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Michael Barone: Dodd-Frank's problems — and potential solutions

BY MICHAEL BARONE Published: January 8, 2013
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The Bear bailout created expectations that the Federal Reserve and the Treasury would bail out every big financial institution — expectations strengthened when the government took over Fannie Mae and Freddie Mac in August 2008 and AIG in early September.

Lehman could and almost certainly would have sold itself out of trouble, Skeel argues, if its executives had not had such expectations.

Dodd-Frank's provisions requiring special treatment of the very largest financial institutions create similar expectations, Skeel says. And it enables those “too big to fail” institutions to borrow money at lower rates than smaller banks. Similarly, Fannie and Freddie — with their implicit government guarantee — were able to borrow cheaply and engage in the practices that brought them down, which has cost taxpayers $140 billion.

Small amendments could help

Skeel is a specialist in bankruptcy law, and he argues that the relatively fixed rules of bankruptcy could better handle the breakdown of big financial institutions than the discretion Dodd-Frank gives to regulators.

Solutions? Skeel argues that small amendments could improve the law. Remove the special treatment for derivatives in bankruptcy. Allow investment banks to declare Chapter 11 bankruptcy without liquidation. A special panel of judges could be set up to handle financial firm bankruptcies. And, based on his criticism of the Chrysler and General Motors bankruptcies, he argues that bankrupt firms should not be able to sell assets without an auction allowing outsiders to bid.

Not everyone will agree with Skeel's analysis and recommendations. But they're worth looking at.

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