This vote was on an amendment by Jeff Sessions, R-Fla., that would have prohibited the Federal Reserve from using its emergency authority to fund insolvent entities, thereby forcing those firms to enter bankruptcy proceedings.  The amendment was offered to a bill that aims to close gaps in financial regulations, strengthen oversight of consumer lending and more closely oversee complex financial investments.

Sessions’ amendment was intended to short-circuit a portion of the underlying bill that would allow the Treasury Department to appoint the Federal Deposit Insurance Corporation (FDIC) as the receiver for certain kinds of failing financial firms.  This essentially would remove these firms from being subject to normal bankruptcy law and instead give FDIC the responsibility for resolving the affairs of an insolvent firm.

Sessions said his amendment would have the effect of ensuring that normal bankruptcy proceedings in court are usable for cases that involve complex financial investment vehicles.

“It would allow the cases to be brought in large bankruptcy court areas so that there is sufficient expertise and personnel to handle it, and it would deal with the problem of derivatives that some have raised and gives the courts more flexibility to do that. I think it is the better approach. It is our historic, fair approach. The American people will know the same judgment that falls on them and their small businesses will fall on the big boys,” Sessions said.

Chris Dodd, D-Conn., said the presumption of the underlying bill is for placing insolvent firms into bankruptcy, in order to avoid “too big to fail.”  However, Dodd said that for large, very complex entities, pushing them into bankruptcy proceedings “can have the unintended collateral damage effect of affecting otherwise solvent, good companies that are well-managed.”

“I am shorthanding this, in a way. So the idea was, on some rare occasions, and hopefully they are very rare, when that possibility occurs and you have to go through a number of hoops to get to that conclusion, that we would have a mechanism for a resolution, a winding down of that entity, to avoid the kind of collateral damage that could cause if bankruptcy were the only option for those complex entities,” Dodd said.  “What you are faced with, if the Sessions amendment is adopted, is right back where we were in the fall of 2008 where the choices are bankruptcy or bailout, in a sense, where bankruptcy would pose, as Lehman Brothers potentially did, as we saw, a lot of collateral damage because there was not a wind-down resolution mechanism.”

By a vote of 42-58, the amendment was rejected. All but one Democrat present voted against the amendment.  Every Republican present voted for the amendment.  The end result is that the measure went forward without language that would have prevented the Federal Reserve from using its emergency authority to provide funding to certain insolvent firms, thereby forcing those firms to enter bankruptcy proceedings.