Electronic copy available at: http://ssrn.

com/abstract=2037915
1
Resolution,OrderlyandOtherwise:BofAinOLA
StephenJ.Lubben
+

SincetherecentcollapseofLehmanBrothers,theproblemsassociatedwithlarge,
complexfinancialinstitutionshavebeenfrontandcenter.
1
Questionsremainabout
howbesttohandleinsolvency,bankruptcy,orresolutionofsuchaninstitution.
2

Thediscussionismoredifficultstillbecauseofthehighpoliticalandfinancialstakes.
Forthosesteepedinthebankingindustry,maintainingthespecialnessofbanks
andfinancialinstitutionsnecessitatesdenigratingthebankruptcysystem.
3
The

+
HarveyWashingtonWileyChairinCorporateGovernance&BusinessEthics,Seton
HallUniversitySchoolofLaw,Newark,NewJersey.ManythankstoAnnaGelpern,
KristinN.Johnson,AdamLevitin,MichaelMacchiarola,FrankMedina,Frank
Partnoy,andMichaelSimkovicfortheircommentsonanearlydraft.Thanksalsoto
theparticipantsinthe25thAnnualCorporateLawSymposiumattheUniversityof
CincinnatiCollegeofLawfortheirthoughtsonthepaper.
1
E.g.,AnnaGelpern,FinancialCrisisContainment,41Conn.L.Rev.1051(2009);
AdamJ.Levitin,InDefenseofBailouts,99Geo.L.J.435(2011);MichaelC.
Macchiarola,BewareofRiskEverywhere:AnImportantLessonfromtheCurrent
CreditCrisis,5HastingsBus.L.J.267(2009);KarlS.Okamoto,AftertheBailout:
RegulatingSystemicMoralHazard,57UCLAL.Rev.183(2009);HalS.Scott,The
ReductionofSystemicRiskintheUnitedStatesFinancialSystem,33Harv.J.L.&Pub.
Pol'y671(2010);WilliamK.Sjostrom,Jr.,TheAIGBailout,66Wash.&LeeL.Rev.
943(2009);CharlesK.Whitehead,ReframingFinancialRegulation,90B.U.L.Rev.1
(2010);ArthurE.Wilmarth,Jr.,ReformingFinancialRegulationtoAddresstheToo-
Big-to-FailProblem,35Brook.J.Int'lL.707(2010);SarahPeiWoo,Regulatory
Bankruptcy:HowBankRegulationCausesFireSales,99Geo.L.J.1615(2011).
2
SeeStephenJ.Lubben,FinancialInstitutionsinBankruptcy,34SeattleU.L.Rev.
1259(2011).AsDavidZaringexplains:

Resolutionauthorityisthepolitetermforseizingfailingfinancialinstitutions
andeithershuttingthemdownorsellingthemoffforthebestpossibleprice.
Resolutionismeanttobeimplementedbeforecontagionsetsinandthe
institutions'counterparties,includingcustomers,traders,andeven
competitors,alsofail,eitherthroughpanic(whichisnotthefaultofthe
counterparties)orpoorriskmanagement(whichis,butstillmayexacerbate
acrisis).Itisaparticularkindofinstantbankruptcy,destroyingtheinterests
ofsomecreditorsquicklyandunmercifully,whilegivingothers,especially
thebank'sdepositors,afreshandhappystart.

DavidZaring,ALackofResolution,60EmoryL.J.97,99(2010).
3
http://www.pewfr.org/admin/project_reports/files/Cohen-Goldstein-FINAL-TF-
Correction.pdf
Electronic copy available at: http://ssrn.com/abstract=2037915
2
FDIC,
4
keentodemonstrateitscompetencytowieldthenewpowersgivenitunder
Dodd-Frank,rushedtoproduceahypotheticalresolutionofLehmanthatamused
manybyitsnaivet.
5

Ontheotherhand,othercommentators,inthralltothehealingpowersofmarkets,
haveembracedtheexistingbankruptcymechanismsasthebestwaytoaddressthe
issue.
6
Intheprocess,theytendtoignoretheobviousdifferencesbetweena
corporationwithtangibleassetsandonewhoseprimaryassetisthetrustits
counterpartiesplaceinit.
7
Unlikeamanufacturingplant,trustisapttobequite
vaporousintimesoffinancialdistress.
8

Thispapertakesastepbackfromthisdebateandconsiderstheissuefromamore
practicallevel.Whatpreciselydoesitmeantoresolvefinancialdistressina
complexfinancialinstitution?
9
Whatarethegoalsliquidation,reorganization,or
simplecontagionavoidance?
10
And,moreprecisely,howmightsucharesolution
lookunderrealisticconditions?Embeddedinthesequestionsarelargerquestions
ofwhogetstomakethesechoices,andunderwhatcircumstancesthechoicesmight
change.

Ibeginbyexaminingthelegalandfinancialstructureofaspecific,actualfinancial
institution:BankofAmerica.Thefinancialinstitutioninquestionisoneofthe
reallybiginstitutionsintheUnitedStates,andisselectedasarepresentativeofits

4
http://www.ft.com/intl/cms/0a72e3a2-6948-11e0-9040-00144feab49a.pdf
5
http://dealbook.nytimes.com/2011/04/29/the-f-d-i-c-s-lehman-fantasy/and
http://dealbook.nytimes.com/2011/05/03/no-fantasy-in-f-d-i-c-lehman-paper/
SeeTheOrderlyLiquidationofLehmanBrothersHoldingsInc.UndertheDodd-Frank
Act,FDICQUARTERLY,Vol.5,No.2(2011).
6
http://johnbtaylorsblog.blogspot.com/2011/05/how-to-avoid-new-bailout-
authority.html
7
See,e.g.,BrentJ.Horton,HowDodd-Frank'sOrderlyLiquidationAuthorityfor
FinancialCompaniesViolatesArticleIIIoftheUnitedStatesConstitution,36J.Corp.L.
869(2011).
8
SeeStephenJ.Lubben,SystemicRisk&Chapter11,82Temp.L.Rev.433,447
(2009)(arguingthatChapter11canbeusedtoresolvesystemicallyimportantfirms
liketheautomotivefirms,totheextenttheyaresystematicallyimportant);Ryan
Lizza,TheContrarian;SheilaBairandtheWhiteHouseFinancialDebate,NewYorker,
July6,2009,at30,34.
9
SeeLynnM.LoPucki&JosephW.Doherty,BankruptcyFireSales,106Mich.L.Rev.
1,5(2007)("Bankruptcyoffersthreealternativesforaddressingtheproblemsofa
largepubliccompanyinfinancialdistress.Thedebtormayreorganizethebusiness,
sellitasagoingconcern,orclosethebusinessandselltheassetspiecemeal.").
10
Cf.CherylD.Block,OvertandCovertBailouts:DevelopingaPublicBailoutPolicy,67
Ind.L.J.951,968-72(1992).
Electronic copy available at: http://ssrn.com/abstract=2037915
3
type.
11
ThisinstitutionisnotpresentlythebestIknowindangerofdefaultorin
needofresolution,butsomedayitmightbe.
12

IftheFDICweretoresolvethisinstitutionunderthenewOrderlyLiquidation
AuthorityinDodd-Frank,
13
itwouldfirsthavetounderstandthebusinessin
question.Itwouldbeaidedinthisprocessbytheresolutionplansorlivingwills
thatDodd-Frankrequiressuchinstitutionstoprepareandfile.
14
Thefinancial
institutionIexamineinthispaperhasyettofilesuchaplanitisnotyetrequired
tounderrecentlyenactedregulationsandwhenitdoesso,onlypartswillbe
public.
15
Butitispossibletogainanhonestunderstandingofthefinancial
institutionusingexistingregulatoryreportsandotherinformationmadepublicby
theinstitution.

WhatthisanalysisrevealsisthatnomatterhowcomplexLehmanwas,the
remainingtoobigtofailfinancialinstitutionsareinfinitelymorecomplex.
Lehmaninvolvedmyriadlegalentities,acrossseveralkeyfinancialjurisdictions,but
itlargelyinvolvedasinglelineofbusiness.
16
Ontheotherhand,mostofthe
remaininglargefinancialinstitutionsinvolvenotonlyinvestmentbanking,butalso
commercialbankingandsometimesinsuranceunderwriting.
17
Thecommercial
bankingoperations,inparticular,meanthattheseinstitutionsareintegratedinto
therealeconomytoafargreaterdegreethanLehman,andarethereforelikelytofail
inevenmoredisruptiveways.
18

Moreover,alloftheseinstitutionshavebalancessheetsthataremuch,muchlarger
thanLehmanswhichitselfwasthelargestchapter11debtorever.
19
Forexample,
Lehmanreportedassetsof$713billionuponfilingforbankruptcy,whereasthe

11
http://www.rollingstone.com/politics/news/bank-of-america-too-crooked-to-
fail-20120314
12
http://dealbook.nytimes.com/2011/10/06/bank-stocks-get-a-boost-from-
geithner/
13
12USC5381-5394.
14
12U.S.C.5365(d).Thisprovisionrequires,amongotherthings,"full
descriptionsoftheownershipstructure,assets,liability,andcontractualobligations
ofthecompany."
15
http://dealbook.nytimes.com/2011/09/16/the-problem-with-living-wills-for-
financial-firms/.See12C.F.R.pt.381.
16
SeeStephenJ.Lubben&SarahPeiWoo,ReconceptualizingLehman,Working
Paper(onfilewithauthor).
17
HowellE.Jackson,TheExpandingObligationsofFinancialHoldingCompanies,107
Harv.L.Rev.507,509(1994).
18
http://www.ft.com/intl/cms/s/0/f296cc8e-dedc-11e0-9130-
00144feabdc0.html#axzz1Y7CM0c9G
19
SeeKristinN.Johnson,FromDiagnosingtheDilemmatoDiviningaCure:Post-Crisis
RegulationofFinancialMarkets,40SetonHallL.Rev.1299,1311(2010).
4
institutionIlookatinthispaperreported$2.3trillioninassetsattheendof2010.
20

Bywayofcontext,theWorldBankestimatestheUnitedStatesGDPwasestimatedat
$14.6Trillionin2010.
21

Oncetherelevantpiecesoftheinstitutionareidentified,inPartIIofthepaperI
examinetherelevantlawthatwouldapplytoresolutionofthefinancialinstitutions
financialdistress.IbeginwiththeassumptionthatDodd-FranksOrderly
LiquidationAuthoritywillbeinvoked,butthefactthatIhavetomakesuchan
assumptionitselfrevealssomebasicuncertaintyregardinghowtoanticipateand
pricefinancialdistressinthiscontext.

EvenafterIdecidetoinvoketheOLAregime,thequestionofwhichlawwillapplyto
mytargetedfinancialinstitutionremainsanissue.First,theOLApartiallyinvokes
otherlegalregimestoaddresspartsofthefinancialinstitution.Second,OLAis
incompleteinitspreemptionofotherinsolvencyregimes.

AndofcourseOLAonlyappliesdomestically.Aswillbeseen,notonlydoesthe
financialinstitutionIexamineconductextensiveoperationsabroad,butitalso
specificallytargetsinvestorsinotherjurisdictions.Forexample,ithasextensive
assetsecuritizationoperationsinCanadaandtheUnitedKingdom.Andrecentlyit
hasissuedseveralbilliondollarsofdebtdenominatedinAustralianDollars,Swiss
Francs,CanadianDollars,JapaneseYen,andEuros.Manyofthesedebtissuances
alsoinvolveinterestratesthatfloatbasedonthemovementsofalocalinterestrate
index.Presumablytheseindicesaresensitivetolocaleconomicconditions.

