Yes, Virginia, there is a bailout in the Dodd bill

posted at 3:35 pm on April 26, 2010 by Ed Morrissey

Or Joan, or whomever.  While those empirical-based advocates of the Democratic Party continue to insist that the financial-regulation reform bill offered by Sen. Chris Dodd won’t institutionalize federal bailouts, Peter Wallison read the bill and discovered a lot of mechanisms for shielding large institutions from the normal bankruptcy process.  In today’s Wall Street Journal, Wallison explains exactly what they do — and how we’ll end up paying for them:

If the Dodd-Obama resolution plan is ever actually put to use, the direct or indirect costs could be many times greater. For example, the bill authorizes the Federal Deposit Insurance Corporation to borrow from the Treasury “up to 90 percent of the fair value of assets” of any company the FDIC is resolving. Yet one institution alone—Citigroup—has assets currently valued at about $1.8 trillion. The potential costs of resolving it (not to mention others) would be spectacularly higher than $50 billion. In short, the $50 billion in the resolution fund is a political number—a fraction of what the FDIC is authorized to borrow and spend.

Why would this vast sum be necessary? The Dodd bill has one answer. It says that the FDIC “may make additional payments,” over and above what a claimant might be entitled to in bankruptcy, if these payments are necessary “to minimize losses” to the FDIC “from the orderly liquidation” of the failing firm.

In other words, the agency would be able to borrow huge sums so that it could make more generous payments to creditors than they would receive in a bankruptcy. Generous payments to creditors would certainly make unwinding a firm “orderly”—but it would also encourage lending to the too-big-to-fail financial institutions while disadvantaging smaller, less favored institutions. This in itself will have a profound and destructive effect on competition.

Another possible purpose for the FDIC’s borrowing power is to enable the agency to provide what it calls “open bank assistance.” Here, instead of liquidating a failed bank, the agency keeps it in operation by paying off its creditors and avoiding the disruption a bank closing might entail. This practice is a straightforward bailout of all creditors, and it has been criticized extensively by Congress over the years. Yet here it is, back again, in the guise of an innocuous power to make additional payments to some creditors, coupled with virtually unlimited authority to borrow from the Treasury.

The FDIC certainly knows what to do with a failed bank, but it has no experience taking control of a giant financial institution like Lehman Brothers. It is authorized to borrow against the assets of the failed firm because eventually, in theory, the assets could be sold to repay the Treasury. However, the FDIC’s operation of the failed firm could easily be unsuccessful, with losses quickly diminishing the value of its assets.

“Open bank assistance” is another term for bailout. It would do exactly what the bailouts of 2008-9 did, which is to keep the doors open on a company while floating it on taxpayer money. The FDIC and its political masters would bypass the bankruptcy procedure, in which investors get treated in a rational and predictable manner, in order to pick winners and losers on an arbitrary basis. We saw that in the bailouts of GM and Chrysler.

In fact, the market and the regulatory system already have a rational manner in which to “wind down” financial institutions that can’t meet their obligations to creditors in bankruptcy. It requires no political intervention, and allows investors to make good decisions on risk-taking in a stable regulatory environment. Unfortunately, politicians can’t get their fingers into that process, so instead they want to declare institutions as “too big to fail” and create political solutions instead of legal outcomes. The result? Investors will stay out of the market, and especially avoid larger institutions — unless they have good political ties.

The proper solution to the issue would be to create a regulatory system that incentivized against the “too big to fail” situation. The Dodd bill doesn’t address that problem at all, which is why Goldman Sachs endorses it. The bill creates a safety net for executives, which will only encourage poor risk-taking in the future and leave everyone with the impression that the US government will indemnify everyone against losses. That’s exactly what got us into the financial collapse in the first place.


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The Democratic National Socialist Party is Lying again – who’d thunk it?

Chip on April 26, 2010 at 3:38 PM

yeah….holding my breath for the first time a Democrat tells the truth.

search4truth on April 26, 2010 at 3:42 PM

Unfortunately, politicians can’t get their fingers into that process, so instead they want to declare institutions as “too big to fail” and create political solutions instead of legal outcomes. The result? Investors will stay out of the market, and especially avoid larger institutions — unless they have good political ties.

