The House Financial Services Committee, along with the Treasury Department has proposed a new too big to fail piece of legislation.
The bill is titled The Financial Stability Improvement Act of 2009 and the bill text is here.
The bill creates an inter-agency regulatory agency called the Financial Services Oversight Council.
The bill appears to be once again, making the Federal Reserve super regulator but with wording to hide this fact.
Removes the Gramm-Leach-Bliley Act’s restraints on the Fed’s authority over companies subject to consolidated regulation and provides specific authority to the Fed and other federal financial agencies to regulate for financial stability purposes and quickly address potential problems.
The bill also seems to be not reinstating Glass-Steagall, instead putting some watered down restrictions, but only going forward. Seemingly existing institutions will not be broken up.
Puts safeguards on current ILC and other non-bank bank institutions and closes the ILC and other non-bank bank exemptions going forward; current non-bank banks, industrial loan companies, and similar companies that engage in commercial activities but are not currently subject to bank holding company regulation will not have to divest, but will have to restructure, creating a bank holding company to hold all financial activities, and will face limits on transactions between the bank holding company and any commercial affiliates. Going forward, no additional commercial companies will be allowed to own banks, ILCs or any other specialty bank charters.
A token to the public, the bill puts some Treasury oversight on the Federal Reserve for issuing temporary liquidity assistance, but also puts Thrifts (Savings and Loans), under the Federal Reserve as regulator.
Provides new accountability for the Fed when it addresses short-term credit market disruptions in emergency situations.
Requires approval by the Treasury Secretary for the Fed to provide temporary liquidity assistance using section 13(3) of the Federal Reserve Act, and confines that assistance to generally available facilities.
The bill also seems to be dumping the costs of systemic risk onto the large institutions instead of the American people. Now that's a good thing, but is the plan window dressing?
Large, highly complex financial companies that fail will do so in an orderly and controlled manner, ensuring that shareholders and unsecured creditors bear the losses, not taxpayers, and the stability of the overall financial system is protected.
But isn't this simply nationalizing the banks as what Sweden did and so many proposed a year ago? (Which we liked here, but as an original solution).
It's also unclear precisely how institutions with assets above $10 billion would pay. The bill text assessed various fees, but on first review, the specifics, the amounts are not clear. $23.7 trillion dollars, the amount SIGTARP says the taxpayer is potentially on the hook for with all of the financial commitments made during the crisis, is a lot of dough to save too big to fail institutions.
Costs to resolve a failing firm will be repaid first from the assets of the failed firm at the expense of shareholders and creditors, and to the extent of any shortfall, from assessments on all large financial firms. In this instance we follow the “polluter pays” model where the financial industry has to pay for their mistakes—not taxpayers.
Resolution Fund is structured to spread the cost over a broad range of financial companies with assets of $10 billion or more, and provides for a flexible repayment period to avoid potential procyclical effect of such assessments.
Can you see it now? The lobbyists will scream, this is a crisis, we cannot afford to pay into a TBTF fund! How precisely will the government extract fees and tax assessments from these Behemoths to fund a resolution trust? Another unfunded mandate? A failed institutions going to pay for future failures with U.S. taxpayer funds they have currently?
The FDIC would be chartered with winding down failed institutions instead of U.S. bankruptcy court.
There is also a requirement of a 5% to 10% risk for originator of credit so one cannot make a bunch of bad loans, sell them quickly to someone else and laugh while the toxic time bomb blows up down the road. I don't think 10% is enough. That's still 90% sucker value.
So, what does this all mean? My first take is we have yet another bill trying to make the Fed super regulator and a lot of smoke and mirrors to avoid the public outcry to fully reinstate Glass-Steagall and also plain break up these large financial institutions.