Lehman Brothers and IndyMac: Comparing Resolution Regimes (CRS Report for Congress)
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| Release Date |
Oct. 12, 2009 |
| Report Number |
R40928 |
| Report Type |
Report |
| Authors |
David H. Carpenter, Legislative Attorney |
| Source Agency |
Congressional Research Service |
Summary:
In the United States, the insolvencies of depository institutions are not handled according to the procedures of the U.S. Bankruptcy Code. Instead, they and their subsidiaries are subject to a separate regime prescribed in federal law, called a conservatorship or receivership. Under this regime, the conservator or receiver, which generally is the Federal Deposit Insurance Corporation (FDIC), is provided substantial authority to deal with virtually every aspect of the insolvency. The failure of most other financial institutions within bank, thrift, and financial holding company umbrellas (including the holding companies themselves) generally are dealt with under the Bankruptcy Code.
Two clear lessons of the 2008 recession are that no financial institution, regardless of its size, complexity, or diversification, is invincible, and the failure of large or highly interconnected financial firms can negatively impact other companies and the financial system as a whole. Congress, as a result, is left with the question of how best to handle the failure of these so-called "systemically significant financial companies" (SSFCs). Some have proposed legislation that would impose a conservatorship/receivership regime, much like that for depository institutions, on insolvent financial institutions that are deemed systemically significant. Others have proposed resolving these institutions through a new chapter of the Bankruptcy Code.
In order to make a policy assessment concerning the appropriateness and likely effectiveness of these proposals, it is important to understand both the similarities and differences between insured depositories and other financial institutions large enough or interconnected enough to pose systemic risk to the U.S. economy upon failure, as well as the differences between the Bankruptcy Code and the FDIC's conservatorship/receivership authority.
To address these questions, other CRS reports analyze the FDIC's conservatorship and receivership powers over failed banks and thrifts and compare the FDIC's resolution regime with the Bankruptcy Code. This report seeks to build on those reports by examining the specific failures of two large financial institutions: IndyMac Bancorp, Inc. and Lehman Brothers Holdings Inc. (LBHI).
It should be noted that the resolutions of these two companies and their subsidiaries are still ongoing. As a result, many details about their failures have yet to surface, much less be fully synthesized. At times, there are gaps in the information provided in this report, either as a result of the dearth of information publicly available or the opaqueness of that which is available. For example, Table 2 in this report generally does not include information regarding the primary business activities of LBHI's foreign subsidiaries, but certain foreign subsidiaries were included in the table to provide some perspective as to the breadth of LBHI's global reach, as well as in the financial services its subsidiaries provided. While this report is not an exhaustive analysis of the resolution of these two companies, in conjunction with our other reports, it does attempt to enhance the debate regarding how to structure the insolvency regimes for financial institutions.
