A debtor (or other  interested party) may file a reorganization plan, which ultimately may  be confirmed by the court. In addition to the evaluation of whether the financial company fits within  one of the categories described above, federal regulators recommending  whether the Secretary of the Treasury should appoint FDIC as receiver  must include: an evaluation of whether the financial company is in default or in  danger of default; a description of the effect that the default of the financial company  would have on the financial stability in the United States; a description of the effect that the default of the financial company  would have on economic conditions or financial stability for low- income, minority, or underserved communities; a recommendation on the nature and extent of actions to be taken  under Title II of the Dodd-Frank Act regarding the financial company; an evaluation of the likelihood of a private-sector alternative to prevent  the default of the financial company; an evaluation of why a case under the Code is not appropriate for the an evaluation of the effects on creditors, counterparties, and  shareholders of the financial company and other market participants. Regulators have reported progress on developing a  universal identifier for financial companies that would help them identify  and manage companies’ counterparty exposures. Federal Regulators Have Issued Final Rules for OLA and Resolution Plans

Final Rules for OLA. Proposed Rules Related to OLA. Although this rule requires these types of financial institutions to  submit plans describing how they would be resolved through the  bankruptcy process, regulators reported that having companies file  resolution plans would help FDIC in planning for the exercise of the  possible use of its resolution authorities, including OLA. Plans for the largest bank holding companies  are due in July 2012. FDIC  officials told us that they have started to develop a “minimum recovery”  rule to respond to these concerns and clarify how creditors would receive  no less than they would under a Chapter 7 bankruptcy proceeding. § 343. under OLA. Concerns Have Been Raised about FDIC’s Limited Experience with Resolving Large, Complex Institutions

Although FDIC and other regulatory officials noted that resolution plans  could help prepare for the possible failure of a large financial company,  not enough time has passed to determine the effectiveness of the living  will requirement in assisting financial companies to prepare for  bankruptcy (as discussed earlier) as well as aiding FDIC in the use of its  Title II authority. In the bankruptcy process, the resolution or liquidation of large, complex,  internationally active financial firms involves multiple challenges. Financial Company Bankruptcies Remain Difficult to Track and Several Major Cases Move Forward

In the 2011 report, we found that comprehensive data on the number of  financial companies in bankruptcy are not readily available. Two large cases we began  tracking in our 2011 report, Lehman Brothers and Washington Mutual, are  moving forward, but these cases along with the more recent bankruptcy  of MF Global illustrate the challenges in resolving large, complex financial  institutions. Specifically, data on the number of  financial company bankruptcies and their outcomes have been difficult to  obtain. Although AOUSC officials told us that they currently were not routinely  collecting any data that would allow the identification and tracking of  financial company bankruptcies, AOUSC and the Federal Judicial Center  have undertaken a collaborative effort to create a specialized database of  financial companies that have filed for bankruptcy protection from 2000 to  2010, but they have concerns about the reliability of these data as they  are untested for this purpose. We continued to monitor two financial megacases, Washington Mutual,  Inc. (Washington Mutual) and Lehman Brothers Holdings, Inc. (Lehman)  and began monitoring a third, MF Global Holdings Ltd. (MF Global). Both financial institutions  filed for Chapter 11 protection in September 2008. A new case involves  MF Global, a holding company with a broker-dealer and commodity  broker, which filed for Chapter 11 protection in October 2011. Lehman Brothers. As discussed earlier, FDIC and other regulators have been  taking steps to improve international coordination of the resolution of  large, systemically important financial institutions but challenges remain. We received technical  comments from the remaining agencies, which we incorporated as  appropriate. Appendix I: Objectives, Scope, and Methodology

As required under section 202 of the Dodd-Frank Wall Street Reform and  Consumer Protection Act (Dodd-Frank Act), this report examines: (1)  actions the U.S. District Court for the District of Columbia (D.C. District  Court) has taken in response to the judicial review provision of Orderly  Liquidation Authority (OLA), including any revisions to Local Civil Rule 85;  (2) federal rules or regulations relating to OLA and efforts to improve  international coordination, including living wills, in resolving financial  companies; and (3) data collection efforts and the outcomes of financial  institutions that were in the bankruptcy process. We also conducted interviews with  officials at the Administrative Office of the U.S. Courts (AOUSC);  Commodity Futures Trading Commission; Federal Deposit Insurance  Corporation (FDIC); Board of Governors of the Federal Reserve System  (Federal Reserve); Federal Judicial Center; Securities and Exchange  Commission; Securities Investor Protection Corporation; Department of  the Treasury (Treasury); and the U.S. District Court for the District of  Columbia (D.C. District Court). To address the second objective on federal regulations relating to OLA  and the resolution of financial institutions, we searched the Federal  Register and monitored the websites of FDIC and the Federal Reserve to  determine if relevant rules related to FDIC’s authority under Title II and  resolution planning had been issued.
Why GAO Did This Study

