The financial-reform package making its way through the Senate continues to get worse. Sen. Christopher J. Dodd, Connecticut Democrat, and Sen. Richard C. Shelby, Alabama Republican, struck a compromise Wednesday on an amendment that they hope will end the “too big to fail” debate by dropping the controversial $50 billion bailout fund proposal. Unfortunately, what’s left in its place represents a massive expansion of government control over the economy.
If the bill as it stands is enacted, the Federal Deposit Insurance Corporation would be given authority to cover losses for failed financial firms and decide how to “wind down” insolvent companies. Under the existing bankruptcy process, the rules of the game are clear. The new plan would give unelected bureaucrats the right to make subjective decisions about winners and losers. Fuzzier, ad-hoc rules would allow government czars to make decisions about which contracts are to be honored and who is to be paid first. Regulators, not creditors and debtors, would be empowered to force an institution into the resolution process.
The end result will be a highly politicized process. Just look at how Mr. Dodd’s legislation gives the Securities and Exchange Commission the power to force names of outside nominees onto the corporate ballot for board of director positions. If there’s any doubt that such provisions are specifically designed to empower unions, one need only look to the way bondholder assets at General Motors and Chrysler were given to organized labor.
Democrats claim that their proposal will prevent companies from getting “too big.” But companies are large for a reason. Large companies often have resources to provide services that smaller ones can’t. In many cases, economies of scale allow large firms to offer products at a lower cost. Preventing businesses from operating efficiently will not only harm consumers, it will also make them more likely to fail.
Meanwhile, the poster children for systemic risk are demanding yet more money from taxpayers. As the Senate debate continued, Freddie Mac sought $10.6 billion from the Treasury to shore up its troubled balance sheet. That money comes in addition to the $126 billion taxpayers have already shelled out to Freddie Mac and its twin, Fannie Mae. Freddie Mac indicated that more bailout requests were likely on the way.
So long as there is no penalty for taking unnecessary risks, and as long as the government signals a willingness to cover losses, the cycle of risk, failure and bailout will continue. Congress needs to stop the cycle by restoring bankruptcy to its central place. It has proved to be the most effective means of reining in bad behavior.
It’s also time to take taxpayers off the hook for the reckless government-sponsored enterprises responsible for creating much of our current financial mess. Sen. John McCain, Arizona Republican, has offered an amendment that eliminates the affordable-housing mandates that encouraged Fannie and Freddie to back hundreds of billions of dollars in risky loans that collapsed when the housing bubble burst. Mr. McCain’s measure also includes a number of common-sense oversight provisions, loosely borrowed from legislation introduced in the House by Rep. Jeb Hensarling, Texas Republican, a longtime advocate of reform of government-sponsored enterprises.
Without fixing Fannie and Freddie and restoring the bankruptcy process, the financial-reform bill remains little more than a government power grab.