The House Financial Services Committee held a hearing, Systemic Regulation, Prudential Matters, Resolution Authority and Securitization last Thursday.
What was rare is almost all of the experts said basically the same thing, the too big to fail bill is TARP on Steroids, a disaster, making TARP permanent de facto.
Congressman Brad Sherman sums it up:
Richard L. Trumka, AFL-CIO President came out swinging on the Federal Reserve. Trumka called for reform of the Federal Reserve governance, and notes:
Even more alarmingly, the discussion draft would appear to give power to the Federal Reserve to preempt a wide range of rules regulating the capital markets—power which could be used to gut investor and consumer protections.
On use of more taxpayer funds:
We are also deeply troubled by provisions in the discussion draft that would allow the Federal Reserve to use taxpayer funds to rescue failing banks, and then bill other nonfailing banks for the costs. The incentive structure created by this system seems likely to increase systemic risk.
and suggests a Progressive fee structure to discourage banks from becoming so large.
Finally the AFL-CIO also notes TARP on Steroids:
In these respects, the discussion draft appears to take the most problematic and unpopular aspects of the TARP and makes them the model for permanent legislation.
Interesting fact on Leverage from AFR’s Jane D’Arista:
The rise in financial sector debt from 63.8 percent to 113.8 percent of GDP over the decade from 1997 to 2007 is a telling indicator of how leverage bloated the system.
AEI's Wallison also makes no bones on this bill:
Rather than ending too big to fail, the Draft makes it national policy. By designating certain companies for special prudential regulation, the Draft would signal to the markets that these companies are too big to fail, creating Fannies and Freddies in every sector of the economy where they are designated. This will impair competition by giving large companies funding and other advantages over small ones.
Dean Baker has some research on the value of a too big to fail subsidy in this CEPR report.
The increase in the gap of 0.49 percentage points implies a government subsidy of $34.1 billion a year to the 18 bank holding companies with more than $100 billion in assets in the first quarter of 2009.
Supposedly after so much testimony and criticism, Barney Frank says they will change the bill. But it's been over a year, and as noted the bill was a rehashed version of giving the Fed more powers from a previous proposal that was also blasted by various experts.
Baseline Scenario also has a good critique of what is wrong with the too big to fail bill
The decision that there be “no public list of identified companies,” as the bill currently reads, stems from a belief that secrecy about the identity of these firms will limit moral hazard. However, after more than a year of costly bailouts, the federal government’s implicit guarantee of major financial firms is, sadly, rock solid. To try to make it magically disappear by refusing to name the most systemically dangerous firms not only won’t work, but will severely jeopardize the effectiveness of the regulation itself.
(read TARP on Steroids once again)
Here is the entire transcript and video of this hearing.