Harry Moroz

A Fair Reading of Financial Reform

In Thursday’s New York Post, the Manhattan Institute’s Nicole Gelinas comes extremely close to writing an honest critique of the financial reform bill awaiting action in the Senate. But she writes:

[A]s critics led by Kentucky’s Sen. Mitch McConnell, have pointed out, the bill, sponsored by Sen. Chris Dodd, doesn’t end “too big to fail” – under any fair reading.

Sounds like a challenge.

Gelinas argues that a section of the legislation authorizing “additional payments” by the federal government to failing financial institutions is a kind of hidden bailout mechanism. The section allows the federal receiver to make payments to creditors of the failing firm if the federal government “determines that such payments or credits are necessary or appropriate to minimize losses.” With this, I can’t argue.

However, she conflates this bailout mechanism with a perpetuation of “too big to fail.” In fact, she cuts her quotation of the bill text off before the most important part. The bailout payments can only be made in minimizing losses due to the “orderly liquidation of the covered financial company.” That is, the payments are made in order to put a systemically dangerous firm out of its misery, not to perpetuate the existence of an overly large institution.

It is difficult to see why Wall Street should consider this “capitulation,” as Gelinas suggests it will: what firm will say “let’s get too big to fail” if doing so will only result in its liquidation?

Harry Moroz: Author Bio | Other Posts
Posted at 5:13 PM, Apr 22, 2010 in
Permalink | Email to Friend