In a sign that a bipartisan deal is much farther away from being reached than had been thought, Senate Republicans said Monday they will likely offer an alternative comprehensive bill on financial regulatory reform if they defeat Democrats’ attempts Monday to move forward on debate with the bill as it is currently written.
“We have been drafting an alternative approach since the very beginning,” said a senior aide to Sen. Richard Shelby, Alabama Republican and ranking member on the Senate Banking Committee.
The news indicates that Republicans and Democrats are much farther away from reaching a bipartisan agreement than has been indicated by lawmakers from both sides.
Shelby aides on Monday went public with their complaint that Democrats are not meeting with them, and laid out in great detail why they believe the current bill does not end the problem of “too big to fail.”
A group of 10 staffers met with about 25 Capitol Hill reporters Monday just before noon in the Banking Committee hearing room, speaking on condition that they be identified only as Shelby aides. The GOP aides said that the last time staff aides to Committee Chair Chris Dodd, Connecticut Democrat, met with them to go over details of the bill was Thursday, April 15.
Since then, one aide said, “we’re insisting on meeting … [but] all we get is crickets.” A Dodd spokeswoman did not respond when asked by e-mail if this was true.
Shelby’s staff still has significant disagreement with Dodd’s over how to ensure that big banks and other financial institutions are shut down by the government – if they are so big that their failure might impact the broader economy – in a way that does not give the wrong incentives to Wall Street.
Shelby staff said that right now the bill would compensate creditors of a failed firm more generously than in a regular bankruptcy, which would incentivize investors to pour money into the biggest firms taking the largest risks, instead of playing it safer, they said.
They also have big differences on what powers should be given a consumer protection agency.
Shelby aides characterized Dodd’s bill as essentially a handout to Wall Street, rejecting President Obama’s message that the GOP is on the side of big banks and investment firms.
One aide said the current legislation would create “a de facto government-backed insurance plan for the most sophisticated and wealthiest investors.” He pointed to language in section 204 (page 135) and section 210 D4 (page 245) of the Dodd bill.
Section 204 says there is “a strong presumption that creditors and shareholders will bear the losses of the financial company.”
The Shelby aide says that a presumption is not strong enough and that this should be mandatory.
In addition, section 210 D4 authorizes the Federal Deposit Insurance Corporation to make “additional payments” to claimants if it is determined that “such payments or credits are necessary or appropriate to minimize losses to the [FDIC] as receiver from the orderly liquidation of the covered financial company.”
This would give the government he ability to pay creditors more than they would receive in a regular bankruptcy process, the Shelby aides said.
“The president said this is a bankruptcy like process. That is not the case at all,” one Shelby aide said. “They’re trying to figure out a way to channel funds from secured creditors to preferential or politically connected or special creditors that they want to do the bailout for.”
“Take the [American International Group] example. Go back and review the list of who the creditors were of AIG, and where those creditors got 100 percent payout. They were all major Wall Street firms and a lot of them were actually foreign firms,” the aide said.
Shelby’s staff also argued that taxpayers would be on the hook for these bailouts because the fees that large firms would have to pay to fund the resolution fund used by the government to wind down firms and pay creditors are tax deductible, reducing government revenues. And, they said, the size of large firms is of such a scale that no matter how much money the FDIC had on hand to wind down failing institutions, they would need more and would have to go to the Treasury Department for money that came directly from taxpayer funds.
The Shelby aides said that while their boss and Dodd agree on ending “too big to fail,” they still have major differences in how to accomplish that.
“I’m not sure I would characterize it as really far apart. We just need some significant changes,” another Shelby aide said. “What really matters is how it’s written … That’s where we need to be in the room, at the staff level, nailing down the language, and that is not happening.”