WhiletheFDIC,asapotentialtrusteeofthefinancialinstitutioninquestion,would
havebutalimitedabilitytochangethelegaloutcomesinforeignjurisdictions,it
mustplanfortheeffectsitsactionswillhaveworldwide,particularlyifthoseactions
willreboundintotheUnitedStates.Forexample,whenLehmanfiledforchapter11
intheUnitedStates,itsLondonoperationsimmediatelyenteredadministrationin
theUnitedKingdom.ThathadseriousconsequencesforseveralUS-basedhedge
fundsthatreliedonLehmansLondonoperationsfortheirprimebrokerage
accounts.
22

20
TheLehmanholdingcompanyChapter11caseisInreLehmanBrothersHoldings
Inc.,08-13555,whiletheliquidationproceedingundertheSecuritiesInvestor
ProtectionActforthebrokerageoperationisSecuritiesInvestorProtectionCorp.v.
LehmanBrothersInc.,08-01420,bothinU.S.BankruptcyCourt,SouthernDistrictof
NewYork.
21

http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_m
ktp_cd&idim=country:USA&dl=en&hl=en&q=us+gdp
22

http://www.gibbonslaw.com/news_publications/articles.php?action=display_publi
cation&publication_id=2563
5
Havingthenprovidedapictureofthefinancialinstitutionandthelegallandscape
thatwouldapplyuponfinancialdistress,PartIIIofthepaperconsidersthe
interactionofthesetwoelements.Thisisthecoreofthepaper,asitaddressesthe
vitalquestionofwhatwouldhappen?

IassumethattheFDICandotherkeyactorshavelearnedfromtherecentcrisis,but
ItrytoavoidassumingthekindofperfectionseenintheCorporationsrecent
Lehmanexercise.Afterall,theFrenchgovernmentlearnedthelesionsofWorldWar
I,anditwaswellpoisedtoactifGermanyactedinthesamemannerasithadin
1914.QuiteobviouslythatdidnotmeanthatFrancewasreadytorespondtoa
different,yetsimilar,threatin1940.

Inshort,IassumethattheFDICissomewhatprepared,wellintentioned,butnot
omnipotent.

InthissectionIalsoconsiderhowtheFDICseffortstoprepareaninstitutionforan
OLAproceedingmightdecreasethetimetheFDIChastoactuallymakesuch
preparations.Thisisthegreatparadoxunderstoodbyreorganizationprofessionals
everywhere:themorepreparationthatisdoneforthefiling,thegreatertheriskof
anearlyoruncontrolledfiling,becauseofprematuredisclosureofthedebtors
plans.TheFDIChassomeexperiencehidingitspreliminaryworkinthebank
resolutioncontext,butIalsoexaminethewaysinwhichOLAmightbedifferent.

Moreover,inthespecificcontextoffinancialinstitutions,Iexplorehowfinancial
distressinthefinancialinstitutionIamstudyingwilllikelyresultindoubtsabout
theviabilityofotherfinancialinstitutions(i.e.,contagion),invaryingintensity
dependingonthesimilaritiesbetweentherespectiveinstitutions.Notonlydoes
thishaveafeedbackeffectwithregardtotheoriginalfinancialinstitution,butitalso
limitstheFDICsabilitytofocusitseffortssolelyonthefirstinstitution.

AtsomepointthepreplanninginexorablygiveswaytoanactualDodd-FrankOLA
proceeding.AsexplainedmorefullyinPartIII,thisisthepointatwhichFDICwill
havetomanagethemainproceedingwhilealsocoordinatingrelatedinsolvency
proceedingsathomeandabroad.Theliquidityneedsofthedistressedfinancial
institutionareapttobeextremeintheseinitialdays,butprovidingsuchliquidity
willbekeytocontainingthefinancialdistresswithinasingleinstitution.

TheFDICwillalsohavetobevigilant,readytorespondtounforeseencomplications
andtheunforeseenactionsofroguecounterpartieswhodecidethattheirbest
courseofactionliesinself-help.

Oncethefinancialinstitutionisstabilized,theFDICmustbepreparedtodescribe
whatwillhappentotheinstitutionandmustachievethatresultinrapidfashion.At
thesametime,theCorporationwillneedtogainanunderstandingoftheclaims
againstthefinancialinstitutionandimplementplansforpayingsuchclaims.
Throughoutthekeyquestionwillbe,canthisbedonequickerthanitcouldunder
6
theBankruptcyCode?WhentheU.S.governmentconductedasimilarexercise
duringthefinancialcrisiswithregardtoAIG,itseemslikelythatitoverpaidAIGs
counterpartiesrelativetowhattheywouldhaveobtainedinachapter11case.

PartIVthenconcludesbyconsideringtheimplicationsofthestorytoldinPartIII.
WhilePartIIIrevealssomeseriousdoubtsabouttheabilityofDodd-Frankto
performasenvisioned,italsoshowshowtheBankruptcyCode,atleastascurrently
drafted,wouldbeequallyunsuitedtothetask.Moreover,Iexplainwhyadapting
theCodetotheresolutionoflargefinancialinstitutionswouldinvolvedsomething
farmoresubstantialthanafewtweaks,asisoftensuggested.Ultimatelyitwould
involveadoptingsomethingthattakesmanyfeaturesfrombothOLAandchapter11,
whileapplyingthenamebankruptcytotheresultingbeast.Ihavearguedelsewhere
thatgreaterintegrationofOLAandtheBankruptcyCodewouldbehighlydesirable,
butweshouldnotpretenditwillbeaneasytask.

7
I. TheFinancialInstitution

InthispaperIexamineBankofAmerica,alargeuniversalbankorasclosetoa
universalbankasispossibleintheUnitedStateswhichisheadedbythe
BankAmericaCorporationorBankofAmericaCorporation,aDelawarecorporation
originallycalledNationsBank(DE)Corporation.
23

Alreadylarge,between2006and2008BankofAmericaacquiredseveralother
institutions,includingCountrywideFinancial,MerrillLynch,MBNA,USTrust,andLa
SalleBank.AsofDecember31,2010,theentirebankhad$2.3trillioninassetsand
approximately288,000full-timeequivalentemployees.
24
Itsbroker-dealerunits
holdmorethan$2.2trillioninclientassets.ThebankreportsthatintheUnited
Statesaloneithasmorethan57millionconsumerandsmallbusinessbanking
relationships,andthebankheldmorethan$1trillioninbankingdeposits.The
companyhasapproximately5,900retail-bankinglocationsand18,000ATMs
throughouttheUnitedStates.

TheparentcompanysofficesarelocatedinCharlotte,NorthCarolina,anditsshares
arelistedontheNewYork,London,andTokyostockexchanges.
25
Italsohasmore
thantwo-dozentypesofpreferredsharesthatarelistedontheNYSE.

Table1:BankofAmericaCapital(asofJune2011;millionsofUSD)
+PerpetualPreferred 16,562.20
+CommonStock 101.33
+Surplus 151,465.35
+UndividedProfits 53,254.47
TotalCapital 222,175.60

Inabroadsense,BankofAmericaiscomprisedoftwohalves:theoriginalBankof
America,andMerrillLynch,theinvestmentbankitacquiredonthesamedaythat

23
WhethertheparentcompanyisBankofAmericaCorporationorBankAmerica
Corporationisabitunclear,sincethecertificateofincorporationusesbothnames.
ParagraphoneofcertificatedoesstatethatThenameofthecorporationisBank of
America Corporation, but the introductory paragraph and the title use the other name.
24
2010Form10-K,atpage23.
25
AlldatainthisinitialdiscussioncomesfromBankofAmericas2010Form10-K.
WithregardtothediscussionofthesubsidiariesIrecodedthedatatocorrect
obviouserrors.Forexample,thelistofsubsidiariesincludesseparatecategories
labeledUnitedKingdom,England,andEngland&Wales,whichhavebeencombined
inTable1undertheUnitedKingdomcategory.Note,however,thatScotland
remainsaseparateentryonthetable,withfivesubsidiaries.Ihaveassumedthat
referencestoGeorgiarefertotheAmericanstate.
8
Lehmanfileditschapter11petition.
26
Butthetwohalvesofthebankhavebeen
somewhatintegratedforexample,previouslyoutstandingMerrillpreferredshares
werereissuedbytheBankofAmericaparentcompanyonsubstantiallythesame
terms,givingtheholdersastakeinthecombinedenterprise,ratherthanjustthe
Merrillpieceoftheoperation.

A.CorporateStructure

Attheendof2010BankofAmerica,theparentcompany,hadmorethan2,000
subsidiariesworldwide,formedin97differentjurisdictions.

Aboutforty-fivepercentoftheBankofAmericasubsidiariesareformedin
Delaware.Justoverthirty-eightpercentofBankofAmericassubsidiarieswere
formedunderthelawofaforeignjurisdiction.
27

Thesesubsidiariesconducttheirbusinessoperationsin163differentcitiesaround
theworld.AndwhilethebankhasitscorporateheadquartersinNorthCarolina,
NewYorkCityisthelocationofthelargestnumberofitscompanies.

Sixhundredandthirty-oneofthebanksmorethantwothousandsubsidiaries,or
aboutthirty-onepercent,areoperatedfromlocationsoutsideoftheUnitedStates.
WhentheonehundredandfiftycompanieslocatedinLondonarecombinedwith
theothersubsidiariessprinkledabouttheUKsuchasthetwosubsidiariesin
HertfordshireandtheoneinManchesteritbecomesclearthattheUnitedKingdom
isthesinglelargestforeignjurisdictionwithrespecttoBankofAmericasoverseas
operations.

26
SeegenerallyGREGFARRELL,CRASHOFTHETITANS(2010)(describingtheevents,
particularlyincreasinginvestmentsinCDOs,thatleadtoMerrillsneedfora
takeover).
27
DefinedasanotherotherthanthefiftyUnitedStatesandtheDistrictofColumbia.
9
Table2:BankofAmericaKeyOperatingSubsidiaries(asofJune2011)

Description Location FormationJurisdiction

OutstandingDebt
(namedentityonly)
MBNACanadaBank Creditcards Gloucester,Canada Canada 0
MerrillLynchCanadaInc. Investmentbank Toronto,Ontario,Canada Canada 0
MerrillLynchCapitalServices,Inc. Derivatives NewYork,NY Delaware 0
MerrillLynchCommodities,Inc. Unknown(energytrading?) Houston,TX Delaware 0
MerrillLynchGovernmentSecuritiesInc. USGovernmentsecurities NewYork,NY Delaware 0
MerrillLynchProfessionalClearingCorp. Unknown NewYork,NY Delaware 0
MerrillLynch,Pierce,Fenner&SmithIncorporated investmentbank;holdingco. NewYork,NY Delaware 0
MerrillLynchInternationalBankLimited Universalbanking;f/xtradinginLondon Dublin,Ireland Ireland 0
MerrillLynchJapanSecuritiesCo.,Ltd. Investmentbank Tokyo,Japan Japan 0
MerrillLynchS.A. Investmentbank Luxembourg,Luxembourg Luxembourg 3,285
BancofAmericaSecuritiesLimited Unknown(investmentbank?) London,U.K. UnitedKingdom 0
MBNAEuropeBankLimited Holdingcompany--consumerlendingsub Chester,England UnitedKingdom 0
MerrillLynchCommodities(Europe)Limited Derivatives London,U.K. UnitedKingdom 0
MerrillLynchInternational Broker-dealer London,U.K. UnitedKingdom 0
BankofAmericaRhodeIsland,NationalAssociation Commercialbank Providence,RI USA 0
BankofAmerica,NationalAssociation Commercialbank Charlotte,NC USA 6,659
FIACardServices,NationalAssociation Creditcards Wilmington,DE USA 1,000
Sources:http://investor.bankofamerica.com/andBloomberg

DollarsinMillionsofUSD

Thelargestnumberofsubsidiariesarelocatedinobviousfinancialcenters,andthe
bankscorporateheadquarters,buttherearesomesurprisestoo.Withalldue
respecttoMontevideo,sixsubsidiariesoperatingoutofthatcitymightgiveus
pause.

ManyofthecompaniesamongthethousandsthatmakeupBankofAmericaare
likelytobeoflittlesignificance.Butinaworldwherearecentcollegegraduatecan
incur$2billioninlossesatamajorbank,weshouldnotbetooquicktodismissany
seeminglysmallpieceoftheoverallpicture.

