The Wall Street Journal's Real Time Economics blog reports that a bi-partisan deal may have been struck in the Senate regarding a non-bank resolution authority. I've argued hard for the creation of such a regulator, to insure that all firms can, in fact, fail -- no matter their size. Unfortunately, the report's description of the Senate's new vision for the resolution authority has me very worried.
Here's what it says:
It would create a "presumption" that large, failing financial companies would have to go through a new bankruptcy process. This is different than what the White House proposed, which would give the government immediate control to put large, failing firms through a government-controlled resolution. The Warner/Corker deal would give the government the option to still put failing firms through a government-structured resolution, but they would have to clear hurdles first and it would be a bit more complicated.
This new bankruptcy process is clearly being driven by Republicans. Back in July I was probably the only journalist around who actually took the time to read the Republicans' dead-on-arrival financial regulation proposal. Obviously, they never had the votes for it to have a chance.
But, in fact, the Republican version's very first section would create something it calls "Chapter 14" bankruptcy for non-bank financial institutions. In other words, what you're seeing is the melding of this concept with the House and Treasury's non-bank resolution authority.
Back in July, I criticized this aspect of the Republican plan, because it's absurd. I won't reiterate that argument here, so see that entry for details. But here's the problem that I see in this new suggestion explained in the block quote above -- it makes resolution slower and more cumbersome.
That's exactly what you don't want. In the complex world of finance, minutes and seconds matter. If you've got a robust, powerful non-bank resolution authority in place, then it will have the power and capability of resolving a large firm very quickly and efficiently. What you don't want is a lot of barriers mucking that up. Do you really want courts involved? Do you really want to create "hurdles" and make it "more complicated" for the firm to be wound down? That would result in a less stable financial system.
What I find most striking about this development is the power that Republicans wield in the Senate when it comes to banking. I mean, the health care debacle already taught us that the Republicans can have an effect on politics in the Senate. Yet, when it came to health care reform, Republicans weren't allowed at the table. But from this report, it looks like the Republicans might have far more influence in the financial reform debate than they did in the health care reform process. This news indicates that they're shaping the Senate bill's direction. I'm not sure why that would be, other than the possibility that the financial industry lobbyists have a great deal more power over Senate Democrats than even the health insurance lobby.
At any rate, this is very disappointing news. One of the aspects of the House bill I was most pleased with was its non-bank resolution authority. It looks like the Senate is on the verge of screwing that up. Instead, they would create a slow, clunky process that could possibly make things worse.
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