As I'd warned, conservatives are trying to make political hay out of the Dodd-Shelby amendment to the financial reform bill. The amendment makes makes cosmetic changes to the Wall Street overhaul in order to entice Republican senators' support for the effort. Here's Stephen Spruiell at the Corner:
Nevertheless, Shelby's near-total victory on the bailout issues is worth emphasizing because the politics were so stacked against the Senate GOP. ... Liberals who tried to spin it all as an evil Frank Luntz talking-point conspiracy have reason to feel a little bit foolish today. Dodd was willing to let the administration have the flexibility it wanted to do bailouts until Republicans filibustered the bill.
The only problem with this analysis is that every provision that Spruiell cites was already in the bill; each was simply given a ceremonial tweak to provide for GOP ownership. Here's how:
- Liquidation fund. Before, the liquidation of failing firms was initially funded by a $50 billion fee on banks and thereafter by borrowing from the Treasury, which would be repaid by selling the banks' assets or with an after-the-fact bank tax. Now, the procedure remains the same except there is no liquidation fund, so taxpayers must cover the up-front costs with no buy-in from banks.
- Banks' Creditors in Receivership. A common myth on the right is that the new liquidation authorities are somehow a bailout for creditors, who would receive a full value on their debt, unlike a bankruptcy. However, the bill already clearly states that creditors will never receive more than they recover if "the covered financial company had been liquidated under chapter 7 of the Bankruptcy Code." Republicans have added a provision to the bill that requires creditors who receive more than what they would under the bankruptcy code to pay that money back. So essentially, the "near-total victory" here is ensuring creditors return money the government is legally obliged never to pay them.
- Congressional approval will be required to guarantee debt. One of the great things about this bill is that it limits the ability of regulators to loan money to any firm, but it does allow them to provide market-wide guarantees in the event of a liquidity crisis, as the Fed has done in the last two years. In the current bill, the president must sign off on and deliver the regulators' proposed plan to Congress. Regulators must then wait five days to guarantee the debt; if Congress issues a joint-resolution disapproving of the report, they cannot act. The joint-resolution procedure is fast-tracked in both Houses and must be voted on. The Republican "near total" victory here is allowing Congress to vote to approve the request instead of disapproving. Pretty much the definition of a cosmetic change.
- The Fed's emergency powers. Spruiell notes that the Fed can still lend to firms it deems solvent, suggesting regulators would still be inclined to bail out companies by invoking a liquidity crisis. But the Fed is now barred from lending to any individual firms; it can only set up facilities for multiple banks, hopefully avoiding favoritism. There are no more Bear Stearns- or AIG-style bailouts under this bill.
The above fundamentally outlines why Shelby's changes are cosmetic, and that any claims that Republican filibusters somehow radically transformed the bill are uninformed at best. That said, none of the above insertions are particularly bad; they're just gestures -- similar to the Boxer amendment, a tweak to guarantee liquidation of firms by reaffirming the liquidation procedure already in the bill.
That's ultimately why this was an effective concession to the Republicans -- they had to come away from the deal with something in their political interest. If these are the policies they believe are important, it's too bad they couldn't have simply supported the bill right away.
-- Tim Fernholz
