Leading up to the vote on Senator Chris Dodd’s 1,408 page financial reform bill, lobbyists from big labor and big finance joined forces to make sure the legislation was a Wall Street Bailout Bill. And that’s exactly what it was.

This is perhaps why the bill failed its first test in the Senate on Monday in a vote of 57-41. And then again on Tuesday. But the solid dissent could also be because the Congressional Budget Office found that the costs of this permanent bailout fund created in the bill would fall on the American taxpayers.

In fact, there a quite a few reasons why lawmakers ought to have been skeptical of the plan. In a new Heritage Foundation publication, senior research fellow James Gattuso details 14 “fatal flaws” in Senator Dodd’s regulation plan. Each of these flaws would pave the way for a bigger government with broader powers and a bleaker economic future.

Among the 14 fatal flaws Gattuso points out are:

1. Bigger Government and More Bailouts. A new federal council, the Financial Stability Oversight Council, to determine which firms are “too big to fail.” Qualifying firms will only be encouraged to take on undue risk because they’ll know with certainty that the government will bail them out. 
2. Vast New Powers for the Secretary of the Treasury. The Treasury Secretary will have the power to order seizure, without meaningful judicial review, of any firm he deems “in danger of default.” This seizure must be upheld if the government produces any evidence to support it.
3. Permanent Bailout Authority. The Federal Deposit Insurance Corporation will have the ability to set aside funds for the liquidation of covered financial institutions. This is similar to the AIG bailout that cost taxpayers tens of billions of dollars. Creditors, not shareholders, would be eligible for a cash bailout.
4. $50 Billion Bailout Fund. This “Orderly Resolution Fund” is a clear indication of future bailouts. It is funded by taxes on financial firms, a cost that, as the CBO reports, will ultimately fall on the firm’s customers, employees and investors.
5. Bailouts Not Limited to Failing Firms. Bailout authority can also apply to firms the FDIC determines are “solvent depository institutions.” And the additional costs will be funded by the Treasury’s newly established “line of credit” to the FDIC, which will, of course, be footed by taxpayers.
6. Imposes One-Size-Fits-All Reform in Derivative Markets. The Senate bill would require virtually all derivative contracts, which help markets manage risk, to be settled through a clearinghouse rather than directly between the parties. This would make financial derivatives more costly, more difficult to customize, and, consequently, less widely used—which would increase overall risk in the economy.

While lawmakers who support the bill consider various compromises, they should consider the points above and how they do nothing to reduce the systemic risk offered by “too big to fail” firms. These firms will continue to take risks because the federal government has promised to clean up the mess–on the taxpayers’ dime.

Congress should instead establish accountability by creating a modernized bankruptcy procedure for these large institutions. Heritage senior fellow David John explains that “this would ensure that regulators cannot revert to politically motivated bailouts and other forms of government intervention.”

The consequences of allowing the government to direct the economy are always doubtful and disastrous. Warding off a future economic crisis should not be in the hands of the government. Instead, the government’s approach should be much more hands-off.

Filed Under Activism, Unconstitutional Acts, Unconstitutional Spending

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