WASHINGTON (HedgeWorld.com)–As the members of Congress flee Washington for their August break, they leave behind a stalled bankruptcy bill, and the issue of financial netting reform remains in abeyance.
Negotiators for the House of Representatives and the Senate reached an agreement last week on a bill resolving the differences that had held up the sort of bankruptcy reform that has been urgently pursued by credit card companies, banks and the finance divisions of the automobile manufacturers for five years.
Both houses have long agreed on the need for netting reform–i.e. a provision that would deny an automatic stay to set-offs under swap or netting agreements and would restrict the authority of a bankruptcy trustee in regard to such transfers. There is some concern that, in the absence of such provisions, the insolvency of a large financial institution and its effort to renege on swaps and netting agreements could cause a liquidity crisis in the world financial system.
Scott Duncan, a spokesman for the Financial Services Committee of the House, said Tuesday “everybody understands the importance of netting, especially since the collapse of Enron.” He added that “everybody is still in shock over the sudden collapse of the deal,” to push through an omnibus bankruptcy reform, which would have included netting improvements, this week.
Netting improvements have been the subject of a good deal of discussion since the fall of 1998, when officials of the Federal Reserve had to step in and negotiate a winding-down of the positions of Long-Term Capital Management.