House-Passed Financial Overhaul Allows for GM-Style Bailouts of Big Banks

By Matt Cover, CNSNews.com Staff Writer
Jul. 08, 2010

(CNSNews.com) – The House-passed financial regulation bill would allow the government to save the profitable assets of a failing bank and spin them off into a new company – a power that mirrors the government’s action in saving General Motors and Chrysler.

The provision is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which passed the House on June 29. The Senate has yet to take action on the bill, which is a product of a House Senate conference committee.

The bill allows the Federal Deposit Insurance Corporation (FDIC), after a determination by the Treasury secretary and the president, to seize a failing financial institution whose failure the government determines may harm the broader financial system.

Once the FDIC seizes a company, it can – if it chooses – divide the company’s assets into profitable and unprofitable classes. Both classes of assets can be spun off into what the law calls a “bridge financial company.”

This bridge corporation can then purchase, using federal financing, any of the assets of the failed financial firm.

“Upon the creation of a bridge financial company…such bridge financial company may…assume such liabilities (including liabilities associated with any trust or custody business, but excluding any liabilities that count as regulatory capital) of such covered [failed] financial company…purchase such assets…[and] perform any other temporary function which the Corporation may, in its discretion, prescribe,” the bill states.

The bridge financial company would then essentially become a federally controlled clone of the failed financial firm with the exception that the bridge company would have access to any funds the FDIC determines it needs to continue carrying out the failed firm’s business, while the FDIC settles the debts of the failed firm.

“[T]he Corporation may provide for a bridge financial company to succeed to and assume any rights, powers, authorities, or privileges of the covered financial company with respect to which the bridge financial company was established and, upon such determination by the Corporation, the bridge financial company shall immediately and by operation of law succeed to and assume such rights, powers, authorities, and privileges,” the bill stated.

Once this bridge company has been established, it can continue doing business as a ward of the FDIC for a period of two years, at which time the FDIC must either extend the bridge company’s charter, privatize it, or terminate it entirely.

If the government decides to privatize the bridge corporation, it can either merge or consolidate it with another company, sell 80 percent or more of the bridge company’s stock to another corporation, or sell or transfer all of the bridge company’s liabilities and assets to another company.

“The status of any bridge financial company as such shall terminate upon the earliest of – the date of the merger or consolidation of the bridge financial company with a company that is not a bridge financial company…the sale of a majority of the capital stock of the bridge financial company…the sale of 80 percent, or more, of the capital stock of the bridge financial company to a person other than the Corporation [FDIC]… the acquisition of all or substantially all of the assets of the bridge financial company,” the bill stated.

This last step is much the same process used by the Obama administration to deal with the failures of General Motors (GM) and Chrysler in 2009.

In this instance, the FDIC would replace the Presidential Task Force on the Auto Industry in dealing with the failed firms and would use its power to keep failed financial firms out of bankruptcy court, as it does with banks whose deposits it insures.

In the case of GM, the auto task force negotiated a restructuring of the company, creating a new corporation – called New GM – to purchase most of the assets of the failed GM, so that the company could continue doing business without the burdens of its failed businesses or un-payable debt.

“The newly organized GM will purchase substantially all of the assets of the old GM needed to implement its business plan out of a chapter 11 in exchange for the U.S. Government relinquishing the majority of its loans to GM,” the White House explained in a press release May 31, 2009.

A similar situation was negotiated by the White House to handle the Chrysler bankruptcy. Under that scenario, a new company – Chrysler Group LLC – was created that bought the operations of the failed Chrysler LLC, with financing from the federal government and Italian automaker Fiat.

Like New GM and Chrysler Group LLC, once the government transfers the bridge company’s stock to another company or individual, the bridge financial company will become a new, private entity and will cease to be a ward of the government.

“[T]he Corporation may amend the charter of the bridge financial company to reflect the termination of the status of the bridge financial company as such, whereupon the company shall have all of the rights, powers, and privileges under its constituent documents and applicable Federal or State law,” the law reads.

“[T]he Corporation may take such steps as may be necessary or convenient to reincorporate the bridge financial company under the laws of a State and…such State-chartered corporation shall be deemed to succeed by operation of law to such rights, titles, powers, and interests of the bridge financial company,” it says.