U.S. House of Representatives
Washington, D.C. 20515
December 7, 2009
Re: Support Rep. Miller-Moore Amendment
As members of Americans for Financial Reform, a coalition of more than 200 consumer, employee, investor, community and civil rights groups, we write today in support of the provision in Section 1609 of the Financial Stability and Improvement Act of 2009, Title I of H.R. 4173, sponsored by Representatives Brad Miller and Dennis Moore.
The Miller-Moore provision corrects the problems highlighted by the AIG bailout, where mega financial institutions like Société Générale, Goldman Sachs, and Bank of America got $62.1 billion in Fed payments and collateral from AIG for their bad derivatives bets, and American taxpayers got a $27.1 billion bill. The Miller-Moore amendment prevents taxpayer dollars from being used to bail out failing institutions until after secured creditors have taken a haircut of up to 20 percent. These reasonable haircuts may be imposed on a case-by-case basis at the FDIC’s discretion, and may only be used when an institution’s financial situation is so severe that all other shareholders and unsecured creditors have been wiped out.
The Miller-Moore provision encourages the right kind of lending: secured, long-term lending done when firms are solvent. It discourages the wrong kinds of lending practices, such as firms relying on short-term secured credit to prop up their failing balance sheets or creditors demanding more and more collateral as firms collapse, further exacerbating the firms’ liquidity crises.
There are some misconceptions about what the Miller-Moore provision would and would not do. It only covers non-banks; Federal Home Loan Bank advances to member institutions, of which the vast majority are insured banks and thrifts, are not covered by the amendment. It would not turn secured creditors into unsecured creditors, as some have claimed. The amendment would convert a fully secured loan into a loan which is a combination of 80 percent secured and 20 percent unsecured. This conversion would only occur after all unsecured creditors have been wiped out.
In a properly functioning market economy there will be winners and losers. When firms – through their own mismanagement and excessive risk taking – are no longer viable, they should fail. We strongly support the Miller-Moore provision because it properly places the interests of American taxpayers ahead of financial institutions that engage in risky transactions with failed firms.