Posted on 04/18/2010 7:07:31 PM PDT by Laissez-faire capitalist
Today, the SEC charged giant investment bank Goldman Sachs with more than $1 billion worth of securities fraud for its dealings in the subprime mortgage market.
Ironically at the same time the SEC is seeking justice for Goldman's alleged vitims, President Obama and Senate Banking Committee Chairman Chris Dodd (D-Conn.) are pushing a bill that would reward the firm with potentially billions of dollars by instituting a so-called "resolution authority" that would in practice be a permanent bailout fund.
Supporters of Dodd's bill maintain that it does not create bailouts because the failing firm's shareholders would be wiped out and its managers would be fired. But what they don't say is that the money from the $50 billion resolution fund would be used to frequently give creditors of this firm a better deal than they would have in bankruptcy.
Recall that during the financial implosion of 2008, Goldman was not bailed out directly by taxpayers, but instead received tax dollars as a creditor of AIG. Goldman received $12.9 billion in the "backdoor bailout" because of the credit default swaps it owned that AIG insured. Goldman and other of AIG's counterparties were paid by the government 100 cents on the dollar in this bailout, whereas creditors in bankruptcy court often get less than 50 cents on the dollar.
So as American Enterprise Institute scholar and Financial Crisis Inquiry Commissions member Peter Wallis puts it "That act--paying off the creditors when the government takes over a failing firm--is a bailout. It doesn't matter that the management loses their jobs, or that the shareholders get nothing. When the creditors are aware that they will get a better deal with the failure of a large company than they will get with a small one that goes the ordinary route to bankruptcy, that is a bailout."
To top it off, the fees for the Dodd's bill resolution fund that would pay off a failing firm's creditors would come not just from banks but from a broad array of Main Street businesses. Stable life, auto and home insurance companies would have to pay into this fund to subsidize the failure of the next high-roller, and the fees they pay would likely be passed on in the premiums their policy holders pay. And the bill's definition of "non-bank financial company" is so broad that it could cover manufacturers only involved tangentially in extending credit, such as those that lease equipment to their customers. That would raise prices and cost Main Street jobs.
All in all, the Goldman indictment should serve as a wakeup call to those who want to ram a bill through Congress without looking at who both its victims and beneficiaries would ultimately be.
1.) Under Dodd's bill - if it comes to it - creditors of Goldman Sachs won't have to go the route of bankruptcy court. They will get better than the normal deal that they would get in bankruptcy court.
2.) Dodd's "resolution authority" would give better deals to creditors of failed large firms. The creditors of smaller failed firms get to go to bankruoptcy court where they will not get nearly as good a deal.
3.) Non-failed, stable businesses would have to pay into this "resolution authority," with the money being used to pay the creditors of failed Big Banks, etc. The stable businesses will then pass on the cost to the consumers their having to contribute to this "resolution authority."
4.) Obama was lying when he said that McConnell was being "deceptive and cynical."
Who do you think wants this? The Big Banks?
They would sure love others to have to supplement their high rolling and involvement in subprime mortgages or other risky investments.
That “resolution authority,” as in part 1.) sure gives the big boys a better deal than the smaller firms, doesn’t it?
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Too big too fail. What a joke. This isn’t economics it’s RICO.
Thanks for posting this.
Heard in passing the other day Rush say something about this bill gives nobama the power to take over any business he wants. Did I hear right? If so, this bill can stop America in her tracks.
btt
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