Boxer Financial Reform Amendment Would Force Liquidation

If there's anything the average American wants financial reform legislation to do, it's to ensure taxpayers aren't on the hook for future bailouts. Yet, the government retaining the power to save big firms is one of the very fears that Senators on both sides of the aisle share about the bill under consideration. It's an explicit concern for Republicans, and prominent Democratic Senator Barbara Boxer (D-CA) introduced an amendment on Thursday that would seek to force the government to liquidate large institutions that run into trouble.

First, here's the text of the short amendment:

SEC. 212. PROHIBITION ON TAXPAYER FUNDING.

(a) LIQUIDATION REQUIRED.--All financial companies put into receivership under this title shall be liquidated. No taxpayer funds shall be used to prevent the liquidation of any financial company under this title.

(b) RECOVERY OF FUND. - All funds expended in the liquidation of a financial company under this title shall be recovered from the disposition of assets of such financial company, or shall be the responsibility of the financial sector, through assessments.

(c) NO LOSSES TO TAXPAYERS. - Taxpayers shall bear no losses from the exercise of any authority under this title.

It would fit into Title II -- where the non-bank resolution authority is defined and created. As you can see, the amendment would leave no discretion for the government to save a firm through the resolution process.

Will Republicans Cheer?

This should please Republicans, but it's unlikely they'll be completely satisfied. The Boxer amendment does not address the Federal Reserve. As they made clear through their financial reform proposal, Republicans remain concerned that the Federal Reserve has too much power to prop up failing firms. While the Republicans will likely welcome Boxer's change, they may seek additional language forbidding the Fed from using its emergency funding authority to bail out big banks.

Moreover, the provision may require liquidation, but it doesn't prevent an implicit sort of bailout for large institutions going forward. To do that, it would have to eliminate the $50 billion resolution fund. Republicans are concerned about the existence of such a fund to cover liquidation costs. They worry it could provide firms that would utilize the fund through failure a competitive advantage by achieving lower borrowing costs with creditors sensing less risk. The Boxer amendment doesn't address this concern.

Should Failure Be The Only Option?

There is a problem with a provision like this, however: it's not entirely clear that liquidation is the right approach in dealing with every troubled big firm. For example, Goldman Sachs and Morgan Stanley were near failure during the financial crisis due to liquidity problems and negative sentiment caused by a market panic -- not because their business was stricken by inherent problems that should have led to their bankruptcy.

In such cases, a so-called bail-in approach has been suggested, where some debt could be converted to equity to save a firm, rather than rely on a bailout or liquidation. Senators Mark Warner (D-VA) and Bob Corker (R-TN) have championed this contingent bond approach. But the Boxer amendment would imply that, for any firm that runs into trouble, failure would be its only option.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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