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What will be the result of the Dodd Financial Services Bill?

On the Senate floor this week will be the financial services reform bill, crafted by Senator Chris Dodd (D-CT) with the support of the President. The Senate Banking Committee marked up the bill in 22 minutes with no amendments offered and no debate allowed. Now, Senate Majority Leader and President Obama are trying to rush the bill to the floor before the American people are provided an education about the permanent bailout fund hidden in the bill.

There are two specific problems with the Senate approach to reform. First, this legislation creates a new $50 billion bailout slush fund housed in the Federal Deposit Insurance Corporation (FDIC). The FDIC raises monies by taxing through a provision in the bill titled Risk Based Assessments. Very big banks and other eligible financial companies would be taxed by the FDIC. Of course we all will know who ultimately will pay this you and me.

Last week, in the wake of widespread criticism of this bailout fund, President Obama did request that it be eliminated. But this doesn’t solve the problem federal regulators would still be allowed to raise bailout funds whenever they felt they needed it, without going to Congress. Its not much of an improvement.

These bailout monies would be used to protect creditors in failing firms. If creditors know they are not likely to take a loss and risk is eliminated from the investment, then the taxpayer will assume all the risk. Taxpayers will get none of the rewards if the investments prove to be worth billions to investors, even though they have insured the transaction and protected wealthy investors from any risk associated with investing monies. The AIG bailout is a great example of this model.

Dodd’s plan neglects to address the structural problems within our financial system, and instead showers the broken system with more money and smothers the banks with more regulations. This bill does not make the financial markets less risky because it establishes a bailout system that promises to protect banks no matter how irresponsibly they act. Additionally, the people in charge of regulating the banks under this bill missed the last credit crisis. So unless the regulators gain psychic powers between now and then, banks will not only be as risky, they will have no reason not to be with the new bailout fund.

The Senate bill has many problems, but the multiple bailouts in the bill should raise the eyebrows of Tea Partiers nationwide and taxpayers who are concerned about becoming the insurer of last resort for Wall Street gamblers.

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