A top Republican has set the tone for the opposition against Senate Banking Committee Chairman Christopher Dodd’s financial oversight reform bill, contending it is riddled with loopholes that would enable more bailouts and the same, unacceptable “too big to fail’ posture.
The criticism by Sen. Richard C. Shelby, the top Republican on the Senate Banking Committee, is detailed in a letter to U.S. Treasury Secretary Timothy Geithner. The points Shelby raises are likely to frame his party’s approach to the sweeping reform in coming weeks.
Central to Shelby’s objections is the role of the Federal Reserve and its emergency lending authority which the Central Bank has utilized to bailout out the largest financial institutions over the past 18 months.
“Continuing to allow the Fed to have authority to prop up failing institutions is unacceptable to me as well as many Federal Reserve officials based on their publically expressed views,” Shelby wrote in the letter dated March 25th.
Dodd’s bill includes a new oversight entity that will monitor systemic risk along with the Fed, and impose fees on the biggest companies to fund an orderly liquidation of any entity that may pose a threat to the U.S economy.
But the Fed’s emergency lending powers is enhanced in the bill, Shelby said, an authority “that is far too open for abuse.”
He said the Central Bank could still provide widespread bailouts by “making emergency loans against bad collateral.”
Shelby also said that the bill grants emergency authority to the Federal Deposit Insurance Corp. and the Treasury to provide “broad debt guarantees in times of ‘economic distress’ when firms face ‘liquidity events.’ ”
The reform bill even sets up what is, in effect, a “$50 billion slush fund that, while intended for resolving failing firms, is available for virtually any purpose that the Treasury Secretary sees fit,” he said.
The “too big to fail” policy will be reinvented with Dodd’s reform, Shelby contends. The Fed would be granted authority over 35 to 50 firms with assets of more than $50 billion, creating a readily identifiable pool of companies already positioned as too big to fail, he said.
That elite designation will propagate the concept of “morale hazard” – where large institutions indulge in risky behavior knowing the government will be ready with a bailout.
“The market will view these firms as being identified by the Federal Reserve as ‘too big to fail’ and implicitly backed by the government,” Shelby wrote. “This is akin to setting up dozens of new government-sponsored enterprises that will inevitably receive funding advantages. This only will exacerbate moral hazard in our financial markets.”
