Rep: Finance Safeguards Just ‘TARP on Steroids’

By
Wednesday, October 28, 2009 at 9:06 am
Rep. Brad Sherman (D-Calif.) (house.gov)

Rep. Brad Sherman (D-Calif.) (house.gov)

In the wake of the recent financial meltdown, it sounds like a reasonable idea: A proposal granting the White House broad new authority to take over when a failing institution threatens to drag others — perhaps the whole economy — down with it.

Yet that proposal, included as a part of wide-ranging finance reform legislation moving through the House this month, is also sparking bouts of indignation on Capitol Hill, where at least one vocal Democrat says the provision represents an executive-branch power grab that would prop up too-big-to-fail institutions at the expense of smaller banks.

[Congress1]Rep. Brad Sherman (D-Calif.), a former accountant and member of the House Financial Services Committee, says the proposed new bailout authority would create a kind-of mutant extension of the Wall Street bailout — the differences being, he maintains, that the $700 billion Troubled Asset Relief Program at least had a cap on spending, an expiration date, congressional approval, independent oversight and some executive pay limits for the banks on the receiving end of the taxpayers’ largesse. The California Democrat is calling the bailout authority requested by the White House, which lacks most of those safeguards, “TARP on steroids.”

“The key thing is that the executive branch have the power to commit, not just $700 billion, but $1 trillion or more without having to have Congress be involved at the time of the crisis,” Sherman charged last month during a hearing on finance reform.

The criticisms highlight the pickle facing Democratic leaders as they take steps to regulate the powerful financial services industry in the wake of the worst economic turmoil since the Great Depression — a downturn caused largely by the failure of Wall Street firms to leverage their exposure to risk. On one hand, the Democrats want to rein in the most complex and abusive industry practices in order to protect consumers from companies teetering beneath the weight of their own bad decisions. On the other, they don’t want their safeguards to prop up monster institutions that might require bailing out because they’ve become too big to fail. How to balance those goals will be no easy task — particularly with conservatives in one ear urging less government intervention and liberals in the other pushing for stricter consumer protections.

The Democrats’ proposals — one was introduced by the White House earlier in the year, and another was unveiled Tuesday by House Financial Services Committee Chairman Barney Frank (D-Mass.) — would grant the president new “resolution authority” allowing the government to swoop in and overtake investment houses and other non-bank institutions when their potential failure would put the larger financial system at risk – much like the current authority of the Federal Deposit Insurance Corporation to take over commercial banks when similar risks exist. The idea is to have the government escort the failed company into oblivion in ways that soften the blow on the larger marketplace.

The push to expand the president’s bailout authority gained steam last year, after Bush administration officials found themselves with few tools to manage the near failure of American International Groups and the actual collapse of Lehman Bros. — two firms falling outside of the FDIC’s regulatory umbrella.

After the fall of Lehman Bros., the perception that some institutions couldn’t be allowed to fail for fear of simultaneously pulling down the financial system led lawmakers to jump in with hundreds of billions of taxpayer dollars to prop up those companies.

The House bill is designed to remove the burden from taxpayers, proposing instead that shareholders — as well as financial institutions with assets exceeding $10 billion — ultimately pick up the tab when the government is forced to bail out a company for the sake of stabilizing the financial system on the whole. Still, that taxpayer safeguard does nothing to tackle the issue of moral hazard. That is, the nation’s largest financial institutions would still be insulated from certain risks, critics say, leaving them with distinct business advantages over smaller competitors.

David Min, financial markets expert at the Center for American Progress, said the resolution authority, by definition, has to be unlimited in order to maintain the government’s credibility as an effective backstop. But such a system, he added, will lower the capital costs for the largest institutions, making it more difficult for smaller banks to compete.

“The whole scheme of systemic stability really favors larger institutions and encourages them to become too big to fail,” Min said.

Sherman agrees. “That is a huge gravy train to the top 20 [financial institutions] because it allows them to borrow money at a lower rate,” Sherman said by phone last week. “Think of what this does to moral hazard.”

No stranger to taking on the finance industry, Sherman was a lonely voice in the push earlier in the year to apply more stringent executive compensation limits to bailed out Wall Street firms — a push that went precisely nowhere in the face of White House opposition.

