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Clearing House War-Games Failure of Megabank

WASHINGTON — For the first time, the death of a financial giant has been war-gamed.

While the results are still being sorted out, the simulation of a $2 trillion-asset bank's failure showed the orderly liquidation authority in Title II of the Dodd-Frank Act went pretty smoothly.

"Title II works," says Paul Saltzman, the president of The Clearing House Association, which sponsored the simulation. "We are digesting it now and will meet with regulators to share our lessons learned."

The data could help convince skeptics that the Dodd-Frank Act did indeed end Too Big to Fail.

Critics of the reform law have been arguing that bankruptcy is a better option and are even championing a revised Chapter 14. They suspect federal regulators will simply continue to bail out big banks and stick taxpayers with the tab.

But that narrative ignores the cold hard facts of the law, not to mention all the work the Federal Deposit Insurance Corp. has put into building the Orderly Liquidation Authority infrastructure.

The Clearing House spent the past 10 months preparing the simulation, which took place Nov. 8-9 at the Doral Arrowwood in Rye Brook., N.Y., as part of a larger symposium.

The association organized 180 people to play various roles in the simulation of $2 trillion-asset institution's demise. Some people played the executives who ran the failing bank while others were executives at two competing firms. The simulation also included people filling the roles of regulators, investors, politicians and even journalists who got to throw some sand in the gears by reporting false rumors.

The Clearing House drew its cast from member banks and the ranks of former regulators as well as lawyers from seven different firms and professionals from Ernst & Young and Promontory Financial.

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