The Corner

The Dodd-Shelby Compromise

I’m a little late getting to this, but according to the CQ article Dan linked yesterday, the Dodd-Shelby compromise gave Shelby almost everything he wanted in terms of reducing the government’s ability to bail out bank creditors and near-insolvent financial firms:

The agreement abandons a $50 billion resolution fund that would have covered the costs of a major financial collapse. Instead, if the amendment is adopted, as expected, the Federal Deposit Insurance Corporation would have the ability to liquidate large firms, and could likely use a credit line from the Treasury Department to cover any costs. Any losses the FDIC encounters would be recovered as the agency sells off the assets of the failed firm.

Creditors of a failed firm would be required to pay back any money they received during a financial failure that is in excess of what they would have been awarded through traditional bankruptcy proceedings.

The agreement also would clamp down on the authority of regulators to assist the financial industry. Congressional approval would be required before the government could guarantee the debt of a financial firm, as the FDIC did during the recent financial crisis.

The Federal Reserve, meanwhile, could only use its emergency lending powers to assist solvent companies. At the onset of the financial crisis, in March 2008, the Fed put up $29 billion to help Bear Stearns collapse into the arms of JP Morgan Chase & Co.

The Fed powers constitute the only area where it appears Shelby was unsuccessful. Senate staffers close to the negotiations had informed National Review Online that he was trying to subject the Fed’s emergency lending authority to stricter oversight. Saying the Fed can “only” use its lending powers to assist solvent companies really isn’t putting much of a restriction on the central bank. There were a number of times during late 2008/early 2009 when federal policymakers decided to pretend that insolvent firms were merely illiquid for the purposes of bailing out everyone, and there’s nothing preventing the Fed from doing this again.

Nevertheless, Shelby’s near-total victory on the bailout issues is worth emphasizing because the politics were so stacked against the Senate GOP that even some conservatives started wondering why they were filibustering and holding out for so long, especially after Reid started opportunistically forcing vote after vote. It’s because the bailout provisions of the bill were really bad — you can catch up here — and thanks to senators such as McConnell, Shelby and Corker who wouldn’t let go of this issue, those provisions are now much improved. Liberals who tried to spin it all as an evil Frank Luntz talking-point conspiracy have reason to feel a little bit foolish today. Dodd was willing to let the administration have the flexibility it wanted to do bailouts until Republicans filibustered the bill. Dodd caved, and the fixes were approved 93-5.

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