Withthatproviso,inJuneof2011BankofAmericaidentifiedseventeensubsidiaries
asamongitsmajoroperatingsubsidiaries.
28
AsshownonTable2,these
companiesarelocatedinavarietyofjurisdictionsintheUnitedStates,Canada,
Japan,andEurope.Thesecompaniesincludethreenationallycharteredbanks,
whicharesubjecttodirectregulationbytheControlleroftheCurrencyandthe
FDIC.

28
http://phx.corporate-
ir.net/External.File?item=UGFyZW50SUQ9OTk3OTF8Q2hpbGRJRD0tMXxUeXBlPTM
=&t=1
10
Table 3: Bank of America Assets by Location (2010)
USD %
Total Assets 2,264,909.00 100
Domestic 1,938,417.00 85.58
Total Foreign excluding North America 310,392.00 13.7
Europe, Middle East and Africa 186,045.00 8.21
Asia 106,186.00 4.69
Latin America and the Caribbean 18,161.00 0.8
Canada 16,100.00 0.71

MBNACanadaBankisamajorcreditcardissuerinCanada,whichBankofAmerica
soldtoTDBankinlate2011.
29
MerrillLynchCapitalServices,Inc.isprimary
derivativescounterpartyintheMerrillLynchpartofBankofAmerica.

MerrillLynchCanadaInc.isaninvestment-bankingarmofMerrillLynch&Co.
CanadaLtd.,whichitselfisasubsidiaryofMerrilyLynchCanadaHoldingsCo.,
MerrillstoplevelCanadianholdingcompany.ThismakesMerrillLynchCanada
similartoMerrillLynchSA,whichisMerrillscontinentalEuropeaninvestment
bankingarm.

Interestingly,someoftheentitieslistedbyBankofAmericaaskeysubsidiariesdo
notappearinBloombergorotherkeyfinancialdatabases.Forexample,Merrill
LynchCommodities,Inc.isasubsidiaryofMLCIHoldings,Inc.,whichitselfisa
subsidiaryofMerrillLynchCapitalServices,thederivativestradernotedearlier.
WhatpreciselyMerrillLynchCommoditiesdoesisapparentlyunknownto
Bloomberg.Ihazardaguessthatthisentityisinvolvedinenergyrelatedtrading,
givenitsplaceintheoverallcorporatestructureanditslocationinHouston,butwe
canhopethattheFDICwillhavebetterinformationthanBloombergonpointslike
these.

EvenmoreinterestingishowlittleofBankofAmericasbalancesheetappearson
Table2.Forexample,thebankreportsmorethan$800billionintotaloutstanding
debt.Justunder$11billionofthatappearsonthetable.Butthisisconsistentwith
priorresearchthatthelateSarahWooandmyselfpreviouslyconductedonLehman:
muchofthedebtwasissuedbyrelativelyinsignificantsubsidiaries,createdtotake
advantageofregulatoryortaxadvantagesofaparticularjurisdiction.
30

Similarly,subsidiarieslikeMerrillLynchUKHoldingsLimiteddonotappearon
Table2,despitereportingmorethan$155billioninrisk-weightedassets.
31
Asit

29
CanadianBigDeals,Am.Law.,Dec.2011atp.41.
30
SeeLubben&Woo,supranote16.Seealsohttp://www.ft.com/cms/s/0/098ac1ec-
882d-11de-82e4-00144feabdc0.html.
31
http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-basel
11
turnsout,thismakessenseinthestrictlyliteralsensethatMerrillLynchUK
Holdingsisaholdingcompany,withnoindependentoperations.

ButgiventhatTable3showsthatBankofAmericahasbut$188billionofassetsin
thewholeofEurope,theMiddleEast,andAfrica,MerrillLynchUKHoldings
subsidiariesmustcarryaparticulardegreeofrisk(asdefinedintheBaselaccords)
orsignificance.
32

Infact,MerrillLynchUKHoldingsistheholdingcompanyforMerrillLynch
International(MLI)andMerrillLynchCommodities(Europe)Limited(MLCE),
twoofthekeysubsidiariesidentifiedonTable2.AsreportedbyBankofAmerica,
MLIactsasabroker/dealerinfinancialinstrumentsandprovidescorporate
financeservices.MLCEisatraderofnaturalgas,electricity,coal,emissionsand
weatherderivatives.
33

Table 4: Bank of America Revenues by Location (2010)

USD %
Net Revenues 110,220.00 100
Domestic 87,179.00 79.1
Total Foreign Excluding North America 21,541.00 19.54
Europe, Middle East and Africa 12,369.00 11.22
Asia 6,115.00 5.55
Latin America and the Caribbean 3,057.00 2.77
Canada 1,500.00 1.36

Takentogether,Tables2through4provideapictureofabankwhosekey
subsidiariesarespreadacrosstheglobe,whilemuchofitsassetsandrevenuesare
stillassociatedwiththeUnitedStates.

Thatis,eventhoughmanyBankofAmericaentitiesoperateoversees,theyoften
facilitatetradingwithAmericancounterparties.Thefollowingtable,reproduced
fromtheBaselIIPillar3ReportonMLI,bestillustratesthis.RecallthatMLIisa
London-basedbroker-dealer,yetmorethanhalfofitscreditexposurerelatesback
totheAmericas,arathervaguetermtobesure.

AnditispossiblethatthelocationoftheassetsseeTable3maybesomethingof
amirage,oncetheriskofrehypothecationistakenintoaccount.
34
Rehypothecation
ofcollateralinvolvesthereuseofclientassetsinanewtransaction,asifapawnshop
couldgrantitsownlendersalienorsimilarrightsinitemsleftatthestoreby

32
See,infraTable__,formoreonMLI.
33
http://phx.corporate-
ir.net/External.File?item=UGFyZW50SUQ9NzUwMjB8Q2hpbGRJRD0tMXxUeXBlPT
M=&t=1
34
http://www.imf.org/external/pubs/ft/wp/2010/wp10172.pdf
12
customers.ManyofLehmansprimebrokeragecustomersclaimedtobesurprised
thattheirassetshadmovedtoEurope.Whilecontractingwilladdressthatspecific
problem,otherrelatedissuesremain.

Table 5: Merrill Lynch International Counterparty Exposure

B.CapitalStructure

Whileapotentialdebtorscapitalstructureisimportantinalltypesofinsolvency
proceedings,intheinsolvencyofafinancialinstitutionunderstandingthecapital
structureisevenmoreimportantsincesuchacompanyisrootedinitsbalance
sheet.
35
Andfinancialinstitutionsarequiteoftenmoredependentonshort-term
borrowingthanotherfirms,whichleavesthemexposedtoextremeliquidityneeds
upontheonsetoffinancialdistress.
36

Table6setsforthbalancesheetinformationforBankofAmerica,whichshowsthis
typicalpatternofborrowingforafinancialinstitution.
37
Justover90%ofthis
bankscapitalstructureiscomprisedofdebt.Thekeyimplicationforpresent
purposesisthatboththepreferredandcommonshareholderscanbequickly
dismissedifweassumemorethana10%declineinassetvalues,asmightoccur
whenafinancialinstitutionexperiencesfinancialdistress.
38

Table 6: Bank of America Balance Sheet (USD Millions)

FQ2 2011
Balance Sheet - Assets

+ Cash and Due from Depository Institutions 138,389.21
+ Trading Account Assets 253,123.18

35
SeeSarahPeiWoo,SimultaneousDistressofResidentialDevelopersandTheir
SecuredLenders:AnAnalysisofBankruptcy&BankRegulation,15FordhamJ.Corp.&
Fin.L.617,666-68(2010).
36
SeeMacchiarola,supranote1,at297-98.
37
JohnC.Coffee,Jr.,SystemicRiskAfterDodd-Frank:ContingentCapitalandtheNeed
forRegulatoryStrategiesBeyondOversight,111Colum.L.Rev.795,815(2011).
38
SeeFaheyv.Mallone,332U.S.245,250(1947);ElizabethWarren,Bankruptcy
Policy,54U.Chi.L.Rev.775,792(1987).

4.4. Counterparty and Credit risk capital component by asset class




Exposure Value - Geographical Distribution
$ millions Asia Americas EME
Counterparty and credit risk capital component by asset class
$ millions
Risk
Weighted
Assets
Capital
Require-
ment
Risk
Weighted
Assets
Capital
Require-
ment
Risk
Weighted
Assets
Capital
Require-
ment
Risk
Weighted
Assets
Capital
Require-
ment
Central Governments or central banks 103 8 50 4 93 7 50 4
Corporates 45,438 3,635 61,962 4,957 41,300 3,304 50,837 4,067
Institutions 32,009 2,561 18,875 1,510 29,094 2,328 18,875 1,510
77,550 6,204 80,887 6,471 70,487 5,639 69,762 5,581
Merrill Lynch International Merrill Lynch UK Holdings
2009 2008 2009 2008


4.5. Counterparty and Credit risk Exposure value
Further analysis oI MLI showing the geographical, industry and residual maturity distribution oI the
exposure value is shown below. MLI accounts Ior 93 oI the MLUKH total exposure value. The
remainder is mainly MLCE which Ior reasons as stated in Section 1.1 is not disclosed.

A Total Asia Americas EMEA Total
Central governments or central banks 39 270 1,259 1,568 146 6,021 1,059 7,226
Corporates 1,704 41,299 22,523 65,526 2,306 70,881 27,416 100,603
Institutions 3,025 24,559 42,193 69,777 3,433 23,760 51,699 78,892
Total Exposure Value 4,768 66,128 65,975 136,871 5,885 100,662 80,174 186,721
2008
Merrill Lynch International
2009

Exposure Value - Residual Maturity
$ millions
Less than
one year
One to
five years
Over five
years Total
Less than
one year
One to
five years
Over five
years Total
Central governments or central banks 1,085 317 166 1,568 1,170 5,763 293 7,226
Corporates 16,139 27,815 21,572 65,526 16,839 48,310 35,454 100,603
Institutions 17,897 41,082 10,798 69,777 42,144 26,752 9,996 78,892
Total Exposure Value 35,121 69,214 32,536 136,871 60,153 80,825 45,743 186,721
Merrill Lynch International
2009 2008


Page 9 oI 13

13
+ Total Securities 351,463.11
+ Federal Funds & Reverse Repos 259,708.37
+ Net Loans and Leases 923,898.92
+ Bank Premises and Fixed Assets 13,792.69
+ Other Real Estate Owned 3,915.80
+ Goodwill and Other Intangibles 92,891.39
+ All Other Assets 194,135.15
Total Assets 2,264,435.84

Balance Sheet - Liabilities

+ Total Deposits 1,040,171.86
+ Federal Funds & Repurchase Agreements 239,520.83
+ Trading Liabilities 128,299.95
+ Other Borrowed Funds 406,814.47
+ Subordinated Debt 45,678.69
+ All Other Liabilities 154,843.60
Total Liabilities 2,041,102.95

Balance Sheet - Equity

+ Perpetual Preferred 16,562.20
+ Common Stock 101.33
+ Surplus 151,465.35
+ Undivided Profits 53,254.47
Total Capital 222,175.60

Thebankreports$420billioninshorttermborrowing,includingabout$50billion
inmoneymarketborrowingand$250billioninreporelatedborrowing,andmore
than$1trillionindeposits,dividedbetweenalmost$950billionindomestic
depositsand$90billioninforeigndeposits.

