The politics, truth and lies of financial reform

Speaking in Manhattan today, President Obama addressed financial reform.

CNN
"Ultimately, there is no dividing line between Main Street and Wall Street. We will rise or we will fall together as one nation," the president said in a speech aimed at the financial industry.

Obama said the goal of Wall Street reform is to ensure that taxpayers never have to pay for bailing out a firm considered "too big to fail."

Obama rejected a claim by opponents of reform proposals before Congress that the changes would lead to future bailouts.

"That may make for a good sound bite, but it's not factually accurate," Obama said. "In fact, the system as it stands is what led to a series of massive, costly taxpayer bailouts. Only with reform can we avoid a similar outcome in the future. A vote for reform is a vote to put a stop to taxpayer-funded bailouts. That's the truth. End of story."

Obama said that while the American economy is showing signs of improvement, "until this progress is felt not just on Wall Street but Main Street we can't be satisfied."

"That crisis was born of a failure of responsibility -- from Wall Street all the way to Washington -- that brought down many of the world's largest financial firms and nearly dragged our economy into a second Great Depression," the president said.

The president reiterated five key principles he wants to see in Wall Street reform legislation.

They include ending the idea of a bank being too big to fail, enacting the Volcker rule -- named for former Federal Reserve Chairman Paul Volcker -- that limits the risks banks can take, making complicated financial trades known as derivatives more transparent, creating a consumer financial protection agency and allowing investors to have more say in the compensation of bank company executives.

"The only people who ought to fear the kind of oversight and transparency that we're proposing are those whose conduct will fail this scrutiny," he said.

Obama ended his speech by quoting a Time magazine article quoting bankers saying if reform passes it will be a disaster.

Then he pointed out that the article was from the 1930s -- during the fight over creation of the Federal Deposit Insurance Corp.

Herein lies the problem: the only people who should be concerned about this are banks still engaged in the activities that almost killed us last time.

Republicans, eager to say "no" to anything that his administration puts forward, are pushing back with nonsense. Frank Luntz, the GOP"s Word Doctor, published a paper suggesting Republicans defeat this bill by casting it as a bailout, implying, of course, that under this bill taxpayers will again be forced to foot the bill for Wall Street"s excesses. All the while, the GOP is opposing any kind of reform, leaving us vulnerable to a repeat of the Collapse of 2008. (view Luntz"s document below)


Language of Financial Reform -

Dave Weigel

Just how tightly are Republicans clinging to Frank Luntz's argument that they should portray the $50 billion fund in the current version of financial reform as a permanent bailout" On his Sunday appearance on CNN's "State of the Union," Sen. Mitch McConnell (R-Ky.) used the word "bailout" five times, including once in this exchange.

CROWLEY: But that bailout is funded by the banks themselves, is it not" It is not a taxpayer bailout"

MCCONNELL: Well, Robert Reich, who was Bill Clinton's secretary of labor, says it is a bailout fund.

Washington Independent

Of course, the "bailout fund" is no "bailout fund." The idea is that banks would fund a $50 billion pool; were any to get into trouble, regulators would fire every member of management, wipe out shareholders, split the company up and sell the pieces, and tap the $50 billion fund to pay for the process and ensure the orderly dissolution of the firm. Companies like Citigroup were given bailouts during the crisis. This would be an execution (or, as Sen. Mark Warner (D-Va.) likes to say, a "death panel").

Ezra explains how the liquidation works:

Here's how the liquidation fund works: A year after the bill is signed, the secretary of the Treasury begins taxing banks based on the risk they pose to the financial system. This tax must raise $50 billion and last for at least five years but no more than 10 years. So first, that's where the fund comes from: a tax on too-big-to-fail banks, which has the added bonus of giving a slight advantage to smaller banks that won't be laboring under this tax.

When it comes to saving failing banks, $50 billion isn't a lot of money. Think of the $700 billion TARP fund. Or even look at the House bill, which has a $150 billion resolution fund. But then, the $50 billion isn't there to save banks. It's there to liquidate them.

Here's the chain of events: A bank is judged failing. The FDIC submits a plan for the bank's liquidation -- which includes firing management, wiping out shareholders, handing losses to creditors, and selling off the firm -- and gets it approved by the Treasury secretary. Then the FDIC takes over the banks. The $50 billion fund is used to keep the lights on while all this happens. It's there to prevent taxpayers from having to foot the bill for the chaos that will occur between when we recognize a bank is failing and when we shut it down.

Whatever you want to call this, it isn't a bailout. It's the death of the company. And the fund is way of forcing too-big-to-fail banks to pay for the execution.

Of course, spineless Democrats are talking about letting the fund go, as that seems preferable to defending it against an outrageous lie. Which is exactly what the GOP wanted.

Mark Halperin and Austan Goolsbee pointed out the following on Morning Joe:

The Plumline

HALPERIN: They are willfully misreading the bill or they are engaged in a cynical attempt to keep the president from achieving something.

GOOLSBEE: Everybody knows a consultant just handed them that line and they"re just reading it. It doesn"t matter what"s in the bill. It could be a bill about breakfast cereal and they"re going to say this is a bailout bill.

Senate GOP leader Mitch McConnell has come under intense fire for meeting with Wall Street bankers and enlisting their help in the November elections in exchange for helping to stop financial reform.

These are your Republicans, folks.