Regulation intended to give the U.S. more authority to reshape the financial industry, including how bank holding companies or insurance companies wind down, isn’t likely to do any good, said billionaire investor Wilbur L. Ross, chairman of WL Ross & Co.
Ross, speaking at a conference of the American Bankruptcy Institute in Manhattan today, said that reforms such as those passed by the Senate last week won’t necessarily bring what’s needed -- common sense -- to the U.S. financial system.
“Whether more layers of entities will do much good I rather doubt,” Ross said. “I think common sense is what left the banking community, and common sense is what needs to be restored to it.”
Ross also said that if the U.S. can wind down companies, there may be lower recoveries for taxpayers than if a traditional Chapter 11 bankruptcy process is used.
“Recoveries to the U.S. will be worse under this regime than under the chapter 11 regime,” he said. “There’s no going concern value if you force a company to liquidate lickity split.”
A Senate bill shepherded by Senator Christopher Dodd, a Democrat from Connecticut, would give the Federal Deposit Insurance Corp., which already has authority to liquidate failed commercial banks, power to unwind large failing financial firms, such as bank holding companies or insurance companies.
A conference panel also addressed the U.S. decision to bail out Chrysler Corp., General Motors Corp., and American International Group Inc. James E. Millstein, Chief Restructuring Officer of the U.S. Treasury Department, said that the government couldn’t do a prepackaged bankruptcy for AIG because like a bank, it could have experienced a run. As holders of life insurance or annuity programs cashed out at the first news of balance sheet troubles, causing a ripple effect on the securities that AIG itself held.
“They were afraid of the parade of horrors,” Millstein said. “I think they made the right decision. The parade would have been horrible.”
Timothy Coleman, senior managing director of Blackstone Group LP, speaking on the panel alongside Ross, said investors will be hesitant to stay involved in a FDIC-run wind-down because it isn’t a tried and true process like the bankruptcy code.
“In a bankruptcy, there are tried-and-true rules, and history,” Coleman said. “People will know what they’re getting and it’s a consistent, familiar place. Confusion, lack of knowledge, and of certainty, costs more money.”
Banks such as Washington Mutual Inc. and Indymac Bancorp Inc. have sought bankruptcy protection for their holding companies while putting their retail banking units in the hands of the FDIC.
Ross, speaking in an interview after the panel discussion, said the legislation may also make investors more hesitant to become noteholders in banks.
“The other big question is -- the rating agencies have said they could downgrade banks because of the legislation,” Ross said. “That means the legislation raises the costs for banks.”