Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

House-Senate negotiators likely to throw out good provisions of financial reform bill, while institutionalizing future bailouts
Howard Richman, 6/7/2010

Three provisions remain on the table as the House and Senate conference committee negotiates the final provisions of the financial reform bill this weekend. An Associated Press analysis by Daniel Wagner discusses their likelihood of being included in the final draft:

• Derivatives. A Senate provision preventing big banks from dealing with risky derivatives will be deleted by negotiators from the bill because it would cut into banking industry profits and is opposed by the Obama administration.
• Volcker Rule. This provision would break up banks so that they would no longer be "too big to fail." In the House and Senate versions of the bill, the Volcker Rule was made optional, at the discretion of regulators, but the Obama administration is pushing for the rule to be restored by the conference committee. Wagner reports: "It's hard to predict what the final bill will say."
• Institutionalized Bailouts. This provision institutionalizes bailouts of the big banks through a bailout fund created by taxing banks. It lets Federal government regulators take over banks even if they are solvent,  firing their executives and wiping out their stockholders, with a full 100% Federal government guarantee of their debts, no matter how large those debts. Banks would gain by being able to borrow at low interest rates with the full guarantee by the government of their debts. Politicians and regulators would gain because bank executives would have to corrupt the political and regulatory process so that they won't lose their jobs. Wagner reports "most observers expect it to be adopted."

These provisions are opposite in their future impact. The parts that will likely be deleted, the derivatives provision and the Volcker Rule, would shrink the big banks so that future bailouts would not be necessary. The part that will be kept, the institutionalization of bailouts, would create a kind of fascism that will eventually destroy the Federal government's credit rating after corrupted government reglators fail to close debt ridden banks in timely fashion.

Secretary of the Treasury Timothy Geithner believes strongly in the institutionalization of bailouts. But when he tried to sell the international community on the idea of a global bailout fund at last weekend's meeting of G-20 finance ministers, he was rejected. Reuters' reported: "ministers abandoned the idea of a universal levy on banks to pay for future bailouts after divisions proved irreconcilable."