Despite an outright ban on bailouts written into the legislation, Wall Street investors and credit agencies remain skeptical that the government will not step in again to prevent any downfall of major banks such as Bank of America, Citigroup or JP Morgan. Those financial goliaths have only grown in size and power, making it more certain that they would bring down much of the financial system with them. The most concrete sign that the banks still enjoy an implicit guarantee from the government is that none of the top banks has been downgraded since the legislation was enacted, even though their high credit ratings for years have been based on the expectation that the government would prevent any catastrophic failure of the bank that would harm the bankÂ’s creditors.
Standard & Poor’s Corp. last week pointedly disputed the often-stated claim on Capitol Hill that the legislation had put an end to “too big to fail” and the era of federal bailouts. S&P thinks “the government in a handful of situations may be forced to provide some sort of support to an institution,” especially if the failure of the bank threatens the economy and well-being of ordinary Americans, as occurred in the fall of 2008, said S&P managing director Rodrigo Quantanilla. S&P cited the long history of bank bailouts in times of economic stress as well as what it sees as ambiguities in the Wall Street reform law. The S&P may change its mind, depending on how regulations implementing the law turn out. Yet the agency is so skeptical of Congress’ resolve that it expects an amendment to the Wall Street reform law to remove any ambiguity and make it easier to bail out big banks.
“For us to change our views about whether the U.S. government remains supportive or not,” Congress would have to, among other things, require that bank creditors are forced to take losses if a bank makes mistakes that leads to its failure, Mr. Quantanilla said. Attempts to amend the law to include such language failed last year. Moody’s Investors Service also has defied the law’s authors by not downgrading any of the biggest banks, whose ratings depend on government support. It says, however, that it is reviewing whether regulations implementing the law would require a downgrade.
Rep. Barney Frank, Massachusetts Democrat, former chairman of the House Financial Services Committee and co-author of the law, blasted S&P for “clearly misreading” the law and said the agency’s assertion that the law is likely to be changed to permit bailouts shows that, in fact, the law accomplished what it set out to do. “Any fair reading of the mood of the American public and the appetite of Congress suggests that there is absolutely no support for more bank bailouts,” he said in a letter to S&P last week, adding that the credit agency should stop trying to predict what Congress will do and stick to its “core business” of assessing creditworthiness.
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Well, that was rather an eloquent defense of why Obama's special interest groups deserve waivers from Obamacare.
