April 26, 2010

NOT A BANK? NO BAILOUT:

Yes, It's a Bailout Bill: Markets participants will understand that the Senate financial regulation bill allows for bailouts, and this will give rise to riskier behavior that in turn makes future bailouts more likely. ( Phillip Swagel, April 24, 2010, The American)

The debate over financial regulation is now focused squarely on the ability of the government to take over a failing financial institution such as a bank holding company or hedge fund—so-called non-bank resolution authority. This is the linchpin of reform because allowing the government to intervene in a crisis will affect investors’ risk-taking behavior from the start—for better or worse. A resolution regime that provides certainty against bailouts will reduce the riskiness of markets and thus help avoid a future crisis, while a reform that enshrines the possibility of bailouts will foster risky behavior and unwittingly make future bailouts more likely. The key choice is thus whether financial regulatory reform gives the government discretion to bail out creditors or instead ensures that these counterparties take losses.

President Obama’s approach, as embodied in Democratic Senator Chris Dodd’s bill, is for discretion and thus for bailouts.

Posted by Orrin Judd at April 26, 2010 6:03 AM
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