Senate Republicans have criticized Sen. Chris Dodd’s financial-reform bill on the grounds that it would preserve and enlarge the government’s power to bail out financial institutions. Now the Obama administration has asked Democrats to remove one of the provisions Republicans have criticized, but just removing this provision would not address GOP concerns.
Republicans have focused their opposition to the bill on a $50 billion fund that would be raised by taxing large financial institutions. (To be sure, they have other concerns with the legislation, as do we: for example, with the proposed Consumer Financial Protection Bureau and the corporate-governance provisions.) Federal policymakers would use the money to fund a new “resolution authority,” which would have the power to oversee the orderly failure of large non-bank financial institutions, just as the FDIC has the power to liquidate failing banks while protecting depositors.
If this new authority were strictly limited to financial companies — and if the government’s discretion in distributing a failing firm’s assets clearly circumscribed — then it could work as a useful alternative to bailouts. But the Dodd bill is full of loopholes that allow the government to practice bailouts-as-usual. The authority is not strictly limited to financial firms; just about any company with a banking arm can qualify. (This is the same loophole that allowed the government to use the Troubled Asset Relief Program to rescue GM and Chrysler.) And it does not force the government to distribute assets among creditors in a fair, pre-determined, and transparent way; instead, it would allow for the kind of special deals that the Obama administration doled out to the unions when it divvied up the automakers’ assets.
Nor is the pool of money at the government’s disposal limited to the $50 billion fund. The bill would preserve the government’s power to guarantee a failing company’s liabilities, shield creditors from losses, and shunt the firm’s risk onto the taxpayer. Compared with such loan guarantees — the government guaranteed more than $300 billion of Citigroup’s liabilities in late 2008 — $50 billion is chump change, which is as it should be: The amount of money in the new fund should be just enough to keep a failed firm operational while the government winds it down safely. The problem with the Dodd bill is not the $50 billion fund; it’s the loopholes that enable the government to exceed the fund’s limits.
The Obama administration proposes to remove the $50 billion fund but keep the loopholes in place. Some GOP moderates might be tempted to support the bill if Senate Democrats grant the president’s request and remove the fund. But if these moderates were prepared to oppose the bill because it created a permanent bailout authority, they should not change their position just because the administration has decided to change, for the worse, the way this authority would be funded.
The administration’s proposal, far from being a capitulation, actually gives it everything it wants. It removes a political liability (the “bailout fund”) while preserving a loophole-ridden resolution authority. Instead of being pre-funded and capped at $50 billion, the resolution authority would now be funded by after-the-fact assessments on the financial industry. In other words, a failing firm’s erstwhile competitors would be saddled with funding a bailout that the failing firm itself did not pay into. This would give the government even more leverage in arranging shotgun marriages and coercing Wall Street firms to bail out each other. The government’s new pitch would essentially be: Pay now or pay later.
Senate Republicans should oppose the bill until the bailout loopholes are closed. This strategy carries some political risk — the administration might claim it offered a huge concession and paint continuing Republican opposition as a sign that the GOP was never really interested in negotiating — but dealing with that risk should not prove impossible. Democrats are pushing a bill that, as written, would allow the administration to keep engineering the kind of politically skewed bailouts the public loathes. Republicans should take the opposite side of that trade.