Removal of $50 Billion Bailout Fund Not Enough to Fix Dodd Bill

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Sen. Dodd (D-Conn.) has pledged Democrats will work with Republicans to “fix” S. 3217, the Restoring American Financial Stability Act of 2010.

Floor speeches last week and recent reports claim the $50 Billion Orderly Liquidation Fund will be removed and that Sen. Boxer’s amendment will prevent taxpayer funds from being used as bailouts.  

However, the removal of this fund and the Boxer Amendment are not enough to fix this bill. Those who voted against cloture on this bill would be foolish to support the same failed policies in a different package.

The following problems continue to plague this bill:

• Cauterizes “too big too fail:” Section 113 of the bill establishes a “Financial Stability Oversight Council,” charged with identifying firms that would “pose a threat to the financial security of the United States if they encounter “material financial distress.” By being placed under this identification, this bill sends the signal that some company’s are indeed too big too fail.
• Permanent bailout authority: Section 204 of the bill authorizes the Federal Deposit Insurance Corporation (FDIC) to “make available … funds for the orderly liquidation of covered financial institution.” As the Heritage Foundation notes, “Although no funds could be provided to compensate a firm’s shareholders, the firm’s other creditors would be eligible for a cash bailout. The situation is much like the scheme implemented for AIG in 2008, in which the largest beneficiaries were not stockholders but rather other creditors, such as Deutsche Bank and Goldman Sachs”
• Violates consumer privacy: The new Office of Financial Research is created in Title I, Section 151-156, is tasked with collecting and sharing data without restriction. This agency will collect data, create software to standardize financial industry data, and share with other agencies – regulations will be imposed as deemed fit under paragraph (2) of subsection (c).
• Regulating over-the-counter (OTC) derivative trades: Title VII requires OTC derivative transactions to pass through a government monitored central exchange. Requiring OTC derivatives to pass through a clearinghouse and maintain high cash levels will increase the costs associated with OTC derivatives, making it more expensive for a company to insulate itself from risk. Inhibiting OTC trades for end users would unnecessarily lock up capital that a company would have used to invest, grow, and retain and create jobs -- effectively removing liquid capital from corporate balance sheets. In order to satisfy new standards set by the Dodd bill, many companies would have to establish new credit lines or sell current assets.
• Creates Fannie Mae 2.0: Title 12 of this bill, misnamed “Improving Access to Financial Institutions” on page 1398, creates Fannie Mae 2.0. Fannie Mae collapsed because it became a slush fund for bad loans the government forced banks to make. This Title pays banks to advertise to, and seek out, low income people who would otherwise not qualify for loans. The bank, backed by the government, issues risky loans and either the loan is paid back on time, in which case the bank keeps all the profits, or the loan defaults and the government uses taxpayer money to cover the bank’s loss. Win-win for government backed banks, total failure for taxpayers.
• Promotes activist/union shareholder proxy terrorism: Section 972 of Subtitle G under Title IX authorizes the SEC to require firms to allow shareholders to nominate directors in proxy statement. This ensures political popularity and influential power trump knowledge and experience. The political agenda of the far left – the trial lawyers, environmental elites, and labor unions – will have a controlling stake in the corporate governance of financial institutions.
• Regulates non-banks under financial regulations: Section 102 of Title I provides that any “U.S. non-bank financial company,” that is “substantially engaged in activities in the United States that are financial in nature” be regulated under the same applications this legislation provides for traditional financial institutions. According to former Treasury official Gregory Zerzan, this includes things such as “holding assets of others in trust.” Department stores could be potentially regulated under this bill if they offer “layaway” – a system where they hold assets of consumers in trust until a certain period whereby an obligation is met and an exchange of goods/services occurs.
• Seizure of private property without judicial review: Section 203 of Title II gives the Secretary the authority to take over by seizure any financial or non-financial institution that “is in default” or is simply “in danger of default,” which includes institutions that “are, or are likely to be, less than its obligations to creditors and others.” This is regulating based on assumptions. This classifying determination is only subject to legal review on a “substantial evidence” basis, meaning that the seizure must be upheld if the government produces any evidence in favor of its action – making reversal of this decision nearly impossible.

Americans for Tax Reform continues to urge all Senators to oppose this bill for, but not limited to, the above reasons. Real reform must address and eliminate the egregious over-regulation this bill will bring on the U.S. economy and individual consumers.

For more information, please contact Federal Affairs Manager Brian Johnson at bjohnson@atr.org.

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