Making Failure Feasible is a collection of nine essays predominantly focused on a Chapter 14 of the bankruptcy code. The reason you may not have heard of that chapter before, as opposed to the more familiar Chapters 7, 11, and 13, is that Chapter 14 is not law—at least, not yet. It is the product of a working group out of the Hoover Institution, the so‐​called Resolution Project, which was formed in early 2009 while the after‐​effects of the financial crisis were still lingering.

The most recognizable name associated with the book is John B. Taylor, the former under secretary of the treasury for international affairs during the early years of the George W. Bush administration and developer of the Taylor Rule for monetary policy. His research makes him a competitive candidate for a Nobel Economics Prize. Taylor is one of the editors of the book and he also wrote its preface, which gives some background on the Resolution Project and the books that have flowed from it.

The financial authorities have moved forward with the Dodd‐​Frank one‐​two punch of Title I living wills and Title II orderly liquidation authority (OLA) that are at the core of the legislation. These provisions would be applied to deal with the approaching failure of a so‐​called “systemically important financial institution” (SIFI) if we had a repeat of a Bear Stearns– or Lehman Brothers–type stumble in the future.

There has not been a resolution of a SIFI under this authority as of yet and we may have to wait for the next full‐​blown financial crisis for that to occur. But, the more entrenched the regulatory framework gets, the more difficult it becomes to make wholesale changes short of a new set of post‐​crisis reforms. The political outlook for Republicans, whose vocal criticism of Dodd‐​Frank was a theme of a number of their presidential candidates this year, is not looking good whether one considers the presidency or the congressional landscape. Alternatively, Democrats tend to think Dodd‐​Frank, passed by Democratic majorities in the House and Senate on a partisan basis and signed by President Obama, was a step in the right direction. They would only favor comparatively modest adjustments to the legislation, including to existing provisions allowing the break‐​up of SIFIs.

The chapters in Making Failure Feasible are a little uneven in their pace, likely attributable to the varied backgrounds of the authors. Over half of the chapters are drafted by lawyers and law professors and at least one of the chapters has the feel of material you would find in a legal textbook, which gave me some flashbacks to my law school years. The remaining chapters are drafted by finance specialists. Overall, the chapters are readable for a general policy audience, especially if the reader is knowledgeable about the financial crisis and its policy and legislative aftermath. Given the limitations on the length of this review, I will highlight select chapters that I found to be particularly important to the analysis of a Chapter 14.

The book’s first chapters are background in nature, providing basic definitions on Chapter 14 topical areas (capital, debt, liquidity, due process, international coordination, and systemic risk), followed by two proposed versions of Chapter 14 (Version 1.0 released in 2012 and Version 2.0 released in 2013). A chapter entitled “Building on Bankruptcy” notes that Chapter 14 “could be adopted either in addition or as an alternative to the new resolution regime of Dodd‐​Frank.”

The financing conundrum / One cannot broach the subject of resolving a large financial institution without considering the topic of how that resolution will be paid for. The issue of how a proposed Chapter 14 would address the funding of a SIFI is tackled by University of Pennsylvania law professor David Skeel, who writes regularly on bankruptcy in the editorial pages of the Wall Street Journal. Dodd‐​Frank provides for a line of credit from the U.S. Treasury and largely keeps in place Federal Reserve lender‐​of‐​last‐​resort funding. That is the problem. Government funding has been too readily available, the exhortations from Walter Bagehot on central bank lending have been ignored, and the SIFIs take full advantage of these facts.

The current Chapter 11 does not provide for any type of SIFI financing. Skeel argues that under Chapter 14 such financing could be addressed through the market similar to the current debtor‐​in‐​possession financing employed in bankruptcy. He speculates that Dodd‐​Frank regulatory changes, such as increased capital and liquidity requirements, mean less of a need for such financing. Finally, he suggests some form of prearranged private funding mechanism, while at the same time allowing the Fed’s emergency lending powers to carry forward. Although Skeel’s proposal tightens up on the current open‐​ended government lending, his suggestion of leaving in place Fed lending, largely as it is, is troubling given the Fed shows no signs of letting up on its present plenary authority to lend to any institution it sees fit to lend to.

