WASHINGTON — The Federal Deposit Insurance Corp. gave the most vivid picture yet of how one day it will seize and clean up a giant firm.
To date the FDIC's extraordinary new resolution powers over nonbanks as granted by the Dodd-Frank Act have been somewhat intangible. But a proposal Tuesday focused on mechanics of the regime, including the order of payments for unsecured creditors and clawbacks of executive pay at failed firms.
"We're really building an infrastructure here to implement the orderly liquidation authority," FDIC Chairman Sheila Bair said at a board meeting to discuss the plan.
The nonbank creditor order would resemble the priority list the FDIC uses to pay creditors with funds left over at a failed bank. However, the priority list for nonbanks is also tailored to parallel the bankruptcy process, a key intent of Dodd-Frank. For example, the proposed claims process for unpaid wages and benefits to employees of the failed firm are more common to bankruptcy code.
Under the FDIC's proposal, the agency's costs — including paying off privately issued debt meant to finance the receivership, administrative expenses and then debt owed the government — would be first in line after secured claims. Then come portions of the unpaid compensation to low-level employees of the failed firm, followed by certain claims of creditors who also owed debt back to the failed firm; "general" unsecured claims; holders of subordinated debt; compensation for senior executives; any interest available after the failure; and lastly, any shareholder equity.
The plan would also provide creditors with instructions on how to file claims, and how "disaffected creditors" can attempt to seek relief in court. Claimants would have 60 days to bring such an action.
The proposal, which provides for 60 days of public comment, indicated the FDIC would start compensating a class of creditors only after the previous one had been fully paid.
Bair said the process aims to instill market discipline by making it clear that losses are likely, while also addressing any concerns about unfairness among different classes.
"We want shareholders and creditors to understand that if their institution fails that they're on the hook for losses, not taxpayers," she said. "But we also want to ensure transparency and fairness and the payments of claims and allocation of losses will be done fairly and openly in a manner designed to preserve value and maximize recoveries."
Under the proposal, the FDIC, as authorized by Dodd-Frank, could also recoup two years of compensation from senior executives or directors determined to have been "substantially responsible" for the failure of a firm. The agency would review whether managers performed their duties well or alternatively performed in a manner that resulted in losses.
But for the most senior principals — such as a chief executive officer, chief operating officer or chief financial officer — responsibility for a failure would be "presumed," although the final determination is subject to further review.
The proposal was the biggest step toward laying out specifics of how the new regime — intended to prevent the type of chaos that ensued from large-firm failures during the crisis — will work. The agency had discussed implementation at two industry roundtables on the new authority, and in January had approved a narrow rule clarifying which creditors in rare cases could get more relief than others in their class.
Further rules to implement the authority under Dodd-Frank are expected, including a joint regulation with the Federal Reserve Board on standards for firms' own internal resolution plans, known as "living wills."
Board members on Tuesday spent considerable time discussing the clawback provisions. The recoupment authority is separate from FDIC powers to bring civil cases against officers and directors for negligence, as well as from a pending rule by several regulators under Dodd-Frank to restrict compensation at open firms.
John Walsh, the acting comptroller of the currency and an FDIC board member, said the FDIC should not recoup compensation just because an individual was senior in an organization.
"The concern that I have was that the way … 'substantial responsibility' seemed to be defined was that there was a presumption linked to job title as opposed to specific findings," Walsh said.
Officials responded that even though a job title could be an important consideration, it is not the only one.
"The regulation does in fact create a presumption with regard to certain types of positions such as the chief executive officer or chairman of the board of directors, but … it is a presumption that's rebuttable," said Michael Krimminger, the FDIC's general counsel, who briefed the board on the proposal. "I would anticipate that in the future as under the regulatory provisions the FDIC staff will take a look at how the senior executive performed their responsibilities, what was the result of their performance, did they meet the requisite duty of care and loyalty to the particular firm, and we'll evaluate that very carefully in making a judgment or recommendation to go forward or not go forward on the recoupment of compensation."
