From the Heritage Foundation we learn:
Creates a protected class of too big to fail firms. Section 113 of the bill establishes a “Financial Stability Oversight Council,” charged with identifying firms that would “pose a threat to the financial security of the United States” if they encounter “material financial distress.” While these firms would be subject to enhanced regulation, such a designation would also signal to the marketplace that these firms are too important to be allowed to fail and, perversely, allow them to take on undue risk.
Liberals love "councils" - it's a great way to avoid taking real responsibility. Would someone explain to me what happens in a free market when the government suddenly paints a big bullseye on a company's chest?
Creates permanent bailout authority. Section 204 of the bill authorizes the Federal Deposit Insurance Corporation (FDIC) to “make available … funds for the orderly liquidation of [a] covered financial institution.” Although no funds could be provided to compensate a firm’s shareholders, the firm’s other creditors would be eligible for a cash bailout. The situation is much like the bailout AIG in 2008, in which the largest beneficiaries were not stockholders but rather other creditors, such as Deutsche Bank and Goldman Sachs.
The original intent of the FDIC was to protect Ma and Pa's checking account. The folks getting this protection now are the fun bunch at Goldman Sachs. I have no quarrel with these guys - investment banking is a brutal business and if you want to be Gordon Gecko, that's your gig. But just as they are allowed to make money, they should also be allowed to use it. There's a term for that - "free market."
Provides for seizure of private property without meaningful judicial review. The bill, in Section 203(b), authorizes the Secretary of the Treasury to order the seizure of any financial firm that he finds is “in danger of default” and whose failure would have “serious adverse effects on financial stability.” This determination would be virtually irreversible in court.
This one bothers me...a lot. Explain to me how a guy who, oops, can't do his own taxes is going to decide what firms to seize. Then explain to me how you are not going to avoid political corruption - regardless of the party!
Establishes a $50 billion fund to pay for bailouts. Funding for bailouts is to come from a $50 billion “Orderly Resolution Fund” created within the U.S. Treasury in Section 210(n)(1), funded by taxes on financial firms. However, according to the Congressional Budget Office, the ultimate cost of bank taxes will fall on the customers, employees and investors of each firm.
You are kidding right? This last round took $285 billion to prevent financial Armageddon. So if you are going to do it, at least be realistic about what the real cost will be. Looks to me like Joe Taxpayer gets hit coming and going with this scheme - higher fees at the bank so they can pay in to the Fund and higher taxes from the Feds so they can make up the difference. We are institutionalizing bail outs.
Opens a “line of credit” to the Treasury for additional government funding. Under Section 210(n)(9), the FDIC is effectively granted a line of credit to the Treasury Department that is secured by the value of failing firms in its control, providing another taxpayer financial support.
Why not - this is the "What the Hell It's Only Money" Club anyway.
Authorizes regulators to guarantee the debt of solvent banks. Bailout authority is not limited to debt of failing institutions. Under Section 1155, the FDIC is authorized to guarantee the debt of “solvent depository institutions” if regulators declare that a liquidity crisis (“event”) exists.
Umm, why? If they are solvent...i.e. not going to fail, why do they need a federal guaranty? This strikes me as a license - nay an encouragement - for banks to behave badly, knowing that regardless of what they do, they are covered.
Imposes one-size-fits-all reform in derivative markets. Derivatives are already increasingly being traded on clearinghouses thanks to private efforts coordinated by the New York Fed. But the Senate bill would require virtually all derivative contracts to be settled through a clearinghouse rather than directly between the parties. Applying such ill-designed blanket regulation would make financial derivatives more costly, more difficult to customize, and, consequently, less widely used—which would increase overall risk in the economy.
That's great - I know everyone hears the word "derivatives" and they get all jealous about those "greedy fat cats." The reality is financial ingenuity has been the source of American economic power. Sometimes, things like "junk bonds" go bad...sometimes things like "derivatives" do well. There is (was) not guaranty.
Have things gone badly in the past couple of years in the financial services sector? Absolutely...$245 billion in bank bailouts is baaaad. Oh, $169 billion of that has already been paid back. And let's not forget that a lot of institutions were forced into taking the TARP funds whether they needed them or not. To put it further in perspective, the Savings and Loan bailout of 1989 cost us $289 billion in 1989 dollars and we didn't get a dime of that back. Where's the crisis?
It seems to me what this legislation achieves is three things:
1. It finishes New York as the financial capital of the world. It snuffs out financial creativity, makes everyone up there beholding to the Rajahs in Washington and will essentially chase away talent. Capital, as we all learn in Econ 100 is fungible. This bill is great news for London, Tokyo and Hong Kong.
2. It is the final act in a struggle that has been going on since the 1930's - the fight between a culture of independence and dependence. One could argue that this struggle has actually been going on since 1865, as Herman Melville observed in "Conflict of Convictions:"
Power unanointed may come--
Dominion (unsought by the free)
And the Iron Dome,
Stronger for stress and strain,
Fling her huge shadow athwart the main;
But the Founders' dream shall flee.
Independence has it's ugly sides - depressions, recessions, frauds and scandals. But it has also raised more people out of poverty and mediocrity not only in this country, but around the world - independent financial markets have provided the capital for a world that our grandparents could not have imagined. Dependence is steady - it's gruel and gray...it looks like East German housing. Wall Street has represented the independence, the Iron Dome of Washington represents the opposite.
3. It is a progressive's dream: unchecked state control over the financial sector.
I pray it will be defeated, but fear we will have to wait for a brighter day. Mencken was right: "the American people deserve what they get, and they are going to get it good and hard."
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