Obama signed the Dodd-Frank act to punish those banks and end government bailout of too-big-to-fail financial institutions. D-F would foster transparency and competition and make sure that everybody follows the same set of rules. If would also insure that the American people will never again be asked to foot the bill for Wall Street mistakes.
We rise or fall together as one nation under D-F.
D-F has some unintended consequences designates a number of banks as too big to fail and they’re effectively guaranteed by the federal gov. Romney assaulted the D-F on the conventional wisdom that D-F punished Wall Street.
Many analysts and officials have explained D-F subsidizes large influential WS financial institutions, while imposing disproportionately heavy burdens on main street banks and the communities they serve. The law they passed accomplishes the opposite result.
Romney criticism targeted the parts of D-F that were ostensibly enacted to limit the power of too big to fail financial institutions. Title 1 creates the financial stability oversight council, an interagency board that will formally designate certain large bands and nonblank financial companies as “systemically important financial institutions”. SIFI’s Title 11 creates the orderly liquidation authority by which the treasury secretary and the FDIC are empowered to liquidate troubled SIEI’s.
Titles 1 and 11 exacerbates the very problem they were purported to solve; the dangerous power of financial institutions that are treated as to big to fail. According to the treasury secretary the council will soon begin designation large financial institutions” systemically important”. When it does the council will be making official a status that before D-F was strictly unofficial and conjectural. Official SIFI status will be worth billions of dollars to the companies that receive it.
Before D-F a handful of big banks enjoyed unofficial too big to fail status among investors. $100 billion in assets was a common benchmark.
Investors saw the banks as less risky than their “small enough to fail” competitors. Accordingly the big banks were able to attract investment capital at much lower cost. Instead of ending that subsidy to big banks, D-F intensifies it in at least 3 ways. Officially designating SIFI’s , by lowering the asset threshold from $100 billion to $50 billion, it increases the number of likely SIFI’s, and by including not just banks but also nonbank financial companies, D-F further expands the universe of possible SIFI’s.
SIFI’s will face stricter oversight by federal regulators. D-F regulators will put SIFI into a “penalty box”, big banks might try to spin it like it’s a good thing to receive the government’s SIFI designation “but it’s a bad thing”.
Deloitte went so far as to predict that banks falling short of the $50 billion threshold “are likely to face a strategic decision: either forgo SIFI status or aim to become SIFI’s to take advantage of possible perceived funding.
D-F tends to fall back on a second defense: that D-F title 11 ensures that troubled SIFI’s will be liquidated not rescued and that taxpayers shall bear no losses form the exercise of that liquidation authority. Because of this law, the American people will never again be asked to foot the bill for WS mistakes. There will be no more tax-funded bailouts—period. This reform gives us the ability to wind it down without endangering the broader economy.
Title11 does not actually require the government to wind down a troubled SIFI. Under D-F liquidation can consist of the government keeping the company alive and restructuring it by us of an FDIC created bridge financial company.
Re, Gruenberg the FDIC will not wind down troubled SIFI’s as Obama promised: instead as Gruenberg explained in a May 10, speech the FDIC most promising resolution strategy will be to take the SIFI parent company into receivership, transfer its assets to a bridge company, operate its subsidiary banking units and ultimately keep the SIFI alive—an outcome that Gruenberg suggested will not just mitigate systemic consequences but also preserve the franchise value of the firm.
The FDIC will be able to exploit a section in D-F that gives regulators extraordinary power to ignore the rules of bankruptcy and favor certain creditors over others.
In short D-F liquidation provisions will not actually end too big to fail only in the same sense that the 1928 Kellogg-Briand Pact ended the WAR.
Nor can it truthfully be said that taxpayers will not fund the liquidation process. The treasury department and FDIC can fund liquidations by imposing fees on financial institutions—fees that ultimately are passed through to the taxpayers and other s who own the stock of those fee paying companies or who are the companies customers.
Source weekly standard—adam white


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