Critics of the financial regulatory reform bill that looks set to pass the Senate have been knocking the legislation by saying that it would not have prevented the financial meltdown of 2008. “Democrats have crafted a bill that fails to address the origins of the crisis and will not prevent a replay of events in the future,” said Rep. Tom Price (R-GA).
However, not all Republicans are so disparaging of the legislation. In fact, former Treasury Secretary Hank Paulson said in an interview with the New York Times’ Andrew Ross Sorkin that he would have “loved to have” the resolution authority that the bill creates for dismantling failed financial firms. Paulson said that such power would have allowed him to take over Lehman Brothers and AIG, thus stemming the financial panic that occurred in 2008:
“We would have loved to have something like this for Lehman Brothers. There’s no doubt about it,” Mr. Paulson declared…[H]e suggested that had he had resolution authority, he would have been able to take over Lehman Brothers and the American International Group without the financial system crumbling…He said that he believed that if the government had had the authority to take over Lehman and A.I.G., it would have stopped the panic endangering other firms.
Paulson’s comments resemble those of Federal Reserve Chairman Ben Bernanke, who has said that “if a federal agency had had such tools on September 16, they could have been used to put AIG into conservatorship or receivership…That outcome would have been far preferable.” And Paulson’s evident support of the Senate bill is especially interesting considering that it includes almost none of the fixes that Paulson himself recommended for the financial system in early 2008.
Congressional Republicans have continually tried to portray resolution authority as a continuation of the ad hoc bailouts to which the government had to resort in 2008. But in fact, the bill creates a clear process for unwinding big financial institutions without calling on taxpayers to bear the burden. It lays out a process for identifying whether a failing financial institution is too systemically entangled for traditional bankruptcy and, if so, puts it into an FDIC-style receivership, after receiving approval from a panel of bankruptcy judges.
Of course, the ultimate success of the new resolution authority all depends on regulators actually pulling the trigger and using it when the time comes. But at least regulators will have the adequate tools going forward, instead of improvising unsavory fixes like they had to in 2008.
Paulson added that the most important part of the financial reform bill is actually the creation of a council tasked with identifying systemic risk in the financial system, which was lacking from the pre-2008 regulatory structure. However, he said that such a council would have needed to be in place when the subprime bubble first began inflating to be effective in preventing the economic crisis. “We’d have needed the systemic risk regulator up and running by 2005 or so, to recognize the dangers of ever more lax underwriting and intervene,” he said.