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Sheila Bair: Dodd-Frank really did end taxpayer bailouts
Sheila Bair: Dodd-Frank really did end taxpayer bailouts
By Mike Konczal
Sheila Bair, the hard-charging former director of the Federal Deposit Insurance Corporation, stands at the center of three of the biggest debates in Dodd-Frank implementation.
<...>
Mike Konczal: To start, how do you think Dodd-Frank is unfolding? Specifically, the rules for Title II and “resolution authority.”
Sheila Bair: We finalized most of the rules we could write on our own before I left, though they are working on further clarifications. I think the FDIC has come up with a viable strategy for resolving a large complex financial institution. This is their strategy of using a single-point-of-entry. The FDIC will take control of a holding company and put creditors and shareholders into a receivership where they, not taxpayers, will absorb any losses. This will allow the subsidiaries to remain operational, avoiding systemic disruptions, as the overall entity is unwound over time.
I think this is viable, and they’ve done a lot of great work, particularly coordinating with the Bank of England on the relative resolution regimes. I think bondholders are starting to wake up to the idea that their money is at risk and that they could take losses, which will result in greater market discipline. If you convince the market TBTF is over, debt spreads will go up for large institutions. And you are seeing that happen a bit already. There’s a lot of work left to be done, but so far I’d give implementation a pretty good grade.
It strikes me that coverage of resolution authority is often very political, with many people making up their minds on whether it will work from before the bill even passed. As such, it’s really difficult to understand if a stronger, versus a weaker, set of rules are being written.
We worked hard to make sure taxpayer bailouts are completely prohibited. I think the language is very tight on that. One of the things that frustrates me with critics of Title II is that they perpetuate the myth of Too Big To Fail by insisting that the government is still going to do bailouts, notwithstanding clear language in Dodd-Frank to the contrary. And that just continues the moral hazard by reinforcing market perceptions that the big institutions won’t be allowed to fail.
There are some critics who think just the very act of FDIC being involved, especially with the ability to provide emergency financing, is a de facto bailout and puts taxpayers at risk.
A couple of things. First, the FDIC process is essentially a bankruptcy process. We follow claims priority religiously — you would never see the FDIC haircutting secured creditors and bailing out unsecured creditors as they did with the GM bankruptcy. In fact, Dodd-Frank is more harsh than bankruptcy in that key board members and top managers have to be fired with mandatory clawbacks of their pay.
- more -
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/18/sheila-bair-dodd-frank-really-did-end-taxpayer-bailouts/
By Mike Konczal
Sheila Bair, the hard-charging former director of the Federal Deposit Insurance Corporation, stands at the center of three of the biggest debates in Dodd-Frank implementation.
<...>
Mike Konczal: To start, how do you think Dodd-Frank is unfolding? Specifically, the rules for Title II and “resolution authority.”
Sheila Bair: We finalized most of the rules we could write on our own before I left, though they are working on further clarifications. I think the FDIC has come up with a viable strategy for resolving a large complex financial institution. This is their strategy of using a single-point-of-entry. The FDIC will take control of a holding company and put creditors and shareholders into a receivership where they, not taxpayers, will absorb any losses. This will allow the subsidiaries to remain operational, avoiding systemic disruptions, as the overall entity is unwound over time.
I think this is viable, and they’ve done a lot of great work, particularly coordinating with the Bank of England on the relative resolution regimes. I think bondholders are starting to wake up to the idea that their money is at risk and that they could take losses, which will result in greater market discipline. If you convince the market TBTF is over, debt spreads will go up for large institutions. And you are seeing that happen a bit already. There’s a lot of work left to be done, but so far I’d give implementation a pretty good grade.
It strikes me that coverage of resolution authority is often very political, with many people making up their minds on whether it will work from before the bill even passed. As such, it’s really difficult to understand if a stronger, versus a weaker, set of rules are being written.
We worked hard to make sure taxpayer bailouts are completely prohibited. I think the language is very tight on that. One of the things that frustrates me with critics of Title II is that they perpetuate the myth of Too Big To Fail by insisting that the government is still going to do bailouts, notwithstanding clear language in Dodd-Frank to the contrary. And that just continues the moral hazard by reinforcing market perceptions that the big institutions won’t be allowed to fail.
There are some critics who think just the very act of FDIC being involved, especially with the ability to provide emergency financing, is a de facto bailout and puts taxpayers at risk.
A couple of things. First, the FDIC process is essentially a bankruptcy process. We follow claims priority religiously — you would never see the FDIC haircutting secured creditors and bailing out unsecured creditors as they did with the GM bankruptcy. In fact, Dodd-Frank is more harsh than bankruptcy in that key board members and top managers have to be fired with mandatory clawbacks of their pay.
