Obama-Dodd financial bill would further enrich Goldman Sachs

by John Berlau on April 16, 2010 · 35 comments

in Bailout Watch, Politics as Usual

Today, the SEC charged giant investment bank Goldman Sachs with more than $1 billion worth of securities fraud for its dealings in the subprime mortgage market.

Ironically, at the same time the SEC is seeking justice for Goldman’s alleged victims, President Obama and Senate Banking Committee Chairman Chris Dodd (D-Conn.) are pushing a bill would reward the firm with potentially billions of dollars by instituting a so-called “resolution authority” that would, in practice, be a permanent bailout fund.

Supporters of Dodd’s bill maintain that it does not create bailouts because the failing firm’s shareholders would be wiped out and its managers would be fired. But what they don’t say is that the money from the $50 billion resolution fund would be used to frequently give creditors of this firm a better deal than they would have in bankruptcy.

Recall that during the financial implosion of late 2008, Goldman was not bailed out directly by taxpayers, but instead received tax dollars as a creditor of AIG. Goldman received $12.9 billion in the “backdoor bailout” of AIG because of the credit default swaps it owned that AIG had insured. Goldman and other of AIG’s counterparties were paid by the government 100 cents on the dollar in this bailout, whereas creditors in bankruptcy court often get less than 50 cents on the dollar.

So as American Enterprise Institute scholar and Financial Crisis Inquiry Commission member Peter Wallison puts it: “That act—paying off the creditors when the government takes over a failing firm—is a bailout. It doesn’t matter that the management lose their jobs, or that the shareholders get nothing. When the creditors are aware that they will get a better deal with the failure of a large company than they will get with a small one that goes the ordinary route to bankruptcy, that is a bailout.”

To top it off, the fees for the Dodd bill’s resolution fund that would pay off a failing firm’s creditors would come not just from banks but from a broad array of Main Street businesses. Stable life, auto and home insurance companies would have to pay into this fund to subsidize the failure of the next high-roller, and the fees they pay would likely be passed on in the premiums their policy holders pay. And the bill’s definition of  “nonbank financial company” is so broad that it could cover manufacturers only tangentially involved in extending credit, such as those that lease equipment to their customers. This would raise prices and cost Main Street jobs.

All in all, the Goldman indictment should serve as a wakeup call to those who want to ram a bill through Congress without looking at who both its victims and beneficiaries would ultimately be.

GrannyRob April 18, 2010 at 2:19 pm

Any bill coming out of this Congress on ANYTHING shall be detrimental to America and her people, but I imagine there are still those fools or enemies who still "believe" in this administration.

Tim Ball April 18, 2010 at 7:05 pm

Please…..for decades our congress has been comprised of half wits who can't balance a checkbook. My proof??? How abut a 14 TRILLION DOLLAR DEBT. These people need far less control, not more. They're the CAUSE of, NOT the solution to most of our problems.

OBIWAN April 18, 2010 at 3:00 pm

Greece just bought back its own CDS at 30%… Any law school junior could have negotiated at 50% … with the foregin banks?

Hank Paulson-GS Chairman and Tim Geithner-NYF Pres were both in the 2005 AIG meeting after Eliot Spitzer wiped out AIG founder Hank Greenberg. They saw all of AIG's Insurance operations were extremely profitable, the CDS "insurance" they pushed Hank to do was the one exception.

None of that was a surprise! Chris Dodd should be in the same jail as child molestors. Follow the $$millions in secret named accounts offshore and Paulson, Geitner, Barney Frank, Pelosi, Reid – perhaps even BARAMA will be there!!

Kevin April 18, 2010 at 3:07 pm

Twitter is feminist- which is why all of you girly men like it….

Kevin April 18, 2010 at 3:09 pm

Twitter is feminist- which is why all of you girly men like it. But just know that it will ruin you foos….

billybob1 April 18, 2010 at 4:21 pm

Big bankers control the politicians who in turn control us. Whatever is done to allegedly rein in the big banks is a ruse designed to placate a populace that is largely ignorant when it comes to finance. Napoleon Bonaparte said it well: "When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain." There's not an honest economist who would disagree with that fact.

Freddy April 18, 2010 at 5:30 pm

At a minimum, any financial reform bill that leaves OUT Freddie, Fannie, and AIG, must be stopped.

Considering the level of distrust of this congress, there seems to be only 3 measures that I could support.

1) Repeal of the Gramm-Leach-Bliley Act

2) Eliminate the CRA

and 3) Move CDS/CDO/etc's onto the futures exchange.

GozieBoy April 18, 2010 at 7:18 pm

Obama plays golf while allowing his buds in Goldman to continue to rob the national treasure at teh expense of taxpayers, our children and grandchildren. They ALL need to be sent to prison immediately…

Peter Barker April 18, 2010 at 10:59 pm

Has anybody noticed how quickly Drudge pulled the lead:

“Clinton: Rubin and Summers Gave Me Wrong Advice on Derivatives, and I Was Wrong To Take It”?

Or was it ABCNews that pulled the story?

Whatever… you can read it here: http://blogs.abcnews.com/politicalpunch/2010/04/c

Guess it’s all in knowing What to look for, not so much Where to look.

Just saying…

bob April 19, 2010 at 1:17 am

Let's not forget, it was politicians that stole $2.5 Trillion from social security….our elites should be in prison!

derekcrane April 19, 2010 at 1:23 am

This bill, a concoction of Chris Dodd, who will soon receive a nice cushy Wall Street job when he retires from the Senate, can only cause more financial instability in the system as much of the risk is masked by the built-in bailout. Greater risks will be taken with other people's money since the banker will know that his cheeks are covered. If Dodd is involved, you just know that the bill will benefit the bankers on Wall Street to the detriment of the people on Main Street.

rowley April 19, 2010 at 2:30 am

We the people aren't wearing blinders. This is just another back door way for the Regime to pull a Venezuela take over of an enormous segment of US economy.

In this move the Gauntlet of Govt. will now hold all investors throats in their grasp as they usurp the power from stock holders to chose their own management.

'Another Big Time Govt. Take Over and Control of the Free Market' is the transparent reason for more new legislation.

rowley April 19, 2010 at 2:30 am

We the people aren't wearing blinders. This is just another back door way for the Regime to pull a Venezuela take over of an enormous segment of US economy.

In this move the Gauntlet of Govt. will now hold all investors throats in their grasp as they usurp the power from stock holders to chose their own management.

'Another Big Time Govt. Take Over and Control of the Free Market' is the transparent reason for more new legislation.

Tom April 19, 2010 at 2:44 am

Goldman was bailed out directly by taxpayers. Have you forgotten that they, Morgan Stanley, and some insurance outfits became bank holding companies in order to borrow tens of billions of dollars through the Fed at very low to no interest rates? Without the rich white collar handouts, they too would have imploded just like the others did.

Wake up pension and other large funds! Do us all a favor and take out all these greedy mega banksters with lawsuits.

sam April 19, 2010 at 3:33 am

Why would anyone let Dodd have anything to do with banks after what he has already done to this country.

Cleatus April 19, 2010 at 5:08 am

Dodd along with Barney and Acorn is the real problem with the world finance collapse. They planted the seeds of corruption and the greedy got caught up in the web.

Wally April 19, 2010 at 5:09 am

Why do I care? I have a Government job and good health, so you will pay my pension for a long long time …

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