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  • Morning Bell: The Wall Street Bailout Bill Threat to Your Bottom Line

    This past Friday, President Barack Obama again threatened to veto any financial reform bill that fails to tightly regulate financial derivative products which many blame for the 2008 economic crisis. Derivatives work like insurance to protect certain investments, and provide stability to the price of most goods and services. For example, farmers buy derivatives on the price of their crops, so if the price of their crop plummets, the price of the food at the grocery store won’t change that much. Airlines buy derivatives on oil, so if the price of oil goes up drastically, they won’t have to immediately hike ticket prices.

    Lehman Brothers CEO Dick Fuld shares President Obama’s view on derivatives. He also blames them for the downfall of his Wall Street firm. But a closer examination of Lehman’s failure shows that derivatives may just be a convenient scape goat. Bankruptcy examiners found that it was bad business decisions hidden by complex accounting tricks, not addressed by the current Wall Street Bailout Bill at all, that brought Lehman down. In fact, Lehman’s derivatives positions represented only about 3.3 percent of its net assets, and the bankruptcy examiner found its derivatives trades were reasonable and more carefully monitored than Lehman’s other assets.

    So whenever Sen. Chris Dodd (D-CT) says his Wall Street Bailout Bill “would have prevented that kind of events from happening” he needs to explain how. If anything, the Dodd plan will only make future Wall Street bailouts more likely and more costly while also stifling consumer choice.

    Increases Chance of Future Bailouts: Obama administration officials are claiming their plan “outlaws bailouts,” but in fact it institutionalizes them forever. Just go straight to page 134 of the 1,334 page Senate bill. On that page begins a section titled “Funding for Orderly Liquidation.” The text reads that the Federal Deposit Insurance Corporation, the designated federal receiver for failing financial firms, “may make available…funds for the orderly liquidation of [a] covered financial institution.” Where are those funds to come from? Well, on page 272 the bill creates an “Orderly Resolution Fund” within the U.S. Treasury. The target size of this fund? Fifty billion dollars. The Obama administration claims no funds could be provided to compensate a firm’s shareholders. But the failing firm’s other creditors would be eligible for a cash bailout at the discretion of Treasury Secretary Timothy Geithner who has described the bill’s new bailout authority in exactly the same way he described how he bailed out AIG. This is why Rep. Brad Sherman (D-CA) told Politico: “The Dodd bill has unlimited executive bailout authority. That’s something Wall Street desperately wants but doesn’t dare ask for. The bill contains permanent, unlimited bailout authority.”

    Increases the Costs of Future Bailouts: The second administrative fall back position is that while the bill does bailout Wall Street, the bailouts will be paid for by Wall Street so taxpayers won’t foot the bill. But where does the left think Wall Street will get the money for the bailout funds? The tooth fairy. Just as airlines will ultimately just recoup the money they would have charged for carry on bags in higher ticket prices, Wall Street will suck the bailout money from American consumers in the form of higher bank fees. The Congressional Budget Office has confirmed this the last time the Obama administration proposed a new bank tax. Worse, The New York Times reports: “The Obama administration does not support the $50 billion fund, partly out of concern that more money may be needed if one or more big financial firms ever collapse and that creating a fund could make it difficult to authorize more money.” In other words, the only reason the Obama administration does not want a set $50 billion fund is so it will be easier to ask for even higher bailout funds later.

    Limits Consumer Choice: One of the new Super Regulators Dodd’s Wall Street Bailout Bill would create is a Bureau of Consumer Financial Protection that would make it harder for consumers to utilize new technologies. Debit cards, for example, are common today. Just a decade or so ago, though, customers had to carry bulky checkbooks and two forms of ID in order to pay for many purchases. What might be the next innovation to revolutionize how Americans pay for products? It’s impossible to say, and under the Dodd bill we may never know. Under a CFPA, a cell phone company that wants to offer an even more convenient payment mechanism would have to submit to a massive set of regulations.

    Heritage fellow David John concludes:

    A better approach to preventing another crisis is to modify U.S. bankruptcy law to accommodate the special problems of resolving huge financial firms and to allow the courts to appoint receivers with the specialized knowledge necessary to best deal with their failure. By creating an open process controlled by an impartial judiciary guided by established statutory rules, financial firms, investors, taxpayers, and others would have the advance knowledge that large financial firms that were once known as “too big to fail” can now be closed if necessary without risking disaster.