- more -
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/18/sheila-bair-dodd-frank-really-did-end-taxpayer-bailouts/
These are the new powers given the FDIC under Dodd-Frank.
Public Citizen, a public interest nonprofit organization representing more than 250,000 members and supporters nationwide, hereby petitions the Board of Governors of the Federal Reserve System (the “Board”) and the Financial Stability Oversight Council (the “Council”) to recognize that the Bank of America Corporation (“Bank of America” or “the bank”) poses a “grave threat” to the stability of the United States financial system and to mitigate that threat, as provided by section 121 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or the “Act”). 1 Pursuant to the authority in the Act, the Board and the Council should reform Bank of America into one or more institutions that are smaller, less interconnected, less complex, more manageable and, as a result, less systemically dangerous.
Under section 121 of the Dodd-Frank Act, if the Board determines that a financial institution poses a “grave threat” to U.S. financial stability, then the Board, with approval from the Council, “shall” mitigate that threat.2 The Act offers regulators the flexibility to take a range of actions, including limiting the institution’s mergers and acquisitions, restricting or imposing conditions on its products or activities, or ordering it to divest assets or off-balance sheet items.
- more -
http://www.citizen.org/documents/Public-Citizen-Bank-of-America-Petition.pdf
Under section 121 of the Dodd-Frank Act, if the Board determines that a financial institution poses a “grave threat” to U.S. financial stability, then the Board, with approval from the Council, “shall” mitigate that threat.2 The Act offers regulators the flexibility to take a range of actions, including limiting the institution’s mergers and acquisitions, restricting or imposing conditions on its products or activities, or ordering it to divest assets or off-balance sheet items.
- more -
http://www.citizen.org/documents/Public-Citizen-Bank-of-America-Petition.pdf
Blair also addresses derivatives regulation, which some members of Congress are trying to gut.
Elizabeth Warren Slams ‘Dangerous’ Legislation That Would Weaken Wall Street Reform
By Travis Waldron
A week after a bipartisan group of lawmakers on the House Financial Services Committee overwhelmingly approved a rollback of certain financial reforms contained in the Dodd-Frank Wall Street Reform Act, one of the Senate’s biggest consumer advocates is pushing back.
Massachusetts Sen. Elizabeth Warren (D) came out swinging against the repeal of new rules meant to regulate derivatives, the complex financial instruments that were at “the center of the storm” that caused the financial crisis. The rules shouldn’t be weakened or repealed just because big banks want to see them eliminated, Warren argued Thursday, The Hill reports:
One rule the package of legislation advanced by the House committee would eliminate is a “push out” provision that would limit derivatives trading at banks that receive federal backing. Similar to the Volcker Rule, another provision Wall Street largely opposes, it is aimed at making taxpayer-backed banks safer to avoid crises similar to the one that thrust the United States into a recession and led to a bailout of major banks in 2008.
Warren isn’t alone in her opposition to the rollback. The Obama administration has long opposed the repeal of the derivatives rules, and former Federal Deposit Insurance Commission chair Sheila Bair has said the swaps and derivatives rules need to be strengthened rather than weakened. Whether the rules will face a repeal vote in the Senate isn’t clear: the House passed similar legislation in 2012, only to see it die in the Senate without a vote.
http://thinkprogress.org/economy/2013/05/17/2029651/elizabeth-warren-slams-dangerous-legislation-that-would-weaken-wall-street-reform/
By Travis Waldron
A week after a bipartisan group of lawmakers on the House Financial Services Committee overwhelmingly approved a rollback of certain financial reforms contained in the Dodd-Frank Wall Street Reform Act, one of the Senate’s biggest consumer advocates is pushing back.
Massachusetts Sen. Elizabeth Warren (D) came out swinging against the repeal of new rules meant to regulate derivatives, the complex financial instruments that were at “the center of the storm” that caused the financial crisis. The rules shouldn’t be weakened or repealed just because big banks want to see them eliminated, Warren argued Thursday, The Hill reports:
“The big banks won some battles and lost some battles during the financial regulatory debate in 2009 and 2010, but their tune never changed and their lobbying never let up,” she said. “It is dangerous for Congress to amend the derivatives provisions of the Dodd-Frank Act without at the same time taking accompanying steps to strengthen reform and maintain the law’s equilibrium.”
One rule the package of legislation advanced by the House committee would eliminate is a “push out” provision that would limit derivatives trading at banks that receive federal backing. Similar to the Volcker Rule, another provision Wall Street largely opposes, it is aimed at making taxpayer-backed banks safer to avoid crises similar to the one that thrust the United States into a recession and led to a bailout of major banks in 2008.
