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  1. #1
    Rising above the Fray spursncowboys's Avatar
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    The Dodd-Frank bills for unlimited bailout authority.
    'We won't have a real market-based financial system until it is safe to let a financial firm fail," Federal Reserve Chairman Ben Bernanke said last week. He's certainly right, though you wouldn't know it from Mr. Bernanke's own actions the last two years. Meanwhile, the politicians are preparing to give the Fed and Treasury more power to bail out all and sundry companies on an unprecedented scale, and so far without any objection from the Fed chairman.

    Reading the pending bills to "resolve" failing financial houses from Representative Barney Frank and Senator Chris Dodd, the challenge is to conceive of someone who is not eligible for unlimited taxpayer funds. The list of potential bailout recipients under both bills runs from bank holding companies to hedge funds to auto makers, consumer retail chains and just about anyone else engaging in finance of one kind or another.

    While most scholarly investigations of the too-big-to-fail phenomenon start from the premise that it's a problem, Messrs. Dodd and Frank appear to view it as the cornerstone of our financial system. This may not be surprising given their history. Mr. Frank is famous for saying he wanted to "roll the dice" with Fannie Mae and Freddie Mac.

    Less well known is how Mr. Dodd has labored to make Wall Street increasingly eligible for the taxpayer safety net. By raising expectations that bailouts will be available, he has, as much as anyone in Congress, encouraged the risk-taking that took the financial system to the brink of ruin.

    During consideration of the 1991 Federal Deposit Insurance Corporation Improvement Act, the Connecticut Senator insisted on reducing the quality of collateral Wall Street would need to present when borrowing from the Federal Reserve in times of emergency. Said Mr. Dodd: "My provision allows the Fed more power to provide liquidity, by enabling it to make fully secured loans to securities firms in instances similar to the 1987 stock market crash." He also fought every serious reform of Fannie and Freddie.

    In his current bill, Mr. Dodd allows private market participants to receive emergency cash from both the Federal Reserve and the Federal Deposit Insurance Corporation, without the bailout recipient having to enter either bankruptcy or the vaunted "resolution" process we'll describe in a moment.

    Under "miscellaneous provisions," Mr. Dodd's bill rewrites a portion of the Federal Deposit Insurance Act and allows cash going to depository ins utions—i.e., commercial banks backed by FDIC's insurance fund—to also go to nondepositories in an emergency. We see no limit in the bill on what these nonbanks can be.

    Similarly, Mr. Dodd rewrites the Federal Reserve Act's section on "unusual and exigent cir stances." Bailouts could now go to "any program or facility with broad-based participation." Mr. Dodd's "resolutions" do not require that firms be liquidated or wound down. Regulators can pump unlimited funds into failing firms and choose to rescue creditors.

    Alabama Republican Richard Shelby warns that these multiple paths for large firms to avoid bankruptcy "will undermine incentives for investors and executives to effectively monitor risks. They will likely take even more risks because they know that they will reap the benefits, while taxpayers will have to cover the costs." He adds that the moral hazard created by the bill "could set the stage for an even more severe and more expensive financial crisis in the future." That sounds exactly right.

    Over in the House, Mr. Frank gives the FDIC new power to pump cash into both banks and nonbanks that are neither bankrupt nor under government "resolution." As for that "resolution" process, which Mr. Frank has described as "death panels" for nonbanks, shareholders and unsecured creditors could still recover money. In fact, they might recover a great deal, because the FDIC can make loans or buy equity in a failing company or guarantee its debts, among other assistance.

    The FDIC may "take such action as necessary to put the covered financial company in a sound and solvent condition." So the government can do more than just prevent a "disorderly failure." It can pump in so much cash that the business becomes an orderly success. This sounds like a mandate to treat even more companies like Citigroup, which has been rescued despite multiple failures and with little discipline for shareholders or executives, much less for creditors.

    To fund these bailouts, large financial companies will pay fees until the government has collected $150 billion. Republican Scott Garrett has been warning House colleagues that Mr. Frank's "death panels" really add up to a "permanent bailout authority" that would expand the power of government and taxpayer rescues to historic highs.

    Mr. Dodd decided against writing a bipartisan bill with Mr. Shelby, and it shows. For years, Mr. Shelby warned about Fannie and Freddie and the rise of moral hazard, not to mention government-selected credit-ratings agencies and bank capital standards. One might think these warnings would have inspired Mr. Dodd to seek the Alabamian's counsel after the disasters of 2008. But down in the polls and facing re-election, Mr. Dodd wants to pose as a populist reformer even as his bill would entrench moral hazard (and cheaper funding costs for the likes of Goldman Sachs) even deeper into the financial system.