Democrat playbook: If you can’t own the business yourself, make sure your friends/donors do.

SKYFOX on April 26, 2010 at 3:46 PM

The whole thing is in Orwellian lie.

To promote the financial stability of the United States by
improving accountability and transparency in the finan-
cial system, to end ‘‘too big to fail’’, to protect the
American taxpayer by ending bailouts, to protect con-
sumers from abusive financial services practices, and for
other purposes.

The bill then proceeds to give $50 BN as the floor limit of ‘too big to fail’, $10 BN for publicly traded companies.

fluffy on April 26, 2010 at 3:46 PM

The result? Investors will stay out of the market, and especially avoid larger institutions — unless they have good political ties.

In other words – The government will have an even bigger role in the banking industry, just like the auto and healthcare industries – what is that called again?

Chip on April 26, 2010 at 3:46 PM

That’s exactly what got us into the financial collapse in the first place.

Really! I thought it was Boooooooooooosh, Atleast that’s what all the lefties keep howling…

SHARPTOOTH on April 26, 2010 at 3:48 PM

Thanks to Rush, I know that there’s also a bailout for Warren Buffet/Berkshire Hathaway.

Buy Danish on April 26, 2010 at 3:49 PM

More payouts to Obama cultists and party loyalists.

Skandia Recluse on April 26, 2010 at 3:50 PM

For example, the bill authorizes the Federal Deposit Insurance Corporation to borrow from the Treasury “up to 90 percent of the fair value of assets” of any company the FDIC is resolving. Yet one institution alone—Citigroup—has assets currently valued at about $1.8 trillion. The potential costs of resolving it (not to mention others) would be spectacularly higher than $50 billion.

So the FDIC will be authorized to borrow 90% of $1.8 trillion from the Treasury? Where the hell is that money coming from?! We didn’t have trillions to throw around BEFORE TARP, Porkulus, and Obamacare. And now they wanna institutionalize this sort of activity?

Doughboy on April 26, 2010 at 3:51 PM

Dodd and his co-conspirarors should not even be thinking about writing legislation. He and Franks should be thinking about who gets the top bunk in the big house.

fourdeucer on April 26, 2010 at 3:52 PM

Dodd and his co-conspirarors should not even be thinking about writing legislation. He and Franks should be thinking about who gets the top bunk in the big house.

fourdeucer on April 26, 2010 at 3:52 PM

Cannot be repeated enough.

Dodd and Franks are criminals.

Inanemergencydial on April 26, 2010 at 3:54 PM

Unfortunately, politicians can’t get their fingers into that [bankruptcy] process, so instead they want to declare institutions as “too big to fail” and create political solutions instead of legal outcomes.

The Democrats’ politicization of bankruptcy is odious, even by their reprehensible standards.

jwolf on April 26, 2010 at 3:57 PM

The money doesn’t exist, the well is dry. If you are one of those idiots (like the fools at the NYT) who are yapping about how the economy is roaring back and then heading for the nearest Best Buy to purchase the latest LCD tv, then you are in a for a rude surprise.

Not much holding up the circus tent any longer, and the clowns are busy hacking away at the main tent poles with the biggest axes they can find.

Bishop on April 26, 2010 at 3:58 PM

More lies:

(a) PURPOSESANDDUTIESOFTHECOUNCIL.—
(1) INGENERAL.—The purposes of the Council

(B) to promote market discipline, by elimi-
nating expectations on the part of shareholders,
creditors, and counterparties of such companies
that the Government will shield them from
losses
in the event of failure;

Then the bill turns around and describes mechanisms to do the exact opposite.

fluffy on April 26, 2010 at 3:59 PM

That’s exactly what got us into the financial collapse in the first place.
Really! I thought it was Boooooooooooosh, Atleast that’s what all the lefties keep howling…
SHARPTOOTH on April 26, 2010 at 3:48 PM

Yes, that and the implication that the market is virtually Unregulated.

Just for giggles the national socialist left should try telling the truth once in a while – it’ll blow everyone’s mind.