Warren isn’t alone in her opposition to the rollback. The Obama administration has long opposed the repeal of the derivatives rules, and former Federal Deposit Insurance Commission chair Sheila Bair has said the swaps and derivatives rules need to be strengthened rather than weakened. Whether the rules will face a repeal vote in the Senate isn’t clear: the House passed similar legislation in 2012, only to see it die in the Senate without a vote.
http://thinkprogress.org/economy/2013/05/17/2029651/elizabeth-warren-slams-dangerous-legislation-that-would-weaken-wall-street-reform/
The House bill has a Senate counterpart.
Senators want exemption to Dodd-Frank swap rules
By Douwe Miedema and Sarah N. Lynch
WASHINGTON (Reuters) - A bipartisan group of 12 senators is seeking to exempt non-financial companies from new rules to make banking safer, breathing new life into efforts to reduce the scope of the Dodd-Frank overhaul of Wall Street.
The plans are squarely at odds with a warning from Treasury Secretary Jack Lew, who urged the Republican-controlled House of Representatives this week not to make any changes to the broad law drawn up after the 2007-09 credit meltdown.
"These reforms should not be weakened or repealed," Lew said in a letter to Representative Jeb Hensarling, chairman of the House Committee on Financial Services, referring to a raft of bills the panel has since adopted.
Now two senators have introduced a proposal to exempt companies using derivatives to protect against losses - and not to speculate on markets - from rules that would require them to pay high safety margins.
- more -
http://www.reuters.com/article/2013/05/08/us-swap-rules-senate-idUSBRE94716P20130508
By Douwe Miedema and Sarah N. Lynch
WASHINGTON (Reuters) - A bipartisan group of 12 senators is seeking to exempt non-financial companies from new rules to make banking safer, breathing new life into efforts to reduce the scope of the Dodd-Frank overhaul of Wall Street.
The plans are squarely at odds with a warning from Treasury Secretary Jack Lew, who urged the Republican-controlled House of Representatives this week not to make any changes to the broad law drawn up after the 2007-09 credit meltdown.
"These reforms should not be weakened or repealed," Lew said in a letter to Representative Jeb Hensarling, chairman of the House Committee on Financial Services, referring to a raft of bills the panel has since adopted.
Now two senators have introduced a proposal to exempt companies using derivatives to protect against losses - and not to speculate on markets - from rules that would require them to pay high safety margins.
- more -
http://www.reuters.com/article/2013/05/08/us-swap-rules-senate-idUSBRE94716P20130508
Senators Introduce Bipartisan Legislation to Help Ag Producers, Small Businesses Manage Their Risk
(U.S. SENATE) - U.S. Senators Mike Johanns (R-Neb.) and Jon Tester (D-Mont.) are leading a bipartisan group of Senators in introducing a bill to clarify the exemption for farmers, ranchers, manufacturers and small businesses from margin requirements included in the Dodd-Frank financial legislation. These exempted groups, known as end-users, use derivatives to manage their risk and insure against extreme price fluctuations for commodities and inputs - like seed and fertilizer - critical to their business operations.
Joining Johanns and Tester to introduce the bill are Senators Roy Blunt (R-Mo.), Mike Crapo (R-Idaho), Joe Donnelly (D-Ind.), Kay Hagan (D-N.C.), Heidi Heitkamp (D-N.D.), Amy Klobuchar (D-Minn.), Jerry Moran (R-Kan.), Richard Shelby (R-Ala.), Pat Toomey (R-Pa.), and Mark Warner (D-Va.).
The bill introduced by the senators is identical to H.R. 634, which today unanimously passed the House of Representatives' Financial Services Committee. It clarifies current law by making explicit that commercial end-users are not subject to costly margin requirements, consistent with Congress' intent in Dodd-Frank.
- more -
http://www.tester.senate.gov/?p=press_release&id=2889
(U.S. SENATE) - U.S. Senators Mike Johanns (R-Neb.) and Jon Tester (D-Mont.) are leading a bipartisan group of Senators in introducing a bill to clarify the exemption for farmers, ranchers, manufacturers and small businesses from margin requirements included in the Dodd-Frank financial legislation. These exempted groups, known as end-users, use derivatives to manage their risk and insure against extreme price fluctuations for commodities and inputs - like seed and fertilizer - critical to their business operations.
Joining Johanns and Tester to introduce the bill are Senators Roy Blunt (R-Mo.), Mike Crapo (R-Idaho), Joe Donnelly (D-Ind.), Kay Hagan (D-N.C.), Heidi Heitkamp (D-N.D.), Amy Klobuchar (D-Minn.), Jerry Moran (R-Kan.), Richard Shelby (R-Ala.), Pat Toomey (R-Pa.), and Mark Warner (D-Va.).
