04.30.2010 0

The Neverending Bailout

  • On: 05/03/2010 07:25:43
  • In: Economy
  • By Bill Wilson

    Last week, when Senate Republicans lifted their filibuster of the Dodd financial takeover bill, it was under the premise that Senator Chris Dodd had agreed to remove provisions for an unlimited bailout fund.

    Dodd, as it turns out, left the controversial provisions in his bill anyway when he and Senator Blanche Lincoln submitted their substitute amendment combining the banking and agriculture committee versions. On April 29th, as Republicans lifted their objections, Dodd maintained to his colleagues that the bill never did contain any bailouts.

    But, just in case there was any doubt, he said he would accept an amendment from Senator Barbara Boxer affirming his position. Dodd said that he shared his colleagues’ “determination that we never again have institutions that become too big to fail, with that implicit guarantee that the government will bail them out. I’m satisfied that our bill does that already… I know my colleague from California, Barbara Boxer, has some ideas on this as well, she has raised… that I think can help get us there.”

    So, on April 30th, Boxer submitted her amendment, all the while maintaining that there were no bailouts. On April 30th, in presenting her amendment, she said, “When I heard my colleagues on the other side say Senator Dodd’s bill would ensure taxpayer bailouts, I knew it was false, and I went to Senator Dodd and colleagues on the committee and said I did not understand why these comments were coming from the other side, as if saying this glass of water on my desk is a cup of coffee. No. This glass of water is a glass of water. It is not coffee. And if you say seven, eight, and nine times that it is coffee, somebody might believe it.”

    Rest assured, however, the bill does contain an unlimited bailout authority. It is coffee. After all, why submit an amendment to “remove” bailouts if there were none to begin with?

    But, to leave no doubt, let’s look at the specific provisions of the legislation that the Boxer amendment does not even touch. As ALG News has previously reported, the bill would give the government the unlimited power to seize any company deemed “too risky,” placing it into receivership overseen by the Federal Deposit Insurance Corporation and the Treasury Secretary.

    This authority would be funded by a revolving $50 billion “orderly liquidation fund” financed by assessments on about 60 bank holding and insurance companies with $50 billion or greater in assets that would now have the implicit backing of taxpayers.

    Those assessments, as reported by the Congressional Budget Office, would in turn be funded by the American people through higher costs on financial transactions and other fees.

    No Congressional approval would be required for companies to be seized, the assessments to be levied, or moneys from the fund to be spent. There would be no limit on how much money could flow through that fund, nor any limit on how many assessments could be levied. Nor would individual investors or anybody else have any right to challenge a government takeover in court, because the bill shields such cases from judicial review.

    The bill goes further. Boxer says that her amendment would require that any company put into receivership must be liquidated. But, as detailed in an updated ALG backgrounder on the issue, the “orderly liquidation fund” is so broadly established that it even allows the FDIC to operate any company while in receivership, including all staffing decisions and the composition of the board of directors.

    It doesn’t stop there. The FDIC could reorganize the company as a “bridge financial company,” whose board of directors is appointed by the FDIC, and the ownership of the company transferred to the new company by the FDIC. The new company, at the discretion of the FDIC, can then issue capital stock and securities.

    That is a lot more like a Chapter 11 reorganization of company than a Chapter 7 liquidation, except that it can be completely financed by the unlimited fund. That’s because it’s a bailout.

    In fact, the FDIC can fully recapitalize the new company with assessments from the fund. And, then the so-called “bridge” company can be terminated through one of the following methods:

    1) the merger or consolidation of the “bridge financial company” with another company,
    2) through the sale of a majority of the capital stock of the “bridge financial company” to another company at the discretion of the FDIC,
    3) the sale of 80 percent of the capital stock to a person other than the FDIC or another bridge financial company, or
    4) the expiration of a 2-5 year period under which a “bridge financial company” can operate.

    Therefore, when the FDIC seizes a company, it could use the fund to fully compensate all outstanding liabilities to the company’s creditors, turn the company into a “bridge financial company,” fully recapitalize it, and then sell the capital stock to those very same creditors that were bailed with the fund in the first place.

    That’s a bailout, it would never end, and neither the Dodd-Lincoln substitute amendment nor the Boxer amendment would do a thing about it.

    Bill Wilson is the President of Americans for Limited Government.

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