Watchdog Disputes White House Claim That Wall Street Reform Will End Taxpayer Bailout

Eshlemon · Jan 27, 2011

http://blogs.abcnews.com/thenote/20...street-reform-will-end-taxpayer-bailouts.html

ABC News’ Matthew Jaffe & Arlette Saenz report: When the Wall Street reform bill passed Congress last summer, President Obama said the new regulations would mean that taxpayers would never again be asked to bail out financial institutions.

“Because of this reform, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more taxpayer-funded bailouts – period,” the President said July 15.

Not so fast, warns bailout watchdog Neil Barofsky.
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Barofsky is from SIGTARP, a TARP oversight appointed by President and confirmed by Senate.

However Tim Massad, the acting assistant secretary for financial stability at the Treasury Department, argued that the Wall Street reform law, known as Dodd-Frank, had given the government the tools to make sure that future bailouts do not occur.

“I think Dodd-Frank gives us the tools to regulate any financial institution, regardless of its size, that poses systemic risks, and it gives us the tools to shut down such financial institutions,” Massad told the House panel.
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Not suprising as the Treasury faces some of the crticism and stated much needed changes.

Links to SIGTARPs Executive Summary:
http://www.sigtarp.gov/reports/congress/2011/January2011_Quarterly_Report_to_Congress.pdf

Institutions such as Citigroup operate in an environment where size matters because the then-explicit and now implicit Government guarantee that they will not be allowed to fail results in a gross distortion of a normally functioning market, where an institution’s creditors, shareholders, and executives bear the brunt of poor decisions, not the taxpayers. First, for executives at such institutions, the Government safety net provides the motivation to take greater risks than they otherwise would in search of ever-greater profits. This “heads I win, tails the Government bails me out” mentality promotes behavior that, while it may benefit shareholders and executives in the short term if the risks pay off, increases the likelihood of failure and, therefore, the possibility of another taxpayer-funded bailout. Second, an institution’s “too big to fail” status has a dramatic impact on its creditors and other counterparties, which then gives it an advantage over its smaller competitors. Ratings agencies continue to give such institutions higher credit ratings based on the existence of an implicit Government backstop. Creditors, in turn, give those institutions access to debt at a price that does not fully account for the risks created by their behavior. Cheaper credit is effectively a subsidy, which translates into greater profits, which allows the largest institutions to become even larger relative to the economy and materially disadvantages smaller banks. The prospect of A Government bailout also reduces market discipline, giving creditors, investors, and counterparties less incentive to monitor vigilantly those institutions that they perceive won't be allowed to fail. in short, the continued existence of institutions that are "too big to fail"- an undeniable byproduct of former Secretary Paulson and Secretary Geither's use of TARP to assure the markets that during a time of crisis they would not let such institutions fail-is a recipe for disaster. These institutions and their are leaders are incentivized to engage in precisely the sort of behavior that could trigger the next financial crisis, thus perpetuating a doomsday cycle of booms, busts, and bailouts.
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The top 5 to big to fail megabanks are 20% larger post-bailout with an expected continual increase in market share. Wonder if the hundreds of other bankrupt banks that where not big enough to not be allowed to fail could propose legal challenge because of discrimination and unequal treatment in the marketplace.

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Watchdog Disputes White House Claim That Wall Street Reform Will End Taxpayer Bailout

Eshlemon Well-Known Member

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Watchdog Disputes White House Claim That Wall Street Reform Will End Taxpayer Bailout

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