With the financial reform bill now in the full Senate and all signs pointing toward its passing in the next week or two, a flurry of possible amendments are circulating privately and publicly. Which are most important? Not Senator Boxer’s new amendment, which would explicitly state that large financial institutions must be liquidated if they are subject to the proposed resolution procedures for “systemically important” financial institutions. Senator Boxer’s claim that this would prove that the bill doesn’t allow future bailouts illustrates an understandable but dangerous confusion about what a bailout is. If all of an institution’s creditors are paid in full, it’s a bailout even if the institution itself is eventually liquidated. If creditors know they’ll be paid—and they can be under the proposed bill—they’ll be too willing to lend to the institution and won’t monitor as carefully as they would if they would if they weren’t protected. They’ll act like the creditors of Bear, Stearns, AIG and Lehman Brothers did.
Endgame in the Financial Reforms--Skeel
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