… And many Wall Street “fat cats” want this bill passed ASAP.
The Senate is in the process of debating and considering amendments to S.3217, Restoring American Financial Stability Act of 2010. As the debate proceeds, it is important to note that the populist rage exhibited toward “fat cats” on Wall Street is merely theater. Goldman Sachs, a Wall Street firm accused of fraud and the subject of a high profile Senate hearing last week, supports this bill because it may benefit some of Wall Streets biggest firms.
President Obama on April 22nd went to Wall Street and pitched his plan:
In the end, our system only works — our markets are only free — when there are basic safeguards that prevent abuse, that check excesses, that ensure that it is more profitable to play by the rules than to game the system. And that is what the reforms we’ve been proposing are designed to achieve — no more, no less. And because that is how we will ensure that our economy works for consumers, that it works for investors, and that it works for financial institutions — in other words, that it works for all of us — that’s why we’re working so hard to get this stuff passed.
It should be of concern to taxpayers that this bill, in it’s current form, may provide permanent bailout authority for Wall Street, may set up a regulatory process that benefits those with the best lobbying shop and provides a competitive advantage to those who are “too big to fail.” Eyebrows should be raised by the fact that Goldman Sachs supports the legislation. Lloyd Blankfein, the billionaire head of the investment firm Goldman Sachs was quoted by The Hill as saying:
The biggest beneficiary of reform is Wall Street itself. The biggest risk is risk financial institutions have with each other.
Free market capitalism is risky. Competition is risky. Managed crony capitalism is not risky if the risk is born by the taxpayers with the profits going to Wall Street. If risk of losing ones shirt is removed from Wall Street, many would argue that this will provide and incentive for Wall Street to engage in more risky behavior and for the “too big to fail” institutions to get even bigger. One needs to look no further than the so called Troubled Assets Relief Program (TARP) for an example of how bailouts make big banks and Wall Street firms bigger.
Neil Barofsky, the Special Inspector General for the TARP program was quoted in CNNMoney.com that:
After financial institutions threatened the stability of the economy by making irresponsible bets, the government responded by sending them massive infusions of capital. In addition, Treasury gave companies cheap loans to encourage them to buy risky assets like mortgage-backed securities that were a major cause of the credit crisis. The report also notes that “too big to fail” firms only got bigger because of TARP.
There is bipartisan concern about the idea that providing bailout authority to Wall Street is something that Wall Street wants to eliminate risk from investment. Rep. Brad Sherman (D-CA), member of the Financial Services Committee, toldPolitico that “there are serious problems with the Dodd bill. The Dodd bill has unlimited executive bailout authority. That’s something Wall Street desperately wants but doesn’t dare ask for.” Senator Richard Shelby (R-AL) was quoted as saying that he wants to modify the legislation to rid the bill of bailouts. As quoted in the Montgomery Advertiser, “my goal during consideration of this legislation will be to reshape this bill so that it actually ends bailouts, protects consumers without jeopardizing our small community banks, and brings transparency to the world of derivatives without sacrificing economic growth and job creation.”
Supporters of Dodd’s bill maintain that it does not create bailouts because the failing firm’s shareholders would be wiped out and its managers would be fired. But what they don’t say is that the money from the $50 billion resolution fund would be used to frequently give creditors of this firm a better deal than they would have in bankruptcy.
Recall that during the financial implosion of late 2008, Goldman was not bailed out directly by taxpayers, but instead received tax dollars as a creditor of AIG. Goldman received $12.9 billion in the “backdoor bailout” of AIG because of the credit default swaps it owned that AIG had insured. Goldman and other of AIG’s counterparties were paid by the government 100 cents on the dollar in this bailout, whereas creditors in bankruptcy court often get less than 50 cents on the dollar.
So as American Enterprise Institute scholar and Financial Crisis Inquiry Commission member Peter Wallison puts it: “That act—paying off the creditors when the government takes over a failing firm—is a bailout. It doesn’t matter that the management lose their jobs, or that the shareholders get nothing. When the creditors are aware that they will get a better deal with the failure of a large company than they will get with a small one that goes the ordinary route to bankruptcy, that is a bailout.”
To top it off, the fees for the Dodd bill’s resolution fund that would pay off a failing firm’s creditors would come not just from banks but from a broad array of Main Street businesses. Stable life, auto and home insurance companies would have to pay into this fund to subsidize the failure of the next high-roller, and the fees they pay would likely be passed on in the premiums their policy holders pay. And the bill’s definition of “nonbank financial company” is so broad that it could cover manufacturers only tangentially involved in extending credit, such as those that lease equipment to their customers. This would raise prices and cost Main Street jobs.
All in all, the Goldman indictment should serve as a wakeup call to those who want to ram a bill through Congress without looking at who both its victims and beneficiaries would ultimately be.
When you hear liberals calling for reform of Wall Street, keep an eye on those who are urging support. The biggest “fat cats” on Wall Street want this bill and they want it right now.