Obama's Back Door Bailout of Wall Street

The “Restoring American Financial Stability Act of 2010”, authored by Senator Chris Dodd (D-CT), will be considered by the Senate in the very near future and it will make federal bailouts of private enterprise permanent. The House has already passed Congressman Barney Frank’s (D-MA) bailout bill by a 223-202 vote in December. Both bills, supported by President Barack Obama, expand bailout authority for the federal government. These bills provide a back door bailout of Wall Street.

The debate between Republicans and Democrats has centered on a $50 billion bailout fund in the Senate bill. The provision would have the effect of bailing out a failing business’s creditors during the liquidation process. The President has called for the pre-funded $50 billion bailout fund contained in the bill to be removed.

The irony is that the Obama Administration supports a different provision in the bill that provides an even bigger bailout of Wall Street. The other provision, which appears in both the House and Senate bills, provides the Federal Reserve unlimited amounts of money in the form of “loans” to failing businesses. If you like the AIG bailout, get ready for that style of bailout for companies deemed to be friends of the Fed and “too big to fail.”

The House bill contains an authorization for the Federal Reserve for $4 trillion in “secured loans” to bailout individuals, partnerships or corporations in financial distress. Page 506 of the House passed bill, titled the Wall Street Reform and Consumer Protection Act states in part:

The amounts made available under this subsection shall not exceed $4,000,000,000,000.

The Senate bill has the same loan authority with no cap on the amount of funds available to failing businesses.

On page 1302 of the latest draft of Senator Dodd’s bill (a 1336 page bill) the Section titled “Federal Reserve System Provisions” modifies existing Fed “emergency lending authority” to make it easier for the Fed to loan monies directly to troubled financial institutions. This section expands the authority of the Fed to loan out money directly to firms in trouble. Free market capitalism does not include a federal backstop when a company fails. Conservatives and liberals agree that this form of crony capitalism, which looks more like socialism with private gains and taxpayer insured risk, is a terrible economic model.

Existing law can be found at 12 U.S.C. 343 and states the following:

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 357 of this title, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual or a partnership or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions.

This existing Federal Reserve authority was used to extend over $1 trillion of taxpayer assistance to private companies after the meltdown on Wall Street according to the Fed’s monthly report from March of this year. Existing law allowed the Fed to bailout AIG and to create a federal entity for the purposes of injecting liquidity–your money–into failing firms. The new drafts expand this authority of the Fed and grants them an increased level of secrecy with regard to the granting of these loans.

According to the Dodd bill, the eligibility for this program will be subject to approval from a “Financial Stability Oversight Council.” Once the Fed grants a loan to a private company, they may make this loan secret from the public if, the “Board determines that such disclosure likely would reduce the effectiveness of the program.” They still would have to provide justification to the committees of jurisdiction in the House and Senate, yet they would never have to disclose the name of the company receiving the loan.

Don’t be fooled by the President taking the $50 billion bailout fund out of the bill. The federal government can always look to the Federal Reserve for bailout loans to prop up a failing company. Clearly, the House version of the bill tipped the hand of this Administration that they want $4 trillion in loan authority so the titans of Wall Street can engage in risky behavior without the fear of losing their houses in the Hamptons.

You the taxpayer, experiencing almost 10% unemployment, will be on the hook for Wall Street risk thanks to President Obama, Congressman Barney Frank and Senator Chris Dodd’s legislative efforts to make it easier for Washington to use your money to bailout their buddies on Wall Street.