Senators Mark Warner and Bob Corker are proposing setting up a new, separate bankruptcy court to handle complex financial firms in need of restructuring. Their goal is to create a superior alternative to government takeover when a firm "too big to fail" threatens to go under and destabilize the entire economy.
Warner, a Virginia Democrat, and Corker, a Tennessee Republican are collaborating on the legislation. The crux of their plan is to ensure that a specially-trained judge oversees the resolution rather than a government agency. One option is to designate one federal judge in each U.S. Circuit as a financial bankruptcy specialist. Another option is to set up a separate court entirely separate from the current bankruptcy courts. Currently, the FDIC and various other government agencies have the authority to take on large institutions' failures.
The Obama administration has come out against Warner and Corker's proposal. It maintains that the federal government's work with Lehman Brothers Holdings Inc.'s bankruptcy proves that the federal government can successfully wind down large financial firms outside of the court system. Obama is also skeptical of bankruptcy because bankruptcy may shield creditors from losses, and the president wants to ensure that creditors and shareholders take their fair share of losses when a firm fails. Warner and Cocker's proposal does allow for a government-controlled takeover if the Treasury, the Federal Reserve, and other agencies determine that such an extreme measure is necessary.