Some economists, notably Paul Volcker, former chairman of the Federal Reserve and now head of the White House Economic Recovery Advisory Board, have an alternative solution to the too-big-to-fail problem. They want to put back the firewalls between commercial and investment banking — firewalls dismantled in 1999 with the repeal of the Glass-Steagle Act. But that proposal has gained little traction on Capitol Hill, where the finance industry remains a hugely influential player despite its role igniting the recent recession. Min said the Obama administration took a look through its “political lens” and decided to tackle finance reforms without reinstalling Glass-Steagle.

Frank’s panel will hold a hearing on the House legislation Thursday, with Treasury Secretary Tim Geithner testifying.

Expect some fireworks. At a Financial Services hearing last month, Sherman pressed Geithner to apply some limits to his request for new bailout powers. “Would great harm be done to this statute,” Sherman asked, “if we limited the executive branch’s authority to a mere $1 trillion?”

An annoyed Geithner eluded the question before reaching the conclusion that Sherman was “fundamentally mischaracterizing” the provision. The Treasury Department did not respond to requests for comment.

Sherman said he intends to offer a series of amendments addressing the issue during the Financial Services panel’s markup of the bill, which has yet to be scheduled. Included will be a provision to cap the president’s bailout authority at $1 trillion, and another to strip out the resolution authority language entirely. A potential third proposal — to create an oversight panel like that monitoring TARP funds — is one he’s leaning against.

“I’m not looking for a TARP on steroids with oversight,” Sherman said. “I’m looking for an end of TARP.”

Comments

45 Comments

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Brad Sherman: Finance Safeguards An Executive Power Grab, "TARP On Steroids" | Proinvests.com
Pingback posted October 28, 2009 @ 4:07 pm

[...] Read the whole story: Washington Independent Wednesday, October 28th, 2009 Uncategorized [...]


boxjob
Comment posted October 28, 2009 @ 4:14 pm

So break them up like the Europeans just did with ING. Oh I forgot. In this country the banks tell the government what to do not the other way around,.


Guest Post: Government Is Trying to Make Bailouts for the Giant Banks PERMANENT « naked capitalism
Pingback posted October 28, 2009 @ 5:38 pm

[...] week, Sherman made the following comments to the Washington Independent regarding Congress’ proposed bill on the too big to fails: That [...]


newskin234
Comment posted October 28, 2009 @ 4:42 pm

Put Glass-Steagle back in place. Investment banking and standard banking have no business being under the same roof.


Forrest
Comment posted October 28, 2009 @ 4:49 pm

You're both right newskin234 and boxjob.

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SaoMagnifico
Comment posted October 28, 2009 @ 4:53 pm

Good for Sherman. Let's put Glass-Steagle back, fix the crisis we have now, and hope it never happens again. I do not want this to be used as an excuse to give the executive branch, especially unelected figures like Geithner and Summers, broad power over the economy. I feel like that sets up a major conflict of interests which I cannot abide.


woundedduck
Comment posted October 28, 2009 @ 5:59 pm

It's phrases like “…leverage their exposure risk” that creates the public's tragic yet unavoidable ignorance of the corrupt financial services industry. Why not, instead, use a phrase such as “didn't have enough money to cover their debts”?


Guest Post: Government Is Trying to Make Bailouts for the Giant Banks PERMANENT | Froogalizer.com
Pingback posted October 28, 2009 @ 7:02 pm

[...] week, Sherman made the following comments to the Washington Independent regarding Congress’ proposed bill on the too big to fails: That [...]


giggitygoo
Comment posted October 28, 2009 @ 7:02 pm

You want real financial oversight and regulation? Support Ron Paul's “Audit the Fed” bill, not this executive power grab that allows Timmay and Summers hand out more free money to their golf buddies on Wall St.


PetrBuben
Comment posted October 28, 2009 @ 7:21 pm

very bad….. lets break up too big to fail oil, bank monopoly corporations.

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Government Is Trying to Make Bailouts for the Giant Banks PERMANENT | America 20XY
Pingback posted October 28, 2009 @ 8:31 pm

[...] week, Sherman made the following comments to the Washington Independent regarding Congress’ proposed bill on the too big to fails: That [...]


