The Corner

Yes, Jonathan Chait, It Is Still a Bailout Bill

Jonathan Chait handles my recent criticism of his New Republic piece in a slightly musteline fashion here. Denying the undeniable fact that the Dodd legislation is built for bailouts, he cites this piece, which deals with the $50 billion resolution fund attached to the legislation. But, as I and other National Review writers have made clear, the $50 billion resolution fund is not really where the bailouts come from. The bailouts come from the loan guarantees, lending programs, and liquidity injections that this legislation makes a permanent part of our financial regulatory world. In other words, Dodd is threatening to punish Wall Street with money, and Fabulous Fab & Co. are saying, “Please don’t throw us in the briar patch.”

Chait writes: “The proposed regulations may be imperfect, but they are intended to prevent the need for bailouts and to wipe out the creditors and management of bankrupt firms, which is the opposite of a bailout.” (Acknowledging that something is imperfect, as though one’s critics had demanded perfection, is a weak rhetorical strategy, incidentally, as is the invocation of intent, as opposed to content.)

Chait is, at best, half right: Management and equity holders will be wiped out. But, as when dating a mermaid, it’s the other half that presents a challenge: Creditors are set to receive all sorts of politically driven benefits and support—bailouts, in a word—under this legislation. That’s the problem. The AIG bailout, for instance, wasn’t really a bailout of AIG: It was a bailout of AIG’s creditors, who would have had a much harder time collecting 100 cents on the dollar, without delay, under a bankruptcy than they did with Uncle keeping AIG in zombie mode.

Let’s have a (highly simplified) hypothetical example: Bank A, Bank B, and Bank C have among them $300 billion in exposure to debt owed by Firm D. If Firm D should default on that debt, Bank A, Bank B, and Bank C will be insolvent—the lights go off, the paychecks bounce, etc. Unfortunately, Firm D has made some very bad investments in subprime-mortgage securities and finds itself insolvent. So the FDIC steps in, takes Firm D into receivership, and pays off its creditors at 100 cents on the dollar, using its debt-guarantee powers and the other tools in its arsenal to get that done. Firm D’s stock goes to zero, its managers are fired and branded with the financial mark of Cain, and all its Aeron chairs are sent to orphans in Haiti. Question: Was there a bailout? Answer: Yes. Not for Firm D, but for Bank A, Bank B, and Bank C, which would have become insolvent if they’d had to endure the sort of bankruptcy haircut that the Dodd bill  is designed to help them avoid. Got it? Good.

Now, imagine that instead of banks, you’ve got a Saudi princeling, a Chinese sovereign-wealth fund, or a Obama-supporting union pension manager on the other side of that pending default. Question: Which U.S. president is going to say: “Sorry, guys, you’ve got to take 40 cents on the dollar. Want to buy some Treasuries?” Boom: bailout.

Neither Chait nor any of the bill’s other defenders have been able to explain—have not even really tried to explain—what those lending and liquidity provisions are doing in the bill if the purpose is to wipe everybody out. We can let everybody get wiped out under the current bankruptcy law, but Congress, the Fed, and Treasury, and a couple of guys called Bush and Obama have made it abundantly clear that they are not going to let that happen. That is: The entire purpose of the Dodd legislation is to ensure that some creditors get a better deal than they would under bankruptcy proceedings. So Wall Street can continue to make very risky debt investments without worrying too much about, you know, risk—since politically influential creditors are going to be taken care of in a generous and subsidized fashion. That’s a permanent subsidy to Wall Street in the form of lower borrowing costs and risk-pricing.  

Chait tries to get slick with my calling him on buying the Democratic talking points embedded in the mainstream media coverage of the Dodd bill: “Williamson, in an audacious pre-emptive strike, accuses me of ‘epistemic closure’ because I actually believe the factual claims in the Times and Journal news pages,” he writes.  What factual claims would those be? Chait wrote that he knew that Wall Street was hostile to the Dodd bill—the bill that Goldman Sachs, Citi, and other Wall Street players in fact are supporting—because the New York Times and the Wall Street Journal told him so—but the thing is, they didn’t tell him so. What’s my source for that? Jonathan Chait, of course, who wrote: “…nobody had thought to question the basic fact that Wall Street considered the Democratic regulatory reform an intrusion rather than a subsidy. … It was more of an assumption universally embedded in the coverage of the events, rather than a point anybody bothered to specifically establish.” A “point anybody bothered to specifically establish” is one very wordy way to write “fact.” (That Chait here does not evince an ability to distinguish a fact from an assumption is not shocking.) Then he turns around and writes: “I’ll just say we disagree as to whether facts reported in mainstream media organs should generally be presumed correct.” But he’s just written that “nobody had thought to question the basic fact” of Wall Street hostility, that it was “more of an assumption … than a point anybody bothered to specifically establish.” We know what Chait’s assumptions are: They’re the New York Times’s assumptions. (Surprise.) So, let’s talk facts: If Goldman Sachs and Citi and other Wall Street giants are backing the Dodd bill, what is the evidence that Wall Street corporately is hostile to the Dodd bill?

Don’t worry, I’ll wait.

This is not a matter of interpretation: Goldman Sachs and Citi are on the record as supporting the Dodd bill. There’s no way to finesse that fact or to pretend that the fact does not conflict with Chait’s claim that Wall Street is obviously and corporately opposed to the Dodd bill. We don’t have to argue about whether these claims “should generally be presumed correct” because it is irrefutable that these claims are not correct.

Chait is selling a fairy tale in which mean Republicans are doing the bidding of Big Business while brave Democrats stand against them. This is bunk: Goldman Sachs didn’t pour all that money into putting Obama into the White House because they’re just generous souls: Wall Street is generally well disposed toward the Democrats and their agenda. That’s why they bought them. And they are getting what they paid for.




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