Restructuring Failed Financial Firms in Bankruptcy: Selling Lehman's Derivatives Portfolio

Lehman Brothers' failure and bankruptcy deepened the 2008 financial crisis whose negative effect on the US' economy lasted for several years. Yet, while Congress reformed financial regulation in hopes of avoiding another crisis, bankruptcy rules such as those that governed Lehman's failure, have persisted unchanged. How such a vast value loss can occur and how bankruptcy can ameliorate the problem are the subjects of this Article. Congress and the regulators have said that bankruptcy is the favored means for financial resolution. Yet, while regulatory initiatives have sought to make failure less likely and resolution more viable than it proved during the crisis, US bankruptcy law has neither been fixed nor even updated since the financial crisis. The authors outline one critically needed fix: authorizing bankruptcy to break up a large derivatives portfolio by selling its constituent product lines, one-by-one, instead of limiting bankruptcy to its current constraints of either a sale of the entire portfolio or a Lehman-style close-out of each contract, one-by-one.