Wallison, who is the Arthur F. Burns Fellow in Financial Policy Studies at AEI, argues that the bill's provisions allowing for the Federal Reserve to regulate all large, nonbank financial institutions "would signal to the market that these institutions are too big to fail."
The proposed $50 billion rescue fund to be administered by the Federal Deposit Insurance Corporation (FDIC) enhances the too-big-to fail approach by assuring creditors "that they will be bailed out if one or more of these large institutions are in danger of failing," the brief states.
The bill, through these provisions, will favor large financial institutions over smaller competitors, and this, in turn, will lead to a restructuring of the financial markets and the U.S. economy, Wallison states.
These elements of the reform "make sense only if the administration is pursuing an ideological objective instead of striving to ensure a healht and competitive U.S. financial system in the future," Wallison writes.
Wallison, in the body of the brief, points out some of the flaws and consequences of the Obama administration's proposal:
- It fails to address the government's role in the creation of a vast numbers of subprime and other nonprime loans that led to the crisis.
- Instead of controlling large Wall Street firms, as claimed, the bill provides advantages to Wall Street financial institutions.
- The legislation, if enacted, "would establish an unprecedented and unhealthy partnership betgween the government and the largest financial institutions."
- As it did with Fannie Mae and Freddie Mac, the government will protect the largest firms from failure in return for the willingness of those firms to implement the policies of the government.