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There’s old in the new anti-bailout plan

Marketplace Staff Oct 29, 2009
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There’s old in the new anti-bailout plan

Marketplace Staff Oct 29, 2009
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TEXT OF COMMENTARY

Kai Ryssdal: What John Dimsdale was just telling us about the government’s new plan to take over institutions that’re too big to fail is known as resolution authority. Being able to resolve a crisis before it gets out of hand and puts taxpayers on the hook. Commentator David Skeel say government’s new plan sounds a lot like the old one.


DAVID SKEEL: No more bailouts! That’s the new mantra in speeches by the Federal Reserve, the FDIC and the Treasury. Next time a financial behemoth stumbles, they say, taxpayers won’t be footing the bill.

But will this new proposal to give government more power to take over and dismantle firms really end bailouts as we know them? Not likely. Sure, it has a few new bells and whistles, such as a requirement that large financial institutions prepare a so-called “living will.” That would be each firm’s emergency plan in case of emergency. And big financial institutions would need to pay fees to protect against the costs of a future failure, just like commercial banks already do with deposit insurance.

The fees are the clever new innovation. Bank regulators now promise that the financial institutions themselves, not taxpayers, will bear the costs of cleaning up any future Lehman or AIG.

This makes a nice soundbite: no more taxpayer-funded bailouts! But it doesn’t take into account the possibility that regulators will pour taxpayer money into an ailing behemoth in some other way. Or the likelihood that Big Finance will simply pass on the costs of the new fees to consumers.

But the biggest problem is that rescues will continue to be the strategy of choice when a financial behemoth fails. We’ve learned all too well that institutions that expect a helping hand if they stumble may take egregious risks. And the winners in the rescues always seem to be other big Wall Street firms, whose loans and contracts with the failing firm are protected.

Rather than expanding the bailout policies of the past year, Congress should think about ways to encourage these institutions to file for bankruptcy, like other companies do.

If a bank regulator comes to your door chanting “No More Bailouts,” don’t believe him. They may look a little different, but bailouts are what he’s selling.

RYSSDAL: David Skeel is a professor of Corporate Law at the University of Pennsylvania.

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