Why the Banking Regulation Bill Institutionalizes Bailouts

Senator Chris Dodd claims that this bill ends bailouts.

it’s just a Wall Street lie. This bill ends bailouts. . . .

Senator Mitch McConnell does a good job explaining the other side:

Central to the criticism spearheaded by Senate Republican leader Mitch McConnell is a proposed $50 billion fund that big banks would finance and that the Federal Deposit Insurance Corp. would use to liquidate giant, interconnected financial firms on the verge of collapse.

McConnell, R-Ky., said the very existence of the fund "would of course immediately signal to everyone that the government is ready to bail out large banks." . . .

So how does the Washington Post describe this?

So that's what McConnell does. But is it true? "If there’s one thing Americans agree on when it comes to financial reform, it’s this," said Senate Minority Leader Mitch McConnell. "Never again should taxpayers be expected to bail out Wall Street from its own mistakes. We cannot allow endless taxpayer-funded bailouts for big Wall Street banks. And that’s why we must not pass the financial reform bill that’s about to hit the floor." . . . When compared to the status quo, absolutely not. The Dodd bill makes bailouts less likely by empowering regulators and increasing transparency, raises a $50 billion fund from banks to pay for future too-big-to-fail bankruptcies, and then makes the outcome a predictable punishment rather than a chaotic rescue. That last is known as "resolution authority" -- as bloodless a word as one could possibly imagine -- and it wipes out both shareholders and management. It's all there in Section 206 of the bill: "Mandatory Terms and Conditions for All Orderly Liquidation Actions." What we call "resolution" would better be described as "execution." . . .

Huh? Possibly the Post doesn't understand what the term "absolutely note" means. Either McConnell is right that bill allows bailouts or not, and it clearly does allow such bailouts that are at the discretion of the Executive branch with no ability to appeal these decisions. Relative to the current law? I am not sure how that fits in, and current authority to bailout these institutions ends at the end of the this year. Does the Washington Post even try a little bit to hide its political bias?

Here is Dodd's explanation for why this ends bailouts. To me, this is a pretty scary increase in government power and it doesn't end the government's power to give bailouts. In fact, it institutionalizes bailouts.

Cracking down on the biggest players is critical to ending bailouts.

And if a Wall Street firm does become too big or too complex and poses a grave threat to financial stability, the Federal Reserve will have the power to restrict its risky activities, restrict its growth, and even break it up.

Additionally, our bill extends oversight to dangerous nonbank financial companies like AIG that could pose a risk to our financial stability.

And it prohibits banks and other financial institutions that own banks from engaging in proprietary trading, making risky bets with money that doesn’t belong to them. . . .



Blogger Tom Degan said...

If a tree falls in the forest....

....does it make a sound if Mitch McConnell is not there to deny that a sound was made?


Tom Degan

4/17/2010 7:29 AM  

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