Yesterday a “Chapter 14” bankruptcy reform passed the House of Representatives as Title XI (The Financial Institution Bankruptcy Act) of the Appropriations Bill on Financial Services and General Government. This is a very promising development. The reform would largely end the problem of too-big-to-fail by making it feasible for a large failing financial firm to actually fail and go through bankruptcy under clear rules without systemic spillovers, thereby greatly reducing the likelihood of government bailouts. The fact that this reform is largely nonpartisan and is part of a passed appropriations bill greatly increases the chance of it becoming law soon, maybe even before the election or at least in this congress. That is the conclusion on the Wall Street Journal in this report.
Much of the research and legal work on this proposal has been conducted by the Resolution Project at Stanford’s Hoover Institution under the direction of Ken Scott, who unfortunately passed away last month. Ken founded and was the driving force behind the Resolution Project which consisted of legal scholars, economists and market practitioners from around the US and the UK. The goal of the Resolution Project was to design legal and economic reforms to prevent bailouts and spillovers of failed financial institutions. Under Ken’s leadership, the Resolution Project—it began work in 2009—developed the “Chapter 14” bankruptcy reform. In a short span of time he edited three books on this subject, Ending Government Bailouts as We Know Them (2010), with me and George Shultz; Bankruptcy Not Bailouts: A Special Chapter 14 (2012) with me, and Making Failure Feasible: How Bankruptcy Reform Can End Too Big To Fail (2015) with Tom Jackson and me. Without Ken’s dedication, rigorous thinking, insistence on excellence and genuine good-nature, these scholarly and practical contributions would have been impossible. The research has been bolstered by many opeds, blogs and congressional testimony. The idea has been out there, debated and written into law. It is time to make it the law of the land.