Wednesday, May 05, 2010

Email to Senators--Financial Reform--May 5, 2010

This afternoon I sent this to aides of Senators Kaufman and Carper, aides I met last week:

This afternoon’s Wall Street Journal notes that a deal has been made “Under the Dodd-Shelby deal, Democrats agreed to drop a provision for a $50 billion fund to help pay for liquidation costs, collected from the financial industry. Instead, any costs incurred when the government winds down a firm would be recouped from the industry after the fact.
The agreement would require Congress to approve the use of debt guarantees by the Federal Deposit Insurance Corp. and Treasury. It would also tighten restrictions on the Fed's emergency lending powers.

I strenuously object to this arrangement. It calls for the survivors to provide the costs of winding down ‘bad firms.’ This irresponsibly fails to break the moral hazard problems which led to the Great Recession. Financial firms MUST be required to pay into the pool WHILE THEY ARE OPERATING, rather than only after they (or their colleagues fail). The proposed approach is analogous to having the living pay the death benefits to the family of John Smith when John Smith dies, rather than having John Smith pay the premiums during his life.
I recognize that this deal was apparently required by Republican Senators such as Senator Shelby. This does not mean that it is appropriate. From what I’ve heard from Senator Shelby, likely it means that it is bad for the country.
Republicans spend a lot of time decrying having responsible people pay benefits to irresponsible people. The Dodd-Shelby deal is exactly that—assessing no costs to a bankrupt financial firm, and placing the costs on the responsible financial firms.
The original concept of having financial firms pay into a ‘funeral fund’, with the payment consistent with the level of risk they are utilizing is economically, academically, and ideologically sound. Please ask Senator to work to restore the ‘funeral fund,’ and to terminate plans to ‘close the barn doors after the horses have fled,’ as built into the Dodd-Shelby compromise.

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