“This bill does nothing to change the expectations in the market that some firms are too big to fail,” said Senator David Vitter, a Louisiana Republican who serves on the Banking Committee. “I’m disappointed that Senator Dodd has decided to abandon any sort of bipartisan approach in favor of political posturing on behalf of the Obama administration.”
This hews closely to the advice that GOP pollster Frank Luntz gave to Republicans earlier this year, which was to portray financial reform as inevitably leading to more big bank bailouts, no matter what the legislation actually says. House Republicans also used this tactic incessantly during the regulatory reform debate last year, falsely claiming that Rep. Barney Frank’s (D-MA) bill created a “permanent bailout fund.”
However, Dodd’s actual legislation tells a very different story. For one thing, it bars financial firms from owning more than 10 percent of the assets in the financial system, while creating a Financial Stability Oversight Council (formed by the Treasury Secretary and the heads of the regulators) that will recommend stricter capital and leverage standards for firms as they grow. It also includes the option for regulators to implement bans on proprietary trading (although it doesn’t mandate such bans). These provisions will discourage excessive growth and make it more expensive for companies to expand to an outlandish size.
Under the bill, financial firms would also have to craft a plan for “rapid and orderly resolution in the event of material financial distress or failure.” Basically, firms will have to write living wills, laying out their interconnectedness and liabilities in the event that they fail. It also envisions using the bankruptcy court for all but the biggest firms, with the Treasury, FDIC and Federal Reserve needing to act affirmatively to use resolution authority on a failing firm, instead of simply letting it go into bankruptcy court.
Plus, just like the House version, Dodd’s bill would levy a fee on big financial institutions (those with more than $50 billion in assets, as well as those deemed systemically risky) to build up a fund that will be tapped in the event that resolution needs to occur. The Senate bill also explicitly states that the fund can only be used to liquidate a firm, and “not for the purpose of preserving the covered financial company.” Even CNBC’s Larry Kudlow — who thinks that everything Congress does preserves too-big-to-fail — is impressed by Dodd’s work.
Now, at the end of the day, all of this is meaningless if regulators aren’t willing to pull the trigger and actually use resolution authority when faced with the impending failure of a big firm. But that’s going to be true no matter what the bill says. Dodd’s legislation isn’t perfect, but on this piece, he does seem to have thought through a workable way to ensure that firms have a hard time becoming gigantic, and have no expectation of a taxpayer funded bailout, regardless of their size.
http://wonkroom.thinkprogress.org/2010/03/16/dodd-and-too-big-to-fail/Larry Kudlow
http://article.nationalreview.com/428091/is-dodd-ending-too-big-to-fail/larry-kudlow?page=1Surprise, surprise. Sen. Chris Dodd’s financial-regulation proposal raises the possibility of substantial progress on the road to ending “too big to fail” (TBTF) and bailout nation for banks and other financial institutions.
How the Dodd bill will play out in the final details remains to be seen. But when you read the Dodd fact sheet, there are a few key items to like.
First, under the Dodd scheme, large complex companies will have to submit plans for rapid and orderly shutdowns should they go under. These are called “funeral plans.” Then, in terms of these orderly shutdowns, the bill would create an “orderly liquidation mechanism for the FDIC to unwind failing systemically significant financial companies. Shareholders and unsecured creditors will bear losses and management will be removed.” Good.
Then comes the “liquidation procedure.” This spells out that the Treasury, FDIC, and Federal Reserve must all agree to put companies into the orderly liquidation process. “A panel of three bankruptcy judges must convene and agree — within 24 hours — that a company is insolvent,” the bill goes on to say. It also states that the largest financial firms will be assessed $50 billion for an upfront fund that will be used if needed for any liquidation. This is a kind of debtor-in-possession safety net for the bankruptcy-liquidation process. Also good.
Finally, under the heading of bankruptcy, the bill stipulates that most large financial companies are expected to be resolved through the normal bankruptcy process. This is the key. However, it is not an airtight case for bankruptcy. It is possible that a government-resolution process could keep big banks alive or in conservatorship, such as with Fannie and Freddie. That would be wrong. Very wrong. In fact, one of the flaws in the Dodd bill is that there is no mention of Fannie and Freddie.
But the strict language on bankruptcy judges and shutdowns, and the line stating that most large failed financial firms are expected to be resolved through the normal bankruptcy process, is very hopeful.
The biggest flaw in the Dodd bill is that it gives the Consumer Financial Protection Agency (CFPA) far too much free reign. The agency will be housed in the Federal Reserve.
But it will be independent inside the Fed, with a director appointed by the president and financed by the Fed’s own profits.
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