The Dodd-Obama Permanent TARP

The latest word today is that the GOP is standing down from its standoff over the Senate’s financial-regulation bill. Specifically, word is that Republican leaders will now let the bill proceed to the floor, having received assurances that provisions for creditor bailouts will be removed. That’s not an insignificant improvement, despite the fact that President Obama has said that it is not “legitimate” to raise the issue of bailouts. But no one should think this bill is fixed. Far from it: Beyond the creditor bailout, I’ve counted at least 13 other problems with the plan. One of the most troubling is at the core of the bill: the creation of seizure authority — politely called “orderly liquidation authority” — for firms perceived by regulators to be failing. To be sure, orderly liquidation is a Good Thing. But the Senate bill achieves it by allowing federal regulators, with minimal judicial review, to take over troubled financial firms and wind up their affairs. It would be far better to use the time-tested bankruptcy system, with its legal protections and judicial supervision, to do the job.

Skeptics say that that would be unworkable for financial firms. But the idea got some little-noticed support recently from the Judicial Conference of the United States, a council of federal judges presided over by the Chief Justice of the United States. In a letter to Sen. Patrick Leahy, the group pointed out that under the Senate bill, some firms already in bankruptcy would be forced out, and into FDIC receivership — an odd result if bankruptcy is not a viable option. The letter then went on to point out that the (very) limited judicial review of seizures provided by the pending legislation may be unconstitutional, and criticized the 24-hour deadline for such review as “inconsistent with the thoughtful deliberation” needed for a decision of such great significance. These are not concerns, nor are they from a source, to be taken lightly. Before declaring the financial-regulation bill “fixed,” members should take another look at seizure authority, as well as other flaws in the plan.

Cross-posted at The Corner.