The final details of the financial regulatory reform bill being negotiated by Sens. Chris Dodd (D-CT) and Bob Corker (R-TN) are still being hammered out, but the underlying contours are clear: more government bureaucracy layered on top of our existing impenetrable and unaccountable financial regulatory system. Specifically, the Dodd/Corker plan reportedly still contains these elements:

The Consumer Financial Protection Agency – There is still debate over whether this new entity will be a stand alone agency, housed in the Department of Treasury, or housed in the Federal Reserve. Wherever the new entity ends up, the bottom line will be the same: a massive new bureaucracy afforded ambiguous grants of almost unlimited power. Although intended to help consumers, the net result of such a move would be to stifle the innovations that would bring them improved, lower-cost financial products.

Permanent TARP – Details are sketchy here, too, but reports are that federal bureaucrats, possibly the FDIC, will be given new “resolution authority” powers backed by a permanent $50 billion slush “resolution fund.” If this new power is given to the FDIC, it would be the first time the FDIC’s authority was extended beyond the banks that it directly insures. But more importantly, these provisions would establish a permanent TARP – the radioactively unpopular $700 billion Wall Street bail out slush fund.

The Agency for Financial Stability – Sold as purely a monitoring and information gathering entity, without the proper limiting language, a new systemic risk agency could essentially draft any financial firm into the federal financial regulatory system and subject it to a wide variety of restrictions that could include compelling large financial firms to sell off portions of themselves, drop lines of business, break up, or otherwise reduce the “risk” that the regulators believe they may impose on the financial system.

Instead of allowing for risky behavior to be properly priced by the marketplace, taken together these new bureaucracies would almost guarantee more big bank bailouts costing taxpayers untold billions of dollars. The new regulators could declare any problem with a major financial institution to be a potential systemic risk and tap into the fund to bail it out.

There is a better solution. Heritage fellow David John explains:

A better approach to preventing another crisis is to modify U.S. bankruptcy law to accommodate the special problems of resolving huge financial firms and to allow the courts to appoint receivers with the specialized knowledge necessary to best deal with their failure. By creating an open process controlled by an impartial judiciary guided by established statutory rules, financial firms, investors, taxpayers, and others would have the advance knowledge that large financial firms that were once known as “too big to fail” can now be closed if necessary without risking disaster. In addition, requiring all larger financial services firms to hold significant amounts of capital to cover losses would greatly reduce the systemic risk that they could pose to the financial system.

Higher capital levels would enable many firms that would fail under today’s capital levels to survive a crisis, saving shareholders and bondholders their investments, employees their jobs, and taxpayers billions of dollars in federal bailouts. Congress and the Administration need to learn and heed the lessons of 2008, or a repeat crisis will just be a matter of time.

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