Raj Date on Resolution Authority, Conservative Arguments on Bailouts

First up, Raj Date has a new paper out, titled: The Killer G’s: Resolution Authority, Financial Stabilization, and Taxpayer Bailouts. It’s definitely worth your time, as it explains how, if the Dodd Bill was in place in January 2008, our response to the Killer G’s – Goldman Sachs, GMAC and GE Capital – would have gone differently. It’s great on the topic, and pulls back to show the three types of bailouts we are worried about and what the bill does well and doesn’t do well. Highly recommended if you want to learn more.

The Bailout We Just Had

Second, we need to talk about if there are bailouts in the Dodd Bill because conservatives are not going to let this go. But before we dive into that, here’s what is incredibly important to remember: the major, serial bailouts of 2008 were not the result of some unelected, socialist technocrats hidden away in a government basement somewhere exploiting a loophole. They were the results of GOP-appointed Hank Paulson, GOP-appointed Sheila Bair and GOP-appointed Ben Bernanke, all with the support of a Bush White House-sponsored EESA going to Congress and asking that an emergency bill be passed to allow for TARP.

The Dodd Bill cannot stop this. If this all happens all over again, and it could, there’s nothing in this bill to stop GOP Team Paulson et al Version 2.0 from going to Congress and demanding more money for the financial system. By definition, Congress can always pass new laws in an emergency, even if it means overturning old laws. The only way to stop this is through prudential regulation on the front end and a resolution mechanism that is earlier and reduces uncertainty, which the Republican oppose, or by dramatically shrinking the size of the largest and most risky firms, segmenting business lines to de-risk critical infrastructure from that which can fail with less damage, and/or bringing some of the more dangerous business lines like derivatives into market-based sunlight.

The Republicans oppose all that too. I’m not trying to be a jerk – I actually read the GOP House Bill on Financial Reform and there’s nothing in it that does any of that. When the Senate GOP drops their version I imagine it will look the same – let’s just redo the problem with more bankruptcy law.

I’ve never really heard of this working and it’s predicated implicitly on the conservative’s argument that Lehman’s bankruptcy wasn’t that big of a deal (an argument that usually gets demolished by the blogosphere whenever it peeks its head). But if Keith Hennessey or other Bush administration officials who oversaw the bailouts would like to argue that in retrospect their mistake was to not do an overnight bankruptcy law change and force AIG and Bear into a bankruptcy court, and that the economy would be better off for it right now had they done so, I really hope they make their case. I’d really want to read it.

Is There a Bailout in Resolution Authority?

With that in mind, section 210(b)(4)(B) of the Dodd Bill is being called out as the bailout provision conservatives are alluding to as allowing extra payments to certain creditors, (see, for instance, Nicole Gelinas, and I think this provision is what is being alluded to in this unsourced accusation by Phillip Swagel). I’m going to kick it to Raj’s paper:

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