Garrett's WSJ Op-Ed: No More Bailouts
Washington,
Jun 18 -
The House GOP's Alternative to Geithnerism.
By SCOTT GARRETT, JEB HENSARLING and TOM PRICE
http://online.wsj.com/article/SB124529213914426353.html
The turmoil of the past year has caused us to reconsider what we believe to be the reality of the marketplace. Titans of industry, once considered impervious, proved that they weren't as resistant to crisis as was once thought. While the effects of this crisis are still evident in our communities, we've seemed to survive the most turbulent period. Now is the challenge of figuring out how to pick up the pieces to prevent a similar occurrence from happening again – all the while making sure that as we reassemble those pieces, what emerges preserves the free market system.
The Republican leaders of the Financial Services Committee have developed a reform package aimed at preserving free market principles while providing significant reform to our antiquated banking regulations. Our plan includes enhancements to our bankruptcy code, the creation of a Market Stability and Capital Adequacy Board, reforms to the Federal Reserve's authority and a path to privatization for the Government Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac. Our solution also addresses needed reforms to regulatory agencies through regulatory consolidation of depository institutions, including moving supervisory authority from the Federal Reserve and the Federal Deposit Insurance Corporation to this new agency.
Unlike the proposal from the Obama Administration, the core of our plan is a promise to the American taxpayer: no more bailouts. The actions of the past year have merely incentivized additional excessive risk-taking by providing the promise of a government backstop. This backstop – whether in the form of capital injections, loan guarantees, or the purchase of toxic assets – exposes taxpayers to untold risk while benefitting firms, creditors and counterparties that have made questionable decisions. We must put an end to the bailout mentality that has gripped our government and changed the face of our financial sector.
We need to reverse the trend of government interference in the marketplace. Our plan creates a legal reform to allow for the resolution of insolvent non-bank institutions, regardless of size. The United States has a long history using the constitutionally defined bankruptcy court system to resolve failed or illiquid institutions. This new section of the law allows for the failure of large firms without undue greater harm to the broader economy. This will expedite the process and consolidate expertise for resolving large financial institution failures, without institutionalizing too-big-to-fail companies, concentrating too much power in a federal entity, or exposing taxpayer funds - all of which are possible under the bailout authority proposed by our Democrat colleagues.
Our plan also addresses two of the most prominent wards of the state, Fannie Mae and Freddie Mac. Fannie and Freddie played leading roles in adding fuel to the mortgage finance fire that burned down a great portion of our financial system and economy as a whole. By financing roughly 36 percent of the subprime housing market and recklessly growing their leverage to 100-to-1, they abused their federally granted competitive advantages in the marketplace and have run up a bill with the taxpayers to the tune of hundreds of billions of dollars and counting. We are proposing a phase-out of taxpayer subsidies and a sunset of the current GSE conservatorship, telling Fannie and Freddie they must either learn to compete on a level playing filed with other private sector companies or be placed into receivership to save taxpayers from even more liability.
In addition, we must have significant reform of the role of the Federal Reserve in our financial sector. While the Fed is a favorite candidate for a systemic risk regulator role, it has a regulatory record that leaves much to be desired. Its handling of monetary policy in the years leading up to the current crisis is often mentioned as one of the crisis' enabling events. Furthermore, the Fed already has the role of regulator for large bank holding companies, such as Citi and Bank of America, which are two of the largest recipients of federal TARP funds. We must refocus the Fed on monetary policy, and reassign its regulatory and supervisory responsibilities to other agencies. We also limit the Fed's over-abused authority, by narrowly defining the "exigent circumstances" clause it has used to bailout firms. In the future, such moves by the Fed would need to be truly emergency actions, not new lending programs spanning months.
As previously mentioned, the idea of a proposed systemic risk regulator is quite worrisome, regardless of whether it is the Fed or a separate entity. By creating a systemic risk regulator, we would essentially establish a dozen new "too big to fail" companies that, like Fannie and Freddie, would have inherent market advantages because of that distinction. Privatizing profits and socializing risk is a bad business model, and even worse for taxpayers. As an alternative to a systemic risk regulator, we propose a Market Stability and Capital Adequacy Board responsible for observing the strength of the financial system. Such a board will have the potential to identify risks to the system rather than designate selected institutions as protected from failure.
We also recognize that our financial services sector is in significant need of regulatory restructuring. Yet, many areas that are already subject to significant regulation are some of those with the most problems. As previously mentioned, Bank of America and Citi were regulated by the Fed as bank holding companies. IndyMac and Washington Mutual were both regulated by the Office of Thrift Supervision.
Additionally, OTS had oversight responsibility for the AIG Financial Products unit, where most of its problems originated. The current system needs to be streamlined to reduce regulatory gaps and redundancies with more appropriate regulatory expertise targeted to particular subsidiaries of large financial institutions. We propose consolidating depository institution regulators into one agency that also possesses the supervisory functions of the Federal Reserve and the FDIC. This will allow for consistent supervision over depository institutions, while creating greater transparency within the system.
The ability of the financial services industry to help Americans achieve financial security is paramount. To preserve this, the financial services sector must offer a fair and transparent playing field for borrowers and investors. A competitive financial services industry, populated by well run, properly regulated companies, is the best means of helping Americans achieve their financial goals. Regulatory reform is needed to make sure that financial companies are never again allowed to wager their consumers' money without consequence, nor to rely on the government for a handout when they make reckless decisions.
Under the leadership of Ranking Member Bachus, the Republicans on the Financial Services Committee have crafted a thoughtful and substantive plan for regulatory reform. It's time to reject the "too big to fail" bailout logic that has resulted in unprecedented government intrusion into the marketplace and reinstate the free market principles that are the cornerstone of our nation and a healthy financial sector.
Messrs. Garrett, Hensarling, and Price are Members of the House Financial Services Committee and contributors to the Republican Financial Services Regulatory Reform Proposal.
