Almost six years after the financial panic, Rep. Paul Ryan (R., Wisc.) is calling for an end to the federal bailout regime codified in the Dodd-Frank law of 2010. Mr. Ryan advocates instead an “enhanced bankruptcy alternative” for giant banks that run into trouble.
A Journal editorial explains the House Budget Committee Chairman’s new plan to balance the budget over a decade “largely through spending restraint and entitlement reform. He would not raise taxes, and in the best news he includes an economic growth dividend from reducing the deficit.” And diving into the plan’s details reveals even more good news for taxpayers.
The Ryan budget takes aim at current law, under which the Financial Stability Oversight Council chaired by the Treasury secretary can save a stumbling giant from bankruptcy by placing it under the care of the FDIC’s so-called “orderly liquidation authority.” In this scenario the FDIC maintains discretion to give bank creditors a better deal than they would get from a bankruptcy court.
Addressing this FDIC authority, the Ryan budget states: “This resolution calls for ending this regime, now enshrined into law, which paves the way for future bailouts. House Republicans put forth an enhanced bankruptcy alternative that—instead of rewarding corporate failure with taxpayer dollars—would place the responsibility for large, failing firms in the hands of the shareholders who own them, the managers who run them, and the creditors who finance them.”
Assuming the plan passes the House, it will signal that Republicans remain unwilling to accept the major post-crisis reforms enacted by the Democratic Congress of 2010. And should Republicans win a Senate majority in November, with the possibility of Sen. Richard Shelby chairing the banking committee, the expansive taxpayer backstop enjoyed by giant financial firms could be in jeopardy.