The cross‐​border challenge / Under Chapter 14, could we resolve a massive cross‐​border institution? In 2008, so the standard narrative goes, it would have been impossible to resolve a massive cross‐​border institution like Citigroup, with its trillions of dollars of assets spread across thousands of subsidiaries operating in multiple‐​dozens of countries. The analysis of resolving cross‐​border institutions in Making Failure Feasible is bifurcated, with one chapter by legal specialist Simon Gleeson of Clifford Chance and another chapter by financial experts Jacopo Carmassi and Richard Herring of the University of Pennsylvania’s Wharton School. The legal issues come down to whether the legal provisions are recognized in overseas bankruptcy proceedings. Gleeson makes a convincing case that this question is more clearly answered with a Chapter 14 regime as opposed to a Dodd‐​Frank resolution regime.

The resolvability analysis by Carmassi and Herring details the challenge at hand: the average globally systemic institution that will be subject to resolution has about $1.6 trillion in assets, 42 percent of its assets outside of its jurisdiction, and over 1,000 subsidiaries to deal with in 44 countries. They parse out the central issues with regard to resolvability of cross‐​border institutions: international cooperation and the related phenomenon of ring‐​fencing. As the term implies, ring‐​fencing is a procedure whereby local jurisdictions (host countries) “fence off” the assets within their borders, which gets in the way of an effective resolution of the entire cross‐​border institution. They conclude that “we do not yet have a reliable framework to undertake the orderly resolution of a [global systemically important bank].”

Resolvability / The topic of making a bank “resolvable” is addressed by Thomas Huertas of EY Global. The argument made during the financial crisis was that SIFIs were not resolvable because the process was too “disorderly” through existing bankruptcy. The standard narrative justified this argument by presenting the case of Lehman Brothers. In contrast, the objective now when it comes to resolvability is to assure that the institution is “safe to fail” (orderly), defined as doing so without expense to taxpayers and without massive disruption. Huertas builds one example on top of another from the simplest case (unit bank in a single jurisdiction with no branches or subsidiaries) to the more complex cases (branches, parent holding company with domestic and foreign subsidiaries).

William Kroener, former general counsel of the Federal Deposit Insurance Corporation, contributes a brief chapter on “living will” requirements. Those are the resolution plans that the large banks are required under Dodd‐​Frank to submit to the Federal Reserve and FDIC. They test how the bankruptcy law would be applied as part of a resolution exercise.

Reliving Lehman / The chapters discussed thus far progressively lead to a chapter by attorney and Stanford economics doctoral candidate Emily Kapur. Where much of the book is theoretical in discussing what Chapter 14 might look like, Kapur attempts to determine how Chapter 14 would have applied under a Lehman scenario of a prototypical disorderly resolution. Although this may be a case of “generals fighting the last war” in assuming that a crisis will play out in the same way during the next crisis as it did during the last, in some ways this is unavoidable.

For her case study, Kapur assumes that Dodd‐​Frank is in place with an overlay of Chapter 14. She also makes a simplifying assumption that foreign regulators do not ring‐​fence assets, which appears to be unrealistic, although it is not clear how material this assumption is to her case study. Under her counterfactual, Lehman moves assets and liabilities to a “bridge” structure a full 10 days before the bankruptcy filing actually occurred in 2008. In a section entitled “Business after Chapter 14,” Kapur traces through how she envisions the newly structured “New Lehman,” primarily from a standpoint of financing and any adverse systemic effects from implementation.

Conclusion / The Dodd‐​Frank resolution framework has had its share of high‐​profile setbacks this year, between an embarrassing slap‐​down by a federal judge who criticized the means by which the financial authorities designated SIFIs in the MetLife case, to the continuing inability of the banks to compose their living wills in a way that satisfies the Fed and the FDIC. Whether these setbacks are the beginning of a slow collapse of the Dodd‐​Frank framework remains to be seen. The proposed Chapter 14 offers an alternative to continuing down the Dodd‐​Frank road of granting expanded discretion to the financial authorities who failed in their efforts to assure financial stability and avoid drawing on government funding during the last crisis.