Patrick McHenryChairman

Washington, June 26, 2013 -

“Not long after the financial crisis arose in 2008, we heard the cry ‘Occupy Wall Street!’ Most Americans have never wanted to occupy Wall Street, they just want to quit bailing it out.

“Today, though, there is a growing bipartisan consensus that the Dodd-Frank Act regrettably did not end the Too Big To Fail phenomenon or its consequent bailouts.

“Thus, we have much work ahead of us. I want to thank Chairman McHenry and the members of the O&I Subcommittee for their work so far on this subject.

“Ending taxpayer funded bailouts is one of the reasons why this committee has invested so much time on Sustainable Housing Reform. The GSEs, Fannie and Freddie, are the original Too Big to Fail poster children, yet were untouched and unreformed in Dodd-Frank. They have received the largest taxpayer bailout ever - nearly $200 billion. Along with the FHA, the government now controls more than 90% of our nation’s mortgage finance market with no end in sight.

“One of the most important steps we can take in ending Too Big to Fail institutions is to remove the permanent, taxpayer backed, government guarantee of Fannie and Freddie. For far too long Fannie and Freddie have been where Wall Street and foreign banks go to offload their financial risk on Main Street taxpayers.

“This must stop and soon it will as part of our Committee’s Sustainable Housing legislation – sustainable for homeowners so they have the opportunity to buy homes they can actually afford to keep; sustainable for taxpayers so they are never again forced to fund another Washington bailout; and sustainable for our nation’s economy so we avoid the boom-bust housing cycles that have hurt so many in the past.

“Regrettably, Dodd-Frank not only fails to end Too Big to Fail and its attendant taxpayer bailouts – it actually codifies them into law. Title I, Section 113 allows the federal government to actually designate Too Big to Fail firms – also known as SIFIs. In turn, Title II, Section 210, notwithstanding its expost funding language, clearly creates a taxpayer funded bailout system that the CBO estimates will cost taxpayers over $20 billion.

“Designating any firm Too Big to Fail is bad policy and worse economics. It causes the erosion of market discipline and risks further bailouts paid in full by hardworking Americans. It also becomes a self-fulfilling prophecy, helping make firms bigger and riskier than they otherwise would be. Since the passage of Dodd-Frank, the big financial institutions have gotten bigger, the small financial institutions have become fewer, the taxpayer has become poorer, and credit allocation has become more political.

“Even if some conclude that certain financial firms are indeed Too Big to Fail, and I am not of that camp, it begs the question whether Washington is even competent to manage their risks or whether the American people, in light of the recent revelations about the IRS and the DOJ, can trust Washington to do so. A review of the federal government’s risk management record does not inspire confidence. The Federal Housing Administration’s poor risk management has left it severely undercapitalized. The Pension Benefit Guaranty Corporation has an unfunded obligation of $34 billion. Even the National Flood Insurance Program is $24 billion underwater – yes, pun intended.  And, of course, regulators encouraged banks to load up on sovereign debt and agency MBS by requiring little or no capital to be reserved against them. Think Greek debt and Fannie and Freddie.

“We should recall it was the government’s misguided and risky affordable-housing mandate that principally loosened prudent underwriting standards in the first place. Government not only did not mitigate the risk, it created the risk.

“We have to keep our focus on the right questions if we are to achieve the right solutions. As a society, what are we willing to pay for stability? Are we trading off long-term instability and moral hazard for short term stability? Why should the government have to protect Wall Street firms from taking losses? Do we really want a Solyndra-like economy in which risk management is guided more by government politics than market economics and taxpayers are left to hold the bag? And perhaps more fundamentally, don’t we want financial firms to take risks? In the not too distant past, one of the large investment banks took a risk on Apple when it was floundering. Now Apple is one of the most valuable companies in the world and its products have revolutionized our lives and economy. Without financial risk, we lose out on innovation. Under Too Big to Fail, we also risk encouraging irresponsibility and moral hazard.

“Bailouts beget bailouts, and the most fundamental question is this:  If we lose our ability to fail in America, then one day, we may just lose our ability to succeed. That is what this debate should really be about.”