Thesesourcesoffundingareapttobetheunstablewhenafinancialinstitution
encountersfinancialdistress.
39
Forexample,theforeigndepositorsdonotbenefit
fromFDICinsurance,andthusmightbeespeciallylikelytofleeatthefirstsignsof
stress.AndaruninrepofinancingiswidelyblamedforLehmansultimate
collapse.
40

39
http://www.reuters.com/article/2012/02/09/financial-regulation-triparty-fed-
idUSL2E8D9HJU20120209
40
SeegenerallyGARYGORTON,SLAPPEDBYTHEINVISIBLEHAND:THEPANICOF2007
(2010);ActionsbytheNewYorkFedinResponsetoLiquidityPressuresinFinancial
Markets:BeforetheU.S.SenateComm.onBanking,HousingandUrbanAffairs,
110thCong.(Apr.3,2008)(testimonyofTimothyF.Geithner,PresidentandChief
ExecutiveOfficer,Fed.ReserveBankofN.Y.).
14
Evenmoreimportantlyforpurposesofthispaper,theseunstableshortterm
sourcesoffundingshowthepotentialliquidityneedsofthebankduringaresolution
process.Asnotedinthebanks2010Form10-K:

IfBankofAmericaCorporation'sorBankofAmerica,N.A.'scommercial
paperorshort-termcreditratingsweredowngradedbyoneormore
levels,thepotentiallossofshort-termfundingsourcessuchascommercial
paperorrepurchaseagreementfinancingandtheeffectonourincremental
costoffundswouldbematerial.
41

AsofSeptember2011,BankofAmericahadexactlyonethousanddifferenttypesof
debttraded,withanaverage(median)durationofjustover5.6(5.0)years.
42
Much
ofthelongerdateddebtwasissuedinthemidtolate1990s.

Table7showsthecurrencyofeachofthesedebtinstruments.Whilenoneofthe
bankssignificantoperatingcompanieswerelocatedinAustraliaorinContinental
Europe,wecanseefromthetablethatthesetwojurisdictionsareasubstantial
sourceofthebanksfunds.

Table7:OutstandingBankofAmericaDebtbyCurrency(September2011)

Freq. Percent Cum.Percent

USD 824 82.4 82.4
EUR 41 4.1 86.5
AUD 35 3.5 90
JPY 34 3.4 93.4
SGD 10 1 94.4
CHF 9 0.9 95.3
NZD 9 0.9 96.2
CAD 8 0.8 97
GBP 6 0.6 97.6
BRL 5 0.5 98.1
MXN 4 0.4 98.5
INR 3 0.3 98.8
SEK 3 0.3 99.1
NOK 2 0.2 99.3
TRY 2 0.2 99.5
ZAR 2 0.2 99.7
CZK 1 0.1 99.8
HKD 1 0.1 99.9
RUB 1 0.1 100
Source:Bloomberg

41
BankofAmericaCorporation2010Form10-K,atpage7.
42
AsreportedonBloomberg.
15

Thebankalsoreportsmorethan$354billioninsecuritiesamongitsassets.Table8
providessomefurtherinformationaboutthosesecurities.

Table 8: Bank of America Securities (June 2011)

+ US Government Securities 49,269.15
US Treasury Securities 46,571.54
US Govt Agencies 2,697.61
+ Municipals 7,645.96
+ Asset Backed Securities 8,048.56
+ Other Domestic Debt 3,624.13
+ Foreign Debt Securities 4,579.59
+ Equities 20,431.88
Total Securities 351,463.11
Source: Bloomberg

ThepurposeofthispaperisnottoidentifywhatmightcauseBankofAmericatofail,
butrathertoexamine,assumingsuchfailure,howsuchfailuremightbeaddressed.
Inthatcontext,Table8isnotsomuchrelevantinidentifyingpossibleriskatthe
bank,butinsteadbecausewhichmightassumethatsomeoftheseassetscould
declineinvalueduringafinancialcrisisthatmightaccompanythefailureofamajor
bankinginstitution.Thatis,manyofBankofAmericasassetsareapttobe
correlatedwithitsownfinancialcondition,givenitsprominenceinthefinancial
markets.

Independentofwhatevermightcausethebanktoexperiencefinancialdistress,a
moregeneralizeddeclineinfinancialmarketswouldhitthispartofBankof
Americasbalancesheet.ItdoesbearnotingthattheUSTreasuryportionofTable8
willlikelyoffsetsomeofthedownwardmovementinotherpartsofthebanks
securitiesholdings,giventhetypicalflighttoqualitythatoccursintimesoffinancial
stress.

***

ButthisdiscussionoftheBankofAmericabalancesheethastothispointconsidered
thebankasawhole.Financialinstitutionsfailasawhole,butareresolvedinpieces.
EvenaftertheenactmentofDodd-Frank,andaswillbediscussedmorefullyinPart
II,uponfailureafinancialinstitutionwillbedeconstructedintoitsconstituentparts.
Thus,whiletheconsolidatedbalancesheetcanhighlightthescopeoftheissueat
hand,ultimatelyonlytheindividual,company-by-companybalancesheetsofa
financialinstitutionarerelevant.

Andsometimesthefocusonthetraditionalbalancesheetcanhidetherealitiesof
modernfinance.

16
Bothpointsarewellillustratedbythefinaltableinthissection,whichreturnsto
MLI,theLondon-basedbroker-dealerdiscussedearlier.Table9againreproducesa
tablefromtheMLIBaselIIreport,thistimedisclosingMLIscreditdefaultswap
exposure.
43

Table 9: Merrill Lynch International CDS Exposure (USD Millions)

Thebottomsub-tableshowsthatMLIhasbought$3.2trillionofCDSprotection
meaningMLIwillgetpaidifthereisadefaultontherelevantreferenceentity.
Similarly,MLIhasalsosold$3.2trillionincreditprotectionthatitmightsomeday
havetopayout.

Ingoodtimesthesetwoamountsmaycanceleachotherout,especiallyifMLIs
bookislargelybalanced.Inbadtimes,MLIsitsinthemiddleofmorethan$6
trillionoftotaltransactions,perhapspayingoutononesidewhilefacingatroubled
counterpartyontheotherside.

AsseenfromTable10,MLIapparentlyholdsthebulkofBankofAmericasCDS
book.Overall,thebankhasthesecondlargestderivativesportfoliointhenation,
comprisedofmorethan$74trillion(notionalamount).
44
Intheinsuredbanking

43
ForbackgroundonCDScontracts,seeStephenJ.Lubben,CreditDerivatives&the
FutureofChapter11,81Am.Bankr.L.J.405,423-24(2007).
44
Onthebalancesheetdiscussedabove,BankofAmericalistsmorethan$66.5
billionofderivativecontractsasassets.SeeKristinN.Johnson,ThingsFallApart:
RegulatingtheCreditDefaultSwapCommons,82U.Colo.L.Rev.167,169-73(2011);

4.7. Counterparty Credit Risk Credit Derivatives
$ millions
Counterparty Credit Risk - Credit Derivatives
bought sold bought sold
Credit derivative products used for own credit portfolio
Credit default swaps 7,426 3,241 12,471 5,317
Total return swaps 1,316 3,496 1,351 16,170
Total notional value 8,742 6,737 13,822 21,487
Credit derivative products used for intermediation
Credit default swaps 3,156,461 3,156,461 4,058,936 4,058,936
Total return swaps - - - -
Total notional value 3,156,461 3,156,461 4,058,936 4,058,936
Credit derivative products by credit exposure
Institutions 1,383,470 1,478,807 1,827,995 1,929,053
Corporate 1,781,733 1,684,391 2,244,762 2,151,370
Total notional value 3,165,203 3,163,198 4,072,757 4,080,423
2009 2008
Merrill Lynch International

4.8. Value at Risk (VaR) Models.

VaR estimates the potential losses that could occur on risk positions as a result oI movements in market
rates and prices over a speciIied time horizon and to a given level oI conIidence.

The Iirm uses a Historical Simulation based value at risk methodology. It includes all positions in the
Equities Division and the Global Proprietary Trading Group which are booked on approved trading
platIorms.

The methodology used is made up oI two components:

o Four years oI unweighted time series data, which are updated bi-weekly. For the purposes oI daily
reporting and VaR backtesting, weekly returns are generated Irom the time series data. To this
historical observation set we add a hypothetical observation set consisting oI the opposite oI the
historical movements. For the purpose oI reporting regulatory capital, ten-day returns are
generated by scaling up Irom the weekly returns.

o P&L scenario data which is generated Ior a pre-deIined range oI shocks Ior each key risk Iactor.
This data is produced by the trading systems and submitted to the scenario capture system, where
it is veriIied and signed oII by the relevant risk managers every day. This data is produced at the
individual ticker level Ior equity price and volatility risks, and at book level Ior all other risk
Iactors. For speciIic price risk on exotics only, multi-asset products within the equity-linked
portIolio are expanded into single-stock equivalent positions by apportionment oI parallel equity
price general market risk scenarios, using the partial delta oI each underlying.

Page 11 oI 13

17
partofBankofAmerica,OCCrecordsshowthatthebankheldjustover$48trillion
ofderivatives,ofwhichabout$45.5trillionwasheldfortradingpurposes.Recent
pressreportsindicatethatBankofAmericaisfacingincreasingpressuretomove
derivativestradestoitsinsuredbankingaffiliates,andoutofMerrillLynchentities,
astheresultofrecentdowngradesorthreateneddowngradesinthebankscredit
ratings.
45

InitsoverseesBaselIIdisclosurereports,BankofAmericanotesthat

AtDecember31,2009,theamountofadditionalcollateralandtermination
paymentsthatwouldberequiredforsuchderivativesandtrading
agreementswasapproximately$2.1billionifthelong-termcreditratingof
BACanditssubsidiarieswasincrementallydowngradedbyonelevelbyall
ratingsagencies.Asecondincrementaloneleveldowngradebytheratings
agencieswouldrequireapproximately$1.2billioninadditionalcollateral.

Thatis,thereisacontingentliabilityorobligationassociatedwiththebanks
derivativetrading,whichturnsonthestatusofBankofAmericascreditrating.As
seeninAIG,thesesortsofcollateralcallshavetheeffectofdrainingdesirableassets
fromafinancialinstitutionduringthedevelopmentoffinancialdistress,potentially
increasingthedownwardpressureontheinstitution.
46

Table10:NotionalAmountofDerivativeContracts,Top5HoldingCompanies(June2011,USDMillions)
Rank HoldingCompany
Total
Derivatives
Futures
(EXCHTR)
Options
(EXCHTR)
Forwards
(OTC)
SWAPS
(OTC)
Options
(OTC)
Credit
Derivatives
(OTC)
Spot
FX
1 JPMorganChase&Co. 78,977,450 1,693,438 2,164,699 11,569,472 47,598,956 9,845,448 6,105,437 469,152
2 BankofAmericaCorporation 74,811,101 3,288,994 1,546,806 12,519,496 46,529,779 6,787,645 4,138,382 413,117
3 MorganStanley 56,401,634 158,931 1,038,336 7,918,712 35,162,310 6,365,230 5,758,115 442,532
4 CitigroupInc. 55,186,164 877,517 3,342,856 7,974,039 31,250,476 8,916,014 2,825,262 567,407
5 GoldmanSachsGroup,Inc. 53,405,245 1,812,343 3,249,493 4,764,925 29,888,177 9,386,342 4,303,965 359,691
Source:OCC

Theexchangeofcollateralinconnectionwithderivativestradingandother
transactionsalsoexposesthebankanditscounterpartiestorisksassociatedwith
therehypothecationofthecollateral.AsBankofAmericaexplainsinits201010-K

StephenJ.Lubben,DerivativesandBankruptcy:TheFlawedCaseforSpecial
Treatment,12U.Pa.J.Bus.L.61(2009).
45
http://www.bloomberg.com/news/print/2011-10-18/bofa-said-to-split-
regulators-over-moving-merrill-derivatives-to-bank-unit.html
46
SeeCONG.OVERSIGHTPANEL,JUNEOVERSIGHTREPORT:THEAIGRESCUE,ITSIMPACTON
MARKETS,ANDTHEGOVERNMENT'SEXITSTRATEGY(2010).
18
TheCorporationacceptscollateralthatitispermittedbycontractorcustom
tosellorrepledgeandsuchcollateralisrecordedontheConsolidated
BalanceSheet.AtDecember31,2010and2009,thefairvalueofthis
collateralwas$401.7billionand$418.2billionofwhich$257.6billionand
$310.2billionweresoldorrepledged.Theprimarysourcesofthiscollateral
arerepurchaseagreementsandsecuritiesborrowed.TheCorporationalso
pledgessecuritiesandloansascollateralintransactionsthatinclude
repurchaseagreements,securitiesloaned,publicandtrustdeposits,U.S.
Treasurytaxandloannotes,andothershort-termborrowings.This
collateralcanbesoldorrepledgedbythecounterpartiestothe
transactions.
47

Rehypothecationofthissortcanmakeitmoredifficulttounwindafinancial
institutionsaffairsininsolvency,asthedebtorsassetswillbesubjecttocompeting
andconflictingclaims.
48

ReturningtothespecificcaseofMLI,importantlyforpurposesofthispaper,upon
thehypotheticalfailureofBankofAmerica,MLIhasasubstantialpieceoftheCDS
marketthatwilleitherhavetomovedtoanotherfinancialinstitutionwithextreme
haste,ortheCDSmarketwillexperiencesignificantdislocationaspartiesrushto
terminatetheirMLIcontractsandreplacethemwithnewtrades.
49

Andasdiscussedinthenextpartofthepaper,MLIwillremainoutsideofany
OrderlyLiquidationProceedingcommencedwithregardtoBankofAmerica,asMLI
isbasedinLondonandthereforenotsubjecttotheFDICsortheUSCongress
jurisdiction.ThisisanissuefortheroughlythirtypercentofBankofAmerica
entitiesthatoperateoutsidetheUnitedStates,butitisespeciallyimportantwith
regardtoentitieslikeMLIthathavesignificantoperations.

