The top Republican fundraiser in the Senate, John Cornyn of Texas, just gave a preposterous speech on Wall Street reform in which he pushed the plan recently promoted recently by disgraced J.P. Morgan Economist James Glassman.
Cornyn is opposing the use of a "resolution mechanism," which he and other Republicans like Sen. John Ensign are disingenuously smearing as a "taxpayer bailout." This resolution mechanism is what the FDIC uses to shut down ordinary commercial banks. President Barack Obama and the Democratic leadership in Congress are trying to create a similar process for complex megabanks like Citigroup or J.P. Morgan Chase. It's not a bailout, it's not the government picking winners and losers, it's a systematic method for shutting down failing behemoths.
What does Cornyn want? Well, instead of a safe new system to shut down banking behemoths, Cornyn and other Republicans are pushing, "a small tweak of bankruptcy laws," including a change in the status of derivatives, which are currently exempt from the bankruptcy process. This is exactly what Glassman pushed in his infamous "analyst report" that spewed misinformation about Wall Street reform. Here are Glassman's exact words:
What flaws need fixing? The financial system is highly interconnected. The bankruptcy laws need to be modified to allow for an orderly unwinding of a failing financial institution (for example, ending the exemption given derivatives has attracted some attention).
This plan is absurd. Bankruptcy is a slow process that cannot provide the immediate certainty markets need about the impact of a failing institution. There's nothing particularly dangerous about ending the bankruptcy exemption for derivatives, but the idea that it will end too-big-to-fail is ludicrous. The plan's promoters think that if derivatives are subject to bankruptcy law, banks won't be quite so keen to trade them. But of course, the horse is well past the barn door—the derivatives market is already a crazy multi-trillion-dollar casino. Does anybody seriously believe that putting a complex, multi-trillion-dollar financial behemoth through bankruptcy will stop being an economic nightmare just because derivatives are suddenly included? If you rely on bankruptcy, banks will be bailed out, it's as simple as that.
The Republican double-talk on this issue has moved well beyond surreal. Democrats had hoped to impose a $50 billion tax on Wall Street that would be used to pay for any costs associated with shutting down a failing megabank. Earlier this week, Republicans pushed through an amendment that removed that tax. But today we've seen several Republicans go to the Senate floor, including Sens. Jim DeMint, R-S.C., and John Ensign, R-Nev., screaming that the current bill puts taxpayers, not banks, on the hook for too-big-to-fail! Ensign said specifically that, "financial institutions, not the taxpayer" should pay to unwind a failing megabank, and under the current bill, taxpayers will take a hit.
So while pretending to get tough on Wall Street, DeMint, Ensign and Cornyn are pushing a policy that comes straight from the chief economist at J.P. Morgan Chase. It is the same plan pushed in that infamous analyst report earlier this month.
I don't actually believe that a resolution mechanism, with or without a $50 billion tax on Wall Street, will be sufficient to end too-big-to-fail. But it is nevertheless a necessary step. We haven't used bankruptcy for commercial banks since the Great Depression, and there's a good reason for that. Now that our economy is dominated by a handful of complex megabanks, those firms should be subject to a similar process. Just as important, nobody—Republican or Democrat-- should to spewing Orwellian idiocy on the Senate floor.
