C.S. McCoy at Redstate:
The Dems will be able to tap into voter anger at the banks and will argue that they’re preventing the next crisis, all while framing Republicans as the bankster’s evil cronies. Conservatives, of course, know better. Each financial reform bill coming down the pipeline adds more layers to the existing bureaucracy. We can expect higher bank fees, decreased and more expensive access to credit for individuals and businesses of all sizes, and of course, a future crisis brought on by an unforeseen side-effect of the proposed legislation.
Real reform involves fixing the perverse incentive structures in the current system. The moral hazard created by various Federal Reserve initiatives, aspects of the FDIC, and whatever goodies are offered up by whatever Goldman Sachs alum-turned-bureaucrat is in a position of power at a given time each contributed to the financial crisis. And of course, let’s not forget Freddie, Fannie, affirmative-action lending, and similar pieces of legislation that set the housing market on a one-way path to bubble city.
Unfortunately, given the political realities in DC, there may not be much that conservatives can do to transform the current bills into positive legislation. At this point, we must focus instead on minimizing not only the economic consequences but also the political damage that we could very well incur should we appear to be on the wrong side of the fight over financial reform. This issue could very well blunt some of our momentum going into November, and given the importance of retaking the House to prevent funding of various health care initiatives, fighting the tax increases that the Dems will offer up to conquer mounting deficits, and controlling the narrative for the 2012 election, that is simply a chance we cannot take.
This fight has been framed terribly for Republicans. The Democratic aide in the above quote has it exactly right. Already this battle has been described as the consumer vs Wall Street bankers, and we’re poised to appear to be fighting on the side of one of the least popular groups in America. Fortunately, one thing more unpopular than Wall Street is bailing out Wall Street. And fortunately (from a political standpoint), each of the proposed bills has a mechanism to entrench the Federal bailout trough. Republicans must play up this aspect of the legislation to have any hope of turning this fight into a win.
And we need to start by referring to it simply as the “Bailout Bill.” “Financial Reform” has a positive connotation, when none is deserved for the proposed bills. Additionally, “Bailout Bill” does a considerably better job actually describing the legislation. Regardless of whether or not one has been following this debate, does the term “Financial Reform” actually make it clear what the bill entails? No, but the term “Bailout Bill” makes it quite clear. Let’s face it, the Republican leadership in the Senate isn’t exactly the most charismatic bunch. Do we really want to see them on TV droning on about the intricacies of what’s wrong with the “Financial Reform” legislation? No, the typical viewer most likely neither cares nor is knowledgeable enough to accurately assess Mitch McConnell’s criticisms. Boehner, Pence, and Ryan would do a better job, but nevertheless, the topic isn’t particularly engaging. The term “Bailout Bill” delivers the message to the viewer in a clear and concise manner.
On top of that, it throws the Dems’ attempts to appear to be combating “special interests” right back in their faces. Regardless of your opinion of Ron Paul, he brought up a great point this weekend when he referred to Obama as a “corporatist” (although the other part of his statement was wrong…Obama has shown both corporatist and socialist tendencies). We need to harp on about how this “Bailout Bill” will forever put taxpayers on the hook for Wall Street’s misdeeds. The public already knows that Democrats have been handing out goodies to special interests: auto companies, big Pharma, unions, and even the insurance companies. Let’s hammer it home. The Dems of course will respond that Wall Street will actually be the ones paying for the bailouts since special taxes on the banks will go into a bailout trust fund. This may be true, but it requires that the public trust that these funds won’t get looted in the future, something with which Washington doesn’t exactly have a stellar track record (see: social security). Additionally, as seen during the health care debate, the more that proponents of the legislation have to defend its complex and unpopular components, the more difficulty they will have selling the entire package.
Brian Beutler at TPM:
About a week or two. That’s how long Republicans have to decide how they ultimately want to play their hand on financial regulatory reform. According to numerous Democratic aides and key senators, the GOP will either have to join forces with Democrats on a bill that hews very much to the White House’s demands, or they’ll have to do their best to block a bill that enjoys wide popularity. But as much as Democrats want to change the rules that govern Wall Street quickly and smoothly, they also love the politics of moving the bill forward without GOP support and letting Republicans publicly justify their decision to protect hated financial institutions from the regulations they oppose.
