The Wall Street Bailout Bill Threat to Your Bottom Line

Heritage Foundation

This past Friday, President Barack Obama again threatened to veto any financial reform bill that fails to tightly regulate financial derivative products which many blame for the 2008 economic crisis. Derivatives work like insurance to protect certain investments, and provide stability to the price of most goods and services. For example, farmers buy derivatives on the price of their crops, so if the price of their crop plummets, the price of the food at the grocery store won't change that much. Airlines buy derivatives on oil, so if the price of oil goes up drastically, they won't have to immediately hike ticket prices.

Lehman Brothers CEO Dick Fuld shares President Obama's view on derivatives. He also blames them for the downfall of his Wall Street firm. But a closer examination of Lehman's failure shows that derivatives may just be a convenient scape goat. Bankruptcy examiners found that it was bad business decisions hidden by complex accounting tricks, not addressed by the current Wall Street Bailout Bill at all, that brought Lehman down. In fact, Lehman's derivatives positions represented only about 3.3 percent of its net assets, and the bankruptcy examiner found its derivatives trades were reasonable and more carefully monitored than Lehman's other assets.

So whenever Sen. Chris Dodd (D-CT) says his Wall Street Bailout Bill "would have prevented that kind of events from happening" he needs to explain how. If anything, the Dodd plan will only make future Wall Street bailouts more likely and more costly while also stifling consumer choice.

Increases Chance of Future Bailouts: Obama administration officials are claiming their plan "outlaws bailouts," but in fact it institutionalizes them forever. Just go straight to page 134 of the 1,334 page Senate bill. On that page begins a section titled "Funding for Orderly Liquidation." The text reads that the Federal Deposit Insurance Corporation, the designated federal receiver for failing financial firms, "may make available…funds for the orderly liquidation of [a] covered financial institution." Where are those funds to come from? Well, on page 272 the bill creates an Orderly Resolution Fund within the U.S. Treasury. The target size of this fund? Fifty billion dollars. The Obama administration claims no funds could be provided to compensate a firm's shareholders. But the failing firm's other creditors would be eligible for a cash bailout at the discretion of Treasury Secretary Timothy Geithner who has described the bill's new bailout authority in exactly the same way he described how he bailed out AIG. This is why Rep. Brad Sherman (D-CA) told Politico: "The Dodd bill has unlimited executive bailout authority. That's something Wall Street desperately wants but doesn't dare ask for. The bill contains permanent, unlimited bailout authority."

Increases the Costs of Future Bailouts: The second administrative fall back position is that while the bill does bailout Wall Street, the bailouts will be paid for by Wall Street so taxpayers won't foot the bill. But where does the left think Wall Street will get the money for the bailout funds? The tooth fairy. Just as airlines will ultimately just recoup the money they would have charged for carry on bags in higher ticket prices, Wall Street will suck the bailout money from American consumers in the form of higher bank fees. The Congressional Budget Office has confirmed this the last time the Obama administration proposed a new bank tax. Worse, The New York Times reports: "The Obama administration does not support the $50 billion fund, partly out of concern that more money may be needed if one or more big financial firms ever collapse and that creating a fund could make it difficult to authorize more money." In other words, the only reason the Obama administration does not want a set $50 billion fund is so it will be easier to ask for even higher bailout funds later.

Limits Consumer Choice: One of the new Super Regulators Dodd's Wall Street Bailout Bill would create is a Bureau of Consumer Financial Protection that would make it harder for consumers to utilize new technologies. Debit cards, for example, are common today. Just a decade or so ago, though, customers had to carry bulky checkbooks and two forms of ID in order to pay for many purchases. What might be the next innovation to revolutionize how Americans pay for products? It's impossible to say, and under the Dodd bill we may never know. Under a CFPA, a cell phone company that wants to offer an even more convenient payment mechanism would have to submit to a massive set of regulations.

Heritage fellow David John concludes:

A better approach to preventing another crisis is to modify U.S. bankruptcy law to accommodate the special problems of resolving huge financial firms and to allow the courts to appoint receivers with the specialized knowledge necessary to best deal with their failure. By creating an open process controlled by an impartial judiciary guided by established statutory rules, financial firms, investors, taxpayers, and others would have the advance knowledge that large financial firms that were once known as "too big to fail" can now be closed if necessary without risking disaster.