The House Republican budget that was released yesterday, in addition to blowing up the deficit and the national debt and shredding the social safety net, would repeal a key provision in the Dodd-Frank financial reform law. In response to the 2008 financial crisis and the ad-hoc bailouts to which the government was forced to resort, Dodd-Frank gives the government the ability to unwind failing financial firms. But the House Republican budget would take this important power away:
While the authors of the Dodd-‐Frank Act went to great lengths to denounce bailouts, this law only sustains them. The Federal Deposit Insurance Corporation (FDIC) now has the authority to draw on taxpayer dollars to bail out the creditors of large, “systemically significant” financial institutions. CBO’s expected cost for this new authority is $33 billion, although the office recognizes that “the cost of the program will depend on future economic and financial events that are inherently unpredictable.” In other words, another large-‐scale financial crisis in which creditors are guaranteed to get government bailouts would cost taxpayers much, much more…This budget would end the bailout regime enshrined into law by the Dodd-‐Frank Act.
House Budget Committee Chairman Paul Ryan (R-WI) has done this before, dressing up his opposition to the power known as “resolution authority” in the Dodd-Frank law as a principled stand against bailouts. But make no mistake: repealing the power would return the nation’s regulatory framework to where it was in 2008, leaving the government with little choice when large interconnected financial firms fail other than bailing them out or risking the implosion of the financial system.
Resolution authority is meant for firms that can’t go through traditional bankruptcy, due to their size and importance to the financial system. Under that authority, the Federal Deposit Insurance Corp. unwinds such a firm when it fails, and then recoups any losses to the taxpayer by selling off assets from the dissolved firm. Importantly, Dodd-Frank bars the use of taxpayer money to preserve a financial firm: the money can only be used to ease a firm through its dissolution, with all of the funds paid back. As Rep. Barney Frank (D-MA), whose name graces the law, said, resolution authority is a “death panel” for banks.
Former Treasury Secretary Henry Paulson, who oversaw the 2008 bank bailout, said he “would have loved to have” resolution authority to take apart failing firms. House Republicans, instead, would prefer to just holler about bailouts, while taking away the government’s ability to prevent them, thus dooming the country to a repeat of 2008, should the financial system ever face such a systemic shock again.