By Peter J. Wallison

One thing can be said about the current debate over the administration’s financial regulation plan, or at least Senator Chris Dodd’s version: the debate has sharpened the issues so that Dodd, the Democrats, and the administration can no longer hide behind slogans. If the administration thought that the bill could be passed simply because the American people resent Wall Street and the big banks, they may have guessed wrong. Senate Minority Leader Mitch McConnell has called them on this, and pointed out that the Dodd bill has some troubling provisions. This required Dodd, in a speech yesterday, to defend the provisions of the bill. The fact that he did it with misinformation is really a step forward, considering where the administration and he have been for the last few weeks. Read the rest of this entry »

By PETER J. WALLISON AND DAVID SKEEL

There are many reasons to oppose Sen. Chris Dodd’s (D., Conn.) financial regulation bill. The simplest and clearest is that the FDIC is completely unequipped by experience to handle the failure of a giant nonbank financial institution.

The country should be grateful for the determination with which the FDIC Chair, Sheila Bair, has thus far guided the agency through the financial crisis. But it is wrong to think that because the FDIC can handle the closure of small banks it is equipped to take over and close a giant, nonbank financial firm like a Lehman Brothers or an AIG.

Consider first that the largest bank the FDIC closed in the recent financial crisis, IndyMac, had assets of $32 billion. The largest bank ever to fail, Continental Illinois in 1984, had assets of $40 billion. At $639 billion, Lehman Brothers was nearly 15 times bigger; AIG had over $1 trillion in assets when it was kept from failing by the Federal Reserve.

The assets of a large, nonbank financial institution are also different. Neither Lehman nor AIG had insured depositors—or depositors of any kind—and their complex assets and liabilities did not look anything like the simple small loans and residential and commercial mortgages the FDIC deals with.

Moreover, the policies the FDIC follows when it closes small banks would be positively harmful if they were used to close a huge nonbank financial institution. The agency is used to operating in secret, over a weekend; its strategy is always to find a buyer. When applied in the case of a large, failing nonbank financial institution, this means that some other large, “too big to fail” institution will only become that much larger.

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WASHINGTON, DC – House Majority Leader Steny H. Hoyer (MD) released the following statement today after Senate Banking Committee Chairman Chris Dodd (D-CT) unveiled his Wall Street reform proposal:

“I want to congratulate Chairman Dodd for introducing a strong Wall Street reform proposal today. This proposal incorporates ideas included in the House-passed bill, but there are significant differences that will have to be worked out. I look forward to the Senate completing work on this legislation soon, so that we can go to conference and send a final bill to the President for his signature shortly thereafter.”

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