President Obama
castigated Senate Republicans last week for opposing Sen. Chris Dodd's Wall Street "reform bill." Democrats say Republicans' main argument — that the bill won't prevent future bailouts — is false. The bill itself, though, is irrefutable evidence that the Republicans are dead on.
Senate Minority Leader Mitch McConnell started the fight earlier in the week when he said the bill
"not only allows for taxpayer funded bailouts for Wall Street banks, it actually institutionalizes them."
The White House and congressional Democrats have hit back hard. "I am absolutely confident that the bill that emerges is going to be a bill that prevents bailouts," Obama said.
His Treasury chief, Tim Geithner, was even stronger. The bill will ensure that "if a major institution manages itself to the edge of the abyss, we're able to ... dismember them safely without taxpayers being exposed to a penny of loss," he said.
Dodd was the bluntest: "The bill as drafted ends bailouts. Nothing could be more clear."
In the 1,336-page text, though, Dodd left room for regulators to be generous with citizens' money. For example, the bill would direct the FDIC, which would wind down too-big-to-fail financial firms, to operate under only
"a strong presumption that creditors and shareholders will bear the losses."
As for whether the bill puts taxpayers at risk: failed firms must repay "any amounts owed to the United States,
unless the United States agrees or consents otherwise" (italics mine).
Why would the financial firm owe Uncle Sam money in the first place? Partly because of something else in the bill: an "orderly liquidation fund." Big or complex financial firms would have to pay upfront into a Treasury-controlled $50 billion pot of money that would bear the cost of liquidating a future AIG.
The FDIC would have the authority to use this money as it sees fit, including guaranteeing bondholders, uninsured lenders, counterparties and other creditors to a failed company just as the government did with AIG and Citigroup in 2008.
The idea that the financial industry can pre-fund its next arbitrary bailout with $50 billion is a pleasant fiction.
How much would an "orderly liquidation fund" have needed to stem investor panic starting in 2008? Try $20 trillion.
The true tab is not the retroactive cost. Rather, it's what investors demand at the time of an acute crisis so as not to flee the unknowable risks of a financial system in meltdown, precipitating depression.
