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FDIC Doubles Down on the Safe Harbors

posted by Stephen Lubben

In a little noticed footnote in the FDIC's recent report on a hypothetical liquidtion of Lehman under Dodd-Frank resolution authority, the FDIC states

The exemption from the automatic stay under the Bankruptcy Code in the case of qualified financial contracts generally works well in most cases. However, for systemically important financial institutions, in which the sudden termination and netting of a derivatives portfolio could have an adverse impact on U.S. financial stability, the nullification of the ipso facto clause is needed. By removing a right of termination based solely upon the failure of the counterparty, the bridge financial company structure provides the flexibility to incentivize quali- fied financial contract counterparties to either maintain their positions in such contracts, or exit their positions in a manner which does not jeopardize U.S. financial stability.  

Nice. In short, don't even think about trying to get special treatment when we're in charge, but have at it in front of the bankruptcy judges.

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