A Potential Left-Right Consensus For Financial Reform? A Telling Example with the Miller-Moore Amendment.

Reihan Salam, in trying to navigate a potential left-right program for building on and reforming Dodd-Frank, offers us Charles Calomiris’ short paper Beyond Basel and the Dodd-Frank Bill.  Salam asks “Is this a program around which we can build a [left-right] consensus?”

There’s a part of the paper that’s really interesting for how financial reform played out.  Calomiris (my bold):

Limit the extent of discretionary bailouts of creditors under Dodd-Frank. As noted above, the DoddFrank bill makes unlimited bailouts of creditors possible. This is a mistake that could be easily corrected by explicitly limiting the protection of creditors to no more than “x” percentage of their principal. Even if creditors knew that only 90% of their principal was protected, that would provide a powerful incentive for them to be careful about the riskiness of the banks in which they invest. By making that percentage sufficiently generous (say, 90%), the rule should be credibly enforceable, since there could be no justification for the view that permitting a 10% loss to a creditor would produce a chain reaction of cascading loss leading to a global financial meltdown.

This is one of the hallmarks for the conservative reform of Dodd-Frank, presented at the conservative think tank Economics 21 in October, 2010. Creditors would only get back 90% of their principal in case of a winddown. If conservatives could do something to fix Dodd-Frank, this would be it. Taking creditors and telling them that they’d only get back X% in case of a winddown….hmmm……that sounds familiar….

Let’s hop in the wayback machine. Specifically the Miller-Moore amendment in the House version of the bill (my bold):


(iv) PAYMENTS TO FULLY SECURED CREDITORS.—Notwithstanding any other provision of law, in any receivership of a covered financial company in which amounts realized from the resolution are insufficient to satisfy completely any amounts owed to the United States or to the Fund, as determined in the receiver’s sole discretion, an allowed claim under a legally enforceable or perfected security interest (that became a legally enforceable or perfected security interest after the date of the enactment of this clause), other than a legally enforceable or perfected security interest of the Federal Government, in any of the assets of the covered financial company in receivership may be treated as an unsecured claim in the amount of up to 20 percent as necessary to satisfy any amounts owed to the United States or to the Fund. Any balance of such claim that is treated as an unsecured claim under this subparagraph shall be paid as a general liability of the covered financial company.

This “Miller-Moore amendment” turns secured creditors from 100% secured to 80% secured and 20% unsecured with these unsecured claims getting hit after shareholders and unsecured creditors. You are guaranteed 80%, and then the next 20% might have to take a hit in the writedown. This is designed to hit creditors that seize collateral at the last minute, increasing liquidity pressures.

This is close to the vision of the conservative reform listed above – instead of 90% it’s 8)%,and instead of a flat 10% hit, it’s a split to take 20% off and put it as more likely to be winded down as an unsecured claim. Though not exactly the same, its a fairly close substitute to the mechanism mentioned above – if anything it is less strong, less blunt.

So given that two Democratic House members, Miller and Moore, offered an amendment that is close to what the conservative approach should look like, how did voting on the amendment go? Vote record:

Yes, the Republicans are on the right side of the chart, Democrats on the left side of the chart. And yes, every single Republican voted against it. You’d think since this was within an arm’s length of the conservative answer to financial reform, you’d have at least one Republican vote “Present.”  Maybe, just maybe, one would even go as far as to vote in favor.

But those are Republican in Congress. What about the the rest of the conservative movement? If this is essential to the conservative answer to financial reform, certainly the network of think tanks – the hundreds of word salad mad lib places like Center for Responsible Heritage of the Tax Competitiveness of the Family Market, funded by people who inherit billions – stepped up, right? The rest of the “conservative noise machine” should have gotten out the message.

I watched closely, and I didn’t see a single peep out of any of the movement conservative apparatus on this topic. None.

Meanwhile, team LiberalProgressive worked really hard to educate the public about this. Yves Smith and Felix Salmon had an extensive back-and-forth on the topic, with Congressman Miller jumping in comments to clarify the language. Tim Fernholz of The American Prospect said we need to “create rules like the Miller-Moore Amendment that would limit risky overnight financing.” Ezra Klein at the Washington Post pointed out that putting pressure on creditors can be done by “attach[ing] the Miller-Moore amendment that passed in the House” to the Senate Bill. David Dayen at the Progressive FireDogLake argued that the Miller-Moore amendment is a “really important amendments from the House side” that needed to be in the final bill. And I flagged it on my high priority short list of things that were in the House Bill but not in the Senate Bill that were important. And again, no movement conservatives I saw on the internet wrote to educate the public about it.

That’s a crazy lineup for something that is supposed to now be the conservative idea!

As I feared, it didn’t make it into the final bill. It was replaced with a study. But maybe everyone can team up to push that study or something, years after it had a reasonable chance of passing.

In so much as the conservative approach to fixing Dodd-Frank looks like stuff Brad Miller wanted to do two years ago, count me in. But note what happened here. That vote was a tough vote. Calomiris is right, this is a serious piece of reform. All those Democrats who voted for this put their necks out, saying that TBTF needs to stop and that creditors for big financial institutions have to watch out. Republicans could run to Wall Street and point out how they didn’t vote on anything that upset the apple cart. This killed the chances of any left-right alliance and made bank-friendly New Dems the median voter who would decide the course of action. And now Republicans can come back after the fact and point out weaknesses in the bill. That’s a pretty sweet gig.

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4 Responses to A Potential Left-Right Consensus For Financial Reform? A Telling Example with the Miller-Moore Amendment.

  1. Frank says:

    A rightwing blogger recently proposed some pharma sector reforms that were nearly identical to what an academic friend of mine has been advocating for years. I think he wants some credit…but I think he should just not say anything! Just pretend it’s their idea! The idea must come from the “red team” to gain any traction in official Washington.

  2. Carter says:

    I do think regulators are taking the concept seriously: it is very much in the spirit of the bail-in discussions that are occurring at Basel and in the industry. The idea is to avoid the externalities of bankruptcy (such as acceleration of derivative contracts; firesales) while executing a fast recapitalization that wipes out (or significantly dilutes) existing equity, and haircuts creditors according to seniority. Here is a link to the original proposal:


  3. Pingback: Links 4/7/11 « naked capitalism

  4. Pingback: Links 4/7/11 | Jackpot Investor

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