    Still, it's not too late to consider a bipartisan approach. This would start with an appreciation that any resolution authority has to include some rules of the road for regulators, rather than let Mr. Bernanke and the Treasury secretary decide who to bail out and when out of their hip pocket.

    It must also include the guarantee of punishment for firms that come looking for help. The first step in discouraging excessive risks is that the risk-takers understand they will suffer the consequences of their bad bets. Former SEC Chairman Richard Breeden proposes a special bankruptcy court, like the FISA court for intelligence, where experienced judges with ample resources could handle large financial cases.

    This deserves consideration and debate. We think it has potential as a venue if a behemoth like General Electric, with its large finance business, or even a bank holding company like Goldman Sachs, were ever to fail. The FDIC could seize the bank to protect depositors and the rest of the firm could restructure under bankruptcy protection.

    Barring such a resolution process, the other way to reduce moral hazard is to limit certain kinds of risk-taking by ins utions that hold taxpayer-insured deposits, as suggested by former Federal Reserve Chairman Paul Volcker and Bank of England Chairman Mervyn King. This has its own problems. But unlike the emerging plans in Washington, it is credible and would give capitalism a fighting chance to survive regulatory reform.

    http://online.wsj.com/article/SB1000...s_opinion_main

  2. #2
    dangerous floater Winehole23's Avatar
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    This deserves consideration and debate. We think it has potential as a venue if a behemoth like General Electric, with its large finance business, or even a bank holding company like Goldman Sachs, were ever to fail. The FDIC could seize the bank to protect depositors and the rest of the firm could restructure under bankruptcy protection.
    Funny, I thought the FDIC not only had this authority to start with, but was obliged to use it anytime the financial condition of a bank threatened to have "any significant impact" on the US taxpayer.

  3. #3
    Rising above the Fray spursncowboys's Avatar
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    Funny, I thought the FDIC not only had this authority to start with, but was obliged to use it anytime the financial condition of a bank threatened to have "any significant impact" on the US taxpayer.
    The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift ins utions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift ins ution fails.

    The FDIC insures deposits only.

    The FDIC directly examines and supervises about 5,160 banks and savings banks for operational safety and soundness, more than half of the ins utions in the banking system.

    The FDIC also examines banks for compliance with consumer protection laws, including the Fair Credit Billing Act, the Fair Credit Reporting Act, the Truth-In-Lending Act, and the Fair Debt Collection Practices Act, to name a few. Finally, the FDIC examines banks for compliance with the Community Reinvestment Act (CRA) which requires banks to help meet the credit needs of the communities they were chartered to serve.

    To protect insured depositors, the FDIC responds immediately when a bank or thrift ins ution fails. Ins utions generally are closed by their chartering authority – the state regulator, the Office of the Comptroller of the Currency, or the Office of Thrift Supervision. The FDIC has several options for resolving ins ution failures, but the one most used is to sell deposits and loans of the failed ins ution to another ins ution. Customers of the failed ins ution automatically become customers of the assuming ins ution. Most of the time, the transition is seamless from the customer's point of view.

    The FDIC employs about 5,000 people. It is headquartered in Washington, D.C., but conducts much of its business in six regional offices and in field offices around the country.

    The FDIC is managed by a five-person Board of Directors, all of whom are appointed by the President and confirmed by the Senate, with no more than three being from the same political party.

    http://www.fdic.gov/about/learn/symbol/index.html

  4. #4
    dangerous floater Winehole23's Avatar
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    I am aware that the FDIC's does not extend to bank holding companies, car companies and insurers like AIG. Given the FDIC's traditional oversight function and the resolution authority in its recent history, perhaps broker-dealers and bank holding companies could be brought under the umbrella.

  5. #5
    I play pretty, no? TeyshaBlue's Avatar
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    Funny, I thought the FDIC not only had this authority to start with, but was obliged to use it anytime the financial condition of a bank threatened to have "any significant impact" on the US taxpayer.
    Exactly. Wasn't that the premise behind the S&L seizures in the 80's?

  6. #6
    Rising above the Fray spursncowboys's Avatar
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    I am aware that the FDIC's does not extend to bank holding companies, car companies and insurers like AIG. Given the FDIC's traditional oversight function and the resolution authority in its recent history, perhaps broker-dealers and bank holding companies could be brought under the umbrella.
    I know little about the FDIC's power and was looking into what you wrote about and couldn't find anything. This what I found.

  7. #7
    dangerous floater Winehole23's Avatar
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    Perversely, what the Dodd-Frank bills do is to create officially recognized TBTF's, and makes the FDIC and the Fed bailout authorities in their own right. Additionally, instead of collecting risk premiums in advance, like the FDIC does currently with banks, these bills are designed to bailout first, then recoup.

