Thursday, April 29, 2010

Tales from Bailout Nation Pt. XXV

The indespensible Heritage Foundation does their usual fine work in making the dense and complex understandable because in the case of the Wall St. reform bill and like members of Congress who will be voting on it, we have no intention of reading it.

But in the interest of public service and being all-around good Joes, here it is in .pdf.

Reasons to hate:

1. 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.” These firms would be subject to enhanced regulation. However, 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. As American Enterprise Institute scholar Peter Wallison wrote, “Designating large non-bank financial companies as too big to fail will be like creating Fannies and Freddies in every area of the economy.”[1]

2. 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 is subject to review in the courts only on a “substantial evidence” standard of review, meaning that the seizure must be upheld if the government produces any evidence in favor of its action. This makes reversal extremely difficult.

3.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 scheme implemented for AIG in 2008, in which the largest beneficiaries were not stockholders but rather other creditors, such as Deutsche Bank and Goldman Sachs[2]—hardly a model to be emulated.

4. 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. According to the Congressional Budget Office, the ultimate cost of bank taxes will fall on the customers, employees, and investors of each firm.[3]

You can read the rest of the 14, here.

We blogged about #4 months ago. This is the idea floated originally by Barney Frank that would punish good behavior and reward bad behavior. We don't know about you, but we don't think we'd cotton to having a portion of our salary set aside to cover the poor performance of a co-worker.

We suppose we shouldn't be surprised that this good/bad response mechanism has been central to the entirety of Bailout Nation, whether it's bailing out poor performing auto manufacturers or financial institutions, or enticing people to stay in bad home loans.

Perhaps, we were already there, but Bailout Nation has cemented the notion of rewarding the bad at the expense of the good as the prevailing paradigm of this country aided, abetted and enforced by the federal government.

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