Last week, the House and Senate conference committee completed its work on the Dodd-Frank Wall Street Reform and Consumer Protection Act. This tough legislation puts consumers first, holds Wall Street and Big Banks accountable, ends the era of taxpayer-funded bailouts and “too-big-to-fail” institutions and is fully paid for by Wall Street.
Instead of backing this critical reform bill to protect Main Street, Congressional Republicans are following the advice of Republican pollster and strategist Frank Luntz. In his memo to Republicans working against Wall Street Reform, Luntz directed them to claim the legislation creates a “permanent bailout fund of private companies…Frankly, the single best way to kill any legislation is to link it to the Big Bank Bailout.”
Rep. Tom Price (R-GA), Chairman of the House Republican Study Committee, repeated this line last Friday:
If this bill becomes law, bailouts and 'too big to fail' will become institutionalized and continue to block healthy competition and growth in the private sector.
But the experts say just the opposite:
Sheila Bair, Chair of FDIC:
…Ms. Bair said that new powers allowing regulators to seize and liquidate failing institutions would act like a threat hovering over the financial industry, deterring firms from growing too large or reckless.”
“The fact that it’s there, I think, is going to be important. And if we have to use it, we will,” [Bair said.]
Elizabeth Warren, Chair of the non-partisan Congressional Oversight Panel:
Members of the House-Senate conference committee and their staffs worked through the night to produce the strongest set of Wall Street reforms in three generations. They created a strong, independent consumer agency that will have the tools to rein in industry tricks and traps and to cut out the fine print. For the first time, there will be a financial regulator in Washington watching out for families instead of banks.
MYTH: ‘The bill will put in place permanent bailouts–encouraging risky behavior by financial institutions that expect the taxpayers to come to their rescue.’
FACT: Completely untrue. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Bush-era days of taxpayer-funded bailouts are over.
The bill establishes a process to dissolve failing large financial institutions in a way that does not wreak havoc on the whole economy; there are no bailouts. These financial institutions will be allowed to fail in an orderly way to protect the economy. Under this authority, federal regulators will shut down any failing institutions that pose a risk to the financial system and our economy. Executives and management will be fired, shareholders will be the first to see the value of their stock wiped out, the company's assets will be sold, and taxpayers and the financial system will not suffer from collateral damage. For markets to function, those who invest and lend in those markets must know that their money is actually at risk if it is not managed prudently. Financial institutions and investors must be responsible for the risks they take.
Any costs incurred in unwinding these financial institutions will be borne by Wall Street firms and the big banks–not taxpayers. The dissolution of a failing firm will be paid for first by shareholders and creditors, followed by the sale of any remaining assets of the failed company. Any shortfall that results is paid for by the financial industry. The bill requires big banks and other financial institutions (with $50 billion in assets) to foot the bill for the failure of any large, interconnected financial institution posing a risk to the entire financial system, as AIG did in the run-up to the 2008 financial crisis. Financial institutions will pay assessments based on a company's potential risk to the whole financial system if they were to fail. Before regulators can dissolve a failing company, a repayment plan to charge Wall Street firms and big banks must be in place to recoup any cost associated with the shutdown.
This bill institutes preventive medicine by making the financial marketplace more accountable and transparent, long before we get to the point of a rescue. It strengthens supervision of large and risky financial institutions with stronger capital standards and rules against excessive and overly risky leverage.