“Too Big To Fail” Continues
Washington,
June 2, 2011 -
Recently, Democrats have claimed in speeches and media interviews that the Dodd-Frank Act ended “too big to fail” and the bailouts. However, the facts show the Dodd-Frank Act sets up a permanent bailout authority that will continue to privatize profits, and socialize losses.
The Special Inspector General for the Troubled Asset Relief Program (SIGTARP) released a report in January 2011 in which he describes an interview with Treasury Secretary Tim Geithner. During the interview, Secretary Geithner admits to SIGTARP that future bailouts are possible:
“In the future we may have to do exceptional things again if we face a shock that large. You just don’t know what’s systemic and what’s not until you know the nature of the shock. It depends on the state of the world – how deep the recession is. We have better tools now, thanks to Dodd-Frank. But you have to know the nature of the shock.”
–Secretary Geithner
SIGTARP report, Jan. 2011
In the report, SIGTARP Confirms “Too Big To Fail” Was Enshrined Into Law:
“It was apparent to SIGTARP from the context of the interview, including the reference to doing something exceptional ‘again’ in the face of a future financial crisis, that Secretary Geithner was referring to the possibility of future bailouts. While Treasury has not disputed the quotation attributed to Secretary Geithner or the context in which it was presented in SIGTARP’s audit report ‘Extraordinary Financial Assistance to Citigroup, Inc.,’ a Treasury spokesperson has reportedly suggested that Secretary Geithner was actually referring to using the tools of the Dodd-Frank Act to wind down an institution. …. Secretary Geithner’s candor about the difficulty of determining ‘what’s systemic and what’s not until you know the nature of the shock,’ and the prospect of having to ‘do exceptional things again’ in such an unknowable future crisis is commendable. At the same time, it underscores a TARP legacy, the moral hazard associated with the continued existence of institutions that remain too big to fail.”
— Neil Barofsky
SIGTARP report, Jan. 2011
During debate over financial regulatory reform, Committee Republicans raised concerns about two provisions in the Dodd-Frank Act that allow regulators to continue AIG-style bailouts. The Dodd-Frank Act makes the government bailout regime permanent by giving government bureaucrats the authority to pay off the creditors of failed “too big to fail” institutions, and to treat similarly situated creditors differently, perpetuating a system in which government officials pick winners and losers in the marketplace. For example:
· Section 204 of the Dodd-Frank Act permits the FDIC to lend to a failing firm; purchase the assets of a failing firm; guarantee the obligations of a failing firm; take a security interest in the assets of a failing firm; and/or sell or transfer assets that the FDIC has acquired from the failing firm
· Section 210 authorizes the FDIC to borrow up to 10% of the book value of the failed firm’s total consolidated assets in the 30 days immediately following its appointment as receiver. After those 30 days, the FDIC is authorized to borrow up to 90% of the fair value of the failed firm’s total consolidated assets. For Bank of America, that’s $2 trillion in bailout authority alone, to be paid for by the taxpayer
The taxpayer liability from these two provisions is shown in the chart below.
CBO has estimated the resolution authority would cost taxpayers $26 billion. Since the Administration proposed this so-called resolution authority, Republicans have continuously asked Secretary Geithner to explain how the resolution authority would resolve failed non-banks. He has failed to provide an explanation.
In other words, the Democrats granted these broad authorities to the Treasury Department and FDIC without knowing exactly how the resolution authority will work or how it will place taxpayers on the hook in the future. In a recent interview, former Federal Reserve Chairman Paul Volcker said:
“Nobody knows quite how it’s going to work. Nobody will know until it is tested, but there are several problems.”
Republicans will continue to maintain oversight of the resolution authority and work towards ensuring taxpayers are never again left holding the bag for future bailouts.
