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Posted at 11:30 AM ET, 12/28/2010

How banks are structured

By Ezra Klein

The finance lawyer behind Economics of Contempt set out to write a defense of the resolution authority provisions in the Dodd-Frank bill, but then realized that to understand why they would work, "you really have to have an understanding of how the major banks/investment banks are structured, legally, and why that structure causes so many problems in bankruptcy." So he sat down and explained it. The resulting post is well worth your time.

By Ezra Klein  | December 28, 2010; 11:30 AM ET
Categories:  Financial Regulation  
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Also, for learning about shadow banking this Fed report is excellent (h/t Mike Konczal):
(check out that graph on page 2)!!!


Posted by: chrisgaun | December 28, 2010 12:29 PM | Report abuse


"What’s important to understand — and I don’t think enough people do understand this — is that one of the biggest reasons that Lehman’s failure was such a catastrophic event for the markets was Lehman’s complete and total lack of preparation for a bankruptcy filing. I know this isn’t what most people want to hear or believe, since it doesn’t fit neatly into any of the popular narratives, and fixing it wouldn’t be gut-wrenchingly painful for the banks. But it’s the truth — and if you ask people who worked through the Lehman failure, they’ll all tell you the same thing: the complete lack of preparation was devastating.

It was honestly as if no one in the entire Lehman organization had thought about what they’d need to do in the event of a bankruptcy filing until the moment they filed. As a result, it was the most chaotic, uncontrolled failure imaginable."

So we need a new resolution authority other than bankruptcy because they didn't bother to properly prepare for bankruptcy?

Seems to me that this is overkill, specifically since my understanding is that the Dodd-Frank resolution authority allows the government to change the creditor prioritization at it's discretion without judicial approval.

Posted by: jnc4p | December 28, 2010 11:03 PM | Report abuse

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