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AFR to Senators: Bring an End to Taxpayer-Funded Solutions to Bank Failures

Submitted by on June 22, 2010 – 2:35 pm
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June 22, 2010

Senator Scott Brown
Senator Susan Collins
Senator Chuck Grassley
Senator Olympia Snowe

To Senators Brown, Collins, Grassley, and Snowe:

The Americans for Financial Reform (AFR) coalition is grateful for your support for the landmark Wall Street reform legislation passed by the Senate last month.  The coalition and you have a shared determination to move the nation beyond the bailout era.  We also share the stated goal of enjoining recourse to taxpayers to finance the failure of financial institutions.  We hope that we can come to agreement about how best to prevent taxpayer-financed bailouts in the future.

The legislation now before the conference committee is not a bailout bill. It is a plan for conducting funerals. As you know, a bailout involves using money to revive a failing business so that it can continue operations.  By contrast, in this legislation, the FDIC is given the mandate to dismantle, shut down and liquidate failing firms. In no way does the bill’s Orderly Liquidation Fund (OLF) bailout and resuscitate failed firms.  Instead, such a fund provides the FDIC with the necessary financial tools to dismantle and terminate firms; it is a funeral fund. Access to resources at the time of receivership is necessary so that the firm can be liquidated carefully, minimizing the systemic contagion effects that a sudden, disorderly halt to business would have.

In response to anti-bailout rhetoric, under the Senate version of bill, the taxpayers now front the funeral expenses.  In contrast, under the House version, Wall Street does.

Under the Senate bill, the amount FDIC can borrow from the U.S. Treasury is capped by a “Maximum Obligation Limit” calculation. The taxpayers may be on the hook for up to five years or beyond. Given that one of the greatest objections to the Bush Bailout of 2008 was the burden on taxpayers, how did this happen?

In December the House financial reform bill passed with its $150 billion dissolution fund intact, and that fund has been included with the House’s Title II offer.  The Systemic Dissolution Fund is created via assessments on systemically risky financial institutions with more the $50 billion in assets over the course of ten years.  At the instant that the fund reaches $150 billion, assessments immediately stop. In the event that the SDF is required by the financial industry, like the OLF, it serves in no way to bailout and resuscitate failed firms.

Now that an upfront industry assessment has been removed from the original Senate bill, taxpayers are equally, if not more vulnerable than they were in 2008.   In fact, and ironically, a financial reform bill without industry pre-funding is a taxpayer-financed solution: in the case of a financial crisis, if no industry assessments are available to the FDIC, the lone source of funeral financing is a line of credit from the Treasury.  As we all know, the U.S. Treasury is funded by taxpayers, not by the financial industry.  Real taxpayer protection is created by an industry-financed OLF or SDF; excluding this from the financial reform bill maintains the status quo, and sustains the possibility of future taxpayer-fronted solutions.

Furthermore, the removal of the industry-financed OLF fund from the Senate bill creates a PAYGO compliance issue.  The Congressional Budget Office’s April 2010 score of the original Senate bill, which included the $50 billion OLF fund, was revenue positive, and yields a $21 billion surplus over ten years.  The June 2010 CBO report on the Senate bill, in which the OLF Fund had been removed, is revenue negative, and creates a $19.7 deficit over ten years.

The House attempted to address PAYGO via two “pay-fors”—Provisions 5 (raising an estimated $12 billion over 10 years) and 6 (raising an estimated $8 billion over 10 years) in the Title III House offer.  But the Senate conferees have rejected Provision 6 (making permanent the Transaction Account Guarantee program), so the bill as it now stands is in violation of PAYGO.

We would welcome the opportunity to discuss the foregoing issues with you at your convenience, issues which must necessarily be resolved if we are to enact financial reform legislation that indeed puts the taxpayer-funded solutions to bank failures behind us.

Sincerely,

Americans for Financial Reform

Click here to download a copy of the letter (.doc).

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