Single Point of Entry and the Bankruptcy Alternative

This Essay, which will appear in Across the Great Divide: New Perspectives on the Financial Crisis, a Brookings Institution and Hoover Institution book, begins with a brief overview of concerns raised by the Lehman Brothers bankruptcy about the adequacy of our existing architecture for resolving the financial distress of systemically important financial institutions. The principal takeaway of the first section is that Title II as enacted left most of these issues unanswered. By contrast, the FDIC’s new single point of entry strategy, which is introduced in the second section, can be seen as addressing nearly all of them. The third and fourth sections point out some of the limitations of single point of entry, first by highlighting potential pitfalls and distortions and then by explaining that single point of entry does not end the too-big-to-fail problem and would not reduce worrisome concentration in the financial services industry. The final section turns to bankruptcy, which remains the strategy of choice for resolving even systemically important financial institutions and considers how a single-entry-style strategy could be used in bankruptcy. Indeed, the strategy harkens back to the original procedure used to reorganize American railroads well over a century ago