Revision To Dodd-Frank Proposed

A new law has been proposed that would clarify how the Federal Deposit Insurance Corp. (FDIC) responds to the seizing and dismantling of failed financial firms.

Currently, the FDIC operates under the Dodd-Frank Wall Street reform law. This law gives the FDIC authority to dismantle a company that is faltering, but is systematically important to the U.S. economy. The FDIC often transfers a failed company's assets to a new “bridge” financial company. The proposed law gives priority to debts incurred by this new “bridge” company, paying back its creditors in full, but the creditors of the original, failed company are paid at a discount.

This new proposal would give creditors more understanding as to how they should expect to be paid and in what priority order. It is proposed that the first paid would be any debt incurred by the FDIC after seizing a company, giving incentive to creditors to help the FDIC liquidate failed firms. This is followed by administrative costs, then employee costs, including retirement benfeits, followed far behind by general creditors. If listed low on the priority lists, it may be unlikely that the creditor will receive any compensation at all.

However, the proposals does allow for a creditor to contest the decisions made in their regard, even allowing them to take their case to the federal court.

Another facet of the new proposal allows the FDIC to “claw back” the compensation for two years prior to the seizure of the company of any senior executives and directors that are determined to be “substantially responsible” for the failure of the company, even more if the executive was involved in any fraud.

The goal of this new law is to make sure that the process of seizing a failed company mimics the bankruptcy process as closely as possible.