There will be no more bailouts of financial institutions, a top official of the Obama administration said Thursday night in what appears to be an attempt to pre-empt Republicans efforts to water down the Dodd-Frank Act.
“No financial institution, regardless of its size, will be bailed out by taxpayers again,” Mary J. Miller, U.S. Treasury undersecretary for domestic finance, said at a financial conference in New York.
Miller’s unequivocal comments appeared aimed at removing one of the hammers being wielded by Republicans against the Obama administration.
Specifically, it appeared to respond to comments April 12 by Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, that too big to fail must be ended. He said in remarks at the Center for Capital Markets Competitiveness that the Dodd-Frank Act (DFA) codified too big to fail with two provisions.
He said the first is Title II, providing for an orderly liquidation authority; and the second is allowing FSOC to designate financial firms as systemically important financial institutions. FSOC is the Financial Stability Oversight Council at Treasury.
Becoming a systemically important financial institution (SIFI) is a double-edged sword, he said, since, while the firm is subjected to enhanced regulation, the designation implies a federal bailout.
Hensarling said that the FSC will take up legislation to repeal Title II and repeal the provisions authorizing FSOC to designate SIFIs.
Hensarling’s comments are consistent with the concerns of many insurers, who fear that SIFI is the camel’s nose under the tent for federal regulation, and such a designation would provide a competitive advantage for insurers so designated.
But Miller, without mentioning Hensarling by name, appeared to categorically reject his theories.
“Shareholders of failed companies will be wiped out; creditors will absorb losses; culpable management will not be retained and may have their compensation clawed back; and any remaining costs associated with liquidating the company must be recovered from disposition of the company’s assets and, if necessary, from assessments on the financial sector, not taxpayers,” Miller said.
She also said that the facts appeared to contradict the argument that being designated a SIFI gave large financial firms an advantage over their smaller counterparts.
“Following enactment of DFA, the rating agencies indicated that they would monitor the impact of financial reform implementation on the largest financial companies and adjust their ratings as appropriate,” Miller said.
Since then, she said, the rating agencies have removed as much as six notches of uplift attributable to expectations of government support.
One rating agency has also recently indicated it may further reduce or eliminate its remaining ratings uplift assumptions by the end of 2013,” Miller said.