Bachus Falsely Claims That Financial Reform ‘Would Make AIG-Style Bailouts Permanent’

As Congress returns from its April recess, one of the big items on its agenda is financial regulatory reform. The White House has said that it would like to see a bill signed into law by the end of May, so Senate Banking Committee Chairman Chris Dodd (D-CT) is working to bring his legislation to the Senate floor by the end of the month.

Republicans, following a strategy outlined by pollster Frank Luntz, have taken to consistently characterizing the Democrats’ reform effort as linked to “the Big Bank Bailout,” even though the two aren’t remotely connected. In a letter to the Washington Post today, Rep. Spencer Bachus (R-AL), the ranking member of the House Financial Services Committee, embraced this tactic, saying that Democratic legislation would lead to more bailouts like that of American International Group (AIG):

Instead of real reform, the Democrats’ proposals would write into law the ad hoc government response to the economic crisis that put taxpayers on the hook for bailouts, rewarded Wall Street’s failures and froze capital needed to create jobs. Remember the bailout of American International Group? This bill would make AIG-style bailouts permanent. The government would decide which politically connected creditors of failed non-banks to bail out, and details would be hidden from the public.

Bachus is no stranger to this sort of rhetoric. Back in October, he said that Rep. Barney Frank’s (D-MA) financial reform bill was simply “permanent bailout authority.”

But let’s unpack this a little bit. For starters, neither the financial reform bill passed by the House of Representatives last year nor the one moving through the Senate makes bailouts “permanent.” In fact, both include a resolution authority, aimed at unwinding systemically risky financial firms, and funded by assessments on the biggest firms themselves. It lays out a process for identifying whether a firm is too systemically entangled for traditional bankruptcy and, if so, putting it into an FDIC-style receivership. It is the opposite of the ad hoc approach to which the government was limited in 2008.

And when you look at the regulatory reform legislation that Bachus himself proposed last year, his critiques hold even less water. For instance, his plan for unwinding failing financial firms is to simply let them file for bankruptcy, even if they pose systemic risk. But as David Min pointed out, the “let them fail” crowd, as he calls it, “by refusing to acknowledge or remedy the problems that result in bailouts, would guarantee that future bailouts are the rule, rather than the exception.”

And Republicans have no interest, it seems, in remedying the problems that result in bailouts, particularly for unregulated non-banks like AIG. Dodd’s bill extends the full regulatory regimen to systemically risky non-banks, treating them for regulatory purposes as if they were a large bank. Bachus’ proposed legislation does no such thing.

And Bachus’ Senate counterpart, Sen. Richard Shelby (R-AL), the ranking member of the Banking Committee, crafted an amendment to Dodd’s bill explicitly preventing non-banks from being regulated. Under Shelby’s plan, even if the regulators felt that a big non-bank was threatening the financial system, they could do nothing.

There are legitimate questions about how effective the resolution authority in Dodd’s bill will be, but Bachus’ letter signals that he’s only interested in scoring political points, not in engaging with the bill on a substantive basis.