James Pethokoukis

Politics and policy from inside Washington

Liberals hit Senate financial reform bill

Apr 20, 2010 17:24 UTC

As HuffPo puts it:

A coalition of former regulators, left-leaning economists and Democratic insiders have slammed the Senate’s version of regulatory reform in a letter to the parties’ two leaders, warning that the current bill won’t prevent a future financial crisis.

One of the signers is liberal think-tank economist Dean Baker. I e-mailed him and asked about the letter’s claim that the Dodd reform bill does not “eliminate a perpetual system of government sponsored corporate bailouts financed by the government or private industry.”

His speedy response:

To my view, the biggest failing is that it does not end TBTF banks. As a practical matter, I really doubt that any regulator is going to stand up to Goldman, Citi or any of the other big banks and tell them they can’t do something that is making them lots of money, but poses serious risks to the system. It would have helped if we had fired Bernanke, so that regulators understood that there was downside risk from failing to do their job and crack down on the big banks when necessary. But if Bernanke can get reappointed, even after allowing the worst economic disaster in 70 years, there is little hope that future regulators will take large personal risks to confront major banks when there is no downside to ignoring their practices.

COMMENT

Hey people. Just pull their business license. Everyone has to be accountable including big business, including banks, drug companies, oil companies, and manufacturers. It is not a right to operate a business in the US. Wake up America

Posted by fred5407 | Report as abusive

Why we shouldn’t break up the big banks

Apr 20, 2010 16:51 UTC

Tyler Cowen gives it his best shot and ends with this recommendation:

If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take. It would mean that our government no longer needs to worry so much about financing its activities. Of course such an outcome is distant these days, mostly because American voters love both high government spending and relatively low taxes.

3 TBTF loopholes in the Dodd bill

Apr 20, 2010 16:37 UTC

The wonderful Nicole Gelinas explains why she does not think the Dodd bill ends TBTF (as outlined by me):

1) Title II, which starts on p. 107, explains how “orderly liquidation authority” would work. When the Treasury and a panel of judges have determined that a financial firm is unsafe for bankruptcy, the FDIC would take over that firm. In “liquidating” the company, the FDIC would figure out who — of the firms’ lenders, other creditors, and shareholders — would get what. On the repayment list is “any amounts owed to the United States, unless the United States agrees or consents otherwise” (italics mine). That speaks for itself on whether taxpayers will be “exposed to a penny of risk of loss.”

2) More important, though, what does it mean to “liquidate” a company? … The bill does not ensure that lenders will take losses. Instead, it merely directs the FDIC to operate under a “strong presumption” (p. 131) that “creditors and shareholders will bear the losses of the financial company” (p. 132).

3) A hundred-odd pages later, the bill offers a big loophole for lenders in a crisis. It says that the FDIC, “with the approval of the [Treasury] Secretary, may make additional payments or credit additional amounts to or with respect for the account of any claimant or category of claimants of the covered financial company” — that is, to lenders — “if the [FDIC] determines that such payments or credits are necessary or appropriate to minimize losses” to the FDIC (p. 241). It wouldn’t be unreasonable for a lender to expect the government and the FDIC to use all of the discretion the bill affords them to guarantee financial firms’ debt in a future systemic financial crisis, just as happened this time around.

4) Finally, Geithner’s language — he wants to “dismember” failed financial firms “safely” — is interesting. Three months ago before Congress, Geithner had this to say about the AIG bailout: “We didn’t rescue AIG. We intervened so we could dismember it safely.” True, that was the government’s intent in the fall of 2008. But AIG is still with us; the stock trades at nearly $40.

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