The bill introduced by the senators is identical to H.R. 634, which today unanimously passed the House of Representatives' Financial Services Committee. It clarifies current law by making explicit that commercial end-users are not subject to costly margin requirements, consistent with Congress' intent in Dodd-Frank.
- more -
http://www.tester.senate.gov/?p=press_release&id=2889
Wall Street reform was a huge achievement, but while its implementation is being ignored by supporters, its opponents are doing everything in their power to delay or weaken it.
Anyone paying attention saw this coming in 2011.
Report: Wall Street’s Opposition to Dodd-Frank Reforms Echoes Its Resistance to New Deal Financial Safeguards
Bedrock Consumer Protections Once Were Flogged as ‘Exceedingly Dangerous,’ ‘Monstrous Systems’ That Would ‘Cripple’ the Economy
WASHINGTON, D.C. – As the nation approaches the first anniversary of the Dodd-Frank financial reform law, opponents are claiming that the new measure is extraordinarily damaging, especially to Main Street. But industry’s alarmist rhetoric bears striking resemblance to the last time it faced sweeping new safeguards: during the New Deal reforms. The parallels between the language used both then and now are detailed in a report released today by Public Citizen and the Cry Wolf Project.
In the decades since the Great Depression, Americans acknowledged the necessity of having safeguards in place to prevent another crash of the financial markets, including the creation of the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC), and laws requiring public companies to accurately disclose their financial affairs. Although these are now seen as bedrock protections when they were first introduced, Wall Street cried foul, the new report, “Industry Repeats Itself: The Financial Reform Fight,” found.
“The business community’s wildly inaccurate forecasts about the New Deal reforms devalue the credibility of the ominous predictions they are making today,” said Taylor Lincoln, research director of Public Citizen’s Congress Watch division and author of the report. “If history comes close to repeating itself, industry is going to look very silly for its hand-wringing over Dodd-Frank when people look back.”
<...>
In fact, the Dodd-Frank Wall Street Reform and Consumer Protection Act is designed to prevent another Wall Street crash, which really made it tough on everyone by causing massive job loss and severely hurting corner butchers and bakers, as well as retirees, families with mortgages and others. The Dodd-Frank law increases transparency (particularly in derivatives markets); creates a new Consumer Financial Protection Bureau to ensure that consumers receive straightforward information about financial products and to police abusive practices; improves corporate governance; increases capital requirements for banks; deters particularly large financial institutions from providing incentives for employees to take undue risks; and gives the government the ability to take failed investment institutions into receivership, similar to the FDIC’s authority regarding commercial banks. Much of it has yet to be implemented.
- more -
http://www.commondreams.org/newswire/2011/07/12-0
Bedrock Consumer Protections Once Were Flogged as ‘Exceedingly Dangerous,’ ‘Monstrous Systems’ That Would ‘Cripple’ the Economy
WASHINGTON, D.C. – As the nation approaches the first anniversary of the Dodd-Frank financial reform law, opponents are claiming that the new measure is extraordinarily damaging, especially to Main Street. But industry’s alarmist rhetoric bears striking resemblance to the last time it faced sweeping new safeguards: during the New Deal reforms. The parallels between the language used both then and now are detailed in a report released today by Public Citizen and the Cry Wolf Project.
In the decades since the Great Depression, Americans acknowledged the necessity of having safeguards in place to prevent another crash of the financial markets, including the creation of the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC), and laws requiring public companies to accurately disclose their financial affairs. Although these are now seen as bedrock protections when they were first introduced, Wall Street cried foul, the new report, “Industry Repeats Itself: The Financial Reform Fight,” found.
“The business community’s wildly inaccurate forecasts about the New Deal reforms devalue the credibility of the ominous predictions they are making today,” said Taylor Lincoln, research director of Public Citizen’s Congress Watch division and author of the report. “If history comes close to repeating itself, industry is going to look very silly for its hand-wringing over Dodd-Frank when people look back.”
<...>
In fact, the Dodd-Frank Wall Street Reform and Consumer Protection Act is designed to prevent another Wall Street crash, which really made it tough on everyone by causing massive job loss and severely hurting corner butchers and bakers, as well as retirees, families with mortgages and others. The Dodd-Frank law increases transparency (particularly in derivatives markets); creates a new Consumer Financial Protection Bureau to ensure that consumers receive straightforward information about financial products and to police abusive practices; improves corporate governance; increases capital requirements for banks; deters particularly large financial institutions from providing incentives for employees to take undue risks; and gives the government the ability to take failed investment institutions into receivership, similar to the FDIC’s authority regarding commercial banks. Much of it has yet to be implemented.
- more -
http://www.commondreams.org/newswire/2011/07/12-0
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