Chip on April 26, 2010 at 4:00 PM

Its a bailout bill, the GOP needs to oppose and trust the people to be on their side despite the media and Democrat lies.

rob verdi on April 26, 2010 at 4:00 PM

The money doesn’t exist, the well is dry. If you are one of those idiots (like the fools at the NYT) who are yapping about how the economy is roaring back and then heading for the nearest Best Buy to purchase the latest LCD tv, then you are in a for a rude surprise.

Not much holding up the circus tent any longer, and the clowns are busy hacking away at the main tent poles with the biggest axes they can find.

Bishop on April 26, 2010 at 3:58 PM

That analogy is both scary and funny all at the same time.

Chip on April 26, 2010 at 4:03 PM

Why isn’t Dodd in jail?

lorien1973 on April 26, 2010 at 4:04 PM

1. Create Crisis
2. Profits based on Favors
3. Sell the Favors…

Haiku Guy on April 26, 2010 at 4:07 PM

There is a whole lot of crony capitalism in our very own Obama-Commie.

It’s how commie/socialists work, they wore the system to bring them the money. You didn’t think those people living in the dachas of the old Soviet Union were peasants did you?

tarpon on April 26, 2010 at 4:09 PM

Why isn’t Dodd in jail?

lorien1973 on April 26, 2010 at 4:04 PM

probably for the same reason his pal Barney Frank is not in jail. Democrat administration.

Wade on April 26, 2010 at 4:09 PM

None dare call it corruption. Screwed we are again young Skywalker.

ronsfi on April 26, 2010 at 4:11 PM

I think you guys are missing the obvious. Look at how much they bullyed and pressured companies that recieved bailout monies.

They don’t want to sell favors. They want to outright control these institutions.

p0s3r on April 26, 2010 at 4:12 PM

Quick, let’s get to November so Mr. Dodd and the Senate will understrand no one is too big to fail.

Rovin on April 26, 2010 at 4:13 PM

A young person, African-American, Latino, and a woman walk into a bank…

(the jokes just keep writing themselves)

Seven Percent Solution on April 26, 2010 at 4:13 PM

wow you would have thought that people would be reading the bills that DC is trying to jam down our throats. I love the political process showing these socialists for what they are.

unseen on April 26, 2010 at 4:15 PM

When the people wake up and see that the corrupt politicians write legislation to give loopholes to the highest bidder, of lobbyists, then we will see reform. This bill is nothing more than codifying “too big to fail” at the taxpayer’s expense. These bozos in DC don’t care that it’s NOT THEIR MONEY, they are only concerned in what it does to enrich their lives. The MSM is complicit in everything that is wrong with career politicians. They have forgotten that they are supposed to keep everyone honest, they have become one of the players.

belad on April 26, 2010 at 4:18 PM

Ed

I strongly recommend the following excellent financial reform plan by conservative/libertarian economist Arnold Kling

My Ideal Financial Reform plan

flawedskull on April 26, 2010 at 4:23 PM

This is why Republicans are fighting this legislation. All it does is move the unlimited bailout mechanism and authority to the FDIC from Treasury. And the FDIC has no experience unwinding any institution the size of a Citigroup. It’s a terrible, sloppy bill written by incompetent people.

rockmom on April 26, 2010 at 4:25 PM

It’s a terrible, sloppy bill written by incompetent people.

rockmom on April 26, 2010 at 4:25 PM

The same is true of just about every major bill from this Congress. The only cure is November.

jwolf on April 26, 2010 at 4:33 PM

Govmint is intent on giving away more of our money that we don’t really have. Just hear Lieberman on FOX touting the energy plan that he, Kerry and Grahamnesty are plotting as a means of stopping our dependence on foreign oil. What a joke these people are. They have been pushing that lie for decades.

Kissmygrits on April 26, 2010 at 4:34 PM

Here’s another reason why it’s important — even if you believe in the idea of maintaining an adequately funded resolution facility, the government needs to be able to calculate its own exposure if the law is invoked. Right now it’s entirely too vague to do that, which guarantees inconsistency (and likely favor) in application.

DrSteve on April 26, 2010 at 4:43 PM

It’s a terrible, sloppy bill written by incompetent people.

rockmom on April 26, 2010 at 4:25 PM

Well written bills written by intelligent people are only written for bills that will be read.