“We are ready to go forward. The bill’s ready…if I have to go it alone, I’ll go it alone…. I’m ready to go to the floor tomorrow if they want.” said Senate Banking Committee Chairman Chris Dodd last night, after a brief meeting with his counterpart, Sen. Richard Shelby (R-AL).
Aides go further, admitting that they’d relish the prospect of putting Republicans on the side of big banks in opposition to reg reform.
In stark contrast to their approach to the year-long fight over health care reform, Democrats now say broad bipartisan agreement isn’t worth it if it sucks up too much time, and needlessly weakens the bill.
“Having an agreement that at the end of the day would largely have no teeth…would be a sham,” DSCC chair Robert Menendez told reporters yesterday, off the Senate floor. “If you just want bipartisanship for a figleaf, I think that would be a huge mistake on a policy basis, and a huge political mistake as well.”
“This is not going to be a repetition of the health care [debate],” Dodd said last night. “That was one of the biggest mistakes ever made, in my view–people waiting around, praying and hoping, day to day, that someone might show up and be supportive of the view.”
Christopher Buckley at The Daily Beast:
Senator McConnell, whose facial opacity amounts to a kind of poker-face magnificence, sallied forth to the microphones outside the White House to denounce the bill as a means of perpetuating federal bailouts of too-big financial institutions. The bill’s defenders rushed to the same microphones to proclaim that in fact, it does the exact opposite. There’s rather a lot of… swing between those two positions. The two top headlines Wednesday on Realclearpolitics.com were a study in Washington yin and yang:
“Financial Reform Bill Ends Bailouts.” Sen. Dodd
“Dodd Bill Institutionalizes Wall Street Bailouts.” Sen. McConnell
Perhaps between now and the November elections, one of these interpretations will emerge as the true one. In the meantime, as Bette Davis used to say, fasten your seatbelts. It’s going to be a bumpy summer and fall.
Edmund L. Andrews at Wall Street Pit:
When Mitch McConnell charged that the Senate Democrats’ bill to reform financial regulation would lead to “more bailouts” for Wall Street, I could almost imagine how GOP word-smiths had racked their brains for ways to spin the effort.
Here was a bill aimed at clamping down on the rapacious mortgages and wanton risk-taking by Wall Street firms that nearly destroyed the financial system and led to huge bailouts. It would be hard to find groups that are more detested by voters — including populist Tea Partiers and End-the-Fed supporters of Ron Paul — than big banks and Wall Street.
GOP leaders know exactly why they oppose the bill: it’s a Democratic bill. Full-stop. But will that fly with ordinary voters? Do red-state conservatives hate derivatives regulation even more than they hate Wall Street greed, trillion-dollar bailouts and all the bad things that led to the epic meltdown? Doubtful.
That’s why McConnell’s attack was so clever. He appeared to be on the ramparts fighting Wall Street rather than helping Wall Street firms avoid all the things they hate: a consumer protection agency, regulated trading for credit default swaps and new levies on the banks to pay for past and future calamities.
Is McConnell right? Let’s nip this in the bud.
It is true that the Senate bill would require financial institutions to put up $50 billion to deal with possible future meltdowns. It is also true that federal regulators would have new “resolution authority” to shut down failing institutions in an orderly way.
But those are very different things from pre-authorizing future bailouts. The recent bailouts kept zombie banks and AIG alive, because both the Bush administration and the Federal Reserve correctly feared that their collapse would set of a chain-reaction of failure. The bailouts were necessary because the government didn’t have the authority to shut the companies down in a orderly way.
One big example: Fed and Treasury officials didn’t have the legal power to force creditors of AIG and others to take haircuts. They had two stark alternatives: push the companies bankruptcy, let them default on hundreds of billions worth of obligations and let the chips fall where they may; or prop them up, bail out the creditors and hope taxpayers would get their money back after the crisis.
The new resolution authority would give the government new powers to take over and shut down failing giants. That is quite different from bailing out a bank and keeping it alive.
James Gattuso at Heritage:
President Obama met today with members of Congress to jawbone them on the pending financial reform bill. A key part of his message: “we must end taxpayer bailouts.” Few statements are less controversial than that. Nobody wants to see more bailouts.
But wait a second. Doesn’t the very legislation he’s plumping for — and which will soon be voted on in the Senate — itself provides for bailouts. When asked that by a reporter just before the meeting, the President hedged, saying only “…I am absolutely confident that the bill that emerges is going to be a bill that prevents bailouts. That’s the goal.”