The Dodd-Frank Act created OLA for resolving failed, systemically important financial companies. Since the act was passed in 2010, regulators have been developing regulations to implement this authority and avoid disorderly resolutions that create substantial losses for the financial system. In July 2011, GAO issued the first of its statutorily mandated reports on the effectiveness of the Bankruptcy Code for resolving or liquidating complex, internationally active financial companies. Among the topics examined in this second report, GAO reviewed: (1) federal rules or regulations relating to OLA and the resolution of financial institutions, including living wills; and (2) status of efforts to improve coordination on international resolutions, data collection efforts, and the outcomes of financial institutions that were in the bankruptcy process.
To address these objectives, GAO reviewed agencies draft and final rules related to OLA and comment letters submitted. GAO continued to monitor developments related to the Lehman Brothers and Washington Mutual bankruptcies, and began monitoring a recent bankruptcy filing by MF Global. GAO also studied available data on the number of financial company bankruptcies and met with relevant agency and court officials.
GAO makes no new recommendations in this report. GAO provided a draft for comment to AOUSC, the Department of the Treasury, and federal financial regulators. None provided written comments and technical comments have been incorporated, as appropriate.

What GAO Found

The federal financial regulators have issued certain final rules for resolving large, complex financial companies under the Dodd-Frank Wall Street Reform and Consumer Protection Acts (Dodd-Frank Act) established Orderly Liquidation Authority (OLA). Under OLA, the Federal Deposit Insurance Corporation (FDIC) could serve as receiver of a failing financial company instead of the company entering the bankruptcy process. Regulators continue to address a number of issues related to FDICs new authority, including how creditors will ensure that they receive no less than they would under a Chapter 7 bankruptcy liquidation; how certain assets and liabilities would be treated in a new company created by FDIC under OLA; and what role the Securities Investor Protection Corporation would play in the resolution of a broker-dealer under OLA. Regulatory officials reported that they were continuing to draft rules to clarify how OLA would be used. FDIC and the Board of Governors of the Federal Reserve (Federal Reserve) also have issued final rules requiring certain financial companies to file resolution plans or living wills that must detail how companies would resolve their operations through an orderly bankruptcy. Regulators told GAO that the plans also would help FDIC plan for the exercise of its resolution authority, including OLA. The filing dates for these plans are phased in over the next year and a half, with the first group of financial companies filing their first plans on July 1, 2012. However, nonbank financial companies that also will need to provide plans have yet to be designated.
International coordination remains a critical component in resolving the failure of a large, complex financial company and regulators have been taking steps to address this and are testing new data collection efforts. Specifically, efforts are under way to develop a universal legal entity identifier that allows companies to identify and manage risks from companies with which they are engaged in financial transactions. This additional information could help regulators in resolving internationally active financial companies. Data to identify financial institutions filing for bankruptcy protection as well as their outcomes are limited. Since neither FDIC nor federal judicial agencies have a database that tracks financial companies in bankruptcy, the Administrative Office of the U.S. Courts (AOUSC) and the Federal Judicial Center have begun a new effort to track financial company bankruptcies, but reported court data are untested for this purpose. Several large financial institution bankruptcies are still in progress. Two of the largest financial company bankruptcies, Lehman Brothers Holdings Inc. (Lehman Brothers) and Washington Mutual, Inc.both of which filed in September 2008recently had their reorganization plans confirmed by creditors and approved by the courts. However, these cases are not yet fully resolved. In the Lehman Brothers case, international litigation could take several years to resolve. The October 2011 bankruptcy of MF Global Holdings Ltd., a holding company with a securities and commodities broker, has raised concerns about how commodity customers are treated under a liquidation regime and also involves international litigation over customer property. These financial company bankruptcies highlight the challenges FDIC and other regulators would face in resolving large, complex financial companies under the OLA process.