A conservative proposal to deal with ‘Too Big To Fail’
Before I post the story, I ask everyone to please read it with a clear eye. It’s really tempting to just dismiss ideas from the other side, but I think Pat Toomey has a decent idea, though its not a complete solution. So I’d ask you to please read the article and then reply and say if you think his idea is a good one and what more needs to be done.
By Patrick Brennan
The gargantuan 2010 Dodd-Frank financial-reform bill has a 78-page section, Title II, devoted to ending the problem of “too big to fail” financial institutions and ensuring that there’ll never be another 2008-like Wall Street bailout. But, Pennsylvania senator Pat Toomey says, Title II doesn’t do that at all: It’s a taxpayer-funded, regulator-run bailout.
After the financial crisis, virtually everyone agrees that too-big-to-fail banks — “systemically important financial institutions” — present a serious risk to the U.S. economy. Dodd-Frank, and Title II specifically, is President Obama’s and congressional Democrats’ answer to the problem, but conservatives contend that it hasn’t been solved, and may have gotten even worse.
This Thursday, the Club for Growth president-turned-senator plans to introduce a private solution: a bill co-sponsored by Texas Republican John Cornyn to replace Dodd-Frank’s bailout process with a new section of the bankruptcy code, Chapter 14, to deal with too-big-to-fail banks.
The proposed new bankruptcy-code section, Chapter 14, explicitly bars taxpayer financing for failing banks. Instead, it would provide for a safe recapitalization by splitting the bank into two: a new, solvent “good bank” that would hold the firm’s assets and its short-term debt, and a subsidiary, controlled by the bank’s shareholders, which would hold the firm’s long-term debt. Assuming that the institution isn’t in truly dire shape and hasn’t misstated its assets and liabilities (as firms essentially did before the financial crisis), a relatively traditional bankruptcy can then proceed. To avoid wider economic shocks, the “good bank” provides certainty for stockholders and creditors, who would then take losses based on their contractual rights — as opposed to, under Title II, these allocations’ being left up to the FDIC.