CLE Materials for Panel #1 - George Washington University Law ...

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WILMARTH 4/1/2011 1:11 PM 1004 OREGON LAW REVIEW [Vol. 89, 951 “advances” to member institutions, including banks and insurance companies. 218 During the financial crisis, banks did not borrow significant amounts from the discount window due to (1) the perceived “stigma” of doing so and (2) the availability of alternative sources of credit through FHLBs and several emergency liquidity facilities that the FRB established under its section 13(3) authority. 219 In contrast, the FHLBs provided $235 billion of advances to member institutions during the second half of 2007, following the outbreak of the financial crisis. During that period, FHLBs extended almost $150 billion of advances to ten major LCFIs. Six of those LCFIs incurred large losses during the crisis, and they either failed, were acquired in emergency transactions, or received “exceptional assistance” from the federal government. 220 Accordingly, FHLB advances provided a significant source of support for troubled LCFIs, especially during the early phase of the financial crisis. 221 During future crises, it seems likely that individual LCFIs will use the FRB’s discount window more frequently, along with FHLB advances, because Dodd-Frank prevents the FRB from providing emergency credit to individual institutions under section 13(3). 222 Discount window loans and FHLB advances cannot be made to banks in receivership, but they do provide a potential source of funding for troubled SIFIs or SIFI-owned banks, as long as that funding is extended prior to the appointment of a receiver for either the bank or the SIFI. 223 To the extent that the FRB or FHLBs provide 218 Id. at 555–62, 577–59 (describing collateralized advances provided by FHLBs to member institutions, including banks); FED. HOUSING FIN. AGENCY, REPORT TO CONGRESS 2009, at 65 (2010) , available at http://www.fhfa.gov/webfiles/15784 /FHFAReportToCongress52510.pdf (stating that 210 insurance companies were members of FHLBs and had received almost $50 billion of advances at the end of 2009). 219 Ashcraft et al., supra note 214, at 567–79; Cecchetti, supra note 216, at 64–72. 220 Ashcraft et al., supra note 214, at 553, 579–80. Of the ten largest recipients of FHLB advances during the second half of 2007, WaMu and Wachovia failed, Countrywide and Merill were acquired by Bank of America in emeregency transactions, and Citigroup and Bank of America received “exceptional assistance” from the federal government. See id. at 580, 580 tbl.3; supra notes 14–15, 104–07 and accompanying text. 221 Arthur E. Wilmarth, Jr., Subprime Crisis Confirms Wisdom of Separating Banking and Commerce, 27 BANKING &FIN. SERVICES POL’Y REP. 1, 6 (2008), available at http://ssrn.com/abstract=1263453. 222 See supra notes 210–11, 216–18 and accompanying text. 223 See 12 U.S.C. § 347b(b) (allowing the FRB to make discount window loans to “undercapitalized” banks subject to specified limitations); supra notes 220–21 and
WILMARTH 4/1/2011 1:11 PM 2011] The Dodd-Frank Act 1005 such funding, at least some short-term creditors of troubled SIFIs or SIFI-owned banks are likely to benefit by obtaining full payment of their claims before any receivership is created. Thus, notwithstanding Dodd-Frank’s explicit promise to end bailouts of TBTF institutions, 224 federal agencies retain several powers that will permit them to protect creditors of weakened SIFIs. A more fundamental problem is that Dodd-Frank’s “no bailout” pledge will not bind future Congresses. When a future Congress confronts the next systemic financial crisis, that Congress is likely to abandon Dodd-Frank’s “no bailout” position either explicitly (by amending or repealing the statute) or implicitly (by looking the other way while regulators expansively construe their authority to protect creditors of SIFIs). For example, Congress and President George H.W. Bush made “never again” statements when they rescued the thrift industry with taxpayer funds in 1989, 225 but those statements did not prevent Congress and President George W. Bush from using public funds to bail out major financial institutions in 2008. As Adam Levitin has observed, It is impossible . . . to create a standardized resolution system that will be rigidly adhered to in a crisis. . . . Any prefixed resolution regime will be abandoned whenever it cannot provide an acceptable distributional outcome. In such cases, bailouts are inevitable. This reality cannot be escaped by banning bailouts. Law is an insufficient commitment device for avoiding bailouts altogether. It is impossible to produce binding commitment to a preset resolution process, irrespective of the results. The financial Ulysses cannot be bound to the mast. . . . Once the ship is foundering, we do not want Ulysses to be bound to the mast, lest [we] go down with the ship accompanying text (noting that FHLBs made large advances during 2007 to troubled LCFIs). 224 See Dodd-Frank Act pmbl.; S. REP.NO. 111-176, at 1 (2010); Kaper, supra note 2. 225 See H.R. REP.NO. 101-54(I), at 310 (1989) (declaring that “Never Again” was “the theme of the Committee’s deliberations” on legislation to rescue the thrift industry), reprinted in 1989 U.S.C.C.A.N. 86, 106; George Bush, Remarks on Signing the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (Aug. 9, 1989), available at http://www.presidency.ucsb.edu/ws/index.php?pid=17414#axzz1IIMYLfO9 (statement by President George H.W. Bush that the 1989 thrift rescue statute would “safeguard and stabilize America’s financial system and put in place permanent reforms so these problems will never happen again” and that “[n]ever again will America allow any insured institution to operate normally if owners lack sufficient tangible capital to protect depositors and taxpayers alike”).
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CLE Materials for Panel #1 “Dodd-
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