There’ll be more TARPs

Our roster of bailout candidates includes the clearinghouses, created under Dodd-Frank, that are meant to increase the oversight of derivatives trading. Because most derivatives transactions are expected to go through these clearinghouses, they will be “systemically important” under the law. As such, Dodd-Frank specifically provides that “in unusual or exigent circumstances,” the Federal Reserve may provide such entities with a financial backstop, including borrowing privileges…

But with the backstop now firmly in place for clearinghouses, the Fed will be able to pay off derivatives players directly, rather than indirectly as it did in the disastrous rescue of the American International Group.

Given the multiple bailouts of 2008, it is to be expected that the line of institutions clamoring to join the cannot-fail party will grow longer. That’s the definition of moral hazard — if you rescue one group, others are sure to want the same treatment and behave in a way that ensures they’ll get it. The losses that taxpayers may endure in the next debacle, meanwhile, mount higher.

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