On Wednesday, in signing the Dodd-Frank bill, President Obama said that the financial-regulation law would “put a stop to taxpayer bailouts once and for all.” In case you didn’t get the point, he repeated that “because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more taxpayer-funded bailouts. Period.”
Someone forgot to tell the folks at Standard and Poor’s, the ratings agency.
Today, S&P came out with a report (not available online) reminding global markets that in its view, four large financial institutions — Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley — continue to enjoy “extraordinary sovereign support.”
This sovereign support — that is, extra-special protection of some sort or another from the U.S. government — factors heavily into the banks’ credit ratings and the interest rates at which the banks can borrow.
But what about Dodd-Frank?
S&P says mildly that “it is possible based on several of the provisions in Dodd-Frank (including Orderly Liquidation Authority) that over time we will change our view of sovereign support for U.S. banks to ’support uncertain.’”
S&P, then, is uncertain about whether it will soon be ”uncertain.” The analysts note, too, that the bill is so complex that it will be a long time before anyone has figured out what’s going on.
For now, though, the big banks still enjoy refuge from rational market forces by virtue of the opaque future obligations they can conceal on their own books, often through derivatives obligations. Speaking of, as S&P says, when it comes to derivatives reform, “there is little clarity” in the law “on new capital, [borrowing], reporting, and compliance requirements.” (Beyond those annoying little details, the derivatives section is crystal clear.)
But the banks may enjoy a new refuge, too — in the opacity of the financial law that now governs their bondholders’ vulnerability to future losses.
It’s possible that S&P is wrong — and it’s possible, too, that newly skeptical bondholders to banks will penalize this newly institutionalized uncertainty rather than reward it.
Either way, Dodd-Frank hasn’t given financial firms or their investors the clarity and consistency that they need so that they can help the economy recover.
– Nicole Gelinas, contributing editor to the Manhattan Institute’s City Journal, is author of After the Fall: Saving Capitalism from Wall Street — and Washington.