(CNSNews.com) – The Treasury Department on Wednesday revealed the details of a proposed government takeover plan for troubled financial institutions that would empower the Treasury secretary to determine when an institution has failed – and whether to bail the institution out or have the government take it over.
Part of the administration’s push for massive new federal regulations, the legislation, released by Treasury Wednesday, would send regulatory powers into uncharted waters, giving the government the power to take over any type of large financial institution.
The proposed legislation, to be introduced in Congress this week would empower the Treasury secretary, in consultation with the president and the Fed, to make a “triggering determination” to take over an institution and either run it until it returns to solvency, which is called “conservatorship” – or to liquidate it, which is called “receivership.”
The proposal also outlined specific “financial assistance measures” that Treasury Secretary Timothy Geithner can take to keep an institution solvent. These measures are exactly the types of things the federal government is already doing under the various bailout programs already in place through the Treasury and the Fed.
“These (measures) include making loans to the financial institution in question, purchasing its obligations or assets, assuming or guaranteeing its liabilities, and purchasing an equity interest in the institution,” the proposal stated.
The only difference between this and previous bailout ideas is that the treasury secretary would be under the control of the entire bailout-liquidation process, essentially making him the government’s bailout czar – a position originally proposed for the Bush administration’s bailout of U.S. automakers but abandoned by the Obama administration.
Currently, only banks are subject to government authority, held by the Federal Deposit Insurance Corporation (FDIC), except for Fannie Mae and Freddie Mac, who are government-sponsored enterprises.
Both conservatorship and liquidation are available to non-bank financial institutions in bankruptcy courts through two different proceedings, Chapter 11 and Chapter 7.
Chapter 7 bankruptcy is when a business, unable to pay its creditors or meet its other obligations, ceases normal operations and begins dividing up and selling off its assets, using the proceeds to repay its creditors. If any money is left over, it is given to the former owners of the business.
Chapter 11 bankruptcy is different from Chapter 7 in that it allows a business to continue normal operations while forming a restructuring plan to present to both the court and its creditors for approval.
If approved, the business carries out the plan, which may include securing loans, renegotiating contracts, and selling off parts of its business. Upon completion of the plan, the creditors are considered paid-in-full by the court, even if they must take a loss – known as a haircut – under the plan.
While Treasury’s plan may appear to be no different than either Chapter 7 or Chapter 11, it contains one key difference. Under bankruptcy law, creditors take a business to bankruptcy court, where a judge hears arguments from both sides, determines which type of bankruptcy is appropriate, and then oversees a businesses’ restructuring or liquidation.
Under Treasury’s plan, the government unilaterally determines whether an institution has gone beyond the pale and which type of action it will take. As proposed, there is no consultation with the company in question, even if the government places it into conservator/receivership.
“None of these actions would be subject to the approval of the institution’s creditors or other stakeholders,” the proposal reads.
Part of the administration’s push for massive new federal regulations, the legislation, released by Treasury Wednesday, would send regulatory powers into uncharted waters, giving the government the power to take over any type of large financial institution.
The proposed legislation, to be introduced in Congress this week would empower the Treasury secretary, in consultation with the president and the Fed, to make a “triggering determination” to take over an institution and either run it until it returns to solvency, which is called “conservatorship” – or to liquidate it, which is called “receivership.”
The proposal also outlined specific “financial assistance measures” that Treasury Secretary Timothy Geithner can take to keep an institution solvent. These measures are exactly the types of things the federal government is already doing under the various bailout programs already in place through the Treasury and the Fed.
“These (measures) include making loans to the financial institution in question, purchasing its obligations or assets, assuming or guaranteeing its liabilities, and purchasing an equity interest in the institution,” the proposal stated.
The only difference between this and previous bailout ideas is that the treasury secretary would be under the control of the entire bailout-liquidation process, essentially making him the government’s bailout czar – a position originally proposed for the Bush administration’s bailout of U.S. automakers but abandoned by the Obama administration.
Currently, only banks are subject to government authority, held by the Federal Deposit Insurance Corporation (FDIC), except for Fannie Mae and Freddie Mac, who are government-sponsored enterprises.
Both conservatorship and liquidation are available to non-bank financial institutions in bankruptcy courts through two different proceedings, Chapter 11 and Chapter 7.
Chapter 7 bankruptcy is when a business, unable to pay its creditors or meet its other obligations, ceases normal operations and begins dividing up and selling off its assets, using the proceeds to repay its creditors. If any money is left over, it is given to the former owners of the business.
Chapter 11 bankruptcy is different from Chapter 7 in that it allows a business to continue normal operations while forming a restructuring plan to present to both the court and its creditors for approval.
If approved, the business carries out the plan, which may include securing loans, renegotiating contracts, and selling off parts of its business. Upon completion of the plan, the creditors are considered paid-in-full by the court, even if they must take a loss – known as a haircut – under the plan.
While Treasury’s plan may appear to be no different than either Chapter 7 or Chapter 11, it contains one key difference. Under bankruptcy law, creditors take a business to bankruptcy court, where a judge hears arguments from both sides, determines which type of bankruptcy is appropriate, and then oversees a businesses’ restructuring or liquidation.
Under Treasury’s plan, the government unilaterally determines whether an institution has gone beyond the pale and which type of action it will take. As proposed, there is no consultation with the company in question, even if the government places it into conservator/receivership.
“None of these actions would be subject to the approval of the institution’s creditors or other stakeholders,” the proposal reads.