BLOG VIEW: With each passing day, the political debate surrounding the proposed overhaul of financial regulation is starting to look more and more like the healthcare tsunami that washed over headlines for the better part of the past year.
What began as perhaps an earnest discussion about consumer protection, systemic risk and regulators' purviews has quickly deteriorated into a he-said/she-said affair between Democrats and Republicans meant to galvanize, rather than inform, the public. Recent evidence of this is found in Senate Minority Leader Mitch McConnell's conclusion last week that Sen. Chris Dodd's bill, if passed in its current form, would place a government seal of approval on bailouts.
‘Everybody agrees on the need to protect taxpayers from being on the hook for future Wall Street bailouts,’ McConnell said. ‘This bill would all but guarantee that the pattern continues.’
The White House – due in no small part to the fact that Dodd's legislation explicitly provides otherwise – took umbrage at these comments. The bill, you'll recall, includes a $50 billion liquidation fund that would (a) be used to wind down "too big too fail" companies, and (b) be funded by industry participants themselves – not taxpayers. McConnell acknowledged the fund in his media statement but discounted its potential impact, suggesting instead that the fund would be woefully insufficient in practice.
The motivation behind McConnell's comments is all the more questionable when linked to a January 2010 poll conducted by Virginia-based The Word Doctors (as White House communications director Jen Psaki had no problem doing in a blog last week). The poll, titled "Language of Financial Reform," spelled out for the financial bill's opponents the quickest way to defeat reform.
"[A] vote in favor of creating a permanent bailout fund of private companies is like committing political hari-kari. Frankly, the single best way to kill any legislation is to link it to the Big Bank Bailout," the report read.
While appearing on CNN's "State of the Union" broadcast Sunday, McConnell was questioned on the matter by the station's chief political correspondent, Candy Crowley.
‘Regardless of where theâ�¦how the money is produced, it is a bailout fund that sort of guarantees in pertuity that we'll be intervening once again to bail out these big firms," McConnell replied.
Despite McConnell's insistence to the contrary, the source of a bailout fund's financing is very much an important aspect of this discussion.
Several media outlets recently reported that the Obama administration appears willing to scrap the $50 billion fund, so long as some provision protecting against future bailouts is inserted in its place. According to at least one report from CNN, which cited unnamed Democratic officials, the fund is being viewed as political bait. The premise is that if Democrats agree to eighty-six their plans for the fund – which, along with the proposed Consumer Financial Protection Agency, has become one of this bill's most prominent lightning rods – the GOP's commitment to reform will be put to the test.
Not to be outdone in the faulty-logic category, House Minority Leader John Boehner chimed in on the financial bill Friday afternoon, following news breaking of the Securities and Exchange Commission's (SEC) lawsuit against Goldman Sachs.
In a statement, Boehner recited ostensibly the same taxpayer-funded bailout line as McConnell: ‘Despite President Obama's rhetoric, his permanent bailout bill gives Goldman Sachs and other big Wall Street banks a permanent, taxpayer-funded safety net by designating them 'too big to fail.' Just whose side is President Obama on?’
His statement was accompanied by the following postscript: "NOTE: Goldman Sachs was President Obama's top Wall Street contributor during the 2008 election cycle, donating nearly $1 million to his campaign."
It takes a much smarter person than I to figure out how the SEC's charges against Goldman Sachs undermine the need for regulatory reform. More perplexing still was Boehner's decision to draw political contributions into the debate (a pre-ABACUS Goldman Sachs was among Boehner's top donors in 2006).
To his credit, Boehner did manage to produce at least one understandable argument, saying that "Republicans believe the best way to protect taxpayers is by reforming Fannie Mae and Freddie Mac." Whether the Obama administration wants to admit it or not, housing finance is a major cog in broader financial markets, and there are no bigger players in that space than government wards Fannie and Freddie.
By all appearances, the administration remains steadfast in its opposition to include government-sponsored enterprise reform in the current Senate bill. Instead, the Treasury Department announced last week that administration officials would soon hit the road to gather public input on housing finance via a series of town hall forums. Any guesses on how long before Barney Frank compares an angry protestor to a piece of furniture?
– John Clapp, editor, Servicing Management
(Please address all comments regarding this opinion column to clappj@sm-online.com.)
