On April 18th, the FDIC released a paper, The Orderly Liquidation of Lehman Brothers Holdings under the Dodd-Frank Act, which explains how it could have used the resolution authority in Title II of Dodd-Frank to taken down Lehman Brothers with no losses to taxpayers and without collapsing the financial system.
This is pretty funny, because three days earlier, on April 15th, the House voted to repeal Dodd-Frank and resolution authority.
Let’s repeat that. In 2008, Lehman brothers collapsed and was put in bankruptcy, causing a wave of panic throughout the financial system. Money market funds broke the buck, liquidity was disappearing, and the government had to step in with a massive, unpopular bailout in the form of TARP. As a reminder, Paul Ryan voted for TARP.
In July 2010 the Dodd-Frank financial reform bill was passed to give FDIC powers to resolve large non-banks as if they were commercial banks, so Lehman wouldn’t go speeding into bankruptcy court and collapse the system. Paul Ryan voted against Dodd-Frank.
In his Path to Prosperity budget he included removing Dodd-Frank and resolution authority as part of what was necessary to fix our budget problems. The actual budget doesn’t mention the CFPB, derivatives, or other parts of Dodd-Frank but instead just mentions resolution authority. That’s the power to tell banks “make a will in case you fail” and allows the FDIC to take them down as if they were a bank.
As the FDIC was preparing a document it released three days later that argued resolution authority could have prevented a panic in the case of Lehman Brothers, put losses on shareholders and creditors, gotten a high recovery from maintaining value and fired senior management, House Republicans voted to pass the Path to Prosperity, repealing Dodd-Frank removing this needed power from the government.
I’m still shocked by what the GOP is up to here. Sheila Bair, the Chairman of the FDIC and who oversaw the report, was the counsel to Bob Dole in the Senate. How different one decade makes the Republican party. Here’s the FDIC, run by a presumed RINO, trying to find a solution to a serious problem – how can we force a large financial company into failure without taking down the system. Does Ryan even have a solution? His budget doesn’t. The only thing I’ve heard him mention involves coco bonds, which is an extension of resolution authority, not a substitute. Is it just “let’s do it all again and think it will go differently?”
We do know that the largest banks are fighting resolution authority and the requirement to make living wills, which puts them on a path to no longer be too big to fail. Is it really that cynical?