Tuesday, October 09, 2012

Rep. Frank Refutes Gov. Romney Claim that Dodd-Frank Enshrines Too Big to Fail Doctrine

Rep.Barney Frank (D-MA), Ranking Member of the House Financial Services Committee, has refuted Gov. Mitt Romney;s presidential debate assertion that the Dodd-Frank Act designates a number of banks as too big to fail, and they are effectively guaranteed by the federal government. In fact, said Mr. Frank in a statement posted on the Committee’s website, Title II of Dodd-Frank provides for an orderly liquidation authority to end failed financial institutions. 

 The law says that no aid can be extended to deal with the consequences of a failure of any large financial institution until the institution is put out of business, said Rep. Frank, and any money expended in the course of liquidating such an institution will be recovered first from the failed institution’s assets, and if those are insufficient, then from the financial industry via an assessment on financial institutions with $50 billion in assets or more. 

No funds from the Treasury can be expended in this process without an automatic 100% recovery. This came via the Boxer Amendment, which clarified that no financial firm will be kept alive with taxpayer money. If a financial firm needs to be liquidated, the costs of liquidation will be recovered from the disposition of the company’s assets or will be the responsibility of the financial sector through assessments. (See remarks of Senator Barbara Boxer (D-CA), Cong. Record, May 4, 2010, S3063). According to Senator Mark Warner (D-VA), the Boxer Amendment reaffirms that entry into the resolution authority will mean that the financial firm will go out of business and that this will be an effective death panel for a financial institution. (Cong. Record, May 3, 2010, S3027)

Senator Christopher Dodd (D-CT) said that the Title II liquidation authority will wind down failing financial firms, eliminate shareholder interests, cause culpable management to be fired, impose losses on creditors and require the clawback of any payment to creditors above liquidation value. (House-Senate Conference Committee Meeting of June 17, 2010). Senator Warner said that he did not want to hear the words ``too big to fail’’ ever again, adding that Dodd-Frank creates appropriate tools through the orderly liquidation authority to unwind failing firms and put them out of business at the expense of the financial industry not the taxpayers. (Press Release of Senator Mark Warner, June 21, 2010).

To be fair to Governor Romney, there is a perception among some that, despite the liquidation authority of Dodd-Frank, the federal government would not allow a large US global financial institution to fail. In 2011 testimony before a House Oversight Committee, at that time TARP Special Inspector General Neil Barofsky said that there is still a public perception, reinforced by global credit agencies, that these institutions are still too big to fail. Dodd-Frank was intended to end too big to fail, acknowledged SIGTARP, and the Title II liquidation authority does wind down a failed financial institution, but there is still a market perception that these large firms will simply not be permitted to fail. (Testimony of SIGTARP Neil Barofsky, March 30, 2011, House TARP Oversight Subcommittee).


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