    Quick Hits:

    Posted in Ongoing Priorities [slideshow_deploy]

    26 Responses to Morning Bell: The Wall Street Bailout Bill Threat to Your Bottom Line

    1. Bill, Columbus, OH says:

      This post says "For example, farmers buy derivatives on the price of their crops, so if the price of their crop plummets, the price of the food at the grocery store won’t change that much." In reality, if the farmer buys derivatives, it protects his profit from a drop in crop prices. If prices plummet, prices to the grocery store may fall, but the farmers profit will be protected by the derivative contract.

    2. Gary Fletcher-Amaril says:

      Your daily Morning Bell is fantastic. Thank you for such great info and research done for all of us. Today's commentary needs one correction and one addition.

      The economic collapse was not caused by the derivatives but was caused by the governments intervention of forcing home ownership and loans into a corrupt Congress and securities underwriters.

      Your example of farmers using derivatives to protect the price of crops and then not to impact grocery prices is totally wrong! The amount of the value of a crop in food is so small it is almost nothing. Farmers use derivatives to protect the overall position of the operation. Manufacturers use deri' to effect grocery prices. Farmers are price takers, not price makers.

    3. Gray_Stroke in the R says:

      After watching the take over of private industry and now the health care industry this is just another typical disingenuous take over with well oiled Orwellian double speak. I watch what he does not what he says. Any financial bill will not be to the benefit of the tax payer. No socialist bill ever was, even as its sold as such.

      Good luck you suckers that continue to fall for those that pontificate the virtues of class warfare; for financial justice etc. et al. (what ever that means)

    4. Ben C. Ann Arbor, MI says:

      Drew – great sarcasm. Wonder if Ken agrees.

    5. curt in Columbus says:

      Here they come…stomp, stomp, stomp.

    6. wayne az says:

      Why are the idiot thieves likle dodd who helped the problem allowed to speak and write or have written socialist legislation. So far haven't heard from any one in congress to know derivatives from welfare. Why hasn't he been replaced? We know the money he stole from wall street freddie and faNNIE, LET'S NOT FORGET THE $1 MILLION FROM GOLDMAN FOR HIS CAMPAIGN. Do we understand bribery, conflict of interest?

    7. Sarah, Tennessee says:

      1. Why can there just not be a written law "No more taxpayer bailouts"? When the other bailouts were done, we the American people were mostly not in favor of it. We really just need Representatives and Senators that will listen to us.

      2. If the above assessment is correct – $50 billion dollars is the limit for the fund to use to liquidate a failed company, but yet a group of companies is all dependent on it, doesn't that make them more susceptible to harm? I doubt $50 billion dollars is enough if say 4 out of 10 large companies need to go out of business at the same time. It seems more reasonable for each company to set aside funds within it's company for it's potential need for liquidation. In other words, what we the American people have said all along – each company needs to be responsible for it's own business and be prepared for it's own potential losses! Leave the American taxpayer out of it and keep our government out of private business!

    8. Ben C. Ann Arbor, MI says:

      How is it that Congress thinks they know answers to questions others ask? It is clear to me that Congress merely passes law after law to deal with imagined or even real problems and then to deal with unintened consequences of their actions. At some point this insanity has to stop.

    9. Drew Page, IL says:

      Obama is right. Wall Street is greedy. Wall Street is bad. The government should just put it out of business. Businesses should not be allowed to sell shares of stock to an unsuspecting public that will only get burned and lose their investments, due to the thivery of Wall Street stock brokers. If businesses were not allowed to make profits off the backs of the poor workers they exploit, then there would be no need to sell stock and the costs of goods and services would be lower. The profit motive should be eliminated from all forms of commerce here in the U.S. Eliminate the profit motive and you eliminate greed. The government will provide a place for us to work, a place to live, food to eat and a place to wait for medical care by a fully qualified nurse. You’ll like the life government provides for you.

      “We the people” need a big strong government to protect us from ourselves. And because of this, those who work for the government would need to be exempted from the limits placed on the rest of us.

    10. Tom, NJ says:

      Whats most offensive is that Chris Dodd, the very person who was in the middle of creating the policy that forced banks to make housing loans to those who could least afford a mortage, is now allowed to still create more laws that will bring more damage to free enterprise and citizens private wealth. The original lending policy (Clinton, 1996) was a perfect example of progressive redistribution of wealth. Chris Dodd and Barney Frank saw power in 2006 and kicked it up a notch with sub-prime lending ratios. Obama knows that redistribution policies kill a free enterprise economy, which is the overall objective of this president and the progressives in power. Looks like they've done a good job so far, and they are going to pass as much damaging legislation as fast as they can before they are voted out of office. Pretty sick isn't it?

