A how-to guide for never-ending bailouts

Rep. Peter Roskam Member of Congress (R-IL)
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For the last few weeks a House-Senate conference committee has been at work trying to craft a final version of a financial regulation package.  One amendment offered within that committee encapsulated the entire debate on regulatory reform, pitting institutionalized bailouts against depoliticized taxpayer protections.

Democrats explicitly wrote in a carve-out for Fannie Mae and Freddie Mac from the main feature of the underlying bill, a regulator-directed authority to wind down failed firms.  Rep. Jeb Hensarling (R-Tex.) offered an amendment to repeal that carve-out.  This showed the Democrat bill for what it is:  a bailout package.  And the debate surrounding the amendment proved that Democrats will make political favors a centerpiece of their “reform.”

The Democrat package provides regulators a “resolution” authority to purportedly facilitate orderly wind-downs of “too big to fail” institutions.  The FDIC could recover the cost of a wind-down by assessing fees on financial firms with more than $50 billion in assets.  This is how Democrats will institutionalize bailouts.  Their legislation will make healthy and successful businesses pay for the failings of others.

The underlying bill exempted Fannie Mae and Freddie Mac from being subject to the wind down process.  Knowing that you can’t call something “regulatory reform” without dealing with the two failed mortgage finance behemoths, Rep. Hensarling had an amendment included that would have repealed this favored status for Fannie Mae and Freddie Mac.  They would be subjected to the same resolution authority that Democrats tout for the rest of the financial sector.  Without the Hensarling amendment, the taxpayer will be forced to continue shoveling billions to these failed enterprises.

Then the special interests went to work.  A week after the Hensarling amendment was accepted by a non-controversial voice vote, Sen. Chris Dodd came to their rescue – in a terrible way.  He stripped out the amendment without an up-or-down vote on the provision.  This made utterly clear the inherent flaw in the underlying legislation: the “resolution” authority is actually bailout authority.  The fears of financial institutions that would face assessment were well founded – they will have to pay for the failings of others.

The financial institutions that Dodd covered for may have won the battle, but they’re losing the war.  The underlying bill will still force these institutions to cover the failures and losses of others in the future.

Beyond the threat of future bailouts, this also demonstrated another major flaw in the Democrat package: it makes who you know in Washington more important than your business.  Here, in drafting the legislation, Sen. Dodd was able to ensure unequal application of the rules to the benefit of a favored few.  Down the road, the FDIC under the resolution authority will have broad discretion in determining who gets paid and how much.  The politically favored will get the ear of the regulators.  The politically favored will get special treatment at the expense of others.

This stands in stark contrast to the GOP regulatory reform plan for “too big to fail” institutions: bankruptcy.  Where the Democrats want to erect a bureaucracy to institutionalize bailouts, Republicans offer an alternative way forward: let’s create a new chapter of the bankruptcy code to bring the technical expertise needed to the depoliticized bankruptcy proceedings of a court.  Republicans want to guard the taxpayer and reform a Depression-era regulatory regime to match our 21st century economy.

One amendment served as a microcosm of our entire national conversation about financial regulatory reform.  It showed us how the “resolution” authority is actually a bailout authority and will require healthy and successful institutions to pay for the failings of others.  It also foreshadowed the political meddling that will taint the government’s involvement in future bailouts.  House Republicans have listened to the people and reflect a better way forward: end the bailouts and taxpayer exposure, let failed firms fail, and get politics out of decisions best left for the marketplace.

Peter Roskam is the U.S. Representative for the Sixth District of Illinois.