StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Yes, we will have no bailouts

14 Apr 2010
Posted by Edmund L. Andrews

   When Mitch McConnell charged that the Senate Democrats' bill to reform financial regulation would lead to "more bailouts'' for Wall Street,  I could almost imagine how GOP word-smiths had racked their brains for ways to spin the effort.

    Here was a bill aimed at clamping down on the rapacious mortgages and wanton risk-taking by Wall Street firms that nearly destroyed the financial system and led to huge bailouts.   It would be hard to find groups that are more detested by voters -- including populist Tea Partiers and End-the-Fed supporters of Ron Paul --  than big banks and Wall Street. 

     GOP leaders know exactly why they oppose the bill: it's a Democratic bill.  Full-stop.   But will that fly with ordinary voters?  Do red-state conservatives hate derivatives regulation even more than they hate Wall Street greed, trillion-dollar bailouts and all the bad things that led to the epic meltdown?   Doubtful. 

     That's why McConnell's attack was so clever.  He appeared to be on the ramparts fighting Wall Street rather than helping Wall Street firms avoid all the things they hate:  a consumer protection agency, regulated trading for credit default swaps and new levies on the banks to pay for past and future calamities.

     Is McConnell right?  Let's nip this in the bud.  

     It is true that the Senate bill would require financial institutions to put up $50 billion to deal with possible future meltdowns.   It is also true that federal regulators would have new "resolution authority'' to shut down failing institutions in an orderly way.

      But those are very different things from pre-authorizing future bailouts.  The recent bailouts kept zombie banks and AIG alive, because both the Bush administration and the Federal Reserve correctly feared that their collapse would set of a chain-reaction of failure.  The bailouts were necessary because the government didn't have the authority to shut the companies down in a orderly way. 

       One big example: Fed and Treasury officials didn't have the legal power to force creditors of AIG and others to take haircuts.   They had two stark alternatives: push the companies bankruptcy, let them default on hundreds of billions worth of obligations and let the chips fall where they may; or prop them up, bail out the creditors and hope taxpayers would get their money back after the crisis. 

     The new resolution authority would give the government new powers to take over and shut down failing giants.  That is quite different from bailing out a bank and keeping it alive.

     What's that $50 billion for?   The same thing that the Federal Deposit Insurance Corp's fund is for: shutting down institutions without sending shockwaves through the whole system.       
      If the system stays the way it is right now, we are all but certain to have another round of real bailouts at some point in the future.   On top of that, the big banks will remain much harder to rein in if they lose their heads in another orgy of recklessness like the last housing bubble.

     The Democratic bill may not be nearly tough enough on Wall Street and the banks.  But it certainly doesn't set up a system to bail them out all over again.

        Republicans might be able to cloak their opposition with what sounds like anti-Wall Street rhetoric, but they do so at their peril.













     Like it or not, here iblock the Democrats' proposed overhaul of financial regulation.



This is a cultural not a legal issue

You completely miss the point. Bailouts will continue to happen so long as they're politically expedient. The law is irrelevant (cf. GM/Chrysler); this is a cultural issue. The US has bailed out Citi in the early '80s, early '90s, and in the recent crisis. In each case, it simply ignored or changed the rules as was required. Perhaps you could explain why you think Dodd's bill will change (at least) 30y of government policy enacted under both Republican and Democratic presidents.

I'm totally agree with you

I'm totally agree with you !



Most of us object to overpaid CEOs walking away from their mess with their bonuses and wealth intact and leaving the mess for the rest of us to clean up. There will always be failures that leave a mess in its wake. The public will ALWAYS be left responsibility for the final cleanup.

This bill will wipe out the banksters when they fail, they same way that YourMainstreetBank will be wiped out if they become insolvent. The depositors are protected but the shareholders are wiped out. That is what should have happened in 2008, but Paulson did not propose that option. Since that did Not happen, we should impose a surtax on the financial industry and very large CEO bonuses to help balance our budget.

We should also RAISE the top

We should also RAISE the top marginal tax rates on the wealthy. They got bailed out; now pay us back.

Back up to 70%.

Dems bill is a pipe dream

DO you really believe that if this system had been in place, the government would have wound down:

Bear Stearns
Merrill Lynch
Wells Fargo

Just to name the ones most obviously insolvent when the bubble popped? The answer is in the question. Simon Johnson is right; the only way to avoid a repeat is to shrink the banks to the point where they can be allowed to fail.

The Republicans are no better on this issue; they seem to want to pretend that this didn't happen and go back to acting like free market capitalists (until the next time they don't like the outcomes). But the Democrats are looking to pass face-saving legislation that will not fix the problem, but will take away the opportunity to do something useful.

You left out the third option; let failed companies fail, and then take the responsibility for which creditors to bail out and which to let take the loss that they all deserved. The problem with that approach is that it makes it harder to bail out the politically unpopular elites (Goldman stockholders, European banks) who are hiding behind the need to bail out pension funds, etc.

Bigger Bailouts

Although the new industry fund will take care of smaller failures, the reform bill almost guarantees that there will be a need for much larger bailouts than we have seen yet. "Federal regulators can create a “widely available program” to guarantee the debts of not just banks, but their parent companies as well, and all of their affiliates." The bill has been improved from an earlier version where this could have happened over the objections of the FDIC but it still implies that the banks have government backing in case there is a need to bail them out. Sorry, Mitch McConnell is not the one who is lying here.

Why not Glass-Steagall

You know, we don't need to hire thousands of new federal employees, all of whom are going to be paid $100,000+, putting an larger tax burden on Americans, or on the banks who will just pass the cost onto Americans anyhow in lower interest payouts and more fines and fees. We could just force them back to being small enough to fail again. We learned a lesson in the 1930s, and then we obviously forgot it.

And if we are regulating them tightly enough that they can't fail anymore, then what's the point of the $50 billion fund? It's just going to turn into another gov't slush fund like social security and an excuse to charge tens of billions in extra taxes for more political pork barrel spending. And the jobs are just going to be highly overpaid and given to incompetant friends of the politicians.

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