The bill creates a moral hazard by making an implied guarantee by the government. It will produce more Fan/Fred situations. It would be vastly more efficacious to divide some or all of these giants up into companies "small enough to fail." That is the primary reason Rs don't like it. I expect that to be the Republican recommendation IF they don't get rolled.
Please show us exactly where there is an "implied guarantee" in the bill.
Be sure to give us the exact location.
As far as I can tell, the government is making the banks set up a system between themselves to stop individual banks from failing.
Apparently the concept of "implied" is lost on you.
Creating a $50 (to begin with) billion dollar fund for bailouts for companies that are considered too big to fail amounts to an implicit guarantee that they will not be allowed to fail without government intervention. That guarantee will cause investors to rely on that implied guarantee, and like Fan and Fred these companies will grow faster than those without that guaranteee, thus they will be presumed to be already too big to fail. They know it, the Congress knows it, and anyone who does business will recognize it.
Notice that Fanny and Freddy are still intact, and remain too big to fail with their implicit guarantee, such that they aren't even mentioned in the legislation. They were and are GSEs (government Sponsored Enterprises) which endowed them with an implied guarantee which was the subject of warnings even into the late nineties.
It does not matter that the funding for that guarantee will come in part from the companies themselves, the guarantee is the same.
The Republicans would prefer to take action to see that they don't get that big in the first place, and a good way to accomplish that is to dismember them now.
im·ply -
1 obsolete : enfold, entwine
2 : to involve or indicate by inference, association, or necessary consequence rather than by direct statement <rights imply obligations>
3 : to contain potentially
4 : to express indirectly <his silence implied consent>
EDIT: Apr 16, 2010
By
Major Garrett - FOXNews.com
<SNIP>
The Senate Republican leader,
Mitch McConnell of Kentucky,
offered mute praise for the administration’s formal dismissal of a so-called bailout fund.
“I appreciate the Obama administration’s recognition of the need to substantively improve this bill,” McConnell said from Louisville. “And I hope we can work with them to close the remaining bailout loopholes that put American taxpayers on the hook for financial institutions that become ‘too big to fail.’”
The administration has never been a fan of the bailout reserve fund, a mechanism in both the House-passed bill and legislation passed out of the Senate Banking Committee. The House passed it as a populist move to tax big financial firms up front in case there is a need to finance a liquidation. Sen. Chris Dodd, D-Conn., included a version of the fund in the Senate bill.
Treasury Secretary Geithner testified before the House Financial Services Committee on Oct. 26, 2009, that
big Wall Street firms should finance liquidations after they happen (through what’s called an ex-post fund), not build up a rainy day fund (known as an ex-ante fund) in case a failure occurs.
“
Such an ex-post funding mechanism has several advantages over an ex-ante fund,” Geithner said. “Most notably, it would generate less moral hazard because a standing fund would create expectations that the government would step in to protect shareholders and creditors from losses. In essence, a standing fund would be viewed as a form of insurance for those stakeholders.”
