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JP Morgan provides opportunity to reflect on Orderly Liquidation Facility

{mosads}Shockingly, in April, Republicans on the House Financial Services Committee inexplicably voted to eliminate Title II during the Ryan Budget process, rejecting amendments Ranking Member Barney Frank (D-Mass.) and I offered to save Title II. In the wake of the JP Morgan loss revelations, I urge my Republican colleagues to rethink their position on this vital reform to end  “too big to fail.”

One of the lessons of the Lehman Brothers bankruptcy in 2008 was that the regular bankruptcy process for systemic financial institutions is not adequate. It is simply too slow and uncertain in modern global markets. Bankruptcy takes years, while financial contagion spreads and ravages markets in minutes and hours. Therefore, Dodd-Frank included Title II to deal directly with how to liquidate these institutions in a way to that places management, shareholders, and creditors on the hook for the failure and not taxpayers, while protecting the broader economy. 

In an interview, Bush Treasury Secretary Hank Paulsen said this about the OLF: “[w]e would have loved to have something like this for Lehman Brothers.  There’s no doubt about it.” Title II ensures that taxpayers are never again backed into the corner of deciding between the two equally untenable false choices of either providing a bailout or putting the entire economy at risk.

JP Morgan is the largest U.S. bank and widely regarded as one of the most sophisticated and best managed. Nonetheless, the positions that generated the losses eluded the notice of management and then went on to produce losses that exceeded what JP Morgan’s “value-at-risk” models predicted. JP Morgan is likely to weather this loss. However, it is possible to envision a scenario where a transaction at an institution generates losses that it cannot weather. It just did not happen this time. The question then is do we have a system to deal with that eventuality? Currently, we do, but it is under attack.

I am discouraged to think that the hard learned lessons of the financial crisis would be so soon forgotten. There is a market truism that says the market can stay irrational longer than you can stay solvent. I hope that my Republican colleagues do not remain irrationally opposed to Title II before another institution becomes insolvent. 

Rep. Moore (D-Wis.) is a member of the House Financial Services Committee.


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