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Dodd Says Bankruptcy Law Must Help Address ‘Too Big to Fail’

Senator Christopher Dodd, co-author of the biggest overhaul of financial regulation since the 1930s, said he fears bankruptcy courts would be ill-equipped to handle the collapses of interconnected firms not covered by the law.

The Dodd-Frank Act, crafted in response to the September 2008 failure of Lehman Brothers Holdings Inc., established a federal mechanism to wind down systemically important companies. Dodd, speaking today at a Securities Industry and Financial Markets Association conference, said firms that don’t trigger the wind-down mechanism may still roil markets in bankruptcy.

“The bankruptcy code needs to be reformed, in my view, to accommodate highly interconnected companies if they want to go through that process,” said Dodd, the Connecticut Democrat who leads the Senate Banking Committee. “That has to happen.”

Lehman’s collapse sparked a credit crisis that prompted lawmakers to approve a $700 billion bailout for financial companies including Citigroup Inc. and Bank of America Corp. It also helped inspire the Dodd-Frank law, which creates a council of regulators, a regulatory apparatus for the derivatives market and a bureau to oversee consumer lending.

“The process of implementation is moving swiftly and efficiently,” said Dodd, referring to the rule-making process being handled by agencies including the Treasury Department and the Federal Deposit Insurance Corp.

Cutting the regulators out of the process by having Congress write the specifics of the rules “would have been a terrible idea,” he said.

Dodd, who is leaving office at the end of this year, said lawmakers must resist calls to repeal the new law, even as Democrats face a slimmer majority in the Senate and a loss of power in the House.

He said he hopes the Senate Judiciary Committee will change the bankruptcy law to ally his concerns that some “too big to fail” firms may not be subject to the new resolution authority.

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