Finally,asdiscussedinthenextpartofthispaper,differentfinancialinstitutionsare
subjecttodifferentresolutionprocedures,eveniftheinstitutionsinquestionareall
subsidiariesofthesamefinancialholdingcompany.Accordingly,Table11identifies
thedomesticBankofAmericasubsidiariesthataresubjecttospecialregulatory
treatment,andthusspecialresolutionprocedures.

47
201010-Katpage142.
48
StephenJ.Lubben,TheBankruptcyCodeWithoutSafeHarbors,84Am.Bankr.L.J.
123,n.20andtext(2010).
49
Lubben,TheBankruptcyCodeWithoutSafeHarbors,supranote48,at123-24;see
alsoPatriciaA.McCoy,AndreyD.Pavlov&SusanM.Wachter,SystemicRiskThrough
Securitization:TheResultofDeregulationandRegulatoryFailure,41Conn.L.Rev.
1327,1343-44(2009);MichaelSimkovic,SecretLiensandtheFinancialCrisisof
2008,83Am.Bankr.L.J.253,253(2009).
19
Thetableisapttobebothoverandunderinclusive,sinceanoutsiderobviouslymay
notcorrectlyidentifythepurposeofallofBankofAmericasmyriadsubsidiaries.
50

Alsonotethatthetableonlyincludesdomesticentities:thereareclearlyseveral
foreigndepositorybanks,insurancecompanies,andbroker-dealersinthebanks
corporatestructure.
51

Table11:BankofAmericaDomesticRegulatedSubs

Location
Formation
Jurisdiction
Assets(if
available;
USD
millions)
InsuranceCompanies:

BalboaInsuranceCompany Irvine,CA California 2,581.00
BalboaLifeInsuranceCompany Irvine,CA California 43.25
BalboaLifeInsuranceCompanyofNewYork Irvine,CA NewYork 18.30
MeritplanInsuranceCompany Irvine,CA California 184.00
NewportInsuranceCompany Irvine,CA Arizona 146.10
BankofAmericaReinsuranceCorporation Burlington,VT Vermont

CWReinsuranceCompany Burlington,VT Vermont

InvestorProtectionInsuranceCompany Burlington,VT Vermont

GeneralFidelityLifeInsuranceCompany Columbia,SC SouthCarolina 210.30

IndependenceOneLifeInsuranceCompany Phoenix,AZ Arizona

RIHTLifeInsuranceCompany Phoenix,AZ Arizona

SummitCreditLifeInsuranceCompany Phoenix,AZ Arizona

Banks(depositoryandtrust):

BankofAmerica,NationalAssociation Charlotte,NC USA 1,454.05
BankofAmericaOregon,NationalAssociation Portland,OR USA 8.82
BankofAmericaRhodeIsland,NationalAssociation Providence,RI USA 17.81
BankofAmericaCalifornia,NationalAssociation SanFrancisco,CA USA 15.98
BankofAmericaNationalTrustDelaware Wilmington,DE USA 2.90
U.S.TrustCompanyofDelaware Wilmington,DE Delaware

Broker-Dealers(activeonly,includingalltypesofbrokersanddealers):

MerrillLynchGovernmentSecuritiesInc. NewYork,NY Delaware

MerrillLynch,Pierce,Fenner&SmithIncorporated NewYork,NY Delaware 297,900.00

MerrillLynchProfessionalClearingCorp. NewYork,NY Delaware 18,145.00
BancofAmericaSpecialist,Inc. NewYork,NY NewYork 6,028.00

50
Forexample,Ihaveattemptedtoexcludeinsuranceagenciesfromthelist,but
sometimesaparticularsubsidiarysfunctionislessthanclear.
51
LikelyexamplesincludeMLInsurance(IOM)Limited(incorporatedinDouglas,
IsleofMan),MerrillLynchCreditReinsuranceLimited(Hamilton,Bermuda),Merrill
LynchBank(Suisse)S.A.(Geneva,Switzerland),andMerrillLynchYatirimBankA.S.
(Istanbul,Turkey).
20

Sources:BankofAmericaCorporation201010-K;OCC;FDICCallReports;SEC;FINRA;TexasDepartmentof
InsuranceandNAICWebPages

II. ResolutionLawforFinancialInstitutions

Americanregulationoffinancialinstitutionshashistoricallyfocusesonafunction-
by-functionapproach,andthisholdstruefortheinsolvencylawoffinancial
institutionsaswell.Eachspecializedareaofthefinancialinstitutionistypically
subjecttoitsownspecialinsolvencyregime,meaningthatalargefinancialholding
companywithmyriadsubsidiarieslikeBankofAmericawillbesubjectedto
severaldifferentinsolvencyregimes.Thisrealityhasonlypartiallyimprovedwith
theenactmentofDodd-FranksnewOrderlyLiquidationAuthority.

BeforediscussingOLA,itishelpfultobrieflysketchthepre-Dodd-Frankrulesfor
financialinstitutioninsolvency,togetabettersenseofwhathaschanged.Table12
summarizesthisdiscussion.

Table12:FinancialInstitutionResolution(Pre-DoddFrank)

Banks,whetherstateorfederallychartered,aresubjecttoreceivershipsinstituted
bytheFDIC,andoverseenbyaDivisionofResolutionsandReceiverships.The
receivershipisquiteoftencenteredaroundoneormorepurchaseandassumption
Banks
FDIC
Receivership
Insurance
Company
Statecourt
receivership
Broker-
Dealer
SPIALiquidation
(Bankruptcy
Court)
Financial
Holding
Companies
Chapter11
Everything
Else
Chapter11
21
agreements,wherebytheCorporationsellsthefailedbanksassetsanddepositsto
anotherbank.ThesalemaybefacilitatedbysomesortofriskretentionbytheFDIC,
butthekeyaimistominimizedisruptiontothebankingsystemandlossestothe
FDICascreditor(byvirtueofitsroleasdepositinsurer).Thisstandsincontrast
withthetypicalgoalofchapter11,whichisoftenstatedasmaximizationofthe
debtorsoverallvalue.

BecauseoftheMcCarran-FergusonAct,
52
Congresshaspassedregulationof
insurancetothestates.Thusinsurancecompanyinsolvenciesareamatterofstate
lawbyvirtueofthecombinedeffectsofMcCarran-Fergusonandanexpress
exemptionfromtheBankruptcyCode.
53
Unlikebankreceiverships,insurance
companyreceivershipstypicallyfeaturecourtoversight.

Aswithbanks,appointmentofareceiversuspendsthepowersofmanagementand
placesthecontrolofthecompanyinthehandsofthereceiver.
54
Claimsarefixedas
ofthedateoftheappointment.Aninsurer'spoliciesaretypicallydeemedcancelled
onappointmentofareceiver.Theestateisnotliableforfuturelosses,but
policyholdershavevalidclaimsforlossesincurredtothatpoint.Inmanycasesthe
policyholderswillalsohaveclaimsforbreachofcontractagainsttheestate.And
oftenpolicyholderclaimshaveapriorityoverotherunsecuredcreditorclaims.
55

SIPAisthefinalspecializedresolutionprocedurerelevanttothisdiscussion.
Enactedinthe1970stodealwiththefailureofbrokeragehousesduringtheback
officecrisis,
56
SIPAprovidesforsomebasicinsuranceprotectionforcustomersof

52
15U.S.C.1011-1015.
53
11U.S.C.109.Theexemptionmaybeimportant,giventhattheBankruptcyCode
isenactedunderexpressConstitutionalauthority,andthusmighttrumpthe
McCarran-FergusonAct.SeeWilliamGoddard,InBetweentheTrenches:The
JurisdictionalConflictBetweenaBankruptcyCourtandaStateInsuranceReceivership
Court,9Conn.Ins.L.J.567,574(2002).
54

http://www.delawareinsurance.gov/departments/berg/FederalMotor_Files/Feder
alMotors_StipLiqInjOrder-WithConvSignature-20110818.pdf
55
PatrickCollins,Note,HMOEligibilityforBankruptcy:TheCaseforFederal
Definitionsof109(b)(2)Entities,2Am.Bankr.Inst.L.Rev.425,431(1994).
56
Thebackofficecrisisdevelopedinthelate1960s,whensecuritiestradeswere
stillprocessedinpaperform,butthesizeofthestockmarketbegantoovertake
brokersabilitytoprocessthepaperwork.Becauseofanunderinvestmentin
infrastructure,severalbrokersfailedandotherscameclosetofailing.SeeThomas
W.Joo,WhoWatchestheWatchers?TheSecuritiesInvestorProtectionAct,Investor
Confidence,andtheSubsidizationofFailure,72S.Cal.L.Rev.1071,1076-78(1999);
seealsoTheSecuritiesInvestorProtectionActof1970:AnEarlyAssessment,73
Colum.L.Rev.802(1973).
22
securitiesbrokers,butnotcommoditiesorfuturesbrokers,andsetsforthaspecial
insolvencyschemeforbrokerages.
57

SIPAspecificallyprovidesfortheapplicationofchapters1,3and5andsubchapters
IandIIofchapter7oftheBankruptcyCodetotheextentsuchprovisionsarenot
inconsistentwithSIPA.
58
Bothchapter11andSIPAproceedingsdrawonthesame
generalpartsoftheBankruptcyCodetoresolveclaimsanddefinethebasic
elementsoftheprocess.
59
ButSIPAisstrictlyaliquidationprocedure,whichmakes
itsoutcomebothmorecertainandlessflexiblethanachapter11case.

SIPAproceedingsarecommencedindistrictcourtandtypicallyquicklyremovedto
thelocalbankruptcycourt.
60
AtrusteeisappointedbySIPCorSIPCitselfactsas
trusteewhenasmallbrokerageisinvolvedandthetrusteedirectedtodistribute
securitiestocustomerstothegreatestextentpracticableinsatisfactionoftheir
claimsagainstthedebtor.Throughsuchdistributions,thecustomersofabroker-
dealerreceiveapriorityoverother,generalunsecuredcreditorswhohavetoawait
amorebankruptcy-likedistribution,ifthereareanyassetstomakesucha
distribution.
61

SIPAtypicallyappliestoinvestmentbanks,oratleastkeypartsofinvestmentbanks
(i.e.,thebroker-dealerbits).Thus,whileLehmanBrothersHoldings,Inc.famously
filedachapter11petitiononSeptember15,2008,oneweeklatteritskeybroker-
dealersubsidiary,LehmanBrothers,Inc.,filedaSIPApetitiontofacilitatethe
LehmanBrothersHoldingssaleofassetstoBarclaysCapital.

