Panel Calls for Lawmakers to Adopt Better Resolution Mechanism

Alan Beller, a partner at Cleary Gottlieb Steen & Hamilton and former director of the Division of Corporation Finance, believes that if Congress is able to turn only one pending proposal into law, it should be the legislation that provides for the resolution of failing financial services companies. This is the single most important piece of the reform effort that would prevent the markets from reliving a weekend like the one in 2008 when Lehman Brothers collapsed, he said. Beller was one of several panelists at Practising Law Institute’s conference on securities regulation that discussed the merits of pending financial reform legislation.

Stephen Cutler, general counsel of JPMorgan Chase & Co., said the U.S. desperately needs a resolution authority that works. There was a tremendous amount of chaos surrounding the Lehman Brothers failure, and lawmakers should not let that happen again, he said. The resolution mechanism addresses the too-big-to-fail issue, and Cutler believes the U.S. needs to be in a position to let institutions fail. The only way to do that is to have effective resolution authority in place, he said. It is a tall order, he added, noting that legislators have just begun to work out the details.

The answer should not be to break up the big institutions, according to Cutler. Large companies like Nike and Coca-Cola are international in scope and need big international banks to serve them, he said. However, legislators need to ensure that if it comes to it, these large banks can be allowed to fail.

The Treasury Department’s George Madison noted that financial institutions have gotten so large and interconnected that even they do not know how much they impact the economy. With respect to the chaos surrounding the Lehman Brothers failure, Madison said that the government cannot take the time to argue with the board and shareholders in situations where it would bring the entire financial system to a screeching halt. There must be a way to resolve failing institutions that is very fast, he said.

Sullivan & Cromwell’s Rodgin Cohen believes the Administration is right in stressing the importance of resolution authority, but he cautioned that legislators should not get stopped by trying to come up with the perfect plan. Often the greatest enemy of the good is the perfect, he said. Lawmakers must do something, he noted, and then give regulators the resources to implement the plan.

Panelists were asked if reform is still necessary or even possible given the recent economic recovery. Cutler said it is still necessary because the financial crisis showed that current regulation is not exactly right.

He is concerned, however, about proposals to create two new regulators, the Systemic Risk Oversight Council and the Consumer Financial Protection Agency. There are many regulators already, and the U.S. is moving toward something more unwieldy and awkward, rather than taking the opportunity to simplify and consolidate the regulatory structure, in Cutler’s opinion. If you look at the regulatory architecture elsewhere in the world, there is nothing as complicated as the U.S., he noted.

Madison also believes that some kind of regulatory reform will be completed. We have to deal with derivatives and with the gaps between regulators, he said. He believes the U.S. also needs an agency to enforce consumer rights rules.

Cohen noted that there has already been a move toward much more rigorous enforcement at government agencies, but he does not think it is sufficient. He believes there will at least be legislation that provides for the resolution of financial services companies and a law to cover regulatory gaps. The U.S. is missing an opportunity to consolidate regulators, he noted, but it at least needs rationalization of a regulatory system with too many gaps.