Well, that goal, as it turns out, only survives up to page 134 of the 1,334 page Senate bill. On that page begins a section entitled “Funding for Orderly Liquidation.” The text reads that the Federal Deposit Insurance Corporation, the designated federal receiver for failing financial firms, “may make available…funds for the orderly liquidation of [a] covered financial institution.”
Where are those funds to come from? Well, on page 272 the bill creates an “Orderly Resolution Fund” within the U.S. Treasury. The target size of this fund? Fifty billlion dollars.
That sure looks like a bailout fund. Yet, the bill’s supporters deny it. Elizabeth Warren, a leading proponent of the plan, calls the idea that it perpetuates bailouts “just nuts.”
The argument is that no funds could be provided to to compensate a firm’s shareholders. They would be forced to bear the cost of a firm’s failure, so it’s true they they aren’t being bailed out. But the failing firm’s other creditors would be eligible for a cash bailout. The situation is much like the scheme implemented for AIG in 2008, in which the largest beneficiaries weren’t stockholders, but rather other creditors, including foreign firms such as Deutsche Bank. Hardly a model to be emulated.
The second line of defense is that, bailout or not, the funds are to come from fees on big banks, not from taxes. But that’s a distinction without a difference — whether it’s called a fee or a tax, the effect is the same. And the fact that it will be paid by “big banks” is hardly cause for relief. Like other taxes, these would certainly be passed on to consumers, who would ultimately pay the tab.
Peter Wallison at American Enterprise Institute:
Does the bill, as McConnell has said, provide for permanent bailouts? Yes, again without question. The administration and the Democrats, especially Dodd, seem wounded by this suggestion. To them it seems obvious that this can’t be true. Why, they protest, the bill says that these firms have to be wound down, not bailed out. But why then is there a $50 billion fund set up to assist this wind down? In his statement yesterday on the Senate floor, in which he said the opposition had used “falsehoods” to oppose his bill, Dodd said: “And middle class families on Main Street won’t have to pay a penny: the largest Wall Street firms will have to put up money for a $50 billion fund to cover the costs of liquidating the failed financial firm.” The costs of liquidating the failed financial firm? What might those costs be?
The answer is that the $50 billion will be used to pay off the creditors, so that the market’s fear of a general collapse will be allayed. Remember, the theory under which the administration and Dodd are operating is that the failure of one of these large companies will cause a systemic breakdown or instability in the economy. The way to avoid that is to assure the market—in other words the creditors—that they will be paid. Otherwise, they will run from the failing company, and every other company similarly situated. That act—paying off the creditors when the government takes over a failing firm—is a bailout. It doesn’t matter that the management lose their jobs, or that the shareholders get nothing. When the creditors are aware that they will get a better deal with the failure of a large company than they will get with a small one that goes the ordinary route to bankruptcy, that is a bailout. And the signal it sends to the market is the most dangerous part of this bailout, because it tells the market that creditors will be taking less risk when they lend to small companies than if they lend to large ones, and this—as noted above—will simply provide the credit advantages to large companies that will not be available to small companies. Again, like too big to fail, this will distort and suppress competition in financial markets.
Michael Barone at Human Events
In negotiations stretching from the spring of 2009 to February of 2010, Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) worked together to agree on financial-regulation bill. Their work produced the resolution authority section of Dodd’s legislation, which is to say, the section that attempts to avoid future bailouts. After that, Corker continued to work with Dodd on other elements of the bill. So after Sen. Mitch McConnell said that the legislation ensures “endless taxpayer-funded bailouts for big Wall Street banks,” I called Corker to get his perspective. What follows is a transcript of our conversation, lightly edited for clarity.
Was Sen. Mitch McConnell correct? Is the Dodd bill, as currently written, a permanent bailout?
I’ve cautioned against hyperbole. But the fact is that the bill as it now is written allows numerous loopholes that allow a situation where you could have bailouts in perpetuity. It’s a fair statement. This all happened after Mark [Warner] and I finished our work but my negotiations with Dodd ceased. Treasury and FDIC became involved and there are provisions that have been added that change the effect of our work. It can be fixed pretty easily. And everyone already knows how to fix it. To be fair, every administration wants unto themselves as much flexibility and freedom as they can get. What we need to do is take some of that back.
I think it would be useful for us to get very concrete here. So what is a “bailout,” exactly?
A bailout is when the government comes to the aid of a company after the company begins to fail. The government comes in and creates mechanism for its survival.