InaworldbeforeDodd-Frank,anypartofthefinancialcompanynotcoveredbyone
oftheforegoingspecialinsolvencyregimes,includingbankholdingcompanies,was
resolvedundertheBankruptcyCode.
62
Intheorymanyforeignpartsofthefinancial

57
RichardCarlucci,HarmonizingU.S.SecuritiesandFuturesRegulations,2Brook.J.
Corp.Fin.&Com.L.461,473(2008);OnnigH.Dombalagian,SelfandSelf-
Regulation:ResolvingtheSROIdentityCrisis,1Brook.J.Corp.Fin.&Com.L.317,326
(2007).
58
15U.S.C.78fff(b)
59
SIPAitselfisonlyapplicabletobroker-dealersrequiredtoregisterunderthe
1934ExchangeAct,leavingsmallbroker-dealersandcertainforeignbroker-dealers
subjecttocertainspecializedprovisionsofchapter7oftheBankruptcyCode.Byall
accounts,theseexceptionsareasmallminorityofbroker-dealers.
60
15U.S.C.78eee(b)(4).SeealsoPelorov.UnitedStates,488F.3d163,172(3d
Cir.2007).
61
15U.S.C.78fff-3(a).
62
UntilpassageoftheDodd-FrankAct,aBankHoldingCompanywassubjectto
regulationbytheFederalReserve,buttherewasnospecializedinsolvencysystem
fortheseentities.TheBankHoldingCompanyActdefinesbankholdingcompany
asanycompanythathascontroloveranybankoroveranycompanythatisor
becomesabankholdingcompanybyvirtueoftheAct.Anycompanyhascontrol
23
institutioncouldalsofileabankruptcypetition,althoughtheremaybedifficultiesin
gettingsuchapetitionrespected,especiallyifthesubsidiaryinquestionwasengage
insignificantactivityintheforeignjurisdiction.

HowdoesthecreationofOLAchangethis?

Table13summarizesthechange,but,inshort,OLApotentiallyreplaceschapter11
astheresolutiontoolforbankholdingcompaniesandtheirnon-regulated
subsidiaries.Itonlypotentiallydisplaceschapter11becausechapter11remainsin
placeunlessfinancialregulatorsdecidetoinvokeOLA,
63
throughacomically
byzantineprocessthatculminateswiththeD.C.Districtcourthaving24hourstosay
nounderverylimitedcircumstances.
64

AndOLAdoesnotsupplantFDICbankreceiverships,stateinsurancereceiverships,
orSIPAliquidationprocedures,althoughthestorywithregardtoSIPAisnotquite
asclearthatwouldsuggest.
65
Asexplainedbelow,OLAlargelyoverridesthe
provisionsofSIPA,withoutwantingtoappeartodoso.

Inessence,OLAexpandstheFDICsbankreceivershippowerstocoveragreater
partofthefinancialinstitution.
66
ThisallowstheFDICtoconductapurchaseand
assumptiontransactionwithregardtonon-bankpartsoftheinstitution,ortransfer
theinstitutiontoanewlycreatedbridgebank.
67
ThelatterallowstheFDICtosplit
thegoodassetsfromthebad,inaprocessthatisverymuchlikethatusedin363
salesunderchapter11,widelypublicizedbytheautomotivechapter11cases.
68

overabankoroveranycompanyif:(1)thecompanydirectlyorindirectlyoracting
throughoneormoreotherpersonsowns,controls,orhaspowertovote25%per
centormoreofanyclassofvotingsecuritiesofthebankorcompany;(2)the
companycontrolsinanymannertheelectionofamajorityofthedirectorsor
trusteesofthebankorcompany;or(3)theboarddetermines,afternoticeand
opportunityforhearing,thatthecompanydirectlyorindirectlyexercisesa
controllinginfluenceoverthemanagementorpoliciesofthebankorcompany.12
USC1841(a).
63
12USCS5382(c)(1);see12USC5388,5383(b)(2).
64
12USC5382;seealso12USC5383.
65
12USCS5383(e);5385;5381(a)(8).
66
12USCS5384(b).
67
12USC5390.
68
StephenJ.Lubben,NoBigDeal:TheGMandChryslerCasesinContext,83Am.
Bankr.L.J.531(2009).SeealsoStephanieBen-Ishai&StephenJ.Lubben,Salesor
Plans:AComparativeAccountoftheNewCorporateReorganization,56McGillL.J.
591(2011).
24
Thekeydistinctionwithchapter11isthattheFDICactswithoutcourtoversightor
theneedtogivenoticebeforeitacts.
69
Thus,whiletheLehman363salehappened
afteroneweeksnoticetothestakeholders,theOLAequivalentcouldhappenwithin
secondsoftheOLAproceedingscommencement.
70

TheFDICisalsograntedaone-daystayoncounterpartiesabilitytoterminatetheir
derivativecontracts.
71
ThiscontrastswiththeBankruptcyCodewhich,particularly
after2005,exceptsawiderangeofderivativecontractsandthingsthatlooklike
derivativecontractsfromthenormaloperationoftheCode.

Andequallyimportantly,theOLAprocedurecanbeself-fundedbytheFDIC.
72
This
obviatestheneedtosecureprivateDIPfinancing,
73
somethingthatmightbe
especiallydifficulttoobtainduringafinancialcrisis,especiallyifoneconsidersthe
scaleofthefundingneedsofmostlargefinancialinstitutions.
74

69
PaulL.Lee,TheDodd-FrankActOrderlyLiquidationAuthority:APreliminary
AnalysisandCritique-PartII,128BankingL.J.867,899(2011).
70
MarkA.McDermott&DavidM.Turetsky,RestructuringLarge,Systemically-
Important,FinancialCompaniesanAnalysisoftheOrderlyLiquidationAuthority,Title
IIoftheDodd-FrankWallStreetReformandConsumerProtectionAct,19Am.Bankr.
Inst.L.Rev.401,421(2011).
71
DouglasE.Deutsch&EricDaucher,Dodd-Frank'sLiquidationScheme:Basicsfor
BankruptcyPractitioners,Am.Bankr.Inst.J.,July/August2011,at54,55.
72
JamiesonL.Hardee,TheOrderlyLiquidationAuthority:TheCreditor'sPerspective,
15N.C.BankingInst.259,275(2011).
73
11U.S.C.364.
74
12U.S.C.5384(d).
25
Table13:FinancialInstitutionResolution(AfterDodd-Frank)

Unfortunately,theFDICmustrequestthatTreasurysupplyitsfunding,andthe
Treasuryisauthorizedtoimposeconditionsonsuchfunding.Thus,theFDICmight
notactuallyhaveaccesstofundingifpoliticalconsiderationscausetheTreasuryto
imposeonerousconditionsonthefunding.Butthisconcern,althoughraisedinthe
literature,seemssomewhathypothetical,sincetheSecretarycouldjustaseasily
avoidtheentireissuebydisallowingtheOLAfilinginthefirstinstance.
75

ThisfundingalsosupplantstheFederalReservesformerabilitytolenddirectlyto
non-banksintimesofcrisis.
76
NowtheFederalReserveandtheTreasuryonlyhave
thepowertolendacrossindustries,whileanyfirm-specificlendingmustbedone
throughtheFDICinthecontextofanOLAproceeding.FDICspowersoutsideof
OLAhavealsobeengreatlycurtailed.
77

75
E.g.,MorganRicks,TheCaseforRegulatingtheShadowBankingSystem,October
2011WorkingPaper(onfilewithauthor).
76
LissaLamkinBroome,TheDodd-FrankAct:TarpBailoutBacklashandTooBigto
Fail,15N.C.BankingInst.69,78(2011).
77
Forexample,duringthefinancialcrisistheFDICannouncedatemporary
TransactionAccountGuaranteeProgram,givingdepositorsunlimitedinsurance
coveragefornon-interestbearingtransactionaccountsiftheirbankwasa
participantintheFDIC'sTemporaryLiquidityGuaranteeProgram.Non-interest
bearingcheckingaccountsincludedemanddepositaccountsandanytransaction
accountthathasunlimitedwithdrawalsandthatcannotearninterest.Alsoincluded
wereotherinterest-bearingcheckingaccounts,MoneyMarketDepositAccounts,
savingsaccountsandCertificatesofDeposit.Thisprogramwaslargethanthe
Banks
FDIC
Receivership
Insurance
Company
Statecourt
receivership
Broker-
Dealer
SPIALiquidation
SIPCastrustee;
limitedpowers
Financial
Holding
Companies
OLA
Everything
Else
OLA
26

Thismightbeproblematic.
78
Obviouslythecostofanybailoutintermsoftaxpayer
costs,moralhazard,andreducedmarketdiscipline,willsometimesoverwhelmthe
costsofallowinganyparticularinstitutiontofail.Butinthespecificcasesof
depositorybanks,sincethe1930sthegeneralassumptionhasbeenthatanybank
failuremightresultincontagion,hencetheneedforsystemwidedepositinsurance.
Andintimesofmarket-widedislocation,ithaslongbeenacceptedthatitcanbe
sociallyusefulforcentralbankstoprovideliquidity,andevenrecapitalization,to
avoidthepanicthatwouldresultfromthefailureofaspecificfinancialinstitution.
79

Thatsuchlendingnowcanbedoneonlyafterthefailureoftheinstitutionis
announcedrepresentsabetthattheannouncementofanOLAproceedingwillnot
itselfoverwhelmthebenefitsoftheFDICslendingtotheinstitution.Itseems
equallylikelythatputtinganinstitutionintoOLAwilltriggerachainreactionof
panicandfailuresthroughoutthesystemthatcouldresultinaseverecontractionof
moneyandcreditinthefinancialsystem,whichcouldresultintheneedtoconduct
severalOLAproceedingsinparallel.

ThereisalsothequestionofwhethertheanalogythatDodd-Frankmakesbetween
bankreceivershipandfinancialinstitutionfailureholdsuptocarefulscrutiny.
80
For
example,theFDICstechniqueofchoiceistofindabuyertowhomtosellthe
troubledbank,butintimesofsystemiccrisistheremightwellbenobuyerslarge
enoughorconfidentenoughtoperformasimilarfunctionwithregardtoalarge
financialinstitution.
81
AttheveryleasttheremightbeaneedforFDICtoheavily
subsidizethesale,apointinsometensionwiththenotionthatDodd-Frankhas
endedbailouts.Moreover,giventhelimitednumberofbuyersineventhebestof
times,arguablythemarketforverylargefinancialinstitutionswillneverbe
competitive,andwillalwaysfunctionasabuyersmarket.

