Refuting Some Recent Financial Resolution Talking Points

uccess has many fathers, while failure is an orphan. The current GOP talking points has two dads. One is Frank Luntz, and his memo on financial reform. The other dad is Peter Wallison, and the editorial he wrote with David Skeel,

The Dodd Bill: Bailouts Forever from a few weeks ago. Michael Barone just

quoted this editorial, and I assume it will be floating around as one of the two sources for all the contributions McConnell and others will add to the debate.

Luckily, I don’t have to respond to it because the FDIC already has. Here is FDIC Rebuts Inaccurate Op-ed, a list of around 40 points that systematically take apart the many assertions made in that editorial. Examples:

Op-ed assertion: Bankruptcy courts do have the experience and expertise to handle a large-scale financial failure. This was demonstrated most recently by the Lehman Brothers bankruptcy.

The facts:

• Bankruptcy has been rarely used for large firms.
• Lehman Brothers (LEHMQ.PK) was the largest bankruptcy filing in U.S. history. Second to Lehman was Worldcom at $103 billion — $500 billion less than Lehman, and $200 billion less than WaMu. Third, was Enron with $63.4 billion; fourth, Conseco with $61.4 billion; and fifth, was Texaco with $35.9 billion in 1987.
• In 22 years, the bankruptcy courts have only resolved five major corporate entities — one of which was a financial company.
• The Lehman failure would have been much more destructive had the Federal Reserve Bank of New York not lent into the illiquid Lehman broker dealer after the failure of Lehman Holdings – in effect providing liquidity so that trades could settle outside of bankruptcy.
• The bankruptcy process did not respond rapidly to ongoing transactions. For example, about 100 hedge funds used Lehman as their prime broker and relied largely on the firm for financing. Despite the availability of collateral, those positions were not transferred to other parties and the prime broker positions were frozen.
• The bankruptcy process has shown that it creates: Significant market disruptions; Huge fees and expenses. As of January 2010, fees paid to debtor’s counsel and experts in the Lehman bankruptcy exceeded $588 million without a plan of reorganization having been proposed by that date; Drawn out resolution (WAMU was resolved in 24 hours on a Thursday). Lehman has offered a “blueprint” for its reorganization 18 months after filing Chapter 11….

Op-ed assertion: The Dodd bill provides for a $50 billion fund, collected in advance from large financial firms that will be used for the resolution process. In other words, the creditors of any company that is resolved under the Dodd bill have a chance to be bailed out.

The facts:

• An ex ante resolution fund, funded by industry participants based upon their risk levels is not akin to a bailout.
• This is demonstrated by the Deposit Insurance Fund – which is an ex ante fund and does not bail out creditors.
• The proposed resolution fund will not protect any class of creditors, but is designed solely to provide liquidity to maximize the value of the failed firm’s assets and allowing an orderly liquidation of the institution. Creditors will bear losses.

Really, it is clean, fantastic and to the point. Worth your time if you want to learn more about the Republican talking points and have them immediately refuted.