BARNEY FRANK AND “DEATH PANELS”
Jul 23, 2014 -
At today’s Financial Services Committee hearing marking the four-year anniversary of the Dodd-Frank Act, former Committee Chairman Barney Frank proclaimed, as he has on many prior occasions, that the law that bears his name created “death panels” for large financial institutions, which he claims will be “terminated” in the event that they reach the point of failure. Yet as conclusively demonstrated by a Republican staff report released earlier this week and testified to by a host of experts who have examined the Dodd-Frank Act and its implementation, the former Chairman has his facts wrong.
Indeed, none other than former Federal Reserve Chairman Paul Volcker has suggested that under the Dodd-Frank Act’s “Orderly Liquidation Authority,” what awaits a “too big to fail” firm that reaches the point of failure is not death, but eternal life, under the auspices of the federal government. A press account of a December 11, 2013 forum hosted by the FDIC on its “Single Point of Entry” strategy for implementing Dodd-Frank’s “Orderly Liquidation Authority” quotes Chairman Volcker as follows:
“When I read [the “Single Point of Entry” proposal], it doesn’t sound like a liquidating situation,” he said. It sounds more like the FDIC “takes a little cancer out” and “the rest of it goes on as the Great Universal Bank of the U.S. A lot of people look at this and they say, ‘This is a fancy way to subsidize or temporarily assist the company so it can continue in its new life.’ That’s what happened last time.”
Source: Barbara Rehm, FDIC’s Own Experts Skeptical of Resolution Plan, American Banker, Dec. 12, 2013.
In addition to Chairman Volcker, numerous financial experts, including two sitting Federal Reserve regional bank presidents, have dismissed the notion that Dodd-Frank will result in the “termination” of firms that are put through the “Orderly Liquidation” process mandated by Dodd-Frank:
Selected witness statements from the Oversight Subcommittee’s May 15, 2013 hearing entitled Who is Too Big to Fail: Does Title II of the Dodd-Frank Act Enshrine Taxpayer-Funded Bailouts?”
“[T]aking a position on the likelihood of bailouts requires defining what one means by bailout, examining the Orderly Liquidation Authority (OLA) of Title II, and assessing-based on practical experience--how it would actually work. Doing so leads me to take the position that bailouts and too-big-to-fail are preserved rather than eliminated under Title II.
“To see this, first note that while full liquidation with wiped out shareholders was a major selling point of the Dodd-Frank Act-that is the reason for the in “L” in OLA-in the years since the Act was passed the focus of the FDIC has been on how to resolve and reorganize the failing firm into an ongoing concern, rather than on how to liquidate it.”
--John Taylor, Professor, Stanford University
“The single point of entry won’t end Too Big To Fail at all. It will essentially rescue the troubled financial institution and is designed to ensure that the institution retains just as dominant a position after a financial crisis as before it.”
--David Skeel, Professor of Law, University of Pennsylvania
“The [Orderly Liquidation Fund] will be cheap and will provide great benefit—only the non-systemically holding company creditors will take losses, and the company will emerge from OLA much as it entered, to do it all again.”
--Josh Rosner, noted financial analyst
Selected witness statements from the Committee’s June 26, 2013 hearing entitled Examining How the Dodd-Frank Act Could Result in More Taxpayer-Funded Bailouts
“With regard to Title II, Dodd-Frank described and designates the Orderly Liquidation Authority as the resolution mechanism to handle the disposal of a giant systemically disruptive financial enterprise. These three letters themselves evoke the descriptive doublespeak of what I consider to be an Orwellian nightmare. The “L,” which stands for liquidation, will in practice become a simulated restructuring, as would occur in a Chapter 11 bankruptcy.”
“Whatever you call it, this is taxpayer funding at below market rates. At the Dallas Fed, we would call this form of liquidation a nationalization of a financial institution.”
--Richard Fisher, President, Federal Reserve Bank of Dallas
“I think it is clear that in the Orderly Liquidation Authority and the use of the Orderly Liquidation Fund, the FDIC has a tremendous amount of discretion in the extent to which they provide creditors with returns that are greater than they would receive in bankruptcy.”
--Jeffrey Lacker, President, Federal Reserve Bank of Richmond
Rep. Lynn Westmoreland: This question is for President Fisher and President Lacker. Can Dodd-Frank’s Orderly Liquidation Authority provide the opportunity for more AIG-like bailouts[?]”
President Lacker. Sure . . . the way that the Orderly Liquidation Authority is envisioned to work, with a single point of entry, a parent company, it envisions providing funds from the FDIC that would let creditors of operating subsidiaries escape losses. So I have to say that your characterization is accurate, that it could happen again.
Finally, George Washington University law professor Arthur Wilmarth, whom Mr. Frank invited to testify on financial reform when he chaired the Committee, described the implementation of “Orderly Liquidation Authority” this way: “This doesn’t look like a liquidation. It looks like a restructuring or reorganization in which the systemically important financial institution survives to fight another day. Instead of liquidating or breaking up the institution it comes out the other end … looking much like it did before in terms of its functions and operations.”
Source: Joe Adler, Is the FDIC’s ‘Single-Point Resolution’ Plan a Stealth Bailout? American Banker, Dec. 12, 2013.