Similarly,althoughtheFDIChasconsiderableexperienceresolvingbanksunderits
bankreceivershippowers,ithasnoexperienceresolvingadomesticorglobal
diversifiedfinancialinstitution.
82
TheFDICcouldbeaddedintheOLAprocessby

controversialTARPprogram,andarguablyplayedakeyroleinstabilizingthe
financialsystem.
78
SeeJeffreyManns,BuildingBetterBailouts:TheCaseforALong-TermInvestment
Approach,63Fla.L.Rev.1349,1382(2011).
79
http://krugman.blogs.nytimes.com/2011/10/09/financial-romanticism/
80
PaulL.Lee,TheDodd-FrankActOrderlyLiquidationAuthority:APreliminary
AnalysisandCritique-PartI,128BankingL.J.771,781(2011).
81
{citetoZaringhere}
82
Thenewregimeisalsodifferentfromabankresolutioninthatlossesmustbe
imposedontheunsecuredcreditors,eventotheextentofclawingbackpayments
previouslymadeundertheFDICsliquiditypowers.Anyremaininglossesafter
creditorshaverepaidtheirsharearetobecoveredbyexpostassessmentson
survivinglargefinancialinstitutions.Inshort,unlikebankreceivershipwhereanex
27
therequirementthatfinancialinstitutionsfileresolutionplansbeforethefirstsigns
oftrouble,andthepowersthatregulatorshavetoorderfinancialinstitutionsto
rationalizetheircorporatestructures.Butsomecommentatorshaveraised
legitimateissuesaboutwhetherregulatorswillhavethelong-termwillpowerto
enforcetheseprovisionstotheirfullestextent.
83

TheinterfacebetweenOLAandFDICbankreceiverships,stateinsurance
receiverships,orSIPAliquidationproceduresisalsosomewhatproblematic.As
notedattheoutset,OLAdoesnotsupplantanyofthesespecializedprocedures.
84

Andparticularlywithregardtobankandinsurancecompanyreceiverships,the
statusquoprevailsandtheFDICasOLAreceiverwillhavetointeractwiththe
receiversofthesepiecesofthefinancialinstitution.Ofcourse,inthecaseofabank,
theFDICwillbeinteractingwithitself,buttheFDICasbankreceiveroperatesunder
adifferentsetofstatutoryinstructions
85
thantheFDICasOLAreceiver.
86

Inthecaseofbroker-dealers,theprocessissomewhatmoreconfused.
87
Aclose
readingoftherelevantprovisionactuallysuggeststhattheFDICcanbeappointed
receiverofabroker-dealerunderOLA.
88
ButthestatutetheninstructstheFDICto
appointSIPCastrusteeforthebroker-dealer.SIPCistheninstructedtopromptly
fileaSIPApetitionwiththewithanyFederaldistrictcourtofcompetent
jurisdictionspecifiedinsection21or27oftheSecuritiesExchangeActof1934.
89

ThuscommencesaSIPAcase,withsomenotableexceptions.First,SIPCnormally
appointsanoutsidetrusteeinallbutthesmallestcases.UnderOLA,SIPC,wholacks

anteinsurancefundexiststopaylosses,Dodd-Frankrestsonthepremisethatsuch
afundcanbecreatedexpost.PrefundingmayhavemadeOLAmoreusable,andone
cansurmisethisisexactlywhytheargumentthatpre-fundingwould
institutionalizebailoutswassurfaced.OnecanalsoreasonablydoubtCongress
willtoimposeexpostassessmentsonfinancialinstitutionsinthefaceofconcerted
lobbyingandgeneralconcernsaboutcausinganewroundofdistressinthefinancial
industry.SeegenerallyJeffreyN.Gordon&ChrisMuller,ConfrontingFinancialCrisis:
Dodd-FranksDangersandtheCaseforaSystemicEmergencyInsuranceFund,28Yale
J.onReg.151(2011).Cf.12USC5394.
83
SeeJonathanR.Macey&JamesP.Holdcroft,Jr.,FailureIsanOption:AnErsatz-
AntitrustApproachtoFinancialRegulation,120YaleL.J.1368,1390(2011).
84
HollaceT.Cohen,OrderlyLiquidationAuthority:ANewInsolvencyRegimeto
AddressSystemicRisk,45U.Rich.L.Rev.1143,1151(2011).
85
E.g.,12USC1823(c)(4).
86
12USC5386.
87
12USC5385.
88
12USCS5385(a)(UpontheappointmentoftheCorporationasreceiverforany
coveredbrokerordealer,theCorporationshall...).
89
5385(b).Notably,thisisnotapttobetheD.C.DistrictCourt,whomayhavehad
theinitialtaskofreviewingtheOLApetition.
28
experienceliquidatinglargebroker-dealers,isplacedincharge.ButSIPCwillnot
havethefullpowersofanormalSIPAtrustee,insteaditsispowerlesstointerfere
withtheFDICsdecisiontotransferassetstoanewpurchaserorbridgeinstitution.

SIPCsroleisprimarilylimitedtodealingwiththedebrisremainingaftertheFDIC
takeschargeofthebroker-dealer.SIPCisplacedinthedifficultposition.For
example,theyaretoldtoessentiallyleavetheFDICtodoitsthing,whilethestatute
alsoprovidesthatSIPCshouldnotdoanythingtoadverselyaffecttherightsofa
customertocustomerpropertyorcustomernamesecurities.
90
Fortunatelyfor
SIPCthestatutealsotellsthedistrictcourttostanddownoncetheSIPApetitionis
granted.
91

EssentiallyDodd-FrankusestheOLAprocesstorideovertheexistingSIPAprocess,
withouthavingthewillingnesstosayso.Inthislight,theotherwisepuzzling
decisiontoappointSIPCastrusteemakessensesinceanoutsidermightfindit
difficulttobeatrusteeundertheconditionsimposedbyDodd-Frank.

OLAwillgivetheFDICstrongpowersovermuchofafinancialinstitution,savefor
insurancecompaniesandbanks.Coordinationofthebankresolutionprocesswith
theOLAprocessshouldbepossiblegiventheunitaryidentityoftheOLAtrustee
andthebankreceiverbutitwillrequiretheFDICtoglossoveritsschizophrenic
responsibilitiesunderDodd-Frankontheonehand,andthegeneralbanking
statutes,ontheother.

OLAisalsosomewhatlessglobalthanchapter11mostofitsprovisionsare
expresslylimitedtodomesticentities,whereaschapter11potentiallyappliestoany
entitywithassetsintheUnitedStates.
92
Giventhenatureofmodernfinancial
institutionstherereallyisnosuchthinkasapurelydomesticfinancialinstitution
coordinationacrossbordersiskey,andthatissueremainsunresolvedbyDodd-
Frank.
93

Thuswecanexpectthatanycross-bordercoordinationofresolutionprocedures
willhavetohappenonaninformalbasis,amongregulators.AsseeninLehman,
however,sometimestheregulatorsarenotfullyawareoftheglobalinsolvency
system.Onecanonlyhopethatthisimprovesinlightofrecentevents.

Butnomatterwhathappensinthisregardinvestorsareunlikelytogetthecertainty
theymighthavehoppedforfromDodd-Frank.

90
5385(d).
91
5385(c).
92
11U.S.C.109(a).
93
SeeMATHIASDEWATRIPONT,BALANCETHEBANKS:GLOBALLESSONSFROMTHEFINANCIAL
CRISIS122-29(2010).
29
Weshouldalsorememberthatthereisalotthathaschangedinthepastfewyears
thatmightmakefinancialinstitutionfailurelesslikely,oratleastlesstraumatic.
NewregulationsoffinancialinstitutionsunderDodd-Frank,BaselIII,andother
initiativesallwillinfluencehowOLAoperates,andwhetheriteverneedstobe
invoked.Morebroadly,thebettertheexanteregulation,thelesslikelyOLAwill
everbeneeded.

30
III. BankofAmericainOLA

BankofAmericasentryintotheorderlyliquidationprocesswouldtriggerstate
insurancereceivershipsinCalifornia,NewYork,Arizona,SouthCarolina,and
Vermont.SixFDICbankreceivershipswouldcommence.AtleastfourSIPA
brokerageliquidationswouldbefiled.

Andtheholdingcompanyandanyunregulated,domesticsubsidiarieswouldenter
OLAproceedings,wheretheywouldcomeunderthecontroloftheFDIC.

Theassetsintheforegoingentitieswouldbeimmediatelyseveredfromtheassetsin
keyforeignsubsidiaries,likeMerrillLynchS.A.orBancofAmericaSecurities
Limited.
94
BasedontheexperienceinLehman,thismayresultinthesesubsidiaries
losingaccesstosharedcomputerandcashmanagementsystems,threateningtheir
abilitytosurviveasindependententities.Thus,evenifthesecompaniesare
separatelycapitalizedandotherwiseviable,theywillexperienceextremebusiness
disruptionunlesscontingencyplansareinplacewellbeforetheoccurrenceof
financialdistress.

Giventhatitwasreportedthatalargepartapproximately85%--ofBankof
AmericaassetsarereportedlyintheUnitedStates,itwouldbeeasytoassumethat
theFDICinoneofitscapacitieswillquicklytakechargeofthebulkofthe
company.
95
Butitisequallypossiblethatforeignsubsidiariesofthebankmight
haveclaimsonthoseassets,nomatterwhattheirlocation.Moreover,thereporting
ofderivativestradesonanetbasismeansthatassumingassetlocationcorrelates
withimportancemaybeextremelyimprudent.Inshort,itisunclearpreciselyhow
muchofBankofAmericawillfallunderFDICcontrol,actingaseitherasOLAtrustee
orbankreceiver.

ButwhateverpartofthebankfallswithintheFDICsjurisdiction,itwillhavetoact
fasttoprotectthevalueofthedebtor,especiallywithregardtoitsderivatives
tradingbook(assumingitisdomesticallyheldatthetimeoftheOLAfiling).As
such,thepathFDICwillfollowseemsrelativelyclear.

First,theFDICwillmovethevaluableandsystemicallyimportantpartsofthe
companytoabridgebank.Next,itwillmovetheentirederivativeportfolioorat
leasttheentiredomesticderivativesportfoliotothebridgebankaswell.While
hereitmightbetemptingtoonlymovethegoodorinthemoneytradestothe
bridgebank,Dodd-Franksprohibitiononsplittingpositionsagainstanysingle
counterparty,andtherealitythattheFDICmustactwith24hoursmakesanydeep
analysisofderivativetradesunlikely.Thissortofwholesaletransferdoes,of

94
SeesupraTable2foralistofBankofAmericasself-identifiedkeyoperating
subsidiaries.
95
SeesupraTable3.
31
course,amounttoawindfallforsomecounterpartieswhosuddenlygetthebenefit
ofamuchmorecreditorworthypartner.

ThethirdstepwouldbetoremoveBankofAmericasseniormanagement.Dodd-
Frankrequiresnoless.

Finally,theFDICwouldhavetoarrangeasensibleliquidationoftheremainderof
theBankofAmerica.Thatis,thescrapsleftoutofthenewbridgebankwouldhave
tobefinancedtofacilitatetheirliquidation.Eventuallyitseemslikelythatsome
sortofliquidatingtrust,asisoftenusedinlargechapter11cases,mightbeusedto
allowthecreditorsofthebadbanktomanagetheirownrecoveryinsomesortof
collectivesense.Thetrickherewillbemanagingthetensionbetweencreditorswho
wantrapidrepayment,whileavoidingfiresalesofdistressedsecurities,thatmight
havefurthereffectsonanalreadydepressedmarket.

That,ataveryabstractlevel,ishowOLAmightbeappliedtoBankofAmerica.Of
course,eachofthesebroadstepsraisesimportantconcernsandquestions.

Mostfundamentally,willitbepossibletocleanlyseparateBankofAmericaintoits
goodandbadparts?ThisistheareawheretheFDIC,throughthelivingwills
provisionsanditsotheroversighttools,mustbothunderstandandreformatBankof
Americainawaythatwillfacilitatethetransfertothebridgebank.Atpresent,it
seemshighlyunlikelythatthebank,withitsmorethan2,000subsidiaries,couldbe
splitintogoodandbadbankswithoutseriousdisruptiontothebank,andthusthe
entirefinancialsystem.

Thisisalsoanareawheretheinternationalcomponentofthebankshouldbe
addressed.Inparticular,thelivingwillforanyglobalfinancialinstitutionshould
explainhowtheforeignpiecesofthebankwouldbeseparatedfromtheAmerican
bank.

AsRichardW.Fisher,PresidentoftheFederalReserveBankofDallas,stated
recently,thereisscantchancethatmanagersof$1trillionor$2trillionbanking
enterprisescanpossiblyknowtheircustomer,followtime-honoredprinciplesof
bankingandfashionreliableriskmanagementmodelsfororganizationsascomplex
asthesemegabankshavebecome.
96
Thisrealitywouldbecomeevenmoreacute
duringafinancialcrisis,whentheFDICasreceiverisevenlesslikelytohavesuch
knowledge.

96
RichardW.Fisher,TamingtheToo-Big-to-Fails:WillDoddFrankBetheTicketor
IsLap-BandSurgeryRequired?RemarksbeforeColumbiaUniversitysPoliticsand
BusinessClub,November15,2011,availableathttp://bit.ly/vUPkmk.Asaremedy,
Fisherproposeddownsizingthebehemothsovertimeintoinstitutionsthatcanbe
prudentlymanaged....
32
Nonetheless,FDICwouldhavetooperatethebridgebank,whichcontainsthebetter
partsofBankofAmerica.Thiswillmeanfundingthebridgebank,withtheideathat
itwillgetbackitscostsfromtheindustryatsomepointinthefuture.

