I hope to get time to write a full post on Sen. Dodd's financial reform bill in the next couple of days, but I do want to highlight one significant provision in the proposed resolution authority (which very much surprised me). In normal commercial bank resolutions, the derivatives safe harbor doesn't apply for the first 24 hours — that is, counterparties to a failed bank's derivatives contracts (and repos, etc.) can't terminate, liquidate, or net the derivatives until 5:00 p.m. on the business day following the FDIC's seizure of the bank. The purpose of this 1-day breather is to give the FDIC time to transfer a failed bank's derivatives positions, usually en masse, to healthy institutions.

Section 210(c)(10)(B) of Sen. Dodd's bill, however, provides that the derivatives safe harbor doesn't apply for five (5) full business days after a covered nonbank financial institution is seized (pp. 231–232). This essentially gives the FDIC five days instead of one to figure out what to do with a failed financial institution's derivatives positions. That's a major difference, especially considering that the House bill stuck with the traditional 1-day breather. Frankly, I think the House bill was wrong, and that the FDIC would almost certainly need more than one day to sort out where to transfer a failed financial institution's derivatives positions. But at first blush, five days strikes me as way too long. (The five days immediately following Lehman's failure felt like an eternity.) I think three days strikes the right balance, but even that's probably optimistic.

In any event, that provision immediately caught my eye.


Kate said...


Off topic, but do you have any thoughts on the process, vote tally, forthcoming provisions,and fiscal economics of the health care bill. I can imagine that the Democratic party leadership is aggressively whipping for votes.

Anonymous said...

Or, any thought on the possibility that health care passage may "poison the well" for Republicans on financial reform? Will they resent health care more than they want to pass financial reform?

Economics of Contempt said...

Kate: House leadership is definitely aggressively whipping votes for health care reform. I don't know what the current whip count is (it seems to change every hour), but I have no doubt that they'll get there. The leadership in the House is just too powerful not to get there. When it comes down to brass tacks, the House leadership can always steamroll enough members to get what it wants. (Remember Medicare Part D? They held that vote open for 3 hours, and eventually DeLay was able to flip 2 Republicans.) Likewise, one way or another, Pelosi will eventually flip enough Dems to pass health care reform.

So I'm not worried about the House. The Senate, on the other hand, is more worrisome. There are going to be some serious fireworks on the reconciliation bill. I'm still pretty confident that they'll get 51 votes in the end, but I think it'll be really ugly. It's only fitting that that the health care debate end with a bang, though.

Anonymous: I tend to think that tensions will ratchet down after health care is done. On the other hand, legislative fatigue will be a problem as well.

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