Obama-Dodd Wall Street Heavy Hitters Protection Act makes bailouts permanent, says economist Lindsey 

Democrats are up in arms over charges by Senate Minority Leader Mitch McConnell and other Republicans in Congress that the Obama-Dodd Wall Street Heavy Hitters Protection Act - aka the "financial reform bill" - institutionalizes forever the bailout culture created by the $700 billion Troubled Assets Recovery Program (TARP).

Sen. Chris Dodd, D-CN, the bill's principal sponsor, tells everybody who will listen that his measure ends bailouts. McConnell and others say not so, it makes them a permanent tool in the government's arsenal for regulation of the economy.

Over on the House side, Minority Leader John Boehner asked Lawrence Lindsey, former director of the White House economic council, about the issue. Lindsey's response is detailed, concise and rather barbed in giving multiple reasons for why the Obama-Dodd proposal would perpetuate bailouts:

"To date, public attention has focused on whether the bill is a 'bailout' bill that will keep 'too big to fail' alive. You be the judge.

"First, the bill contains a $50 billion fund for resolution of systemically risky institutions. The bill allows a 2/3 vote of the Financial Stability Oversight Council to deem any firm (financial or non-financial) as coming under its rubric and then authorizes the FDIC and Treasury Secretary to treat each of the firm’s shareholders and creditors as they choose, without regard to bankruptcy law.

"Second, the bill gives the Treasury and the FDIC authority to grant an unlimited number of loan guarantees to systemically risky institutions. No congressional authorization or appropriation is required.

"Third, the bill gives the Fed the authority to fund any 'program' to assist these institutions accepting as collateral anything it deems appropriate. So perhaps too big to fail is dead. How could any firm actually fail when all of its debt could be guaranteed by the Treasury, the Fed could print money to assist it, and just in case, there was $50 billion sitting around to reassure nervous creditors that they would be repaid regardless what contract or bankruptcy law said?"

Lindsey adds that there should be no surprise that Wall Street is enthusiastic about this portion of the Obama-Dodd bill: "Needless to say, the large Wall Street firms aren’t complaining; they will permanently benefit from having lower borrowing costs thanks to these provisions, the same way Fannie Mae and Freddie Mac enjoyed implicit guarantees."

For the rest of the Lindsey memo, go here.

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