HereIthinkwehavetoworryaboutFDICsabilitytorunamajorfinancial
institution,markedlylargerthananybankithaseveroperatedunderits
receivershippowers.Moreover,marketconditionsareapttoberatherturbulent
followingthetakeoverofaninstitutionofBankofAmericassize.

TraditionallytheFDIChasfavoredsalestootherbankswhenithashadtodealwith
abigbankfailure.
97
ButwillanyonebeableorinterestedinbuyingBankofAmerica
followingitsfailure?Certainlyitwouldseemtomakelittlesensetoaddeventhe
goodbitsofthebanktoanyoftheexisting,verylargedomesticbanks.
98

ThatleavesthesecondtierbanksthinkUSBancorpandPNCFinancialServices
Groupaspotentialsuitors,orforeignfinancialinstitutions,likeBarclays,who
boughtLehmanoutofchapter11.Thequestioniswhetheranyofthesecondtier
bankswouldwanttojointhetoptier,andwhetherregulatorsshouldallowthemto
doso.Asimilarcalculuswillbeatworkwithforeignentities,whoseregulators
mustworryaboutrecreatingtoobigtoofailproblemsinthebuyinginstitution.

AndalsorememberthatBofAhasbeensomewhatdismemberedatthispoint
bothbythelimitedscopeofOLAandbytheinternationalpiecesbeingpulledout
sosomeofitsattractionmaybegone.Lehmanhadexactlyonebidderforitsassets,
andnowthatbankhasaU.S.broker-dealer.Whoremains?

FDICgetsoutofthisproblemintheirLehmanhypotheticalbyassumingabuyer
whoiswillingtopaybookvaluebutthepresentexerciseisaimedatasomewhat
morerealisticanalysis.

Asanalternative,FDICcouldcontinuetofundthebridgebankuntilthemarkets
stabilizeandthebridgecanthenberecapitalizedthroughanIPO.
99
Thiswillexpose
FDICtohighdegreesofmarketandpoliticalrisk,butendinthebestoverall
outcome.Nonetheless,thismodellooksmuchmorelikethemodelusedintheGM
casewhichmostpeoplewouldnottermaliquidation,despiteDodd-Franks
putativerulethatallfuturefinancialinstitutionsshouldsufferthatfate.

Ultimately,theremaybemanygoodreasonstobreakupthelargestU.S.banks.In
manyrespects,theyarenotunliketheconglomeratesofthe1960s,pursuingseveral
linesofbusinessonthebasisofpurportedeconomiesofscalethatmayexistmorein

97
http://www.fdic.gov/news/news/press/2012/pr12013.html
98
AnddoingsowouldrequirewaiverofDodd-Franksconcentrationlimits.
99
SeeMichaelSimkovic,CompetitionandCrisisinMortgageSecuritization,88Ind.
L.J.____(forthcoming2013),availableathttp://ssrn.com/abstract=1924831.
33
themindsoftheirCEOthaninreality.
100
Butinanyevent,itseemsunlikelythatthe
idealmomenttobreakupthesebankswillbeatthepointofcrisis.Anditseems
equallyunlikelythattheseinstitutionswilldivideneatlyalonggeographicallines
yetthatispreciselywhatDodd-FranksOLAispremisedon.

IV. ConcludingThoughts

GivenOLAsadmittedlyshakiness,whynotusetheBankruptcyCode?Afterall,
chapter11benefitsfromdecadesofunderstandingabouthowtorestructurea
financiallydistressedcompany.Andseveralextremelylargecompanies,including
financialinstitutionslikeLehmanandDrexelBurnhamLambert,havesuccessfully
usedchapter11.

ThemostprominentproposaltousetheCodeinplaceofOLAactuallycallsfora
newchapter14,proposedbymembersoftheResolutionProjectatStanford
University'sHooverInstitution.
101
Inshort,proposedchapter14wouldapplytoall
financialinstitutionswithassetsofmorethan$100billion.
102
Petitionscouldbe
filedeithervoluntarily(bytheinstitution)orinvoluntarily(byregulators).Cases
wouldbeoverseenbyasmallandspecializedpanelofdistrictcourtjudgesand
specialmasters.
103
Otherwisethecaseswouldproceedundernormalprovisionsof
theBankruptcyCode,subjecttomodifiedtreatmentofderivativesandrepos,as
outlinedinacompanionarticlebySkeelandJackson.
104
Thestategoalistotakethe
governmentoutoftheinsolvencyprocess,astheproponentsarguethatinvolves
politicaldistortionofthemarket.

ThekeydifficultywithanysuchuseoftheBankruptcyCoderestsonfunding.The
chapter14proposalsupposestheuseofamodifiedversionofthepresentsection
364oftheBankruptcyCode,thestatutorysupportforthewell-knownDIPloansin
chapter11cases.
105

Beforethefinancialcrisis,LyondellChemicalreceivedthelargestcommercialDIP
loanonrecord:$8billion.ThatloanwasarrangedbyMerrillLynch,Goldman

100
http://finance.fortune.cnn.com/2012/01/18/big-banks-break-up-
bair/?iid=SF_F_Lead
101
http://www.federalreserve.gov/SECRS/2011/June/20110620/OP-1418/OP-
1418_061511_81311_544434921739_1.pdf
102
24bankorfinancialholdingcompaniesfitthatdefinitionattheendof2011,
majorregionalbankslikeUnionBankofCaliforniaandKeyCorpwouldnotbe
covered.
103
Id.at1-6.
104
DavidA.Skeel,Jr.&ThomasH.Jackson,TransactionConsistencyandtheNew
FinanceinBankruptcy,112Colum.L.Rev.152,153-54(2012).
105
JamesonRice,III.ChangesinDebtor-in-PossessionFinancingFollowingthe
FinancialCollapseof2008,29Rev.Banking&Fin.L.312,313(2010).
34
Sachs,Citigroup,andtheRoyalBankofScotland,andfundedbythirteenfinancial
institutions,includingcommercialbanks,investmentbanks,hedgefunds,and
privateequityfunds.

GeneralMotorsreceiveda$33billionDIPloan,fromtheU.S.Treasury.
106
That
remainsthelargestDIPloanever.

ThetotalvalueofthetenlargestDIPloansinthe2011was$3billion,onethirdof
whichinvolvedasingleloanarrangedbyBankofAmerica.In2010thetotalvalueof
thefifteenlargestDIPloanswas$7billion,ofwhich$725million,comprisingfour
loans,wasarrangedbyBankofAmerica.

BankofAmericacurrentlyhasliquidityneedsofmorethan$400billion.

RelyingonthecommercialDIPmarketespeciallyduringafinancialcrisisfora
DIPloanofanythingnearthissizeseemsmorethanimplausible.Thenumberof
financialinstitutionsthatwouldhavetobeinvolvedwouldbemassiveperhapsas
manyas650,iftheproportionwerethesameastheLyondellDIPloan.Thereisno
wayaloanofthissizecouldbearrangedwithoutstartingarunonBankofAmerica.

Dodd-Franksolvesthisproblemwiththefundingmechanismdiscussedearlier,and
thatmechanismorsomethinglikeitisaprerequisitetoaviableresolution
authority.
107

Andonceweconcedetheneedforgovernmentfunding,thenotionthatthe
governmentwillnotultimatelybeincontroloftheprocessseemslittlemorethan
nave.Afterall,untiltheautomotivecases,itwaswidelyagreedthataprivate
lenderwasentitledtocalltheshotsinanycaseinwhichitprovidedthedebtors
meanstokeepoperating.
108

Similarly,thechapter14proposaltoutsitsbenefitasatransparent,court-based
process,itdoeslittletoaddressthespeedneededtoaddressfinancialdistressin
thiscontext.ThenewOLAobtainsmostofitsbenefitsfromitsratherlimited

106
http://dealbook.nytimes.com/2009/06/25/gm-wins-final-approval-of-dip-
financing/
107
MichaelS.Barr,TheFinancialCrisisandthePathofReform,29YaleJ.onReg.91,
101(2012).
108
DouglasG.Baird&RobertK.Rasmussen,TheEndofBankruptcy,55Stan.L.Rev.
751,784-85(2002);M.ToddHenderson,PayingCeosinBankruptcy:Executive
CompensationWhenAgencyCostsAreLow,101Nw.U.L.Rev.1543,1570(2007);
DavidA.Skeel,Jr.,Creditors'Ball:The"New"NewCorporateGovernanceinChapter
11,152U.Pa.L.Rev.917,923(2003).Aftertheautomotivecases,certain
proponentsofthatviewseemedtochangetheirmind.SeeLubben,NoBigDeal,
supranote68.SeealsoMarkJ.Roe&DavidA.Skeel,AssessingtheChrysler
Bankruptcy,108Mich.L.Rev.727,731-32(2010)
35
versionofdueprocess,whichisbothtroublingandnecessary.
109
Lehmanwasable
tousetheordinarybankruptcyprocesstoachieveasaleofitsbroker-dealerwithin
oneweek,butthatonlycameaboutasaresultoftheFederalReserveswillingness
tosupportthesaleprocess.ArguablytheFednolongerhasthatpower,andthe
proponentsofchapter14donotseemtoprovideanyalternative.

Moreimportantly,rememberagainthatLehmaniscomparativelysmallwhen
measuredagainstthelikesofBankofAmerica.Thefinancialmarketsneedtoknow
theplan,andtheyneedtoknowitquicklywhenamajorbankfails.
110
OLAclearly
winsonthispoint,and,asnotedabove,manyofthedueprocessconcernswillfade
ifFDICcanprovidegreaterclarityonwhenOLAmightbeinvoked.
111

Finally,itwouldseemthatthechapter14proponentswantedjudicialexpertise,but
wereunwillingtoembracethatexpertisewhenitcameintheformofnon-ArticleIII
bankruptcyjudges.
112
Iftruerestructuringexperienceisdesired,thebankruptcy
judgesinDelawareandtheSouthernDistrictofNewYorkseemliketheobvious
choice,butthechapter14proposalinsteadgoeswithdistrictcourtjudges,whosee
chapter11casesonappeal,ifatall.
113
AsbetweenadistrictjudgeandFDIC,it
appearsthatthereislittletobegainfromreplacingOLAwithchapter14.

Inshort,whileabankruptcy-basedprocesswouldundoubtedlybepreferable,given
thegainsintransparencyandlegitimacy,itwouldnecessarilyinvolveOLA-like
fundingandtimingprovisions.
114
Thisissomethingmorethanbankruptcywitha
fewtweaks.

Andchapter14doesnothingtosolvetheinternationalcomponentoftheproblem,
whicharguablyisthebiggestissueloomingovertheentiretopic.Afterall,while
Lehmanisoutofchapter11,itsNewYorkbroker-dealeranditsLondonbroker-
dealercontinuetofightoverownershipofassetsinbothbankruptcyestates.

Giventhatalllargefinancialinstitutionsareinternationalfinancialinstitutions,the
failuretotacklethekeyissueleavesthebiggestpieceoftheproblemunaddressed.

109
RandallD.Guynn,AreBailoutsInevitable?,29YaleJ.onReg.121,153(2012).
110
AlisonM.Hashmall,AftertheFall:ANewFrameworktoRegulate"TooBigtoFail"
Non-BankFinancialInstitutions,85N.Y.U.L.Rev.829,851(2010).
111
AcknowledgingthatFDICisonlypartiallyabletocommittoanystrategyinthis
regard,giventheroleoftheSecretary.
112
SeeSternv.Marshall,131S.Ct.2594(2011).
113
TroyA.McKenzie,JudicialIndependence,Autonomy,andtheBankruptcyCourts,
62STAN.L.REV.747,781(2010).
114
SeeAdamJ.Levitin,InDefenseofBailouts,99Geo.L.J.435,487(2011).