) Bankruptcy is designed to protect creditors-not the public and not the government. Even temporary government funding would allow for enrichment of creditors and the attorneys who represent them, at the expense of the government, It is important to note that bankruptcy advocates are on record calling for govemment funding of a bankruptcy process through the Fed's 13(3) lending authority. I understand ‘you are both opposed to this, but the bankruptcy bar will likely advocate this in the Judiciary Committee, their committee of jurisdiction. This raises a broader issue of why the Banking Committee would want to cede jurisdiction to the Judiciary Committee on a specific resolution mechanism for financial intermediaries. And as we discussed, I very much fear that the entanglement of the Judiciary Committee on financial services reform will add a new complication to what is already an uphill battle to get a bill done this year. Fourth, the bankruptcy process can be inefficient and protracted and itis certainly not designed to protect the public or the economy. The Lehman insolvency created massive market uncertainty, inequity among creditors, and illiquidity across the financial markets. And it continues to drag on, with more than $500 million having already been paid out to advisors and attomeys. This cannot be our model. The FDIC process is more efficient than bankruptcy, can be pre-planned unlike the litigated bankrupicy model, and the FDIC can issue regulations to govern the process and provide even more certainty and transparency. Perhaps most importantly, itis designed to protect the public from financial loss and to prevent a systemic collapse. Fifth, the rest of the global community is moving toward setting up special resolution regimes for large, inter-connected financial firms. The Financial Stability Forum (FSB) has made this a top priority, and the head of the FSB, Mario Draghi, tells me that they are looking to the U.S. to set the model. Because of the thousands of different, frequently conflicting bankruptcy rules in various jurisdictions throughout the ‘world, it is simply not feasible to resolve a large, multi-national financial institution using the bankruptcy process. A special resolution mechanism is needed that can be globally replicated, and the U.S. is uniquely situated to lead the way. Finally, I must admit that I feet bankruptey advocates are at cross-purposes in their arguments. On the one hand, they whisper that the FDIC-style process could lead to ‘a “bailout” (which we categorically reject); on the other hand, they argue that it is “too harsh” on the creditors that they represent. We invite review of the thousands of orderly resolutions we have conducted over the years. No process is perfect, but ours has worked well for banks large and small. Large institutions should not escape the same process we continue to use for smaller banks simply because they have grown their non-bank activities.can certainly support a prompt judicial review of whether to trigger a FDIC resolution. I would be very concemed if we moved to some hybrid between a judicial bankruptcy process and the more expeditious FDIC-style process. In many ways, and for the reasons noted above, that would be the worst of all worlds As always, thank you for the opportunity to share our views with you. I hope you find these thoughts useful, and I look forward to our continued collaboration in ending 100 big to fail. Sincerely, Slate Sheila C. Bair