Conservatives Stick Up For Big Banks In Wall Street Journal Op-ed

April 07, 2010 2:51 pm ET

In an April 7, 2010 op-ed in the Wall Street Journal, American Enterprise Institute senior fellow Peter Wallison and Penn Professor David Skeel attacked the financial regulatory reform bill in the Senate. Despite their claims, the bill ends the bailout culture on Wall Street.  It creates an "Orderly Liquidation Authority" that does not bail firms out, but safely dismantles any failed financial company that threatens the stability of the entire economy.  The fund is financed NOT by taxpayers, but by fees levied on financial companies.

Creditors Will Not Be "Bailed Out"

Wallison & Skeel:

The Dodd bill provides for a $50 billion fund, collected in advance from large financial firms, that will be used for the resolution process. In other words, the creditors of any company that is resolved under the Dodd bill have a chance to be bailed out. That's what these outside funds are for. But if the creditors are to take most of the losses-as they did in Lehman-a fund isn't necessary.

Which system is more likely to eliminate the moral hazard of too big to fail? In a bankruptcy, as in the Lehman case, the creditors learned that when they lend to weak companies they have to be careful. The Dodd bill would teach the opposite lesson. [Wallison & Skeel op-ed, 4/7/10]

The Dodd Bill Specifically States Creditors Of Failed Companies Will "Bear Losses." According to Section 206 of the Restoring American Financial Stability Act of 2010:

[Restoring American Financial Stability Act of 2010, accessed 4/7/10]

Financial Reform Ends The Bailout Culture, Brings Accountability And Transparency To Wall Street

The bill creates an "Orderly Liquidation Authority" that does not bail firms out, but safely dismantles "any failed financial company" that threatens the entire economy.  The fund is financed NOT by taxpayers, but by fees levied on financial companies.

The Senate's Restoring American Financial Stability Act Ends The Risky Bailout Culture, Liquidates Failed Institutions.  According to Section 204 of the Restoring American Financial Stability Act of 2010:

 

[Restoring American Financial Stability Act of 2010, accessed 4/7/10]

WSJ: Senate Bill "Would Make A Government Bailout Virtually Impossible." As reported by the Wall Street Journal: "A spokeswoman for the Connecticut Democrat said Friday he would change a provision that would have allowed the Federal Reserve to use emergency powers to lend to an individual 'financial market utility.' Only payment and clearing firms deemed 'systemically important' by a proposed council of regulators would have been eligible.... The change Mr. Dodd has agreed to would make a government bailout virtually impossible, though the government would be able to seize and dismantle failing firms." [Wall Street Journal via Factiva, 3/19/10]

Kudlow: "Dodd's Financial-Regulation Proposal Raises The Possibility Of Substantial Progress On The Road To Ending "Too Big To Fail" (TBTF) And Bailout Nation." In a column written for RealClearMarkets, Larry Kudlow wrote, "Sen. Chris Dodd's financial-regulation proposal raises the possibility of substantial progress on the road to ending "too big to fail" (TBTF) and bailout nation for banks and other financial institutions... First, under the Dodd scheme, large complex companies will have to submit plans for rapid and orderly shutdowns should they go under. These are called 'funeral plans.' Then, in terms of these orderly shutdowns, the bill would create an 'orderly liquidation mechanism for the FDIC to unwind failing systemically significant financial companies. Shareholders and unsecured creditors will bear losses and management will be removed.' Good." [Kudlow, RealClearMarkets, 3/16/10]

Washington Post: "The Bill Provides A Way To Rein In The Risks They Take With That Money, And Taxpayers Won't Be On The Hook If They Nevertheless Collapse." In an editorial written after the Senate released its plan to reform the financial system, the Washington Post wrote, "Like the House bill, it would authorize a council of regulators to name systemically risky institutions, limit their leverage and require them to pay into a $50 billion resolution fund that would deal with a big firm's collapse. To be sure, listing 'too big to fail' institutions only encourages the market to offer them artificially easy funding. But at least the bill provides a way to rein in the risks they take with that money, and taxpayers won't be on the hook if they nevertheless collapse." [Washington Post, 3/18/10]

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