House Republicans Serve The Banks By Voting To Repeal Key Anti-Bailout Provision

When Republicans first took back the House of Representatives in 2010, the new chairman of the House Financial Services Committee, Rep. Spencer Bachus (R-AL), said that he feels Washington’s role is to “serve the banks.” And his committee certainly followed through on that directive yesterday, voting to repeal a key provision of the Dodd-Frank financial reform law that is aimed at preventing a repeat of the ad-hoc bank bailouts that occurred in 2008:

The House Financial Services Committee voted along party lines to repeal the section of the law that allows the Federal Deposit Insurance Corp to liquidate large, failing financial institutions seized by the government.

This authority was included in the law in an attempt to avoid the type of market chaos and government bailouts that followed the bankruptcy of Lehman Brothers in September 2008 by giving the government a mechanism for better controlling the breakup of a financial giant.

As I explained here, this provision corrected a key flaw in the nation’s regulatory structure by giving the government the power to seize and wind down a failing financial firm, recouping any losses to the taxpayer by selling off the failed firm’s assets. In 2008, due to not having this power, the government was left in the unenviable position of either bailing out banks or potentially allowing the financial system to implode.

House Republicans justified repealing the provision by claiming that it would reduce deficits by $22 billion over the next ten years. This was based on a rather bizarre score from the Congressional Budget Office, which said the provisions “costs” $22 billion because, in the event that the government needs to unwind a failing firm, it might not recoup all of the money spent unwinding it within a ten-year budget window; therefore, CBO said, the provision “costs” money (though no money is actually being spent). As financial analyst Brian Gardner said, “it’s tough to understand where the $22 billion comes from — it’s a wild assumption since there are currently no cash flows involved with this part of Dodd-Frank.”

Financial Services Committee Republicans also voted to gut the budget of the Consumer Financial Protection Bureau, and to eliminate a key foreclosure prevention program (that, admittedly, has been underwhelming). If their goal is to “serve the banks,” they could barely have done more to accomplish that yesterday, short of just giving them more free government money.