Federal Judiciary

Corker vs. the Real Bailouts -- By: Stephen Spruiell

Will the financial-reform bill before Congress -- the Dodd bill, named for Senate Banking Committee chairman Chris Dodd (D., Conn.) -- put an end to bailouts, as Democrats claim? Or does it create a permanent bailout authority, as Republicans have argued? There is an answer, and there is a complication. The answer is that the Republicans are right: This bill would leave the door open for more of the same bailouts that became commonplace in the fall of 2008. The complication is that Republicans have been focusing on the wrong provision in the bill -- a $50 billion fund, raised from assessments on large financial institutions, that would be used to wind them down if they fail. This fund looks like what Republicans have called it -- a bailout fund -- but it?s not. The real bailouts are hiding in the details.

Sen. Bob Corker (R., Tenn.) has been pushing back against the strategy of making the ?bailout fund? the centerpiece of Republican opposition to the bill in its current form. He says the fund isn?t the problem, and that other parts of the bill are far worse. Some of the bill?s other provisions would preserve and enlarge the government?s ability to engineer bailouts.

?We?ve got to remove some of the flexibilities that have been given to regulators,? Corker tells National Review Online. ?We saw it with the Troubled Asset Relief Program -- where a program was created with a specific intent, but, after the bill passed, lots of liberties were taken: going into auto companies, and then auto suppliers, and then being used for mortgage modifications. That was not what was supposed to happen. If you give just a little flexibility sometimes, the outcome ends up being very different than you thought.?

So what kind of flexibility is given to regulators under the Dodd bill? After all, its supporters defend the $50 billion ?bailout fund? by arguing that the fund gives regulators very little flexibility. They say it exists only to keep financial firms operating while the government breaks them apart and liquidates them. Management would be fired, shareholders wiped out, and creditors left to divvy up what?s left. Doesn?t sound like much of a bailout.

But read the fine print: Under the Dodd bill, regulators retain the power to bail out firms that aren?t technically insolvent yet. The FDIC can guarantee loans, and the Fed can make loans accepting the shadiest of assets (such as subprime-mortgage-backed securities) as collateral. So the ?bailout fund? isn?t the problem: The Dodd bill would give regulators all the power they need to keep wobbly but not insolvent firms from ever tapping into it.

Corker wants the loopholes closed, and most of his Republican colleagues agree. But by focusing on the ?bailout fund,? Republicans have complicated the politics of opposing the Dodd bill, especially now that the Obama administration has come out in favor of dropping the fund. Regulators would still be given the power to prop up tottering firms and/or seize insolvent ones. The only difference is that, rather than being able to ?pre-fund? the resolution authority and cap it at $50 billion, the government would ?post-fund? the resolution of a failed firm by borrowing whatever it needs from the Treasury and then sending Wall Street the bill.

Dropping the $50 billion bailout fund would not substantially change the nature of the resolution authority. If one opposed it before (and there are legitimate reasons to oppose it), changing the way it is funded should not change one?s mind. Nevertheless, water-carriers for the administration have already labeled the administration?s willingness to drop the fund a ?key substantive concession,? thus setting the table for Democrats to paint the Republicans as obstructionists if they continue to object to the structure of the resolution authority or to the aforementioned loopholes that would allow for future bailouts.

?My concern,? Corker says, ?which I?ve expressed internally, is that focusing on the $50 billion fund and not focusing on these other things is not an approach that I would take -- but it?s the approach that was taken, and we?ll see what happens as we move along.?

Whatever the merits of its case against the bailout fund, the Senate GOP leadership deserves credit for unifying the party and forcing the Democrats back to the negotiating table. Sen. Richard Shelby (R., Ala.), ranking member on the Banking Committee, has taken the lead role in negotiating with Dodd, and Corker is optimistic that the bill?s problematic loopholes will be addressed. ?I know the Shelby team is well aware of our concerns in that regard,? he says. ?I know the Dodd team is also well aware of our concerns. And I don?t know this to be a fact, but it?s my understanding that Dodd?s team is already working on those troublesome provisions.?

It?s important to understand that Senate Democrats aren?t the ones who are really pushing for these loopholes. That would be administration officials at the Treasury and the FDIC. ?Let?s face it,? Corker says, ?If I was a Treasury official, or if I was head of the FDIC, or if I was at the Fed, what I would be saying is: Give me as much flexibility as you can, and I?ll take care of everything.? Federal officials have legitimate reasons to want this kind of flexibility in the face of impending economic collapse. But as we saw in the case of the automakers, this flexibility can be easily abused to protect politically favored groups at the expense of other creditors.

By pushing the bailout theme, Senate GOPers have put their Democratic counterparts in the difficult spot of defending loopholes they might not be inclined to support had Obama not asked for them. Corker is hopeful that this pressure will yield an acceptable compromise on the Dodd bill. ?If the loopholes aren?t closed, we?re going to have amendments to try to do that,? Corker promises. ?But my sense is there?s a good chance that the bill that comes to the floor will have addressed our concerns.?

-- Stephen Spruiell is an NRO staff reporter.

Full post as published by Bench Memos - National Review Online on April 22, 2010 (boomark / email).