Wade on April 26, 2010 at 4:44 PM

Its a bailout bill, the GOP needs to oppose and trust the people to be on their side despite the media and Democrat lies.

rob verdi on April 26, 2010 at 4:00 PM

Get some backbone, GOP. Get your best people out in front of the camera and start telling the public that Dems are lying. The corruption theme is taking hold with independents even if not with the media.

BuckeyeSam on April 26, 2010 at 5:02 PM

As best as I can tell is the bill is all about implementing a policy for the Democrats to cronyize the banking in the US. After they make it so small banks can’t succeed, smaller banks will be bought up by larger banks. If the large banks need money to make this work, so long as they’ve got their political donations to the Obamacrats up to date, they’ll get some ‘financial support’ (aka bailout) for ‘saving’ the smaller banks patrons from evil capitalism.

Then with the Dem’s controlling the banks, they’ll make embark on a process to see that union and/or green shops get all the small business loans. Other small businesses can just go suck on rocks.

drfredc on April 26, 2010 at 5:07 PM

The result? Investors will stay out of the market, and especially avoid larger institutions — unless they have good political ties.
In other words – The government will have an even bigger role in the banking industry, just like the auto and healthcare industries – what is that called again?

Chip on April 26, 2010 at 3:46 PM

Corporatism. AKA mussolini-style fascism. I know, “fascist” is becoming cliche. But it’s accurate.

I swear these guys get their ideas from “Atlas Shrugged,” except that they are confusing the good guys from the bad guys, and want to do all the stuff that brought ruin to the country in that book.

iurockhead on April 26, 2010 at 5:37 PM

Hey Dhims, if you want to end ‘‘too big to fail’’, get serious about cutting back federal outlays to comport with the Constitution… ’cause its gonna happen.

ya2daup on April 26, 2010 at 6:09 PM

It’s a terrible, sloppy bill written by incompetent people.

rockmom on April 26, 2010 at 4:25 PM

Who, unfortunately, are elected to their offices by too many voters who refuse to believe that there’s no such thing as a free lunch.

ya2daup on April 26, 2010 at 6:11 PM

Sorta on-topic: I hope I didn’t hear this right. Carper (D-DE) wants to create a billion dollar fund to address big banks when they fail….so the tax payer doesn’t have to?

obleo on April 26, 2010 at 6:19 PM

How can the country club republicans trust this retiring Countrywide wheeling and dealing criminal? Why aren’t you running for senate again senator Dodd? How much did Fannie Mae and Freddie Mac give to Senator Dodd? Did he return the money? Nope. Barney Frank will be glad to stutter out a response, won’t he? The culture of corruption democrats are writing the bills for the culture of corruption. Why do the Americans continue to trust elected criminals?

Americannodash on April 26, 2010 at 6:47 PM

Dodd is a freaking crook that should be behind bars and not involved in screwing the American people with bad legislation. Just the fact he is front man on this proves the demonrats could care less what the American people want.

volsense on April 26, 2010 at 6:56 PM

Where is the leadership of the GOP when the corruption by the demonrats is running rampant?

volsense on April 26, 2010 at 6:59 PM

STOP THE PRESSES!!!!! The Mainstream Media is gonna have a field day with this! They’re gonna expose it for the sham it is! You just wait!

Any minute now, I tell ya’, they’re gonna sound the alarms!

You just wait and see.

The watchdog media is gonna jump all over this. Mark my words!

Keep waiting….any minute now!!!!!

olesparkie on April 27, 2010 at 9:18 AM

The nut of the problem, as Karl Denninger points out again and again, is that banks are supposed to be promptly rolled-up the moment they get close to being underwater. Instead, nearly every bank closed over the last two years has seen losses of 30% or more.

To put this another way, it is the policy of this administration (and the last) that failing banks are not to be closed until they represent a 30% loss to the taxpayer. Until then, they can keep soliciting deposits, making loans, and paying management bonuses. If a bank screws up to the point where they are insolvent without hitting that 30% threshold, regulators tell ‘em to hit the table again — double or nothing.

cthulhu on April 27, 2010 at 9:56 PM