Public Contract Law Journal

Removing Uncertainty for the Most Uncertain Times: The Need for Amending the Anti-Assignment Acts to Better Prepare for a Financial Crisis

by Chung Kun Kevin Park

Chung Kun Kevin Park (cpark@law.gwu.edu) is a J.D. candidate at The George Washington University Law School and serves as the Senior Notes Editor of the Public Contract Law Journal. He would like to thank Professor Arthur Wilmarth and Professor Collin Swan of The George Washington University Law School as well as Roya Motazedi and Nicole Giles for their guidance and support. Most of all, he recognizes that none of this would be possible without the unwavering support and love of his father, mother, and sister.

I. Introduction

When financial regulators see the clouds of a financial crisis approaching, they begin a race against time to minimize the impact of the coming storm. If they cannot calm the market quickly, it could result in an economic catastrophe. The market generally expects its investments to safely return with added value. But in times of financial turmoil, the market begins to lose faith. The possibility of investments suffering extreme losses or the investment company becoming insolvent becomes all but certain in the market’s mind.

Once this fear overtakes the market, the gears of the economy grind to a halt — stopping the flow of incoming capital. In this moment of vulnerability, even a sliver of evidence of a looming economic crisis could transform this fear into a panic and send investors in a race to withdraw their funds. The mass withdrawals force the dried-up channels of capital to reverse their flow in a scale that the financial system was never built to handle. Most financial institutions do not operate with sufficient capital reserves to absorb withdrawals of such magnitude,1 and bankruptcy becomes inevitable for many of them. Each failing financial institution acts as fuel to feed the raging fire — coercing investors of even the most stable institutions to give in to the panic.

Efforts by financial regulators to singlehandedly calm the market have generally been insufficient.2 Financial regulators often need the private sector — primarily banks and other financial institutions — to cooperate.3 The more stable financial institutions must agree to absorb the assets of those institutions facing bankruptcy — often at great risk with uncertain returns. In the recent 2008 financial crisis, this type of cooperation allowed banks, including JPMorgan Chase (“JPMorgan”) and Bank of America, and public entities, like the Federal Deposit Insurance Corporation (“FDIC”) and the Federal Reserve (“the Fed”), to prevent the collapse of major financial institutions and stop the economy from crashing into a full-blown depression.4 The negotiation and drafting of complex asset transfers and corporate reorganizations occurred at a frantic pace.5 The gravity of the situation prioritized expediency, and certain nuanced details were inevitably overlooked.

The Anti-Assignment Acts (“AAA”) was one of these ignored details.6 The AAA prohibits the assignment or transfer of claims against the government once a financial institution takes possession of them.7 Congress can exempt individual transfers or categories of transfers from the AAA, but the statutory language of the AAA alone does not provide any express exemptions.8 The judicial system has carved out various exemptions to the AAA since its inception — with the Court of Federal Claims (“COFC”) expanding on the decisions made by the Supreme Court.9 The series of decisions issued by the COFC provide five categories of exemptions,10 but reliance on these exemptions remains precarious at best due to the COFC’s lack of binding authority.11

During the onset of a financial crisis, intervention measures must be enacted faster than Congress can approve AAA exemptions. Failing financial institutions need to be wound down in a controlled manner through a partial asset purchase, acquisition, or merger by either a government entity or a private party.12 However, the AAA may interfere with such emergency measures and prevent valuable claims against the government from being considered due to restrictions on transfers of the claims.13

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