  8. #8
    Rising above the Fray spursncowboys's Avatar
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    Nothing like loan guarantees to really keep banking honest. If someone told me that if my company wasn't profitable the government would cover me-I wouldn't be irrational or or risky. That kind of blind trust would create an atmosphere of accountability and disciplined business practices.

  9. #9
    dangerous floater Winehole23's Avatar
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    Exactly. Wasn't that the premise behind the S&L seizures in the 80's?
    Yes.

    In this case the problem was that a lack of transparency (i.e., regulation and reporting) regarding a big asset class (mortgage based derivatives and swaps) concealed the financial exposure -- and therefore, the true financial condition -- of banks, broker-dealers and insurance companies like AIG.
    Last edited by Winehole23; 11-23-2009 at 11:28 AM.

  10. #10
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    The big banks created lending subsidiaries to escape FDIC, etc regulations on the main bank.

    As if the govt didn't know this was going on.

    I don't expect ANY serious regulation to be enacted (the Repugs will obstruct any and all regulation), and if anything were enacted, it will be enforced with the same vigor as SEC/Fed polices Wall St now.

    "- that government of the people, by the corps, for the corps, shall not perish from the earth"

    The corps are too strong now, own too much of the Exec and Legislature, and are supported by the right-wing Repug SCOTUS activists.

  11. #11
    Rising above the Fray spursncowboys's Avatar
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    The big banks created lending subsidiaries to escape FDIC, etc regulations on the main bank.

    As if the govt didn't know this was going on.

    I don't expect ANY serious regulation to be enacted (the Repugs will obstruct any and all regulation), and if anything were enacted, it will be enforced with the same vigor as SEC/Fed polices Wall St now.

    "- that government of the people, by the corps, for the corps, shall not perish from the earth"

    The corps are too strong now, own too much of the Exec and Legislature, and are supported by the right-wing Repug SCOTUS activists.
    What can the republicans do with their small minority?

  12. #12
    dangerous floater Winehole23's Avatar
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    What can the republicans do with their small minority?
    They can get in Obama's way, and hope the economy doesn't turn around too soon.

  13. #13
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    "republicans do with their small minority"

    combined with the DINOs, they can obstruct damn near everything.

    eg, the health care bill with even the gutted public option will not be passed, since Reid says he won't use reconciliation.

  14. #14
    Rising above the Fray spursncowboys's Avatar
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    They can get in Obama's way, and hope the economy doesn't turn around too soon.
    How can they get in his way? The Dems have super majorities. I could see if McCain got some blue dogs and made a coalition.

  15. #15
    dangerous floater Winehole23's Avatar
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    In the Senate, all that needs to be done is to peel one Democratic Senator away

  16. #16
    Scrumtrulescent
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    Perversely, what the Dodd-Frank bills do is to create officially recognized TBTF's, and makes the FDIC and the Fed bailout authorities in their own right. Additionally, instead of collecting risk premiums in advance, like the FDIC does currently with banks, these bills are designed to bailout first, then recoup.
    The only thing worse than allowing TBTF's to come into existence in the first place is allowing them to continue to exist under a false belief that we can control them.

  17. #17
    Rising above the Fray spursncowboys's Avatar
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    The only thing worse than allowing TBTF's to come into existence in the first place is allowing them to continue to exist under a false belief that we can control them.
    +1
    If GM had to sink or swim, they wouldn't get rid of their trucks, or Saturns. Those two would do better than the GM small cars, which I don't know anyone who had a good one that didn't screw up all the time. Saturn has a built in loyal fan base. Don't know why, but everyone I know who owns a Saturn loves them and loves the customer service they experienced.

  18. #18
    Scrumtrulescent
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    If GM had to sink or swim, they wouldn't get rid of their trucks, or Saturns. Those two would do better than the GM small cars, which I don't know anyone who had a good one that didn't screw up all the time. Saturn has a built in loyal fan base. Don't know why, but everyone I know who owns a Saturn loves them and loves the customer service they experienced.
    Speaking of GM......

    NEW YORK (CNNMoney.com) -- GM could one day be Chinese owned.

    A shocking concept for the ultimate all-American company, but one some auto industry experts say isn't too far-fetched.

    "I can tell you right now the Chinese are shopping heavily in the U.S. auto sector," said David Cole, chairman of the Center for Automotive Research, a Michigan think tank.


    http://money.cnn.com/2009/11/23/news...hina/index.htm

  19. #19
    keep asking questions George Gervin's Afro's Avatar
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    What can the republicans do with their small minority?
    you really know nothing in regards to how politics works do you? Either your stupid and really don't know how the senate minority can stall a president's agenda or you do know they can and you are just being dishonest when you ask the question...which is it dummy?

  20. #20
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    LOL at how one minute it is "the GOP is broken! horraaayyy" and "the reps are all mighty!" the next.

  21. #21
    Veteran InRareForm's Avatar
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