The never-ending bailout

Peter Wallison, writing at the Wall Street Journal,
Taxpayers and the Dodd Bill
The FDIC could borrow vast sums to bail out failing banks and their creditors.

Last week, the Congressional Budget Office reported on the costs of the Dodd bill. It reviewed the budgetary effects of the bill’s $50 billion resolution fund for the large nonbank financial firms—insurance companies, securities firms, hedge funds, bank holding companies, finance companies and others—that are considered “systemically important” and thus too big to fail. These firms, among others, would be assessed for the $50 billion fund, which Mr. Obama apparently believes will not be a cost to the taxpayers.

But in a footnote the CBO reported that “such assessments would become an additional business expense for the companies required to pay them.” This means the assessments will be tax deductible, and place additional costs on other U.S. taxpayers to make up the difference in government revenue. Thus, even on the face of it, taxpayers will not completely escape the tax costs that are associated with this fund.

That is merely the beginning. The footnote goes on to say, somewhat elliptically, that “those additional expenses would result in decreases in taxable income somewhere in the economy, which would produce a loss of government revenue from income and payroll taxes.” The meaning? A loss of government revenue from income and payroll taxes means a loss of the things that produce income and payroll taxes—that is, jobs.

This will occur simply because of the size of the fund. It doesn’t account for the jobs that will be lost if large U.S. financial firms are priced out of foreign markets because of the costs of the resolution fund. Nor does it include the added costs that will be built into the products that taxpayers—as consumers—will buy. Thus the $50 billion resolution fund is not cost-free to the taxpayers.

If the Dodd-Obama resolution plan is ever actually put to use, the direct or indirect costs could be many times greater. For example, the bill authorizes the Federal Deposit Insurance Corporation to borrow from the Treasury “up to 90 percent of the fair value of assets” of any company the FDIC is resolving. Yet one institution alone—Citigroup—has assets currently valued at about $1.8 trillion. The potential costs of resolving it (not to mention others) would be spectacularly higher than $50 billion. In short, the $50 billion in the resolution fund is a political number—a fraction of what the FDIC is authorized to borrow and spend.

The effect? The FDIC would be able to borrow huge sums so that it could make more generous payments to creditors than they would receive in a bankruptcy,

encourage lending to the too-big-to-fail financial institutions while disadvantaging smaller, less favored institutions. This in itself will have a profound and destructive effect on competition.

We are witnessing the gutting of the competitive banking system by the administration.