Peter J. Wallison, a financial policy studies fellow at the American Enterprise Institute, recently said that the 2010 Dodd-Frank Act aimed at ending “too big to fail” may make future taxpayer-funded bank bailouts more likely.
Following the financial crisis, members of the Obama administration said that Dodd-Frank would end future bailouts. Under Dodd-Frank, however, swaps are now required to be cleared through eight central clearinghouses, essentially playing a critical role in maintaining the health of the global financial system, The Daily Caller reports.
“If a clearinghouse fails, the U.S. and global economy could grind to a halt as counter-parties do not receive expected payments,” Wallison said, according to The Daily Caller. “In other words, Dodd-Frank has added to the list of financial institutions that are too big to fail and then created a procedure for bailing them out with taxpayer funds if they fail. The Obama administration has been saying that Dodd-Frank eliminated too-big-to-fail. If that were true, there would be no need to provide for bailouts of clearinghouses with taxpayer funds.”
Wallison said that the claim was “never true,” adding that the Obama administration and congressional Democrats extended the authority to the Financial Stability Oversight Council designate the clearinghouses as “systemically important financial institutions.”
The FSOC announced in July that eight clearinghouses are now designated Financial Market Utilities and are eligible for the same bailout by the Federal Reserve given to Bear Stearns and AIG.
“Not only is this another example of the Obama administration saying one thing and doing another, but it also makes the failure of a clearinghouse—and its use of taxpayer funds—more likely,” Wallison said, The Daily Caller reports. “Now that clearinghouses have government backing, their financial strength is less important; they will be encouraged to compete on fee levels or willingness to take risks. In the end, one or more of them will fail, and the taxpayers—once again—will have to come to the rescue.”
Wallison also said that under Dodd-Frank, the Federal Reserve is prohibited from using its funds to bail out individual firms like in the case of AIG.
“Most members of Congress have probably been telling voters during the current campaign that Dodd-Frank put a stop to that,” Wallison said, according to The Daily Caller. “No so. The act permits the FSOC to designate any financial institution that is engaged in clearing, settlement or payments activities—that is, almost every bank of any size—as eligible for a Federal Reserve bailout if its financial condition might prevent it from performing these functions.”
Wallison pointed to comments by Republican presidential hopeful Mitt Romney that the Dodd-Frank Act is a “big kiss” for Wall Street banks.
“That is bad enough, because it provides them with lower cost funding than their smaller competitors,” Wallison said, The Daily Caller reports. “But by providing specific authority for Federal Reserve bailouts in the future, Dodd-Frank reneges on its most basic promise to American taxpayers.”