    11. Scott Stevens says:

      Didn’t President George Washington refuse to be made King?
      As Americans and free people we bow to no man or woman of government. The Marxist measures of President Obama, who acts like a king, need to be met with better counter-measures to stop and overcome them. Let’s each do our part, which includes shining the light of truth which the Heritage Foundation does so well.

    12. bigdave, Ocala says:

      The same CROOKS who CAUSED our problems are still there claiming they are the ones to fix them…Dodd, Frank, Boxer, Pelosi and they have a new socialist leader who TRAMPLES over constitutional law, defying anyone to stop him, telling one lie after another knowing the leftwing media backs up his every word. We no longer have journalists, these clowns simply REPEAT what this Alynski-type says, and marvels at his apparent lack of knowledge. What in God's Name do they see in this man?! They are simply afraid of being called a rascist BY RASCISTS!! Liberals are the NUMBER ONE RASCISTS! It is THEY who always play the race card and we(the PEOPLE) have had ENOUGH of it! Every proposal/policy/law/bill by this GANG OF CRIMINALS SHOULD BE STRICKEN FROM ALL RECORDS WHEN THE REPUBLICANS TAKE OVER!!! If DEMORATS SHRED THE LAW…PAYBACK IS A PELOSI…I MEAN A B..ch!

    13. Bob herbst says:

      Gary Fletcher is absolutely correct about the farmers—-The writer seems to be one of many who believe all food is Grown at the grocery store.

    14. Richard Cancemi, Arlington. TX says:

      Serial liar, Obama, is at it again selling his snake oil to ignorami who swallow his doses without wanting to know the contents.

      Informed and thinking people see this sham-of-a-president for what he is: a smooth-talking huckster who seeks to sell his “product” via lies, distortions, partial truths, and obfuscations!

      He and his Progressives wherever they are are bad for America and if the clock could be turned back 150 years, they’d be tarred and feathered and run out of town on a rail!

    15. Billie says:

      Sill believe this was a set-up from the start. With goldman sachs also. Sure wall street and sachs fell into the government bribe of it, not the blunt of it government is now celebrating.

    16. Greg Vail, AZ says:

      Drew Page sounds like a ten year old kid. If businesses cannot sell stock to create operating capital we would have virtually no jobs in this country, or the world for that matter. Yeah, let's get rid of wall street, things would be soooo much better!! Are you a complete idiot? This person obviously does not know anything about how our economy works. It is time for people to educate themselves as to the facts and stop spouting nonsense.

    17. loves Dogs/Colorado says:

      It’s really sad to me. I’m 65 and I feel for the first time in my life getting to know just how rotten politicians are that we are going BACKWARDS in my life time.
      This is sooooooo rediculous it’s sad. This group of idiots are OUT OF CONTROL and have NO idea how to run ANYTHING!!!. They should all be GONE. Bottom line—Gone THEY ARE morons in no uncertain terms.

    18. Rick, Texas says:

      The damage they are about to do to Angel investors should be a crime detaining them to life imprisonment.

    19. Susan Tenofsky, Ando says:

      I'm so glad to hear an article that makes sense about the Wall Street Bailout. I wish only that Congress would read it to absorb the true facts about another Fed takeover. Or do they want to stay blind and dumb, to facts and the American public waking up to the trick ploys.

    20. Dennis Social Circle says:

      Bail outs are now the "American way" just ask the dems and obama. They are so busy blowing smoke up our pants leg and telling us the forest is on fire, they believe their own BS.

    21. Blair, Franconia, NH says:

      When Obama writes his memoirs after leaving office in 2013, he should call it Obama: The Art of the Bailout.

    22. Al Alfonso says:

      As usual scoring political points is far more desirable than actually fixing the problem. One party rules…until November.

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    24. John Murphy, Woodbri says:

      Whatever happened to Chapter 11 Bankruptcy proceedings? Under this, 2/3rds of the large corporations survived. We don't need the government to spend more of our money on any more bailouts, which reward a failed business models. We deparately need fiscal control by the Federal Government. Is Obama deliberately trying to destroy this country?

    25. Zack says:

      Can any of you "conservatives" please provide numerical evidence as to how Barney Frank and Chris Dodd caused the housing crisis? Oh, and for cra, clinton, carter or any government regulation for that matter. Anyone? I thought this battle was lost by the political right years ago.

      85% of the entire housing market share was NEVER touced by the government or cra. Please, please, please, please do some personal research and stop, stop, stop, stop believing every single thing Heritage tells you. PLEASE!

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