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TARP without Strings

Wednesday, September 29, 2010

The most worrisome element of the Dodd-Frank bill involves not what is in it, but what was intentionally left out altogether.

The 2,319-page Dodd-Frank Financial Regulatory Reform Bill touches almost every corner of the economy and creates massive new bureaucracies. The table of contents alone spans 15 pages. But the most worrisome element of the bill involves not what is in it, but what was intentionally left out altogether. Unbeknownst to many, the bill’s supporters—with the purposeful omission of a few words—gave themselves, and the federal government, in essence, uncapped access to tax dollars for bailouts.

The provision singlehandedly granting the government this unprecedented borrowing authority is tucked away in a little section of the bill deceptively titled, the “Orderly Liquidation Fund” (OLF).  The OLF is part of a new government program under the Federal Deposit Insurance Corporation (FDIC). The bill’s authors say the OLF will be used only to liquidate “failing systemically significant financial companies.” They claim that it will not be used for bailouts, and taxpayer exposure will be limited.

We’ve already seen enough backdoor bailouts to know that when the government says ‘liquidation,’ it often means propping up companies for years while funneling billions of taxpayer funds to counterparties and creditors.

We have already seen enough backdoor bailouts to know that when the government says “liquidation,” it often means propping up companies for years while funneling billions of taxpayer funds to counterparties and creditors. Consider AIG, which over the past two years has received over $130 billion in taxpayer funds. The company’s “global divestiture program” is entering its eighteenth month of restructuring with no end in sight. The “liquidation” of AIG funded billions to counterparties and creditors, which included foreign banks.

With this provision, the government now has unchecked authority to bail out all the counterparties and creditors it wants. While the OLF provision uses language nearly identical to that of the Federal Deposit Insurance Act—which sets an aggregate limit to the FDIC’s borrowing authority at $500,000,000,000—there is one glaring difference. The OLF provision does not include any type of aggregate limit.

The Orderly Liquidation Fund can borrow as much as it wants from the taxpayer-funded Treasury. If you thought TARP was excessive, just wait until OLF kicks into gear.

Lest you think this was a mere oversight, the House-passed bill originally included four pages worth of provisions that limited how and when the FDIC could borrow money from the Treasury and even set a hard cap on the amount. But these pages were conspicuously dropped from the final bill shortly before the final vote.

Furthermore, the bill also explicitly states that OLF borrowing will not impact the FDIC’s $500 billion aggregate limit.

Put simply, the OLF can borrow as much as it wants from the taxpayer-funded Treasury. If you thought the Troubled Asset Relief Program was excessive, just wait until OLF kicks into gear. At least with TARP there was an upper limit of $700 billion.

During the financial crisis, we witnessed government agencies using extraordinary authorities granted to them nearly a century ago during the Great Depression. Many questioned the wisdom of past Congresses granting these agencies unfettered powers. We can only hope that a future Congress will recognize the dangers of this new unchecked borrowing authority and exercise its power over the purse.

Derek Kan was policy advisor to Senate Republican Leader Mitch McConnell and chief economist at the Senate Republican Policy Committee.

FURTHER READING: Vincent Reinhart remembers the Fed “Getting Lehman Profoundly Wrong” and encourages “Setting the Table for Fiscal Restraint.” Andrew Biggs asks, “Why Does Government Grow and Grow and Grow?” and says, “Spending, Not Tax Cuts, Is the Real Driver of the Fiscal Mess.” Desmond Lachman announces “The Emerging Markets’ Century.”
 
Image by Rob Green/Bergman Group.

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