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Too Big to Bail

Today’s #youlie is ‘Wall Street Financial reform will put an end to billion dollar bailouts’. The truth is it will eventually make them trillion dollar bailouts.

A bailout reimburses stakeholders in excess of actual value

As part of a major overhaul package the latest Senate Financial Reform bill includes language to setup a $50 billion government regulated insurance fund that Wall Street Banks would pay into, thus creating a system to cover the excessive costs of liquidating a company that goes under. While some would argue that this is not a bailout as it results in the death of the failed company, it remains a bailout in that it reimburses stakeholders for their failed investments in excess of the actual post failure value of those investments. In short, the fund isolates investors from the risk of investing in the financial companies it is intended to regulate, a key driver in creating the economic recession we now find ourselves in.

To say ‘Wall St Reform will prevent future bailouts’ is like saying the FDIC prevents bailouts, 50 this year and counting.

While the FDIC and other funds may be a good idea, it is patently untrue to say any fund prevents bailouts, rather it institutionalizes them. Furthermore, if these funds are a good idea for managing systemic risk, shouldn’t all of the “faildustries” pay into them? What about the automakers, specifically GM who received one bailout to prevent them from declaring bankruptcy and another after they did just that? What about the airlines, who routinely declare bankruptcy, but get too big to fail protections? And what about the good companies? Many banks have already paid back their TARP funds most of whom never asked for them in the first place. Additionally, Ford never took bailout funds, and American is the only legacy airline to have never declared bankruptcy. I don’t know the answers here, but I do know this is the conversation we should be having, not speeches or sound bites on preventing bailouts.

Bailouts have become too big to fail.

True the FDIC, like the proposed reform, is industry funded, but in that sense so is Social Security, Medicare, state unemployment Insurance. Specifically, the FDIC’s 1987 “Sense of Congress” may not be an ironclad legal authorization, but there is no doubt who gets stiffed with the check when any of these funds are overdrawn by systemic risk. Good Ol’ Uncle Sam, and remember, you both share the same wallet.

When that happens, you’re no longer bailing out irresponsible companies, you’re bailing out an irresponsible bailout system.

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