My understanding is that the bill’s resolution authority mandates that a company gets liquidated if it has to tap into the $50 billion resolution fund. Shareholders get wiped out. Management gets wiped out. The company gets taken apart. Am I wrong in any of that?
That’s exactly right. What you’ve just said is true. But there are a ton of technical things that have to do with the FDIC’s ability to guarantee indebtedness, the ability of the Federal Reserve to do things that act like a bailout. I have a list of 14 items that we’re sharing with Treasury that we want them to look at. And by the way, I think they’re very willing to look at them.
I hope what you get out of this is that Mark and I have no issue. But there’s some bankruptcy court language that’s not in here. There are some issues regarding judicial review of the FDIC’s activities. Some of these things, if you read the language, the FDIC could have the ability to inject equity into the company. They want something called incidental powers. Unless things are clearly defined, they can cause problems. The biggest issue is narrowing what the Fed is able to do, what the FDIC is trying to give itself in order to create flexibility.
It sounds like what you’re saying is that the issue here is not a philosophical dispute between the two parties, but technical changes to make sure the language of the law accords with its intent.
That’s exactly right. Let me give you another example. The way the language is written right now, the resolution process could be used on an auto company. We want this clearly, solely to apply to financial institutions. That’s just one example of a definition type of thing that has to be dealt with. But I think the rhetoric has been overheated, and I’ve cautioned against it. Little words mean a lot here. And I think we’re better off discussing this issue on the substance. And there are other things, too. The bill does not adequately deal with one of the basic causes of this crisis, which was that underwriting was really bad. Now, we have to end any discussion of companies being too big to fail. But there are other important issues.
Sheila Bair explains that the regulatory reform bill will end bailouts and that Mitch McConnell and others who say it institutionalizes them are lying:
Would this bill perpetuate bailouts?
SHEILA BAIR: The status quo is bailouts. That’s what we have now. If you don’t do anything, you are going to keep having bailouts. Bankruptcy doesn’t work — we saw that with Lehman Brothers.
But does this bill stop them from happening?
BAIR: It makes them impossible and it should. We worked really hard to squeeze bailout language out of this bill. The construct is you can’t bail out an individual institution — you just can’t do it.
In a true liquidity crisis, the FDIC and the Fed can provide systemwide support in terms of liquidity support — lending and debt guarantees — but even then, a default would trigger resolution or bankruptcy.
As I said this morning, there are some questions as to whether the process the Dodd bill sets up is genuinely 100 percent airtight. But there can be no denying that it makes bailouts less likely. Some conservatives are trying to outline alternative approaches to this goal, but what McConnell and John Boehner have on the table is a policy of make believe—don’t regulate banks, let Wall Street run wild, pretend there won’t be bailouts, then when the casino goes bust show up with a bailout.
To prevent the bill from moving forward towards a vote, all 41 Senate Republicans would have to unanimously agree to filibuster the motion to proceed. (In other words, the GOP would refuse to allow the debate to even get underway.) As of yesterday afternoon, Senate Minority Leader Mitch McConnell (R-Ky.) did not yet have commitments from all 41 members of his caucus.
Today [Friday the 16th], that changed.
Every member of the Senate Republican Caucus has signed a letter, delivered to Senate Majority Leader Harry Reid, expressing opposition to the Democrats’ financial regulatory reform bill, which they all claim will lead to more Wall Street bailouts.
“We are united in our opposition to the partisan legislation reported by the Senate Banking Committee,” the letter reads. “As currently constructed, this bill allows for endless taxpayer bailouts of Wall Street and establishes new and unlimited regulatory powers that will stifle small businesses and community banks.”
The Republican caucus was not specific about the path ahead. Indeed, the GOP’s letter did not even specifically vow to block the motion to proceed, but rather, simply articulated the caucus’ collective “opposition.” It stands to reason, though, that the point of the letter is that Republicans are prepared to block the vote and the debate on bringing some safeguards to the industry that caused the economic disaster.
It’s worth remembering that Senate Democrats, by and large, didn’t really expect it to come to this. Given Wall Street’s scandalous recklessness, and the public’s disgust for irresponsible misconduct in the financial industry, Dems thought it would be politically suicidal for Republicans to reject reform efforts.
As of this afternoon, it appears Republicans are prepared to link arms and take their chances, fighting to protect Wall Street from accountability.