COACHEP » Blog Archive » Posts about How Liberals Destroyed California as of October 28, 2009
Pingback posted October 28, 2009 @ 11:56 pm

[...] where some newspapers’ survival would depend on the government liking what they publish? Rep: Finance Safeguards Just ‘TARP on Steroids’ – washingtonindependent.com 10/28/2009 Rep. Brad Sherman (D-Calif.) (house.gov) In the wake of the [...]


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Comment posted October 29, 2009 @ 12:34 am

Steagall.


Mike Elk: Labor Leader Trumka To Testify Against "Reform" Bill Deemed "TARP on Steroids" | Obama Biden White House
Pingback posted October 29, 2009 @ 3:45 am

[...] the proposed legislation would allow the government to bailout banks into the trillions of dollars without having to seek Congressional approval. It would allow the Federal Reserve to bail these banks out secretly without the publicly knowing [...]


Government Is Trying to Make Bailouts for the Giant Banks PERMANENT | Republic Broadcasting Network
Pingback posted October 29, 2009 @ 9:22 am

[...] week, Sherman made the following comments to the Washington Independent regarding Congress’ proposed bill on the too big to fails: That [...]


Mike Elk: Labor Leader Trumka To Testify Against "Reform" Bill Deemed "TARP on Steroids" | Yuvablog
Pingback posted October 29, 2009 @ 9:25 am

[...] the proposed legislation would allow the government to bailout banks into the trillions of dollars without having to seek Congressional approval. It would allow the Federal Reserve to bail these banks out secretly without the publicly knowing [...]


Labor Leader Trumka To Testify in Congress Against Phony Bank Reform Bill « Beaver County Blue
Pingback posted October 29, 2009 @ 10:27 am

[...] the proposed legislation would allow the government to bailout banks into the trillions of dollars without having to seek Congressional approval. It would allow the Federal Reserve to bail these banks out secretly without the publicly knowing [...]


Government Is Trying to Make Bailouts for the Giant Banks PERMANENT « Politics in the News
Pingback posted October 29, 2009 @ 10:39 am

[...] week, Sherman made the following comments to the Washington Independent regarding Congress’ proposed bill on the too big to [...]


Government Is Trying to Make Bailouts for the Giant Banks PERMANENT « Truthwillrise’s Weblog
Pingback posted October 29, 2009 @ 1:39 pm

[...] week, Sherman made the following comments to the Washington Independent regarding Congress’ proposed bill on the too big to fails: That is [...]


WTF Happened to the Real Barney Frank? « Arranology
Pingback posted October 29, 2009 @ 4:24 pm

[...] proposed legislation would allow the government to bail out banks into the trillions of dollars without having to seek Congressional approval. It would allow the Federal Reserve to bail these banks out secretly without the public knowing [...]


harrybous
Comment posted October 30, 2009 @ 1:14 pm

Bank of America took the TARP money and purchased investments. With these investments now, they are intimidating me as a mortgage holder with late paymenet penalties and automated messages that my mortgage payment is late. Now, I can refinance with their sister….bank, Counrywide for being unable to make my mortgage payment. (this is a fabrication, because I am not late but they have unleased their collections department to go after you) this way their sister bank…Countrywide can benefit from intimidated customers who may loose their homes due to foreclosure. (The Collections department has been calling non stop. Bank of America does not answer calls in person.) They do not hire human beings. Thy only invest in technology, banks and foreign institutions.
Thank you Mr. Lewis


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Comment posted September 4, 2010 @ 8:23 pm

Let's put Glass-Steagle back, fix the crisis we have now, and hope it never happens again. I do not want this to be used as an excuse to give the executive branch, especially unelected figures like Geithner and Summers, broad power over the economy. I feel like that sets up a major conflict of interests which I cannot abide.


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Comment posted September 12, 2010 @ 5:45 pm

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Comment posted October 9, 2010 @ 2:05 am

I was reading something else about this on another blog. Interesting. Your position on it is diametrically contradicted to what I read earlier. I am still contemplating over the opposite points of view, but I'm tipped heavily toward yours. And no matter, that's what is so great about modernized democracy and the marketplace of thoughts on-line.


yachtcharter
Comment posted January 18, 2011 @ 8:19 am

this is a joke… it’s just words, but actually no one is acting upon this. they say they’ll to, they’ll take action, hold hearings, etc…


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Comment posted June 7, 2011 @ 7:17 am

The whole scheme of systemic stability really favors larger institutions and encourages them to become too big to fail,


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