At the end of February, the Treasury Department released a report responding to a memoranda requested by President Trump in 2017 on Dodd-Frank’s Orderly Liquidation Authority (OLA).
In the 53 page report, Treasury proposed a series of recommendations that would work to reform the OLA. While the recommendations are a step in the right direction, they fail to recommend a complete repeal of the OLA, which Americans for Tax Reform has consistently called for in the past. This is the only real solution to protect taxpayers from footing the bill as a result of bailing out a financial services firm.
Established under Title II of Dodd-Frank, the OLA was created as a government-run alternative to bankruptcy. With the collapse of investment giant Lehman Brothers Holdings in 2008 during the subprime mortgage crisis and their following (and still ongoing) bankruptcy, many point to this as the need for the OLA. As a result, the OLA was offered as the solution to quickly dissolve failing financial institutions instead of going through the process of drawn out bankruptcy proceedings.
Under Title II, companies in default or close to default can be seized under approval by the Federal Reserve Board of Governors and Treasury Secretary, and liquidated under a process run by the Federal Deposit Insurance Corporation (FDIC). This massive expansion of powers given to the FDIC took them out of the realm of commercial banking, and granted them regulatory power over the affairs of other financial institutions. Once an orderly liquidation is approved, firms are placed under FDIC receivership, where the FDIC replaces the role of a judge in a traditional bankruptcy court.
Instead of allowing the firms to go into bankruptcy, the FDIC provides capital by dipping into funds from the Treasury to finance the liquidation, all at the expense of taxpayers. Rather than selling off the solvent parts of a firm, the FDIC can move the risk and bad assets onto taxpayers and essentially use the capital as a government backed guarantee. Thus, the government retains the risky or poor performing assets and portfolios.
This has made taxpayer bailouts a permanent fixture in the financial services industry, where creditors who invested in the financial wealth of a failed firm are paid first, leaving hardworking Americans on the hook for the firm if no other institutions offer to buy the company.
Additionally, under Dodd-Frank, Congress ceded most of their power to unelected bureaucrats, in which the Federal Reserve, Treasury Secretary, and FDIC can act with autonomy and impunity, leaving our lawmakers with limited oversight in any part of the process.
After getting access to the Treasury’s report, House Financial Services Chairman Jeb Hensarling was quick to point out its inconsistencies and failures:
“Dodd-Frank’s Orderly Liquidation Authority expressly enables taxpayer funded bailouts; it does not prevent them. It is therefore difficult to square today’s report with the President’s clear guidance on this issue.”
Where the Treasury report fails, the Financial CHOICE Act succeeds. Passed in the House in June of last year, the bill repeals Title II of Dodd-Frank, fully eliminating the Orderly Liquidation Authority. The Senate should consider similar legislation that protects taxpayers in the future.