Future Bailouts Ruled Out by Senate

The Republicans and the Democrats are at loggerheads over various aspects of the new finance bill. But there is at least one thing that both wings have reached an agreement on. It has been agreed that there should not be any more bailouts of major financial institutions using the taxpayers’ money.

Last year, when there was a threat that a number of major banks and financial institutions might go out of business because of their own reckless lending and investments, billions of dollars of taxpayers’ money was used by the government to bail out these financial institutions. Later, many taxes and levies were introduced to recover the money spent on bailing out these financial institutions.

The new finance bill intends to establish a system in which the Treasury Department can take over and disintegrate those financial institutions that are on the brink of failure after it gets approval from a special panel of three judges of the Federal Bankruptcy Court in Delaware. The Treasury Secretary will have to prove that the bank, hedge fund or insurance company is in default or is about to default. After taking over the company, the FDIC will act as a receiver and it can sell the assets as well as liabilities of the company or manage the company until its sale is viable. The management would be removed and shareholders will be ousted.

Instead of using taxpayers’ money, the new process will use the money collected as levies from the financial institutions, which will be kept in a fund.

This bill has been criticized by the Democrats because the proposed levies will only collect $50 billion, which they say will prove insufficient in a crisis where the failure of a systemically important institution will have a chain reaction leading to collapse of many more institutions. There is a general consensus that some additional levy should also be taken from institutions that are considered ‘too big to fail’ as they will be protected by government if they come close to failure. This charge is proposed to be levied only on those institutions who have assets worth more than $50 billion and who are systemically important.

Some people are of the opinion that there should be tougher measures than those suggested. There is a proposal for curbing risk taking and expansion of such institutions. The need to control big institutions that can bring the whole economy down has become imminent. The risk-taking behavior and increasing complications of these institutions make them a hazard to the whole economy. The question is whether the new bill will be enough to protect the economy from the recklessness of major financial institutions in future.

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