I found the Opening Statement at the Full Committee Hearing on ‘Too-Big-to-Fail’ Post- Dodd-Frank, made yesterday (June 26) by The Committee On Financial Services’ Chairman Hensarling, to be notable.
While I don’t necessarily agree with everything said in this Opening Statement – or with all aspects of the following excerpts – here are the excerpts I found most notable:
Today, though, there is a growing bipartisan consensus that the Dodd-Frank Act regrettably did not end the Too Big To Fail phenomenon or its consequent bailouts.
Ending taxpayer funded bailouts is one of the reasons why this committee has invested so much time on Sustainable Housing Reform. The GSEs, Fannie and Freddie, are the original Too Big to Fail poster children, yet were untouched and unreformed in Dodd-Frank. They have received the largest taxpayer bailout ever – nearly $200 billion. Along with the FHA, the government now controls more than 90% of our nation’s mortgage finance market with no end in sight.
Regrettably, Dodd-Frank not only fails to end Too Big to Fail and its attendant taxpayer bailouts – it actually codifies them into law. Title I, Section 113 allows the federal government to actually designate Too Big to Fail firms – also known as SIFIs. In turn, Title II, Section 210, notwithstanding its expost funding language, clearly creates a taxpayer funded bailout system that the CBO estimates will cost taxpayers over $20 billion.
Designating any firm Too Big to Fail is bad policy and worse economics. It causes the erosion of market discipline and risks further bailouts paid in full by hardworking Americans. It also becomes a self-fulfilling prophecy, helping make firms bigger and riskier than they otherwise would be. Since the passage of Dodd-Frank, the big financial institutions have gotten bigger, the small financial institutions have become fewer, the taxpayer has become poorer, and credit allocation has become more political.
I continue to believe that “Too Big To Fail” (TBTF) and “Moral Hazard” issues are of paramount importance. My analyses indicate that these issues lack both recognition and effective remedy, which is very unfortunate.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 1613.93 as this post is written