We are familiar with the concept of “the gift that keeps on giving.” Die-hard opponents of financial reform, who continue to regret that we adopted any significant legislative change last year to deal with reckless financial practices, have created what you might call “the gift that people keep on refusing.”
The gift is that of being designated as a “systemically important financial institution” by the Financial Stability Oversight Council, established by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Such institutions will be subject to a greater degree of regulatory scrutiny and required to hold more capital. Republican critics argue that the designation would signal that a company is “too big to fail,” which would be a license to raise investment funds and deposits more cheaply and would provide a competitive advantage over other firms.
The contrary is clearly the case. The new law includes a number of very specific provisions making clear that no financial institution will be bailed out, and the too-big-to-fail doctrine is no longer even legally possible. For example, the statutory authority under which the Federal Reserve advanced money to AIG, the biggest single example of an institution propped up because it was too big to fail, was abolished.
With other financial institutions, the law explicitly states that while there may be cases when the Federal Deposit Insurance Corp., charged with the responsibility here, has to provide some funds to help put a failing institution out of business, the funds can be spent only to stabilize the financial system while the FDIC is dissolving the institution, wiping out its shareholders and firing all its executives.
And even in this case, if any funds are spent in this process, they must be repaid from the proceeds of the liquidation of the failing firm or, if those proceeds are insufficient, from a levy on large financial institutions — not from taxpayers. That is, Sarah Palin was partly right in her claim last year that Congress was enacting death panels, but they were not for older people — they were for failing financial institutions. To repeat: No money can be spent to keep a failed institution alive, and any funds that are spent in conjunction with its burial expenses have to be recouped.
The strength of this provision was recently confirmed in testimony by two representatives of the private sector who appeared before the House Financial Services Committee during a hearing to consider whether the new financial regulations put American firms at a competitive disadvantage vis-à-vis foreign firms.
Hal Scott, a Harvard Law School professor who was called as a witness by Republican members of the committee, cited the toughness of the new law’s anti-bailout position as a potential source of competitive disadvantage for American institutions. “The U.S., in the wake of the financial crisis, has taken a strong anti-bailout position,” he said. “Other countries may continue to have a more generous attitude towards bailouts than the United States, which could put our financial institutions at a competitive disadvantage.”
Barry Zubrow of JPMorgan Chase, who was also called as a Republican witness, was similarly concerned, noting “the United States is ahead of the rest of the world: The FDIC’s new authorities are already in place, while most countries have no plans for orderly resolution, and some have effectively acknowledged that their banks would be bailed out at taxpayer expense should a crisis occur.”
Still, Republicans desperate to discredit the law cite one fact in defense of the argument that too big to fail lives on. And that brings us to the notion of “the gift.”
Republicans assert that being designated as systemically important is a desirable status because it will lower the cost of acquiring the funds the institution needs, even though it means being subjected to higher capital requirements and stiffer regulation. There are a number of logical problems with this assertion, but there is one overwhelming empirical one: None of the institutions that would be eligible for this gift are at all interested in receiving it. The absolute opposite is the case.
For the Republican partisan interpretation of being so named to be even close to being valid, there would be at least a few institutions lobbying for the designation. While there are some institutions, namely the larger banks, that are automatically labeled systemically important, there is discretion given to the Financial Stability Oversight Council with regard to some large nonbank financial institutions as to whether they should be so designated. In fact, no institution — according to the regulators, the institutions themselves, reports in the media and every other source of information — has asked to be given that designation and an overwhelming number of the institutions in the discretionary area have actively lobbied against it.
At a recent hearing, I asked all nine regulators who are members of the Financial Stability Oversight Council if any institution had lobbied them to be included — each said no. I then asked whether any institution had lobbied them to be excluded — eight of the nine said yes. The one witness who said he had not been lobbied for exemption was the acting comptroller of the currency, which oversees only banking institutions, the largest of which are automatically judged to be systemically important.
What the Republicans characterize as a gift is a gift that no one wants. In fact, it seems that the large banks designated as systemically important would “regift” that label if they could.
What the Republicans’ argument of too big to fail comes down to is a self-fulfilling prophecy — or at least the effort to foster one. Their argument that being designated systemically important is somehow a great boon to the financial institutions has a very hard time surviving the overwhelming response of those institutions that exactly the opposite is true.
By REP. BARNEY FRANK
Source: www.politico.com
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